IN HIGH COURT OF UTTARAKHAND AT NAINITAL Income Tax Appeal No. 01 of 2010 M/s B.J. Services Company Middle East Limited . .. Appellant Versus Assistant Commissioner of Income Tax, (O.S.D.) Range-1,Dehradun Respondent Income Tax Appeal No. 02 of 2010 M/s B.J. Services Company Middle East Limited . .. Appellant Versus Assistant Commissioner of Income Tax, (O.S.D.) Range-1,Dehradun Respondent Income Tax Appeal No. 03 of 2010 M/s B.J. Services Company Middle East Limited . .. Appellant Versus Assistant Commissioner of Income Tax, (O.S.D.) Range-1,Dehradun Respondent AND Income Tax Appeal No. 04 of 2010 M/s B.J. Services Company Middle East Limited . .. Appellant Versus Assistant Commissioner of Income Tax, (O.S.D.) Range-1,Dehradun Respondent 2 Present: Mr. S.K. Posti, Advocate for appellant. Mr. H. M. Bhatia, Advocate for respondent. Coram : Hon ble K.M. Joseph, C.J. Hon ble V.K. Bist, J. JUDGMENT Date: 19th May, 2015 K.M. Joseph, C.J. (Oral) appeals being connected, we are disposing of same by this common judgment. 2. substantial questions of law, which have been framed at time of admission of appeals, are as follows:- (a) Whether learned Income Tax Appellate Tribunal was legally justified in upholding order of learned Commissioner of Income Tax (Appeals) and of Assessing Officer that interest paid to assessee on its refund is business income and therefore it is taxable @ 42% instead of 15% as provided in para 2 of Article 12 of DTAA between India and United Kingdom? (b) Whether learned Income Tax Appellate Tribunal was legally justified in holding that in view of para 6 of Article 12 of DTAA between India and United Kingdom, para 2 of Article 12 of DTAA between India and United Kingdom is not applicable and hence interest paid on refund by Income Tax Department it will be treated as business income? 3. appellant/assessee is engaged in business of Oil Exploration. It is non-resident Company. Originally assessment was completed on 08.03.2005. bone of contention in this case relates to taxability and rate at which amounts received by appellant by way of interest on refund ordered in respect of excess tax paid on behalf of employees of 3 assessee. As already noted, appellant was engaged in Oil Exploration as non-resident of India. tax was computed at rate of 15 per cent on basis of provisions of Article 12 of Double Taxation Avoidance Treaty (hereinafter referred to as Treaty). Subsequently, matter was reopened under Section 154 of Income Tax Act, 1961 (hereinafter referred to as Act). same was dropped. Still thereafter proceedings were initiated under Section 147 of Act. Assessing Officer assessed interest income under Clause 6 of Article 12 of Treaty, which Clause we shall refer to hereinafter. 4. appeal was carried against same which was unsuccessful. Equally unsuccessful was further appeal carried before Appellate Tribunal and appellant is before us. 5. We heard learned counsel for appellant Shri S.K. Posti and Shri H.M. Bhatia, learned counsel for revenue. 6. agreement is one for avoidance of double taxation and prevention of fiscal evasion between United Kingdom of Great Britain and Northern Ireland. Since we are concerned with only Article 12 of Treaty which deals with interest, we refer to relevant portions which are Clause 1, 2 & 6 of Article 12 of Treaty. 1. Interest arising in Contracting State and paid to resident of other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in Contracting State in which it arises and accordingly to law of that State, provided that where resident of other Contracting State is beneficial owner of interest tax so charged shall not exceed 15 per cent of gross amount of disinterest. 4 6. provisions of paragraphs 1, 2 and 3(a) of this Article shall not apply if beneficial owner of interest, being resident of Contracting State, carries on business in other Contracting State in which interest arises through permanent establishment situated therein, or performs in that other State independent personal services from fixed base situated therein, and debt-claim in respect of which interest is paid is effectively connected with such permanent establishment or fixed base. In such case provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as case may be shall apply. 7. We will consider whether there is any merit in contention of appellant that appellant should have been taxed at rate of 15 per cent on gross amount of interest under Clause 2 of Article 12. Under Clause 1 of Article 12, interest arising in Contracting State and paid to resident of other Contracting State may be taxed in other State. In facts of this case, interest which was received in India can be taxed in England. However, Clause 2 provides that said interest can also be taxed in Contracting State in which it arises (which in this case is India) as tax was paid by Government of India in Income Tax Department on excess tax paid on behalf of assessee/appellant s employees. It is to be taxed according to law in India, namely, Income Tax Act, 1961, as it stands. limitation which is cast is that when beneficial owner of interest so charged is resident of other State which means that since appellant is resident of England, tax so charged should not exceed 15 per cent of gross amount of interest. Therefore, appellant would contend that tax should have been charged at 15 per cent of interest received which appellant became entitled to on basis of excess tax paid. 5 8. As matters stood there if there was no other provision to consider, appellant would indeed be justified in offering 15 per cent to taxation. But if we come to Clause 6, we notice that Clause 6 expressly provides that provisions of paragraph 1, inter alia, will not apply, if beneficial owner of interest (the appellant in this case) is resident of Contracting State carries on business in other Contracting State (in India) in which interest arises through permanent establishment situated therein. There is not much dispute raised before us that appellant was indeed carrying on business through permanent establishment in India. Since word or figures immediately thereafter, we need not be concerned with further provisions as requirement of Clause that interest arises through permanent establishment situated therein as fulfilled in this case. To continue with requirement of Clause 6 of Article 12, it contemplates that debt claim in respect of which interest paid is effectively connected with such permanent establishment on fixed rates. In this case, appellant paid excess tax on behalf of its employees. Income Tax Officer, after assessment, apparently has ordered refund. There was delay and interest was paid under Act at statutory rate fixed. So there arises debt claim and interest is effectively connected with permanent establishment on fixed rates. In such eventuality, Clause 6 of Article 12 provides that provisions of Article 7, which relate to Business profits, or Article 15 (Independent personal services) of this Convention, as case may be, shall apply. This will be assessed as business profits and in regard to business profits, rate of tax is 48 per cent. It is on said basis that, in fact, Assessing Officer in first assessment and also in further assessment after proceedings under Sec. 147 of Act had assessed appellant. This assessment has been upheld by First Appellate Authority as also by Tribunal. 6 9. We would think that in this analysis of provisions of Clauses of Treaty, there is no error as such committed by Assessing Officer as confirmed by First Appellate Authority and Tribunal and, therefore, questions of law as framed must necessary be answered against appellant in all cases and we do so. 10. In normal circumstances that should have been end of our enquiry, but Shri S.K. Posti, learned counsel for appellant pressed before us that we also consider fact that another substantial question of law would arise in proceedings. He would submit that it is case where being N.R.I. and otherwise liable to be assessed as such, appellant was taxed under Section 44 BB of Act. He would submit that at any rate, interest income which is derived under refund order from Income Tax Department should also be assessed under Section 44 BB and taxed under sub-section (2) at rate of 10 per cent. His argument is immediately met by Shri H.M. Bhatia, who points out that substantial question of law is not raised in this matter. To same, Shri Posti would respond and submit that Court is not confined to substantial question of law which has been framed and any substantial question of law which may arise can also be considered and framed and answered. In fact, Shri H.M. Bhatia would submit that such question was not even raised before Appellate Authority and it was also not raised before Tribunal and it does not lie into mouth of appellant to raise same in this proceeding under 260 of Act. To same, Shri Posti would submit that even if matter is not raised before First Appellate Authority, it has always been law that Appellate Authority must consider matter as it arises from order of assessment and question as to whether assessee must be taxed as was done by Assessing Officer should have been gone into by Appellate Authority. In fact, Shri H.M. Bhatia, did made 7 attempt to make available memorandum of appeal to convince us that question was not raised before Appellate Authority. Shri Posti would oppose handing over of memorandum of appeal. appellant has also not made available memorandum of appeal before Appellate Authority. Therefore, from this we can conclude safely that appellant has not raised such contention before Appellate Authority, but he would refer to explanation to Section 251 of Act, which provides power of appeal to Commissioner. It reads as follows:- 251. Powers of Commissioner (Appeals).- (1) In disposing of appeal, Commissioner (Appeals) shall have following powers (a) in appeal against order of assessment, he may confirm, reduce, enhance or annul assessment; (aa) in appeal against order of assessment in respect of which proceeding before Settlement Commission abates under section 245HA, he may, after taking into consideration all material and other information produced by assessee before, or results of inquiry held or evidence recorded by, Settlement Commission, in course of proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul assessment; (b) in appeal against order imposing penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce penalty; (c) in any other case, he may pass such orders in appeal as he thinks fit. (2) Commissioner (Appeals) shall not enhance assessment or penalty or reduce amount of refund unless appellant has had reasonable opportunity of showing cause against such enhancement or reduction. Explanation.- In disposing of appeal, Commissioner (Appeals) may consider and decide any matter arising out of proceedings in which order appealed against was passed, notwithstanding that such matter was not raised before Commissioner (Appeals) by appellant. 8 11. Learned counsel for appellant also drew our attention to judgment, reported in (1993) 199 ITR 351 (Ahmedabad Electricity Co. Ltd. Vs. Commisisoner of Income-Tax) of Full Bench of Bombay High Court, wherein Full Bench, inter alia, took following view: basic purpose of appeal in income-tax matter is to ascertain correct tax liability of assessee in accordance with law. Therefore, at both stages, either before Appellate Assistant Commissioner or before Appellate Tribunal, appellate authority can consider proceedings before it and material on record before it for purpose of determining correct tax liability of assess. appellate authorities, of course, can not travel beyond proceedings and examine new sources of income. For this purpose, other separate remedies are provided to Department under Income-tax Act. But, apart from this, there is nothing in section 254 or section 251 of Income- tax Act, 1961, which would indicate that appellate authorities are confined to considering only objections raised before them or allowed to be raised before them either by assessee or by Department, as case may be. They can consider entire proceedings to determine tax liability of assessee. Under section 254 (1), Appellate Tribunal may, after giving both parties to appeal opportunity of being heard, pass such orders thereon as it thinks fit . This gives very wide power to Appellate Tribunal to pass, on appeal, such orders as it may thinks fit. 12. This is appeal under Section 260A of Act and Section 260A of Act reads as follows:- 9 260A. Appeal to High Court.- (1) appeal shall lie to High Court from every order passed in appeal by Appellate Tribunal before date of establishment of National Tax Tribunal, if High Court is satisfied that case involves substantial question of law. (2) Chief Commissioner or Commissioner or assessee aggrieved by any order passed by Appellate Tribunal may file appeal to High Court and such appeal under this sub-section shall be (a) filed within one hundred and twenty days from date on which order appealed against is received by assessee or Chief Commissioner or Commissioner; (b) {***} (c) in form of memorandum of appeal precisely stating therein substantial question of law involved. (2A) High Court may admit appeal after expiry of period of one hundred and twenty days referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing same within that period. (3) Where High Court is satisfied that substantial question of law is involved in any case, it shall formulate that question. (4) appeal shall be heard only on question so formulated, and respondents shall, at hearing of appeal, be allowed to argue that case does not involve such question: Provided that nothing in this sub-section shall be deemed to take away or abridge power of court to hear, for reasons to be recorded, appeal on any other substantial question of law not formulated by it, if it is satisfied that case involves such question. (5) High Court shall decide question of law so formulated and deliver such judgment thereon containing grounds on which such decision is founded and may award such cost as it deems fit. (6) High Court may determine any issue which (a) has not been determined by Appellate Tribunal; or 10 (b) has been wrongly determined by Appellate Tribunal, by reason of decision on such question of law as is referred to in sub-section (1). (7) Save as otherwise provided in this Act, provisions of Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to High Court shall, as far as may be, apply in case of appeals under this section. 13. On conspectus of these provisions, legal effect of Section would appear to be that appeal is normally to be heard on substantial questions of law formulated and appellant can be allowed to argue only in regard to same. It is also open to respondent to point out that though substantial question of law has been formulated but in fact and in law, said question of law is really not substantial question of law. High Court is to deliver judgment on basis of decision on question of law framed and it also provides that High Court may also decide appeal on any other substantial question of law which may not have been formulated. only condition is that it should be satisfied that case involved such question. Even if Appellate Tribunal has not decided issue or issue has been wrongly decided, it is open to High Court in proceeding under Section 260A of Act to either decide question which has not been decided or to decide question which is wrongly decided subject to only limitation that this is occasioned by decision which it renders on substantial question of law. Therefore, in ultimate analysis, High Court s interference with impugned decision must be premised on existence of substantial question of law and decision on same. If there is substantial question of law made out; it provides power to interfere with Appellate Tribunal s order; be it on issue which has been decided by it erroneously or on issue not decided by it. In this case, it may be true that appellant has not raised this question before Appellate Authority and also before 11 Appellate Tribunal. appellant has not produced memorandum of appeal before Tribunal and order of Appellate Tribunal also does not bear it out that appellant has raised this question, but we would think that question which is raised essentially, appears to be pure question of law and it is substantial in sense that it has got direct and substantial impact on destiny of appellant s case and we hence proceed to formulate following substantial question of law:- Whether in circumstances of case, Appellate Authority and Tribunal should have found that amount of interest received on refund by Income Tax Department should be included in amount on which appellant was taxed under Section 44BB of Act? 14. Having formulated said question and having heard learned counsel for parties also, we proceed to answer same. 15. Section 44BB of Act is special provision. It reads as follows:- 44BB. Special provision for computing profits and gains in connection with business of exploration, etc., of mineral oils.- (1) Notwithstanding anything to contrary contained in sections 28 to 41 and sections 43 and 43A, in case of assessee, being non-resident, engaged in business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in prospecting for, or extraction or production of, mineral oils, sum equal to ten per cent of aggregate of amounts specified in sub-section (2) shall be deemed to be profits and gains of such business chargeable to tax under head Profits and gains of business or profession : Provided that this sub-section shall not apply in case where provisions of section 42 or section 44D or section 44DA or section 115A or section 293A apply for purposes of computing profits or gains or any other income referred to in those sections. 12 (2) amounts referred to in sub-section (1) shall be following, namely : (a) amount paid or payable (whether in or out of India) to assessee or to any person on his behalf on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in prospecting for, or extraction or production of, oils in India; and (b) amount received or deemed to be received in India by or on behalf of assessee on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in prospecting for, or extraction or production of, mineral oils outside India. [(3) Notwithstanding anything contained in sub-section (1), assessee may claim lower profits and gains than profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes report of such audit as required under section 44AB, and thereupon Assessing Officer shall proceed to make assessment of total income or loss of assessee under sub-section (3) of section 143 and determine sum payable by, or refundable to, assessee.] 16. argument of learned counsel for appellant would appear to be that amount received by way of interest from Income Tax Department is amount, which has been received by appellant in connection with its business of exploration carried out in India and, therefore, it should be included in sub-section (2) of Section 44BB of Act. 17. Per contra, learned counsel for Revenue would point out that reading of sub-section (2), which provides for ascertaining amounts which are to be included in computing profits and gains under deeming provision in sub-section (1) as chargeable under profits and gains of business or profession, amount is limited to amount which has been paid to person (in this case to appellant) on account of provision of 13 services and facilities in connection with, or supply of plant and machinery on hire used or to be used for purpose of prospecting for, or extracting or production of mineral oil in India. He would point out that payment by Income Tax Department must be treated as payment by third party and he would submit that it is not in connection with provision of services and facilities in connection with, or supply of plant and machinery. Appellant made payment on behalf of employees. amount is found to be in excess of legal liability. Under Income Tax Act, amounts became due by way of refund. amount was refunded late along with interest payable under Act. He would, therefore, submit that it cannot be included under sub-section (2). 18. Learned counsel for appellant would point out that, on one hand, under Treaty, Department lays store by Clause 6 of Article 12, which provides for amount being treated as business profits if it is in connection with permanent office carrying on business in India through permanent establishment. He contends that it is incongruous to still contend that it will not fall within four corners of sub-section (2) of Section 44BB of Act. 19. We are of view that there may not be merit in contention of learned counsel for appellant. What Section 44 BB of Act provides for is special provision in respect of income in form of profits derived by non-residents engaged in business, providing services and facilities, supplying plant and machinery used for extraction or production of mineral oils. Profits is deemed at 10% of amounts mentioned in sub-section (2). said amount is to be treated as profits and gains of such business chargeable to tax under head Profits and gains of business or profession and then we pass on to method of computing amounts for purpose of sub-section (1) which is provided in sub-section (2). It provides for including all amounts paid or which 14 are payable (whether in India or out of India) to assessee or to any person on its behalf. To this extent, appellant is covered by same and it has been assessed also in regard to other income also. This section further provides that payment must be on account of provision of services and facilities in connection with supply of plant and machinery on hire used, or to be used, in prospecting for or extraction of mineral oil in India. Here we cannot possibly hold that amount of interest paid by Income Tax Department is paid to it on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in prospecting for, or extraction or production of mineral oils. amount, which is contemplated under sub-section (2), has already been included. No doubt, we notice that there is no provision which provides as to who is to make payment to non-resident and which is to be included. In other words, it could be argued that any payment by Income Tax Department as such is not expressly excluded. Shri Posti would confine himself to clause (a) of sub-section (2) of Section 44BB of Act and we are not called upon to decide impact of clause (b) of sub-section (2) of Section 44BB of Act. But nonetheless on reading of clause (a), we are left with impression that what is contemplated is only payments received actually or payable on account of provision of services and facilities in connection with, or supplying plant and machinery on hire used, or to be used. No doubt, learned counsel for Revenue drew our attention to judgment of Hon ble Apex Court, reported in AIR 1969 SC 288 (Vidya Sagar Joshi Vs. Surinder Nath Gautam). That is case of Representation of People Act. Therein, Court, inter alia, has held as follows:- critical words of Section 77 are expenditure , in connection with election and incurred or authorised . Expenditure means amount expended and expended means to pay away, lay out or spend. It really represents money out of pocket, going out. It is money in connection 15 with his election. These words mean not so much as consequent upon as having to do with . 20. But here, words in connection with are relatable to provision of services and facilities of supply of plant and machinery. We would think that it will be impermissible being too farfetched to include amount received from Income Tax Department in circumstances which we have already set out as falling within same. No doubt, question may arise as to whether after providing for deeming provision in sub-section (1) providing that notwithstanding anything to contrary contained in sections 28 to 41 and sections 43 and 43A, 10% of amounts in sub-section (2) shall be deemed to be profits and gains chargeable to tax and yet amount under Clause 6 of Article 12 of Treaty is to be taxed as business profits. But, we also asked learned counsel for Revenue whether tax is premised under Section 28, or is taxable under Section 56 (the income from other sources), answer was, it is under Section 56 of Act. Learned counsel for Revenue would submit that appellant had been taxed under Clause 6 of Article 12 of Treaty. 21. We need not probe matter further as we confined ourselves to questions of law which we have formulated already and also which we have formulated today. 22. In upshot of above discussion, we answer questions of law, which were already formulated, against appellant. We also answer question of law, which we have formulated today, against appellant. Consequently, appeals are without merit and they are dismissed. No order as to costs. (V.K. Bist, J.) (K.M. Joseph, C.J.) 19.05.2015 19.05.2015 P. Singh M/s B.J. Services Company Middle East Limited v. Assistant Commissioner of Income-tax, (O.S.D.) Range-1,Dehradun