TaxTMI 
TaxTMI 
2010 (7) TMI 535
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....apore, Tokyo, Moscow, and Sao Paulo. There is, however, no dispute that the assessee does not have any branch office or any other similar form of presence in India. During the relevant previous year, the assessee firm rendered services to certain clients whose operations extended to India, and these services were in connection with projects in India. The services so rendered were rendered from outside India as also from within India. The services were rendered from outside India by assessee's London office, but at times partners and staff members of the assessee firm also visited India to render these professional services. The assessee had worked for following projects for which partly work was done in India and partly work was done outside India: Sl. No. Name of the Client Name of the Project / Matter 1. Denro Ispat Chandrapur coal project 2. CESC Balagrah power project 3. Enron Power Indian power project 4. Hinduja National Power Vizag 5. Dresdner Kleinwortbenson Bajaj GDR issue 6. Barclays Capital Finolex Cables GDR 7. S.S. Warburg Securities Ltd. India cements Limited 8. HSBC Investment Bank PL....
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....y and no stability so as to result in a permanent establishment. The assessee contended that, in any event, the activities of assessee do not involve furnishing of services as envisaged in Article 5(2)(k) of the Indo UK tax treaty as the assessee is an international professional enterprises rendering services directly to its clients. It was also contended by the assessee that the professional services rendered by the assessee can at best be covered by Article 15 but, in any event, Article 15 extended to only individuals and not to the partnership firms or other forms of business organizations. It was submitted that the assessee cannot be taxed under Article 7 as the assessee did not have a PE in India under the provisions of Article 5(2)(k) read with Article 5(1), and the assessee can not be taxed under Article 15 as the said Article only applies to the services rendered by individuals whereas the assessee is a partnership firm. It was contended that since the provisions of the applicable tax treaty were beneficial to the assessee, these treaty provisions will override the provisions of the Indian Income Tax Act, 1961, and the income of the assessee cannot be brought to tax under t....
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....ee is taxable as business profits under Article 7. Without prejudice to this line of reasoning, the Assessing Officer also held that the income earned by the assessee is also taxable under Article 15 as 'independent personal services' and he relied upon the decision of this Tribunal in the case of Clifford Chance Vs DCIT (82 ITD 106) in support of the same. 5. Having held that the income of the assessee from projects in India is taxable in India, the Assessing Officer turned to quantification of the income so liable to be taxed in India. It was noted that without prejudice to assessee's contentions regarding non taxability of its income in India, the assessee had enclosed an income and expenditure account in which income has been computed as follows: In UK GBP Income 6,91,190 Less : Direct expenditure 1,88,206 Overheads (5% of income) 34,565 Profits 4,68,419 6. It was also noted that the above computation was based on the position stated at Note 10 of the statement accompanying the income tax return and the position stated in the tax audit report attached to the return of income. A perusal of these document....
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....he Hon'ble Authority for Advance Ruling in the case of Steffen, Robertson & Kirsten Consulting Engineers & Scientists, In Re (230 ITR 206) wherein it is observed that, "A careful reading of Section 9, together with the Explanations thereto, makes it clear that the statutory test for determining the place of accrual of income is not the place where these services are rendered but where those services are utilized". Therefore, irrespective of the place where services are rendered, income should be deemed to accrue or arise in India. The Assessing Officer, having noted that the assessee has taken into account charges only for services rendered in India, thus held that whether the services rendered from India, or from outside India, the entire income in connection with projects in India is required to be taxed in India. He thus took into account the overall amounts invoiced by the assessee in respect of services rendered for Indian projects. It was also noted by the Assessing Officer that amounts invoiced to the clients were in the nature of invoices for professional fees as well as invoices/ requisitions for reimbursements of expenditure. While Assessing Officer noted assessee's....
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....out complete success. While the CIT(A) upheld the action of the Assessing Officer so far as existence of permanent establishment in India is concerned, he held that under Article 7(1) of the India UK tax treaty as also under Explanation (a) to Section 9(1)(i), only income in respect of such work can be brought to tax in India as has been carried out in India. The CIT(A) rejected the adjustments done by the assessee in respect of revenues for work done by the PE and adoption of hypothetical market rates for such services in India, and held that only actual billing amount is to be taken into account. While holding so, the CIT(A), inter alia, made following significant observations: On the question of existence of PE "........... The contention of the learned A.R. cannot be accepted for the following reasons. • *Para 2 of Article 5 of the DTAA provides the circumstances under which permanent establishment arises in a Contracting State. Para 2 provides for specific instances over and above the general provisions contained in para 1 of Article 4 e.g. duration of construction contract, furnishing of services other than technical services, etc. It is a well accepted pri....
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....pellant and not at the notional rates. On taxability of services rendered outside India in connection with projects in India .......On a careful consideration, I find force in the learned A.R's arguments. I have perused the detailed analysis chart provided by the appellant to the assessing officer regarding the amount of invoice relating to services rendered in India and the amount relating to services rendered outside India. I have also perused the invoices raised by the appellant. From the details, it can be observed that more than 90% of the invoices are raised by the appellant on foreign enterprises. Further, in many cases, the appellant has rendered services in relation to ADR/GDR or Bound issues outside India. Therefore, it will be incorrect to assume that the services rendered by the appellant are utilized in India. In any event, I agree with the learned A.R. that the income earned by the appellant were not in the nature of fees for technical services as defined in section 9(1)(vii) and therefore the AAR Ruling in the case of S.R.K. Consulting Engineers (supra) will not apply to the facts of the appellant. 6.10 Even in the case of Clifford Chance (82 ITD 106) the Ho....
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....sfied by the decision of the CIT(A), and both the parties are in cross appeals before us on the following grounds : Assessee's grounds of appeal 1. The Learned Commissioner (Appeals) ought to have directed the Assessing Officer to determine the total income of the appellant at Rs. Nil as returned by the appellant. 2. The Learned Commissioner (Appeals) erred in holding that the appellant had a permanent establishment in India under Article 5(2)(k) of the Tax Treaty between India and the U.K. The Learned Commissioner (Appeals) ought to have appreciated that appellant had no permanent establishment in India. 3. Without prejudice to the above, the Learned Commissioner (Appeals) erred in not directing the Assessing Officer to accept the computation provided by the appellant in the Income and Expenditure Account as being the income attributable to the permanent establishment. The Learned Commissioner (Appeals) ought to have directed the Assessing Officer to adopt the gross income at 6,91,190 pounds deduction for direct expenditure at 1,88,206 pounds, deduction for overheads 34,565 pounds and net profit 4,68,419 pounds. 4. Without prejudice to the above, the Lear....
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.... dispute that so far as income from the work carried out by the assessee in India is concerned, the same is taxable in India under the domestic law, though he hastened to add that this aspect of the matter is wholly academic since under the applicable tax treaty, the income from even work done by the assessee in India cannot be brought to tax in India. 13.On the question of taxability under the domestic law, learned counsel's basic contention is that even under the domestic law, the income of the assessee firm is taxable only to the extent the work has been carried out in India. It is submitted that in view of Hon'ble Bombay High Court's judgment in the case of Clifford Chance vs DCIT (318 ITR 237) only such services as are rendered in India can be subjected to tax in India. Therefore, according to the learned counsel, even under domestic law, we cannot bring to tax services rendered to Indian projects from outside India. When learned senior counsel's attention was drawn to the amendments in Section 9 as proposed by the Finance Bill 2010, and impact of these amendments, when carried out, on Clifford Chance judgment of Hon'ble Bombay High Court, it was submitted that these amendm....
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....t and legislative process for the same is duly completed. 14. We agree with the learned counsel that the facts in the case of Clifford Chance were materially similar to the facts of the case before us. In the case of Clifford Chance also, the assessee was an English law firm and was rendering legal services in connection with certain projects in India, namely, Bhadravati Power Project, Vizag Power Project and Raviva Oil and Gas Field Project. While the claim of the assessee was that only such portion of the fees received, in connection with these projects is taxable in India as is attributable to services performed in India, the Assessing Officer opined that the total fees received for the India Project, whether the work was done in India or outside India, was taxable in India. When this dispute finally travelled before the Hon'ble Bombay High Court, it was, inter alia, contended by the assessee that "the place of utilization of service is not relevant but place of performance of the service is what would be determinative (of taxability)........" and reliance was placed on Hon'ble Supreme Court's judgment in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT (288 ITR ....
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.... or arise in India" as expressed in section 9 of the Act. Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of ax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevant in determining whether the income of the non-resident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the apex court, if one turns to the facts of the case in hand and examines them on the touchstone, section 9(1)(vii)(c) which clearly states...where the fees are payable in respect of services ....
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.... 9(1). After analysing Hon'ble Supreme Court's judgment in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT (supra), in paragraph 47 of the judgement, Their Lordships have observed that "In is thus evident that section 9(1)(vii)(c), read in its plain sense, envisages the fulfilment of two conditions : services, which are source of earning income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India" and that "In the present case, both these conditions have not been satisfied simultaneously". It is on this basis that Their Lordships came to the conclusion that "In the above view of the matter, contentions raised by the assessee/ appellant are to be accepted". The conclusions arrived at by Their Lordships were thus entirely based on their reading of the scope of Section 9(1) of the Income Tax Act, but in view of the retrospective amendment in Explanation to Section 9(1), the scope of this provision does no longer permit the interpretation adopted by Their Lordships. The very conceptual foundation of Hon'ble Bombay High Court's decision in the case of Clifford Chance (supra) ceases to hold good in law. When the legal provisions considered i....
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.... common factor in taxation policies of tax heavens, source rule is an integral part of the taxation system and any double jeopardy, due to inherent clash of source and residence rule, to a taxpayer is relieved only through the specified relief mechanism under the treaties and the domestic law. It is fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9. 18. It is, therefore, free from any doubt that Hon'ble Bombay High Court's judgment in the case of Clifford Chance is no longer good law, as there have been amendments in law in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the understructure of line of reasoning adopted by the Hon'ble Courts above. It is no longer necessary that, in order to invite taxability under section 9(1)(vii) of the Act, the services must be rendered in the Indian tax jurisdiction 19. In view of the above discussions, we are of the c....
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....dress us on the admissibility of treaty protection, before proceeding to address on the specific substantive provisions of the India UK tax treaty. 22. Learned counsel submits that since the Assessing Officer as also the Commissioner (Appeals) have not questioned this aspect, it is not open to us to raise that issue at this stage of the proceedings. It has been nobody's case that the assessee is not entitled to the treaty benefits at all. We are, according to the learned counsel, expanding the scope of appeal before us - something beyond the scope of our powers. Our attention was invited to Hon'ble Bombay High Court's judgment in the case of Pokhraj Hirachand Vs CIT (49 ITR 293). It is submitted that all that we are to decide at this stage is the issues raised by the appellants, and we cannot travel beyond that to unsettle the settled matters. Without prejudice to these objections on jurisdiction, learned counsel for the assessee also addressed us on merits on assessee's eligibility for treaty benefits. 23. Learned counsel submits that the assessable unit is the partnership firm itself, though the manner of computation of tax liability is such that the tax payable by the....
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....J Grudingh (supra), learned counsel submits that this was a case in which partnership firm was treated as a fiscally transparent entity in both the treaty partner countries, and, as such, it will have no application on the facts of the present case, i.e. in a situation in which partnership firm is treated as opaque entity in the source jurisdiction and as transparent entity in the residence jurisdiction. It is also submitted that the text of the judgment does not provide full information about applicable legal provisions in the relevant tax jurisdictions, and, as such, this decision cannot have any bearing on the question as to whether or not a partnership firm in UK is entitled to the treaty benefits under India UK tax treaty. 27. Learned counsel further submitted that when words of a tax treaty are less than unambiguous, even if that be so, the Courts and Tribunals have to interpret these words so as to advance the objectives and purposes of the tax treaty rather than so as to frustrate the undisputed objectives and purposes of the tax treaty. According to the learned counsel, this peculiar problem regarding eligibility of tax treaty benefits arises, if at all it can be ....
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....as of no consequence to the Assessing Officer since the entire income, whether in respect of work carried out in India or outside India in respect of Indian projects, was held to be taxable under the provisions of tax treaty as well. As this issue was academic, the Assessing Officer did not really address the same. This issue is, however, relevant now as the CIT(A) has given partial relief on the basis of treaty provisions. We are thus urged to decide the issue of eligibility of treaty benefits on merits, and reject the technical objection raised by the assessee. 29. Learned Departmental Representative invites our attention tothe definition of 'resident of a contracting state', as set out in Article 4(1), which states that resident of a Contracting State means "any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature". It is pointed out that as evident from Article 1(1) of the India UK tax treaty, the treaty can only apply to a person who is resident of one or both the contracting states. Therefore, in view of the provisions of Article 4(1) read with Article (1)....
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.... him in a position worse than what it was before the appeal. However, in the case before us, both the parties are in appeal, and we are not venturing into an area where a finding, if adverse to the assessee, will make him worse off vis‐à‐vis the position in the assessment, because whether the assessee is entitled to the treaty benefits or not, his taxable income does not go beyond what was assessed by the Assessing Officer. As learned Departmental Representative rightly contends, the issue was entirely academic at that stage since, even under the provisions of the treaty, entire income of the assessee relatable to project in India was held to be taxable. It is also not the case that the Assessing Officer decided the issue of admissibility of treaty benefits in favour of the assessee and that decision is now being put to scrutiny again. The Assessing Officer's action of not considering it expedient to look into the taxability of an income from all other possible angles cannot foreclose the examination of the taxability from different perspective. What is subject matter of dispute is not a facet of law but an income which is sought to be taxed. As long as the incom....
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....ss such orders as the Tribunal think fit" include all the powers (except possibly enhancement) which are conferred on AAC under section 31. ................. 10. In the present case, the subject matter of appeal before the Tribunal was the question as to what should be the proper written down value of the building, machinery etc of the assessee for calculating depreciation under section 10(2)(vi) of the Act. 16. The facts of the case before us are materially similar to the above case before the Hon'ble Supreme Court. In the present case also, the condition regarding providing eligible telecommunication services was not discussed by the Assessing Officer and the Commissioner (Appeals) and yet this issue was taken up by the Departmental Representative before us. The same was the situation in Hukumchand Mill's case (supra) wherein, as noted by the Hon'ble Supreme Court in paragraph 4 of their judgment, "it was urged before the Tribunal by the department that although the ITO had not considered the provisions of paragraph 2 of Section 2 of Taxation Laws Order, the said provisions were applicable in the present case and certain amounts of depreciation, which are allowed under the ....
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....ch as a disallowance not made by any of the authorities below cannot be made by the Tribunal, or any addition of income not made by the authorities below cannot be made by the Tribunal, but, within the subject matter of appeal, the Tribunal can examine any aspect of the matter - whether the same has been examined by the authorities below or not. It is, thus, not only invitation of the parties but also on its own that the Tribunal can address itself to an aspect related to the issue in appeal, even though the same may not have been specifically raised by either of the parties. The only limitation to this power perhaps is that it should not expand the scope of the appeal in terms of the income sought to be taxed or disallowance sought to be made, and that both the parties should have adequate opportunity of being heard on this issue in terms of the provisions of Rule 11 of the Appellate Tribunal Rules, 1963. As far as this aspect of the matter is concerned, we may usefully refer to the following observations and analysis of the legal position as made by a coordinate bench of this Tribunal, in the case of Morgan Stanley Asset Management Inc Vs DCIT (39 DTR 240) with which we are in re....
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....e subject-matter before it from different angle. As long as the subject-matter continues to remain the same, the Tribunal has sufficient power to examine it from any point of view. The Hon'ble Supreme Court in CIT vs. Mahalakshmi Textile Mills Ltd. 66 ITR 710 considered a case in which the Tribunal examined the true nature of Casablanca conversion system. The contention of the assessee that the introduction of Casablanca conversion system was of the nature of plant and machinery did not find favour with the Tribunal. It was held by the Hon'ble apex Court that : "The Tribunal rejected the claim of the assessee, but on that account the Tribunal was not bound to disallow the claim of the assessee for allowance of that amount spent if it was a permissible allowance on another ground. The Tribunal, on investigation of the true nature of the alterations made by the introduction of the Casablanca conversion system, came to the conclusion that it did not amount to installation of new machinery or plant, but it amounted in substance to current repairs to the existing machinery. The subject-matter of the appeal in the present case was the right of the assessee to claim allowance for Rs. 93,2....
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....us, the only question is the examination of the validity of the return from another angle. The upper limit of harm to be caused to the assessee is that the invalidity will sustain, the position in which the assessee is already sitting in. There is not going to be any enhancement by our action, as has been contended on behalf of the assessee. 24. Although our action is not going to result into any enhancement, but still when the issue has been raised by the learned Authorised Representative that the Tribunal can neither examine this aspect itself nor restore the matter to the AO for proper adjudication from this angle, we want to make it clear that there is no such bar on the Tribunal in restoring the matter to the file of AO even though it may result in enhancement. Hon'ble Supreme Court in CIT vs. Assam Travels Shipping Service 199 ITR 1 has held as under: "The AAC as well as the Tribunal clearly held that the computation of penalty made by the ITO was not in accordance with law and that the correct computation of penalty was also made while taking that view. The conclusion clearly reached was that the computation of penalty had to be made in accordance with s. 271(1)(a....
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....l apply to persons who are residents of one or both of the Contracting States. Article 3 - General definition (2) A partnership which is treated as a taxable unit under the Income-tax Act, 1961 (43 of 1961) of India shall be treated as a person for the purposes of this Convention. Article 4 - Fiscal domicile (1) For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. 35. We find that in terms of Article 1 (1), the India UK tax treaty "shall apply to persons who are residents of one or both of the Contracting States". As to what are the connotations of expression "resident of a contracting state", Article 4(1) of the treaty provides that, for the purposes of the said tax treaty, term 'resident of a Contracting State' " means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." It is thus necessary that the resident can only be 'person' and th....
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....n entity, in respect of its cross border income, in its source and residence tax jurisdictions. While taxing income attributable to a foreign entity, the source country has to first decide as to how such foreign entity should be treated for domestic tax law purposes of the source country, i.e. the exercise of 'foreign entity classification'. These classifications for the purposes of taxation, or the manner in which the taxpayers falling under that classification are taxed, need not be homogenous in the treaty partner countries. Let us consider a situation in which an entity is treated as opaque, and taxed as such, in one jurisdiction, and as fiscally transparent, and disregarded as such, in the other jurisdiction. While in the first jurisdiction, the entity will be taxed in its own right, and the second jurisdiction, i.e. where it is disregarded and treated as transparent, the taxability will be in the hands of the owners. That results in a situation that while there is no juridical double taxation of an income, there is undoubtedly economic double taxation of an income. Take, for example, a situation in which a partnership firm is treated as an opaque entity in the source jurisdic....
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....llowed by the source and residence tax jurisdictions. If this is not reconciled, it will also result in a situation that same tax object will get taxed twice. However, the rules of reconciliation in the case of differences in treaty classification are not as neatly laid down in the tax treaties. The rules not having been laid down does not imply that the glaring incongruity is to be treated as a tolerable evil. OECD efforts to resolve this problem, which are demonstrated by publication of its report 'The Application of OECD Model Convention to Partnerships' and subsequent changes to OECD Model Commentary, also show that it is well within the scope and intention of tax treaties to aim at resolving economic double taxation caused by asymmetrical tax treatment and entity classification. It does not, therefore, seem to be beyond the fundamental objectives of a tax treaty to relive the economic double taxation of an income a situation in which such economic double taxation arises due to asymmetrical tax treatment of a business entity. 43. Coming back to the fundamental issue that we need to deal with, i.e. whether or not the partnership firm before us is entitled to the benefits of t....
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....by us by underlining)" whereas the partnership firm in question was admittedly not a entity for tax purposes. Learned counsel is also right in observing that it was thus not a situation in which taxation of firm was asymmetrical in the partner tax jurisdiction. The judgement itself notes, in paragraph 10.5, "It is a common cause that a partnership is not a person or legal entity both in South African and the Kingdom of Lesotho". That situation is materially different vis‐à‐vis the situation that we are in seisin of in which a partnership firm regarded as a tax entity under the Indian Income Tax Act, under Article 3(2), is specifically covered by the definition of 'person'. This judicial precedent from South Africa is thus of little use to us. 46.In the case of TD Securities (USA) LLC Vs Her Majesty the Queen [2010 TCC 186; IBFD tax treaty case law database reference Canada‐ 2008‐2314(IT)G], Tax Court of Canada had an occasion to deal with the question of treaty entitlements to transparent entities. 47. Although the taxable entity in this case was not a partnership firm, the taxable entity was a fiscally transparent entity under the US....
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....ement or any other criterion of similar nature'. The short issue thus was whether or not a person, who does not pay tax in the residence state, in his own capacity and in respect of its income, can be said to be covered by the scope of expression, as set out in Article IV of Canada US tax treaty (with addition of word 'citizenship') and as is set out in Article 4(1) of India UK tax treaty which requires 'person' to be 'liable to taxation by reasons of his domicile, residence, place of management or any other criterion of similar nature'. On this issue, the Court, inter alia, concluded as follows: .........The US Code provides that the income of TD LLC is fully and comprehensively taxed to its member, Holdings II. This income is consolidated in the TD USA tax return and tax thereon is charged back by TD USA to TD LLC............In such a case, it seems clear that the income of TD LLC should enjoy the benefits of the US Treaty. The evidence is overwhelming that the object and purpose of the US Treaty read in the context of all of the evidence and authorities would not be achieved and would be frustrated if the Canadian sourced income of TD LLC that is fully taxed in the US under t....
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....s process involves looking to the language used and the intentions of the parties." The Court went on to quote approvingly from Addy J. in Gladden Estate v. The Queen, 85 DTC 5188, wherein he wrote at p. 5191: Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned. [54] Both the Vienna Convention and the Supreme Court of Canada in Crown Forest confirm that "literalism has no role to play in the interpretation of treaties": Coblentz v. The Queen, 96 DTC 6531 (FCA). [55] In Crown Forest the Supreme Court of Canada also held that, in ascertaining the purposes of a treaty article, a court may refer to extrinsic materials which form part of the legal context, including model conventions and official commentaries thereon, without the need to first find an ambiguity before turning to such materials. [56] The Preamble to the US Treaty sets out its purposes of reducing or eliminating do....
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....basis of strict principles of interpretation of tax laws. 52. Let us try to find contextual meaning of the term 'liable to tax by reasons of his domicile, residence, place of management or any other criterion of similar nature'. There could be several reasons for which a person may be liable to tax in a tax jurisdiction, such as source based taxation of an income, a presumptive tax in respect of an offshore business, or simply a tax because of a physical presence, such as by of a liaison office, in a tax jurisdiction, or because of a locality related attachment which leads to residence based taxation. The taxation of a person in all these situation does not necessarily indicate a fiscal domicile in that jurisdiction. In our considered view, in its contextual sense, expression 'liable to tax by reasons of his domicile, residence, place of management or any other criterion of similar nature' refers to a situation in which a person is liable to tax in a tax jurisdiction by the virtue of a locality related attachment which leads to residence type taxation. While elaborating upon the scope of this expression, a coordinate bench of this Tribunal, in the case of DCIT Vs General El....
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.... [which is the same as Article 4(1) of India UK tax treaty that we are dealing with at present] 53. We are in considered agreement with the views so expressed by the coordinate bench. The common thread in all the factors which have decisive role to play in determination of fiscal domicile is that these factors consist of some locality related attachment of the person which leads to residence type, i.e. full fledged and not in respect of a limited source, taxation of that person. 54. Let us take a hypothetical example to illustrate application of this principle. There are occasions when a business entity has to pay taxes on its income in more than one tax jurisdiction. Take, for example, a company, incorporated and fiscally domiciled in X tax jurisdiction, which has income generating activities in A,B,C and D tax jurisdictions. It has a royalty income sourced from 'A' tax jurisdiction, so it is liable to tax in 'A' jurisdiction in respect of royalty income sourced from there. It has a liaison office in 'B' tax jurisdiction, and it is liable to pay municipal trade tax in respect thereof in B tax jurisdiction. The same organization has permanent establishments in C and D t....
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....irm is taxed in the residence country - whether in its own hands or in the hands of the partners - this objection can hardly be taken. From a country perspective, what really matters is whether the income, in respect of which treaty protection is being sought, is taxed in the treaty partner country or not. That is the clearly the underlying principle based on which residence definition is modeled. 57. The treaty developments around the globe, for example by way of 2007 amendments in US Canada tax treaty by way of fifth protocol to that treaty, which specifically provides that even a transparent tax entity will qualify for treaty entitlement, confirm this approach. This amendment specifically addresses how the Canada US tax treaty applies to fiscally transparent treaties such as partnerships and LLCs. Of course, the Canadian Tax Court has expressed, in no uncertain words, the view that even without the aforesaid amendment, a fiscally transparent entity is eligible for treaty benefits in the country of domicile as long as its profits get taxed in that country, and the amendment only grants, or rather restricts, application of an existing benefit. That is what was also held in TD S....
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....eing treated as fiscally transparent under the laws of that State, the treatment of the amount under the taxation law of that State is not the same as its treatment would be if that amount had been derived directly by that person; or (b) The person is considered under the taxation law of the other Contracting State to have received the amount from an entity that is a resident of that other State, but by reason of the entity being treated as fiscally transparent under the laws of the first mentioned State, the treatment of the amount under the taxation law of that State is not the same as its treatment would be if that entity were not treated as fiscally transparent under the laws of that State. 59. A plain reading of the judgment of Canadian Tax Court in the case of TD Securities (supra) does show that the above amendment in the treaty position was more of a restriction on the treaty entitlements benefits to a fiscally transparent entity rather than the sole basis for the treaty entitlement benefit. 60. It would, therefore, seem logical that it is the event of taxability in the residence state, rather than the mode of taxability there, which should be a decisive factor for....
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.... basis, in my judgment, this agreement should be construed as ut res magis valeat quam pereat, as should all agreements. The fact that the parties are 'high contracting parties', to use an old description, does not change the way in which the Courts should also approach the construction of any agreement." 64. We are in considered agreement with this school of thought which lays down the proposition that, strictly speaking the principles of literal interpretation do not apply to the interpretation of tax treaties. To find the meaning of words employed in the tax treaties, we have to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose. Literal meanings of these terms are not really conclusive factors in the context of interpretating a tax treaty which ought to be interpretated in good faith and ut res magis valeat quam pereat, i.e., to make it workable rather than redundan Hon'ble Supreme Court in the case of Union of India & Anr. v. Azadi Bachao Andolan & Am. 263 ITR 706, had an occasion to deal with the principles governing the interpretation of tax treaties. In this regard, Hon'ble Supreme Court held that the ....
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......... the meaning of diplomat rather than the lawyer'." 68. Hon'ble Supreme Court, in the case of K. P. Varghese v. Income Tax Officer ( 131 ITR 597) and even in this context of interpretation of taxing statutes, have held that the task of interpretation is not a mechanical task and, quoted with approval Justice Hand's observation that "it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning". Their Lordships observed as follows : " ......... The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be 'drafted with divine pre....
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....en to the treaty in the context and in the light of its objects and purpose. * A tax treaty is to required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other. * The words employed in the tax treaties not being those of a regular Parliamentary draughtsman, the words need not examined in precise grammatical sense or in literal sense. Even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty ut res magis valeat quam pereat i.e., in such a manner as to make it workable rather than redundant. * A literal or legalistic meaning must be avoided when the basic object of the treaty might be defeated or frustrated insofar as particular items under consideration are concerned. Words are to be understood with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam. * It is inevitable that interpreter of a tax treaty is likely to be required to cope with disorganised composition instead of precision drafting. Therefore, the words employed in th....
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....ohn N Gladden V Her Majesty the Queen 85 TC 5188, which was quoted with approval by the Hon'ble Supreme Court in Azadi Bachao Andolan's case (supra), Federal Court of Canada was observed that''' the non-resident can benefit from the exemption (under the treaty) regardless of whether or not he is taxable on that capital gain in his own country, If Canada or the US were to abolish the capital gains tax completely, while the other country did not, a resident of the country which has abolished the capital gains would still be exempt form capital gains in that country". It is thus clear that taxability in one country is not sine qua non for availing relief under the treaty from taxability in the other courts. All that is necessary for this purpose is that the person should be liable to tax in the contracting State by reason of domicile, residence, place of management, place of incorporation for any other criterion of similar nature which essentially refers to the fiscal domicile of such a person. In other words, if fiscal domicile of a person is that person is actually liable to pay tax in that country, he is to be treated as resident of that contracting State. The expression 'liable to....
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....tax authorities, but failed to succeed because of the Greek bureaucracy the company had not yet been assessed to the Greek corporate income tax. These facts were not contested by the Dutch authorities. But in 2004 they assessed the taxpayers for the Dutch corporate income tax retrospective for the year 1995. The tax inspector argued that, for applying Art 4(1) of the Netherlands-Greece tax liability is not sufficient rather a factual subjective indebtedness" ("een feitelike subjective onderworpnheld") is required. The Court, however, refuted this argument it pointed out that the tax treaty did not postulate factual taxation: instead a legal obligation to pay tax on worldwide income was called for, which under Greek law was established. 75. A view is thus indeed possible that, given the context in which the expression 'liable to taxation by reasons of his domicile, residence, place of management or any other criterion of similar nature' is employed i.e. in the context of ascertaining fiscal domicile - as evident from the title of Article as 'Fiscal domicile', it is sufficient that under the assignment or distributive rules of the treaty, the residence state has a right to tax ....
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....mble understanding, as long as de facto entire income of the enterprise or the person is subjected to tax in that tax jurisdiction, whether directly or indirectly, the taxability test must be held to have been satisfied. Of course, the other possible approach to such a situation is that as long as the tax jurisdiction has the right to tax the entire income of the person resident there, whether or not such a right is exercised, the test of fiscal domicile should be satisfied. Viewed thus, all that matters is whether that tax jurisdiction has a right to tax or not; the actual levy of tax by the tax jurisdiction cannot govern whether a person has fiscal domicile in that jurisdiction or not. Having said that, we are alive to the fact that this line of reasoning is diametrically opposed to the stand taken by the OECD in the matter, but, having carefully considered the stand of the OECD on this issue, we are not persuaded by the OECD stand on the matter, nor the Indian judicial precedents support that position. As a matter of fact, even the Government of India's approach to the tax treaties does not entirely approve that school of thought either. 76. While on this issue, it is useful ....
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....s members are entitled to the benefits of the tax conventions entered into by their State of residence. They believe that this result is only possible, to a certain extent, if provisions to that effect are included in the convention entered into with the State where the partnership is situated. 78. In this situation, i.e. when the Government of India has rejected the stand taken in the OECD partnership report and the changes made in the OECD Model Convention Commentary as a result of the same, it cannot be open to hold that in the light of the OECD report, the partnership firm must be declined treaty entitlement benefits. The remedy to unintended consequence of a treaty provision in the said report has been rejected, and, therefore, the treatment accorded to the said provision, in the same report, cannot be accepted either. Any other view of the matter will lead to absurd consequences rather than avoiding the absurd consequences. 79. In view of the above discussions, as also bearing in mind the entirety of the case, we hold that the assessee was indeed eligible to the benefits of India UK tax treaty, as long as entire profits of the partnership firm are taxed in UK - whether ....
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....was no framework or infrastructure, no continuity and no stability so as to result in a permanent establishment. Learned senior counsel has also filed extracts from Prof Klaus Vogel's oft quoted treatise 'Klaus Vogel on Double Taxation Conventions', and referred to his observations at page 295 to the effect that "[a]rticle 5(2) gives substance to the general permanent establishment concept', that '[w]hat must be particularly examined in each case is whether the place of business satisfies the permanence criterion' and that '[t]he opening sentence of Article 5(2) shows that the list that follows is one of the examples and not exhaustive ('specially')'. Our attention is then invited to paragraph 12 of OECD Model Convention Commentary which, inter alia, observes that, Article 5(2) "contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, constituting a permanent establishment" and that "[a]s these examples are to be seen against the background of general definition given in paragraph 1, it is assumed that the contracting states interpret the items listed, 'a place of management', 'a branch', 'an office' etc in such a way that such places consti....
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.... the basis that a permanent establishment under Article 5(2) (k) can come into existence only when conditions of Article 5(1) are also to be satisfied, Article 5(2)(k) will be rendered redundant. Under Article 5(2)(k), if services to an associated enterprise are rendered even for 30 days, it will result in existence of the deemed PE. However, Article 5(1) can come into play only when the assessee has a fixed place of business but once assessee has a fixed place of business, it is wholly irrelevant whether or not services are rendered for one day or for all the three hundred and sixty five days. It is thus submitted that in the case of Article 5(2)(k), permanence test of the PE has been substituted by the duration test for services rendered. Once the duration test is satisfied, according to the learned Commissioner, permanence test visualized in Article 5(1) does not come into play at all. We are thus urged to hold that Section 5(2)(k) is to be decided on standalone basis, and that as long as conditions set out in Article 5(2)(k) are satisfied and, irrespective of fulfilment or non fulfilment of conditions under Article 5(1), permanent establishment comes into existence. As regards ....
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....relation to a person providing storage facilities for others; (h) a mine, an oil or gas well, quarry or other place of extraction of natural resources; (i) an installation or structure used for the exploration or exploitation of natural resources; (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; (k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) services are performed within that Stat....
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....nter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. (5) An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to the same common....
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....ntion and even under US Model Conventions. The very fact that these two categories have been segregated in these model conventions also shows that these two categories belong to different genus. To appreciate this point, it may be useful to take a look at the relevant clauses of OECD, UN and US Model Conventions, which are reproduced below: UN Model Convention Article 5 - PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) A place of management; (b) A branch; (c) An office; (d A factory; (e) A workshop; (f) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. The term "permanent establishment" also encompasses: (a) A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months; (b) The furnishing of services, including consultancy services, by an ent....
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....ior counsel for the assessee, that some degree of uniformity in treatment of all these sub clauses is warranted. What applies to clause (a) to (i) of this Article does not necessarily also apply to article (j) and (k) of this Article 5. As regards the first category of permanent establishments, i.e. under clause (a) to (i), OECD Model Convention Commentary, which is also adopted by the UN Model Convention Commentary, does state that the second paragraph of model conventions, " it contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, constituting a permanent establishment", and that "as these examples are to be seen against the background of general definition given in paragraph 1, it is assumed that the contracting states interpret the items listed, 'a place of management', 'a branch', 'an office' etc in such a way that such places constitute permanent establishment only if they meet the requirement of paragraph 1". Even by the OECD Model Convention Commentaries, however, this theory is not extended to the items in second category i.e. (j) and (k). So far as paragraph 3 of the OECD Model Conventions dealing with these items are concerned,....
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....vered by the OECD Model Convention. According to the UN Model Convention Commentary, the scope of this provision extends beyond the scope of permanent establishment under the basic rule. For this reason also, we are unable to accept learned counsel's suggestion that Article 5(2) of India UK tax treaty should only be read as a bunch of illustration of permanent establishments under the basis rule set out in Article 5(1). 94. Learned senior counsel is perhaps quite right to the extent that Article 5(2), as in most standard model conventions, is no more than an illustration or examples of application of permanent establishment under basic rule i.e. under Article 5(1). However, so far as the provisions of India UK tax treaty are concerned, for the detailed reasons set out above, these arguments do not hold good in respect of clause (j) and (k) of Article 5(2), which are on the lines of provisions in Article 5(3) in all most standard model conventions. For this reason, we also reject learned counsel's reliance on the OECD Model Convention Commentary and Prof Klaus Vogel's analysis. His reliance on these commentaries are misplaced as the provisions these commentaries have dealt with a....
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....Hon'ble Authority for Advance Ruling. Interestingly, in this case, even as it was not brought to the notice of the Hon'ble Authority of Advance Ruling that the OECD Commentary is in respect of the provisions which are not in pari materia with the respective tax treaty provisions [the provisions of Article 5(2) of OECD Model Convention, in respect of which commentary was written and as we have seen earlier in this order, are materially distinct from the tax treaty provisions of Article 5(2) which came up for consideration before the AAR and before us], Hon'ble Authority for Advance Ruling reached the same conclusions. On the basis of the line of reasoning adopted by the AAR also, we reject the contention of the assessee. 97. Let us once again take a look at Article 5(2)(k) and further analyze its scope and purpose. It provides that the term 'permanent establishment' shall include specially the furnishing of services including managerial services within Contracting State by an enterprise through employees or other personnel, where such activities are rendered for more than 90 days for any enterprises, or for more than 30 days for an associated enterprise, within any twelve month p....
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....tionary.org/definition/render). Similarly, one of the usage of expression 'furnish' also refers to 'to furnish one with knowledge or principles" (www.webster‐dictionary.org /definition/ furnish). The expression 'rendering' and 'furnishing' are somewhat interchangeable in normal course of business, and it will be too pedantic and hyper technical an approach to narrow down the meaning of the expression 'furnishing' to exclude rendering of professional services. A treaty, as we have see in detailed analysis of principles of interpretation of tax treaties earlier in this order, is to be interpreted in good faith on the basis of general expectations of the parties and in accordance with the ordinary meaning given to the treaty in the context and in the light of its objects and purpose. The interpretation canvassed by the learned counsel does not fit into this approach to treaty interpretation. 102. In any event, one cannot interpret a tax treaty, or for that purpose even a tax legislation, with dictionary in one hand and tax treaty in another. As Justice Hand has observed in the context of interpreting tax law, which is even more relevant in the context of interpreting a tax tr....
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....f Article 14 is that income derived from professional services or other activities of independent character is now dealt with under Article 7 as business profits.] Model Tax Convention on Income and on Capital - condensed version 15 July 2005 (OECD Committee on Fiscal Affairs; Indian reprint at page 204) 104. The above analysis shows that professional services are not beyond the scope of Article 5, existence of which is sine qua non for any taxability under Article 7. We agree with this analysis. In this view of the matter, we reject the contention that professional services cannot be covered by the provisions of Article 5(2)(k). 105. Learned counsel has also contended that the professional services can only be taxed under the head Article 15 and in case chargeability under Article 15 fails, that is end of the road. It cannot be open to revenue authorities to tax income from professional services under Article 7. It is contended that Article 15 applies only to individuals. As to the situations in which Article 5 will apply in respect of the professional services and the situations in which Article 15 of the India UK tax treaty, which is in pari materia Article 14 ....
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.... of Article 7 (2) 108. Learned counsel has raised an interesting point about the impact of PE's hypothetical independence on profit attribution to PEs. He takes us through the text of Article 7(2) of India UK tax treaty and emphasizes that the profits of the PE are deemed to the he profits which "that permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment". It is thus pointed out that the profits attributable to PE are not the actual profits of the PE but hypothetical profits which the PE was expected to make if the PE was wholly independent of the general enterprise of which it is PE. According to the learned counsel, this exercise of computing hypothetical profits also warrants adjustments in the bills raised by the GE, in respect of the work carried out by the PE, as the prevalent market prices of similar services as were rendered by the PE were lower than the rates charged by the GE to its clients. It is thus contended that for the purpose of computing income of th....
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....penditure of the permanent establishment is taken at the actual figure, which is obviously much higher than domestic costs in India, it will clearly present a highly distorted, and somewhat absurd, figure of income. We are urged to avoid this patent absurdity of results, and hold that the actual billing figures are taken in computation of income of the assessee's PE in India. 110. In rejoinder, learned counsel for the assessee once again invited our attention to the wordings of Section 7(2) and reiterated his submissions. It was submitted that there will not be absurdity of results, and, on the contrary, such adjustments carried out to the revenue figures will lead to true hypothetical profits being brought to tax, as indeed visualized by the scheme of things envisaged in Article 7(2) of the India UK tax treaty. Learned counsel urges us to respect and give a sensible meaning to the scheme of taxability of PE profits under Article 7(2) of the India UK tax treaty. He also points out that there is no other way, except by carrying out the adjustments that the assessee has claimed, in which clear words of Article 7 (2) can be given effect. One cannot proceed in a manner, contends the....
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....r activities in same or similar conditions and dealing wholly independent with the enterprise of which it is permanent establishment". Explaining the import of this provision, OECD Model Convention Commentary states as follows: This paragraph contains the central directive on which the allocation of profits to the permanent establishment is based. The paragraph incorporates the view, which is generally contained in bilateral conventions, that the profits to be attributed to a permanent establishment are those which the permanent establishment would have made if, instead of dealing with the head office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market.....................The arm's length principle also extends to the allocation of profits which the permanent establishment may derive from transactions with other permanent establishments of the enterprise...... 114. We are in considered agreement with the above analysis. In our considered view, the fiction of hypothetical independence indeed provides mechanism for taking into account intra organization transactions whether these are GE‐PE transactions....
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....me that average cost of raw diamond per unit is Rs 1 million, its processing cost per unit billed by PE in B jurisdiction is Rs 0.5 million, and its other costs in connection with coordination and sales and marketing billed from X jurisdiction work out to Rs 0.1 million per unit. In case the average sale price per unit of diamond is Rs 2 million, in this situation, the overall profits of enterprises will be Rs 4,00,000 per unit. To this extent, there cannot be any disputes. However, so as taxation in C jurisdiction is concerned, it will depend on whether or not the intra organization transactions are recognized for tax purposes, and, if so, at what price. In case, C jurisdiction holds that the payment of processing charges that the C PE has made to another PE, i.e. in B jurisdiction, cannot be allowed as a deduction, as it is a payment from one arm of the business to another arm of the same business (i.e. from self to self), the taxable profits in C will go up by that extent. In case, tax authorities also decide that, in any case, deduction can not be allowed in respect of centralized coordination, sales and marketing, because these payments are only payments by self to self, the p....
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....s vary from arms length price, the same can be ignored. 119. Using the figures in the illustration that we can taken a little earlier, let us assume that instead of billing the PE in C tax jurisdiction for processing of diamond @ Rs 0.5 million per unit, which is fair market value of this processing in B jurisdiction, the PE in B jurisdiction raises bills of processing charges @ Rs 0.9 million per unit, entire profits of C jurisdiction will shift from C jurisdiction to B jurisdiction. In this case, while sum of taxable profits in different tax jurisdictions will not exceed overall profits of the enterprise, the allocation of such profits will be distorted. It is in this way, that the adjustments for arms length price under the scheme of Article 7(2) seeks to prevent such distortions in allocation of taxable profits in various tax jurisdictions involved in a business activity involving several tax jurisdiction. 120. As noted by Raffaele Russo, in his article 'Application of Arms length Principle to Intra Company Dealings : Back to Origins ( 2005 ITPJ 7; published by IBFD, Amsterdam), the genesis of arm's length as an international agreed principle goes back to 1933, when the F....
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....e traced back to the studies made, at the League of Nation's request, in 1932/33 by Mitchell B Carroll and Ralph C Jones. In their studies, Carroll and Jones unanimously concluded that permanent establishment of international enterprises should, as far as possible, be treated independent units and, consequently, goods supplied by the a permanent establishment to its head office and vice versa should be taken to have been charged at the market prices. 124. It is thus clear that the fiction of hypothetical independence is confined to a permanent establishment's transactions with its general enterprises, i.e. enterprises of which it is permanent establishment, other permanent establishments belonging to the same GE and other specified associated enterprises. In our considered view, this fictional independence under Article 7(2) does not travel beyond the transactions with entities other than the GE, and the PEs belonging to the same GE. 125. The fiction of hypothetical independence, as set out in Article 7(2), has no role to play in adjusting actual revenues with independent entities. As is clearly set out in that treaty provision itself, it refers for transactions at arm's leng....
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....ing this provision to the effect that the dealings with the outside parties should also be deemed to have been entered into with the GE because these dealings involve a role for such GE as well. 128. Even with respect to the transactions covered by the fiction of Article 7(2), which, we must emphasize are only intra organization or intra associated enterprises transactions, the issue does arises as to what degree this fictional independence can be stretched. It could possibly be argued that the intra organization transactions should be valued at the prevailing market price in ideal conditions, while it is also a recognized approach to the issue that the fiction of hypothetical independence merely permits taking into account the intra organization transactions, at the normal transaction value, which was otherwise impermissible under the law of contracts. Prof Klaus Vogel describes the former approach as of 'absolute hypothetical independence' and the latter approach as of 'restricted independence'. There is a school of thought, which is recognized by Prof Vogel and which has also found favour with several European judicial authorities‐ as mentioned by Prof Vogel in his book....
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....ight of residual profits. The residual is neither given to the anchor of the relay team nor to the stroke of the eight. There are several good reasons for adopting this linear approach to allocation of residual profits because, if nothing else, in today's interdependent world, PEs are to be seen as an integral and essential part of the businesses as a whole, and, not as mere colonies or support systems of the GE. On a balancing note, however, as long as FAR (function, assets and risk) analysis is possible in each of the tax jurisdiction involved, neither there is a need to resort to rather colonial octopus approach, nor is there any need of banking upon a somewhat over simplistic linear approach. In such a situation, profit allocation can be on a more rational and justified basis of FAR analysis of establishment or activity in each tax jurisdiction. Therefore, even when it is a GE PE transaction, the residual profit cannot always be allocated straight away to the general enterprise, as a simplistic revaluation of transaction values on the basis of market prices will inherently involve, and the allocation of profits over GE and PEs have to be on an equitable and rationale basis. Be ....
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.... the Assessing Officer is not in appeal against the disallowance so restricted by the CIT(A), the assessee is not satisfied by the part relief given by the CIT(A) and is in second appeal before us. 132. Learned counsel has taken us through meticulous documentation in respect of reimbursements of expenses, and also produced before us samples of supporting evidences in respect of each claim of reimbursement of expenses. He has also extensively referred to the prevailing regulation in the United Kingdom which ensure strict control over possible inflation of such reimbursement claims, as also to the internal control mechanism in respect of these claims. He submits that all requisitions of the authorities below, in respect of supporting evidences for such claims, have been duly complied with, and the CIT(A) has confirmed the partial disallowance only on surmises and conjectures. He urges us to delete the disallowance confirmed by the CIT(A) and hold that the reimbursements of expenses received by the assessee, particularly on the facts of the case, cannot be treated as income in the hands of the assessee. Learned Departmental Representative, on the other hand, relies upon the orders ....
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....ews of Hon'ble jurisdictional High Curt in the case of NGC Network LLC (supra), we approve the conclusions arrived at by the CIT(A) and decline to interfere on the matter on this count as well. Ground No. 1 of the Assessing Officer is thus rejected. Application of force of attraction principle in computation of profits attributable to the PE. 139. The only other grievance raised in Assessing Officer's appeal is that the CIT(A) erred in holding the assessee was taxable in respect of only that portion of income that was related to services performed in India, and did not appreciate the scope of "force of attraction" principle embedded in Article 7 (1) of the India‐UK tax treaty. 140. As we have seen earlier in this order, the impugned relief given by the CIT(A) was for three reasons reasons - first, the twin factors that the "income earned by the appellant were not in the nature of fees for technical services as defined in section 9(1)(vii) and therefore the AAR Ruling in the case of Steffen, Roberstson & Kirsten Consulting Engineers (supra) will not apply to the facts of the appellant" and that " as per Explanation (a) to Section 9(1)(i), even if there is a business c....
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....Clifford Chance decision by this Tribunal, the said decision has now merged in the Hon'ble Bombay High Court's judgment in the case of Clifford Chance Vs DCIT (supra), and, for the detailed reasons set out earlier in this order in paragraphs 14 to 19 and in view of the legal position as it stands now, Hon'ble Bombay High Court's judgment in Clifford Chance case (supra) does not hold good in law 144. As far as learned CIT(A)'s reliance on Article 7(1) of the India UK tax treaty is concerned, in support of the proposition that only such profits as attributable to the operations carried out in the PE are taxable in India, this is simply contrary to the plain provisions of the India UK tax treaty. Article 7, as we have seen earlier in this order, provides that if the enterprise carries on business through a PE, the profits of the enterprise may be taxed in the other State but only so much of them as is "directly or indirectly attributable to that permanent establishment". 145. Learned CIT(A) has apparently taken note of the profits in respect of the work performed in the PE itself but he has not taken note of the position that it is only in respect of the profits directly attribu....
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.... results as sought to be achieved by Article 7(1)(c) of the UN Model Convention. As to the scope of this provision, we find guidance from the UN Model Convention Commentary in this regard. On this issue, the UN Model Convention Commentary states, inter alia, as follows ..................Some members from developed countries pointed out that the "force of attraction" rule had been found unsatisfactory and abandoned in recent tax treaties concluded by them because of the undesirability of taxing income from an activity that was totally unrelated to the establishment and that was in itself not extensive enough to constitute a permanent establishment. They also stressed the uncertainty that such an approach would create for taxpayers. Members from developing countries pointed out that the proposed "force of attraction" approach did remove some administrative problems in that it made it unnecessary to determine whether particular activities were or were not related to the permanent establishment or the income involved attributable to it. That was the case especially with respect to transactions conducted directly by the home office within the country, but similar in nature to those c....