Arm's length attribution of permanent establishment profits must precede consideration of section 10A deduction claims.

Profits attributable to an Indian permanent establishment had to be computed on an arm's length basis under Article 7 of the India-USA tax treaty before the claim for deduction under section 10A could be examined. Because the lower authorities had not carried out a proper treaty-based attribution exercise, the assessment could not be sustained on that basis. The matter was restored to the Assessing Officer for fresh determination of the profits attributable to the permanent establishment, after which the section 10A claim could be considered. The assessee's reliance on export realisation certificates and government approvals was left for examination in the fresh proceedings.

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Issues: Whether the profits attributable to the Indian permanent establishment had to be determined on an arm's length basis under Article 7 of the India-USA tax treaty before examining eligibility for deduction under section 10A of the Income-tax Act, 1961, and whether the assessment could be sustained without such determination.

Analysis: The assessee was accepted to be a permanent establishment in India of the foreign enterprise, so the profits attributable to the Indian operations had to be computed in accordance with Article 7 of the treaty. That provision requires attribution of profits as if the permanent establishment were a distinct and independent enterprise dealing at arm's length, and permits estimation on a reasonable basis only where the correct amount cannot otherwise be determined. The orders below had not undertaken a proper arm's length determination of the profits attributable to the permanent establishment. Since the claim under section 10A depended upon the profits so attributable, that claim could not be decided until the treaty-based attribution exercise was first completed. The assessee's contention that export realization certificates and governmental approvals supported its case was directed to be examined by the Assessing Officer in the fresh proceedings.

Conclusion: The matter was required to be restored to the Assessing Officer for fresh determination of profits attributable to the permanent establishment under Article 7, and only thereafter could the claim under section 10A be considered. The assessee succeeded to that extent.

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