MUFG Bank Ltd. vs ACIT, Circle-2(2)(1), Intl. Taxation, Delhi: A Case of Taxation Dispute on Income-Tax Refund Interest – ITA 1246/DEL/2022

MUFG Bank Ltd. vs ACIT, Circle-2(2)(1), Intl. Taxation, Delhi

Case Overview

ITA No.1246/Del/2022 was a significant case brought before the Income Tax Appellate Tribunal, Delhi Bench ‘D’. The core of the dispute revolved around MUFG Bank Ltd. (formerly known as the Bank of Tokyo Mitsubishi UFG Ltd.) and the ACIT, Circle-2(2)(1), Int. Taxation, Delhi, for the assessment year 2015-16. This case spotlighted the taxability of interest on income-tax refund under the India-Japan Double Taxation Avoidance Agreement (DTAA) and raised pivotal questions about tax rates, interest under sections 234D and 244A of the Income-tax Act, 1961, and the initiation of penalty proceedings.

Background

MUFG Bank Ltd., a banking institution and a tax resident of Japan, filed its return of income for the assessment year 2015-16, which included a contention regarding the tax rate applicable to interest on income-tax refund amounting to INR 6,83,72,179.

The appellate raised objections against the final assessment order determined by the AO under section 254/143(3) read with section 144C(3) of the Income-tax Act, 1961, particularly disputing the taxation rate applied to the interest on the income-tax refund. The bank argued that pursuant to Article 11 of the India-Japan tax treaty, such interest should be taxed at 10%, contrary to the AO’s imposed rate of 43.26%.

Proceedings and Final Judgment

Detailed analysis and arguments were presented by both parties. The appellant bank contended that the applicable taxation rate for interest on income-tax refunds was not correctly applied, emphasizing reliance on the India-Japan DTAA and previous tribunal and high court decisions favouring a 10% tax rate. Conversely, the Assessing Officer, following the Dispute Resolution Panel’s (DRP) advice, applied a higher rate, arguing compliance with the tribunal’s past direction.

The Tribunal, assessing the arguments and evidences, decided partly in favor of the appellant. It directed the AO to tax the interest on refund accurately in accordance with the India-Japan DTAA and allowed for rectification in case of computational errors, addressing other concerns such as levy of interest under section 234D and the grant of interest under section 244A in accordance to law.

Conclusion

The final verdict pronounced by the Tribunal on January 31, 2023, was a meticulous decision that highlighted the complexities surrounding tax treaties and domestic laws. While the Tribunal dismissed some of the appellant’s grounds as premature or general, it unequivocally directed toward the adherence to the specified tax treaty rates and legal precedents, thus partly allowing the appeal for statistical purposes. This judgment reinforces the significance of accurate tax rate application and adherence to international agreements, providing a noteworthy reference for similar cases in the field of international taxation.

Key Takeaways

• The importance of accurately applying tax treaty provisions in determining tax obligations.
• The role of judicial decisions in interpreting and clarifying tax laws and treaties.
• The necessity for precision in tax assessments and the possibility of rectification in case of errors.

MUFG Bank Ltd. vs ACIT, Circle-2(2)(1), Intl. Taxation, Delhi: A Case of Taxation Dispute on Income-Tax Refund Interest – ITA 1246/DEL/2022