Treaty allocation of business profits to a Sri Lankan permanent establishment barred Indian taxation on the facts found.

Where business profits were attributable to a permanent establishment in Sri Lanka, the India-Sri Lanka tax treaty was applied to allocate taxation to Sri Lanka, so the receipts were not taxable in India on the facts found. The court also noted that the income's not having been actually taxed in Sri Lanka did not by itself create Indian tax liability or raise a double taxation relief issue. As the Tribunal's treaty-based view on the situs of taxation was left undisturbed, no referable question of law arose and the Department's request for reference failed.

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Issues: Whether the income received from Sri Lanka was taxable in India in the presence of a permanent establishment in Sri Lanka, and whether any referable question of law arose for decision.

Analysis: The agreement between India and Sri Lanka was applied to determine the tax situs of the receipts. The existence of a permanent establishment in Sri Lanka was accepted on the facts, and the relevant treaty articles were read together to hold that profits attributable to that establishment were taxable only in Sri Lanka. Since the income arose in Sri Lanka and was not shown to attract Indian taxation merely because it was not actually taxed there, no double taxation relief issue arose so as to justify reference.

Conclusion: The income was not taxable in India on the facts found, and no referable question of law arose.

Final Conclusion: The Department's request for a reference failed because the Tribunal's view on treaty-based exemption and the situs of taxation was left undisturbed.

Ratio Decidendi: Where an assessee carries on business through a permanent establishment in the other Contracting State and the treaty allocates the attributable profits to that State, such income cannot be taxed again in India merely because it was not actually subjected to tax there.

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