1983 (6) TMI 31 - HC - Income Tax

Tribunal Upheld Jurisdiction Under Tax Treaty, Exempting Profits from Tax

The court upheld that the Tribunal had jurisdiction under Article XVIII of the Indo-German Double Taxation Avoidance Agreement. It ruled that the ... Mutual agreement procedure - application of tax treaty over domestic charging provisions - business connection - permanent establishment - agent versus independent contractor - interest as part of purchase consideration - interest as income from indebtednessMutual agreement procedure - Whether invocation of the mutual agreement procedure under the IndoGerman Double Taxation Avoidance Agreement ousts the jurisdiction of domestic courts or tribunals to decide tax disputes - HELD THAT: - Article XVIII (the mutual agreement procedure) affords a procedure additional to, and not in substitution for, the ordinary domestic remedies. International and comparative authorities, the OECD commentary and foreign decisions support that the mutual agreement procedure does not prevent a taxpayer from pursuing domestic appeals; invocation of the procedure does not bar recourse to domestic tribunals if the taxpayer so elects or if the mutual agreement procedure does not yield a satisfactory outcome. The Tribunal therefore had jurisdiction to apply the Agreement in hearing the appeals.Held in favour of the assessee: the mutual agreement procedure does not oust domestic remedies and the Tribunal could consider applicability of the Agreement.Application of tax treaty over domestic charging provisions - business connection - Whether section 9(1)(i) of the Incometax Act, 1961 (business connection deeming provision) overrides or is enforceable notwithstanding the IndoGerman Agreement - HELD THAT: - Sections 4 and 5 of the Act are expressly subject to the Act, which includes agreements entered under section 90. Where a Double Taxation Avoidance Agreement contains express provisions to the contrary, those treaty provisions prevail over domestic charging provisions. Accordingly, even if income might be deemed to accrue or arise in India under section 9 by virtue of a 'business connection', the industrial or commercial profits of a foreign enterprise are not taxable in India except as permitted by article III of the Agreement. The Court rejected reliance on domestic precedents that do not concern superseding effect of tax treaties.Held in favour of the assessee: the Agreement prevails over section 9 to the extent of its provisions; s.9 cannot be applied to tax the German company's profits except as permitted by the Agreement.Permanent establishment - agent versus independent contractor - Whether the German company had a 'permanent establishment' in India (directly, through the Poona company, or through the supervising engineer) so as to render its profits taxable under the latter part of article III read with article II(1)(i) - HELD THAT: - The term 'permanent establishment' requires a substantial and enduring presence amounting to a projection of the foreign enterprise into the taxing State. Subclause (aa) (fixed place) did not apply because the contract contemplated supply and delegation of a supervising engineer only, and the Port Trust alone bore the costs and responsibility for erection and assembly. Subclause (bb) (deeming for construction/installation projects) did not apply because the German company did not itself carry out construction/installation or bear those obligations; the bills stating delivery 'without assembly' do not establish that the German company performed or paid for erection. The Poona company was a separate independent contractor and not an agent of the German company; there was no evidence of control, authority to contract, or identity of profit to treat it as the German company's agent under subclause (dd). The supervising engineer merely supervised and did not conduct the works on behalf of the German enterprise. On these bases the Tribunal's finding that there was no permanent establishment was upheld.Held against the Department: the German company did not have a permanent establishment in India and its profits were not taxable on that ground.Interest as part of purchase consideration - interest as income from indebtedness - Whether the interest paid with the twenty deferred instalments under clause 12(a) of the contract constituted 'interest' from an indebtedness taxable under article VIII of the Agreement - HELD THAT: - Under established principles, interest means amount earned from deprivation of the use of money where there is a debt; however, where an amount described as interest is merely part of the purchase price for deferred payment it is not interest arising from an independent indebtedness. The contract evidenced deferred payment of purchase money with an agreed addition described as interest; there was no novation converting unpaid purchase money into a loan or independent debt. The agreed interest thus formed part of the sale consideration and not an independent source of income within article VIII. Consequently the sums characterized as interest in clause 12(a) are not taxable as interest under the Agreement.Held in favour of the assessee: the interest element formed part of the purchase consideration and did not constitute taxable interest under article VIII.Final Conclusion: The reference is answered for the assessee. The mutual agreement procedure does not oust domestic remedies; the IndoGerman Double Taxation Avoidance Agreement prevails over domestic deeming provisions to the extent of its terms; the German company had no permanent establishment in India through the Poona company or supervising engineer; and the deferredpayment 'interest' was part of the purchase price and not taxable as interest under the Agreement. The assessee is therefore immune from liability, wholly or partly, to incometax under the Agreement. Issues Involved:1. Jurisdiction of the Tribunal under Article XVIII of the Agreement.2. Applicability of Section 9(1) of the Income-tax Act, 1961, in light of Article III of the Agreement.3. Existence of a 'permanent establishment' of the German company in India under Article II(1)(i) of the Agreement.4. Taxability of interest paid under Article VIII of the Agreement.Summary:1. Jurisdiction of the Tribunal under Article XVIII of the Agreement:The court held that Article XVIII of the Indo-German Double Taxation Avoidance Agreement (the Agreement) outlines a 'mutual agreement procedure' that is in addition to, and not in substitution of, the remedies available before domestic courts or tribunals. The Tribunal was therefore entitled to consider the applicability of the Agreement.2. Applicability of Section 9(1) of the Income-tax Act, 1961, in light of Article III of the Agreement:The court ruled that the provisions of Sections 4 and 5 of the Income-tax Act, 1961, are subject to the terms of any Double Taxation Avoidance Agreement entered into by the Government of India u/s 90. Consequently, even if the income of the German company is deemed to have accrued or arisen in India u/s 9, the terms of Article III of the Agreement would prevail, exempting the industrial or commercial profits of the German company from tax unless derived through a 'permanent establishment' in India.3. Existence of a 'permanent establishment' of the German company in India under Article II(1)(i) of the Agreement:The court examined whether the German company had a 'permanent establishment' in India through its dealings with the Poona company or the German engineer, Mr. Bremer. The court found that the German company did not have a fixed place of business in India and that the Poona company acted as an independent contractor, not an agent. The German engineer's role was limited to supervision and did not establish a 'permanent establishment.' Therefore, the German company did not have a 'permanent establishment' in India.4. Taxability of interest paid under Article VIII of the Agreement:The court held that the interest payable along with the 20 instalments of unpaid purchase money was part of the sale consideration itself and not an independent source of income. The interest did not arise from any form of 'indebtedness' as contemplated in Article VIII of the Agreement. Therefore, the interest specified in the contract was not liable to income-tax in India.Conclusion:The court agreed with the Tribunal and answered the question in the affirmative, in favor of the assessee (Port Trust) and against the Department, stating that the assessee is immune from liability either wholly or partly to income-tax under the Double Taxation Avoidance Agreement between Germany and India.