Treaty allocation of business profits and immovable-property gains barred Indian tax on Malaysian income and capital gains.

Under the India-Malaysia tax treaty, business profits of a Malaysian enterprise were taxable only in Malaysia because the assessee had no permanent establishment in India, so income from the rubber estates was not taxable in India. Capital gains from the sale of immovable property in Malaysia were also outside Indian taxation because treaty Article 6 allocated immovable-property income, including gain derived from such property, to the State where the property is situated. The departmental appeal therefore failed on both issues, and the treaty allocation prevailed over domestic taxation.

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Issues: (i) Whether income from rubber estates in Malaysia was assessable in India in the absence of a permanent establishment in India; (ii) Whether capital gains arising from the sale of immovable property in Malaysia were assessable in India.

Issue (i): Whether income from rubber estates in Malaysia was assessable in India in the absence of a permanent establishment in India.

Analysis: Under Article 7(1) of the agreement for avoidance of double taxation, the business profits of an enterprise of one contracting State are taxable only in that State unless the enterprise carries on business in the other contracting State through a permanent establishment situated there. The assessee had no permanent establishment in India.

Conclusion: The income from the rubber estates in Malaysia was not taxable in India and this issue was decided against the Department.

Issue (ii): Whether capital gains arising from the sale of immovable property in Malaysia were assessable in India.

Analysis: Article 6 of the agreement provides that income from immovable property may be taxed only in the contracting State in which the property is situated. Capital gains from the sale of immovable property were treated as arising from the property itself and therefore fell within Article 6. As the property was situated in Malaysia, the gain was outside Indian taxation under the treaty.

Conclusion: The capital gains on the sale of the Malaysian property were not taxable in India and this issue was decided against the Department.

Final Conclusion: The treaty excluded Indian taxation of both the Malaysian business income and the Malaysian capital gains, so the departmental appeal failed in full.

Ratio Decidendi: Where a treaty allocates business profits to the State of residence unless there is a permanent establishment in the other State, and allocates immovable-property income to the State where the property is situated, India cannot tax those items contrary to the treaty allocation.

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