Treaty amendment on permanent establishment profits operates prospectively; related refund, exemption, guarantee commission and bad debt computations are clarified.

A treaty amendment introducing a domestic-law limitation into the computation of permanent establishment profits operates prospectively unless the treaty expressly provides otherwise; accordingly, section 44C did not restrict head office expenses under Article 7(3) of the Indo-UAE treaty for the relevant years. The article also notes related tax computation positions: interest under section 244A is to be calculated on the refund without reducing earlier interest, exemption under section 10(15) applies to gross receipts, guarantee commission accrues over the guarantee period, valuation losses on investments may be allowed where cost or market value principles are applied, and bad debt deduction is computed without the Revenue's improper set-off of the closing provision.

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Issues: (i) Whether head office expenses attributable to Indian branches could be restricted under section 44C in computing profits of the permanent establishment under Article 7(3) of the Indo-UAE treaty, and whether the later protocol amendment applied retrospectively. (ii) Whether interest under section 244A had to be computed without reducing the interest component already granted from the refund. (iii) Whether exemption under section 10(15) was to be allowed on gross receipts and not on net income. (iv) Whether guarantee commission was taxable on receipt basis or had to be spread over the period of the guarantee. (v) Whether loss arising from the difference between cost and book value of investments was allowable. (vi) Whether bad debts were allowable without setting off the closing provision for bad debts under section 36(1)(viia).

Issue (i): Whether head office expenses attributable to Indian branches could be restricted under section 44C in computing profits of the permanent establishment under Article 7(3) of the Indo-UAE treaty, and whether the later protocol amendment applied retrospectively.

Analysis: Article 7(3), as it stood for the relevant years, allowed deduction of expenses incurred for the business of the permanent establishment without the domestic-law limitation later inserted by the protocol. Article 25(1) was held to govern relief from double taxation and not to import domestic-law restrictions into the computation machinery of Article 7(3). The amendment introduced by the protocol with effect from 1 April 2008 was treated as prospective, since a treaty amendment creating a new limitation cannot be read retrospectively in the absence of express language or necessary implication.

Conclusion: The restriction under section 44C did not apply for the years in question, and the issue was decided in favour of the assessee.

Issue (ii): Whether interest under section 244A had to be computed without reducing the interest component already granted from the refund.

Analysis: Interest under section 244A is to be calculated on the tax refund due, and the refund already granted for this purpose cannot be reduced by the interest component earlier paid. The method adopted by the Revenue was held to be incorrect because it diminished the principal refund base by including interest already granted.

Conclusion: The computation directed by the assessee was accepted, and the issue was decided in favour of the assessee.

Issue (iii): Whether exemption under section 10(15) was to be allowed on gross receipts and not on net income.

Analysis: The exemption provision was applied to the interest payable itself, and the Tribunal followed its earlier view that gross receipts constituted the relevant base for the exemption. The Revenue's attempt to confine the benefit to net income was rejected.

Conclusion: The exemption was held allowable on gross receipts, in favour of the assessee.

Issue (iv): Whether guarantee commission was taxable on receipt basis or had to be spread over the period of the guarantee.

Analysis: The commission was linked to the continuing obligation under the guarantee and therefore accrued over the guarantee period rather than entirely on the date of receipt. Consistent accounting treatment and the principle of accrual supported apportionment over the currency of the guarantee.

Conclusion: The addition on account of guarantee commission was deleted, in favour of the assessee.

Issue (v): Whether loss arising from the difference between cost and book value of investments was allowable.

Analysis: The assessee followed the method of valuing investments at cost or market value whichever was lower. The reversal of an earlier over-valuation and the consequent claim for the differential were consistent with accepted valuation principles and were supported by precedent on stock and investment valuation.

Conclusion: The claim was allowed, in favour of the assessee.

Issue (vi): Whether bad debts were allowable without setting off the closing provision for bad debts under section 36(1)(viia).

Analysis: Deduction for bad debts had to be worked out with reference to the actual write-off and the permissible provision under section 36(1)(viia), but the closing provision could not be set off in the manner adopted by the Revenue so as to reduce the allowable write-off beyond the correct statutory computation.

Conclusion: The assessee's claim was accepted, and the issue was decided in favour of the assessee.

Final Conclusion: The consolidated result was that the principal treaty-based claim and the connected computation issues were substantially accepted for the assessee, while the remaining matters either followed earlier precedent or were restored only for limited fresh verification, leaving the assessee with partial overall success.

Ratio Decidendi: A treaty amendment introducing a domestic-law limitation into the computation of permanent establishment profits operates prospectively unless the treaty expressly provides otherwise, and general elimination-of-double-taxation provisions cannot be used to import such a limitation by implication.

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