Double taxation agreement prevails over domestic deeming rules; no permanent establishment and no separate indebtedness were found.

A double taxation agreement was treated as an additional remedial framework and not a substitute for domestic remedies under the Income-tax Act. The agreement prevailed over section 9(1)(i) to the extent of any inconsistency, so foreign business profits were taxable in India only if attributable to a permanent establishment. On the facts, no permanent establishment arose through the project arrangement, the Indian company, or the supervising engineer, as the Indian activities did not create a fixed place or dependent agency presence. Amounts described as interest on deferred instalments were part of the purchase price, not interest on separate indebtedness, and Article VIII did not apply.

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Issues: (i) Whether the mutual agreement procedure under the Double Taxation Avoidance Agreement excluded the ordinary remedies under the Income-tax Act; (ii) whether the Agreement overrode section 9(1)(i) of the Income-tax Act, 1961 so as to prevent taxation of the German enterprise's profits in India on the basis of business connection; (iii) whether the German enterprise had a permanent establishment in India through the project arrangement, the Poona company, or the supervising engineer; and (iv) whether the interest payable on deferred instalments formed interest on indebtedness within Article VIII of the Agreement.

Issue (i): Whether the mutual agreement procedure under the Double Taxation Avoidance Agreement excluded the ordinary remedies under the Income-tax Act.

Analysis: Article XVIII provided a machinery for a resident to present a case to the competent authority where double taxation was said to arise. The provision was treated as an additional remedial procedure and not as a replacement for the domestic appellate or tribunal remedies available under the taxing statute. The assessee was therefore entitled to invoke the Agreement before the Tribunal.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether the Agreement overrode section 9(1)(i) of the Income-tax Act, 1961 so as to prevent taxation of the German enterprise's profits in India on the basis of business connection.

Analysis: The charging and deeming provisions of the Income-tax Act were held to operate subject to the Agreement entered into under section 90. Article XVI preserved the domestic law only to the extent the Agreement made no contrary provision, while Article III restricted taxation of industrial or commercial profits of the foreign enterprise unless profits were derived through a permanent establishment. The Agreement therefore prevailed over the domestic deeming fiction to the extent of inconsistency.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Issue (iii): Whether the German enterprise had a permanent establishment in India through the project arrangement, the Poona company, or the supervising engineer.

Analysis: A permanent establishment was construed as a fixed place of business involving a substantial and enduring projection of the foreign enterprise into India. The contract showed that the supply obligation was separate from the erection work, and the erection and installation at Visakhapatnam were undertaken by the Port Trust at its own expense. The Poona company was treated as an independent contractor acting on a principal-to-principal basis and not as an agent with authority to bind the German enterprise. The supervising engineer merely supervised the work and did not himself carry on construction, installation, or assembly on behalf of the foreign enterprise. None of the deeming clauses relied upon by the Revenue was satisfied.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Issue (iv): Whether the interest payable on deferred instalments formed interest on indebtedness within Article VIII of the Agreement.

Analysis: The agreed interest was found to be part of the deferred purchase price and not interest arising from a separate loan or indebtedness. The contract did not create an independent debt distinct from the sale consideration, and the mere use of the label "interest" did not alter its true character. Article VIII was therefore inapplicable.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The Agreement protected the assessee from Indian tax on the disputed amounts, and the foreign enterprise's profits, including the deferred-payment interest, were not taxable in India on the facts found.

Ratio Decidendi: Where a double taxation agreement makes a contrary provision, it prevails over the domestic deeming rules; a foreign enterprise is taxable in India on business profits only if it has a permanent establishment there, and interest forming an inseparable part of deferred sale consideration is not interest on a separate indebtedness.

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