Treaty allocation of business profits through a permanent establishment bars Indian taxation where the income is taxable only abroad.

Profits earned through a permanent establishment in the USSR were governed by the business profits article of the applicable double taxation avoidance agreement, which allocated taxation only to the extent attributable to that permanent establishment in that State. The elimination-of-double-taxation article could not override this specific allocation rule, because it applied only where the same income remained taxable in both countries. A prior Special Bench decision, affirmed by the Supreme Court, was treated as binding and applied to the materially similar treaty language. The income from the USSR permanent establishment was therefore not taxable in India, and the addition was deleted.

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Issues: Whether the profits earned by the assessee from its branch operations in USSR, being attributable to a permanent establishment there, were taxable in India or only in USSR under the applicable double taxation avoidance agreement, and whether the credit/elimination article could be invoked to tax such profits in India.

Analysis: The relevant treaty provision governing business profits provided that the profits of a resident enterprise carrying on business through a permanent establishment in the other Contracting State were taxable only to the extent attributable to that permanent establishment in that State. The article dealing with elimination of double taxation applied only where the same income was otherwise exposed to taxation in both countries and therefore did not displace the specific allocation rule under the business profits article. The earlier Special Bench decision, affirmed by the Supreme Court, was treated as binding and was applied to the materially similar treaty language in the present case.

Conclusion: The income earned through the USSR permanent establishment was not taxable in India, and the deletion of the addition was upheld in favour of the assessee.

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