Treaty allocation of foreign business profits bars Indian loss set-off, while interest income remains fully taxable

Treaty allocation under the India-Malaysia agreement governed the taxation of a resident company's Malaysian plantation profits and Indian interest income. Business profits attributable to the Malaysian permanent establishment were taxable only to the extent permitted by Article 7, so the Malaysian plantation income could not be brought into Indian computation as an Indian business loss or used for inter-head set-off. Indian office expenditure connected with that foreign enterprise was treated as attributable to the Malaysian business, not as a separate Indian loss. Interest earned in India was separately covered by Article 12 and, where no expenditure was incurred to earn it, was taxable in full under the residuary head.

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Issues: Whether the interest earned in India on remitted foreign exchange could be set off against the claimed Indian loss, and whether the Malaysian plantation income or the Indian expenditure connected with that business could be brought into computation for Indian income-tax purposes under the applicable double taxation agreement.

Analysis: The assessee was a resident company carrying on a Malaysian rubber plantation. Under the residence rule, foreign income of a resident is ordinarily within Indian taxability, but the double taxation agreement altered the position. The plantation constituted a permanent establishment in Malaysia, and the business profits attributable to that establishment were taxable only to the extent permitted by Article 7 of the agreement. On the facts found, no part of the plantation profits accrued in India, and the Indian office expenses were not a separate Indian business loss but expenditure attributable to the Malaysian enterprise. The treaty therefore did not permit apportionment of Malaysian profits into an Indian business loss for inter-head adjustment. The interest income received in India was separately governed by Article 12 and, since no expenditure was incurred to earn it, it was taxable in full as income from other sources.

Conclusion: The claim to set off the Indian loss against the interest income was rejected, and the Malaysian business income could not be excluded from the Indian computation on the basis contended by the assessee. The decision was against the assessee and in favour of the Revenue.

Ratio Decidendi: Where treaty provisions specifically allocate business profits to the State of the permanent establishment and separately deal with interest, Indian office expenditure attributable to the foreign business cannot be recharacterised as an Indian business loss for inter-head set-off, and interest earned in India without related expenditure is fully taxable under the residuary head.

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