TaxTMI 
TaxTMI 
2004 (5) TMI 8
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....al gains should be taxable only in the country in which the assets are situated? 2. The facts leading to these appeals are that the respondent is a firm owning immovable properties at Ipoh, Malaysia; that during the course of the assessment year the assessee earned income of Rs. 88,424/- from rubber estates; that the respondent sold property, the short term capital gains of which came to Rs. 18,113/-; that the Income-tax Officer held that both the incomes are assessable in India and brought the same to tax; that the respondent filed an appeal before the Commissioner of Income-tax (Appeals) who held that under article 7(1) of the Agreement for Avoidance of Double Taxation of Income and Prevention of Fiscal Evasion of Tax unless the respondent has a permanent establishment of the business in India such business income in Malaysia cannot be included in the total income of the assessee and, therefore, no part of the capital gains arising to the respondent in the foreign country could be taxed in India. 3. This order was carried in appeal to the Tribunal. The Tribunal, after examining various contentions raised before it, confirmed the order of the Commissioner of Income-tax (Appe....
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....be accepted as of substance or merit. (vi) The High Court rejected the application of commentaries on the article of the Model Convention of 1977 presented by the Organisation for Economic Co-operation and Development (for short "OECD") as it would not be a safe or acceptable guide or aid for such construction. (vii) Disposal of the property or the capital asset itself is as much a form or method of use of the immovable property as such, and the words "direct use. . . or use in any other form" are sufficiently wide enough to include within its scope the transfer, sale or exchange of the property. (viii) The provision of article VI alone would apply and govern the assessment of capital gains also derived from the immovable property situated at Malaysia. 5. Before we embark upon the examination of the contentions raised in these cases, we shall briefly notice the legal position in regard to the provisions relating to double taxation and the reliefs granted therein. 6. The traditional view in regard to the concept of "double taxation" is that to constitute double taxation, objectionable or prohibited, the two or more taxes must be (1) imposed on the sa....
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....nflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of section 90(2) of the Act. Section 90(2) makes it clear that "where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee" meaning thereby that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein. 9. The learned Attorney-General urged that an agreement can give different types of reliefs either by way of "avoidance" or by way of "credit" to eliminate double taxation; that the "credit" method as well as the "avoidance" method will have to be decided with reference to the provisions in the agreement ; that wherever the expression used in the treaty is "income shall be taxable only in" or "shall not be taxed in" or "shall be exempt from tax in", what is contemplate....
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....its territory or by virtue of the residence of the assessee within its territory. However, in contrast to the State where income is source, the country of which the assessee is a resident is entitled to tax the assessee on its global income and in other words, the assessee is subject to unlimited fiscal liability in the State of residence. Similar view has been taken by Kamataka High Court in CIT v. R. M. Muthiah [1993] 202 1m 508. Thus, the State of which the assessee is a resident has inherent jurisdiction to tax the assessee's income from property situated in another State. However, since it is generally recognised that the State of source in respect of immovable property has a closer economic connection with the income from that property, the treaties generally provide that tax may be imposed by the State of source in respect of such property and shall be allowed as a credit in the State of residence; that it needs to be emphasised that there is no bar under the international law for the State of residence to impose tax on income from property situated in another State and whether there is such a bar under the treaty depends upon the correct interpretation of its provisions....
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....e contended that it may be noted that the scope of article VI(1) is restricted by the words of article VI(3) which provides that the provisions of the said article shall apply only to the income derived from the use of immovable property; that the expression" capital gains" is a well defined concept and the taxable event is "transfer" or "alienation" of property and capital gains cannot arise from the use of property because "transfer" and "use" are different legal concepts since use of property postulates the continuous existence of the property whereas on transfer of property, the property ceases to be the property of the owner. Therefore, he contended, capital gains is the profit arising from the transfer of the property as distinct from the profits arising from the use of the property. 11. On behalf of the respondents it is submitted that there is a distinction between the agreements for avoidance of double taxation of income falling under clause (b) of section 90(1) of the Act and agreements for granting relief in respect of income on which tax has been paid in more than one country falling under clause (a) of that section; that articles VI to XXI of the Treaty must be read....
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.... the assessment year 1973-74 though the treaty was signed in October 1976; that prior to 1973-74 the procedure adopted was to allow only tax credit on the income taxed both in India and Malaysia; that this procedure was found to be extremely difficult and cumbersome and the assessees have to produce' even for the purpose of claiming the tax credit not only the assessment orders passed by the concerned authorities in Malaysia but also the receipted tax paid challans evidencing payment of tax in Malaysia; that in the recent years, the income-tax authorities in Malaysia have dispensed with the procedure of issuing any assessment orders and even the taxes are paid directly into the bank and this has resulted in there being no assessment order passed by these authorities in Malaysia or any receipted tax paid challans being issued; that this again resulted in considerable difficulty in the matter of completing the assessments in India. It is submitted that to avoid such difficulties experienced by the assessees the Government of India and Malaysia entered into an Agreement for the" A voidance of Double Taxation" between the two countries which in effect meant that the income arising ....
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....for certain category of income capital gains is also income as per section 2(24) of the Income-tax Act and the decision of the Karnataka High Court in CIT v. R. M. Muthiah [1993] 202 ITR 508 has accepted this kind of reasoning and since no appeal has been filed to this court against the decision of the Karnataka High Court reported in CIT v. R. M. Muthiah [1993] 202 ITR 508, the law declared therein has been applicable to the assessees to whom treaty applies. In regard to article VII relating to income from business, it is submitted that importance has to be the place where the permanent establishment is situate and if the assessee earns business profits through a permanent establishment situate in Malaysia, such income could be said to arise only in Malaysia and such income cannot be included in the total income in India. The importance of article XXII(2) of the treaty is that it is applicable to income arising to an assessee other than those mentioned in articles VI to XXI of the treaty and also a situation where any income that has not been referred to therein becomes taxable in either country at a much later date. He further argued that the OECD model treaty came into existence....
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....sia; for the basis year for a year of assessment for the purpose of Malaysian tax ; (b) the term 'resident of India' means a person who is treated as a resident of India in the previous year for the relevant assessment year for the purpose of Indian tax; (c) the terms 'resident of one of the contracting States' and 'resident of the other contracting State' mean a resident of Malaysia or a resident of India, as the context requires. 2. Where by reason of the provisions of paragraph 1 of this article an individual is a resident of both contracting States, then his residential status shall be determined in accordance with the following rules: (a) he shall be deemed to be a resident of the contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both contracting States, he shall be deemed to be a resident of the contracting State with which his personal and economic relations are closer; (b) if the contracting State with which his personal and economic relations are closer cannot be determined, or if he has not a permanent home available to him in eit....
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....eparatory or auxiliary character for the enterprise. 4. An enterprise of one of the contracting States shall be deemed to have a permanent establishment in the other contracting State if : (a) it carries on supervisory activities in that other contracting State for more than six months in connection with a construction, installation or assembly project which is being undertaken in that other contracting State; (b) it carries on a business which consists of providing the services of public entertainers (such as stage, motion picture, radio or television artistes and musicians) or athletes in that other contracting State unless the enterprise is directly or indirectly supported, wholly or substantially from the public funds of the Government of the first-mentioned contracting State in connection with the provision of such services. 5. Subject to the provisions of paragraph 6 of this article, a person acting in one of the contracting States on behalf of an enterprise of the other contracting State shall be deemed to be a permanent establishment in the first mentioned contracting State if : (a) he has, and habitually exercises in that first-mentioned co....
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....contracting States shall be taxable only in that contracting State, unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, tax may be imposed in that other contracting State on the income or profit of the enterprise but only on so much of that income or profits as is attributable to that permanent establishment. 2. Where an enterprise of one of the contracting States carries on business in the other contracting State through a permanent establishment situated therein, there shall in each contracting State be attributed to that permanent establishment the income or profits which it 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. 3. In the determination of the income or profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative....
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....ns as designed to promote economic development in Malaysia- (aa) which are set forth in sections 21, 22 and 26 of the Investment Incentives Act, 1968, of Malaysia ; or (bb) which may be introduced in future in the Income Tax Act, 1967, Supplementary Income Tax Act, 1967, Petroleum (Income tax) Act, 1967, or Investment Incentives Act, 1968, in modification of or in addition to the existing measures: Provided an agreement is made between the two Contracting States in respect of the scope of the benefit accorded by the said measures. 3. (a) The amount of Indian tax payable, under the laws of India and in accordance with the provisions of this Agreement, whether directly or by deduction, by a resident of Malaysia, in respect of income from sources within India which has been subjected to tax both in India and Malaysia, shall be allowed as a credit against Malaysian tax payable in respect of such income, but in an amount not exceeding that proportion of Malaysian tax which such income bears to the entire income chargeable to Malaysian tax. (b) For the purposes of the credit referred to in sub-paragraph (a) above, there shall be deemed to have been paid by the res....
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....al connection arises in relation to taxation either by reason of residence of the assessee or by reason of the location of the immovable property which is the source of income. In the clauses which we have set out above fiscal domicile is set out in article IV which states that in a case where the person is a resident in both the contracting States fiscal domicile will have to be determined with reference to the fact that if the contracting State with which his personal and economic relations are closer, he shall be deemed to be a resident of the contracting State in which he has an habitual abode. This implies that tax liability arises in respect of a person residing in both the contracting States has to be determined with reference to his close personal and economic relations with one or the other. 17. The immovable property in question is situate in Malaysia and income is derived from that property. Further, it has also been held as a matter of fact that there is no permanent establishment in India in regard to carrying on the business of rubber plantations in Malaysia out of which income is derived and that finding of fact has been recorded by all the authorities and affirme....