TaxTMI 
TaxTMI 
2010 (7) TMI 1226
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....Brussels, Frankfurt, Hong Kong, New York, Paris, Singapore, 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. In....
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....hat there was no framework or infrastructure, no continuity 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 cannot 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, ....
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....ommercial sense". It was thus held that the income from services rendered by the assessee 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 accompa....
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....ect of the PE in India are to be taken into account for the purpose of computing income of the PE. A reference was then made to the ruling given by the 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 i....
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....Receipts not taken into account for computing income under Indian matter as under: Nippon Denro Rs.1,08,21,119 Serum Institute of India Rs. 5,80,757 Rs. 1,14,01,876 TOTAL TAXABLE INCOME Rs. 23,66,86,260 8. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) but without 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 ....
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....ated as separate and distinct entity of the enterprise of which it is a permanent establishment. It does not provide that profit of the permanent establishment is to be determined on the basis of what other enterprises in the other contracting State would have earned. Therefore, I confirm the findings of the assessing officer that the profit of the appellant's permanent establishment in India has to be computed on the basis of the actual rates charged by the appellant 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 outsid....
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....As regards the reimbursement of expenses, the CIT(A) upheld the action of the Assessing Officer to the extent of 15% of the total amount of reimbursement. As regards levy of interest under section 234 B on the delay in payment of advance tax amount, the CIT(A) deleted the same on the ground that entire amount received by the assessee was subject to deduction of tax at source under section 195 and, therefore, the assessee cannot be faulted for not paying the advance tax. 10. None of the parties is satisfied 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, t....
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....on record and duly considered factual matrix of the case as also the applicable legal position. Taxability under the domestic law 12. One of the arguments which is raised by the learned counsel for the assessee, in support of the conclusions arrived at by the CIT(A) to the effect that income from only such services can be brought to tax in India as are rendered through the Indian permanent establishment, is that even under the domestic law, only income relatable to the services rendered in India can be taxed in India. Learned counsel did not 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....
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....no longer constitute good law. It is submitted that as long as the source of income is in India, and irrespective of whether work is carried in India or outside India, the income is deemed to have arisen in India. Learned Departmental Representative thus urged us to hold that entire fees for services rendered by the assessee in India as also abroad are taxable in India as long as services are utilized in India. It may be added that the proposed amendments relied upon by the learned Departmental Representative, on which we have also heard the learned counsel for the assessee, are since carried out 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 attribu....
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....hat is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance with 90 days rule. As per the above judgment of the apex court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non­resident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words "income deemed to accrue 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 non­resident 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 tax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non&s....
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....vices in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India. The paradigm shift in the legal provisions, or perhaps a mere conceptual clarity - as could perhaps be a possible point of view, is too glaring to be missed. In this view of the matter, it cannot really be said that the change in law brought about by amendment in Explanation to Section 9(1)(i) does not affect the aforesaid decision. 16. The entire rationale of the judgment is on the basis of Their Lordships' analysis of legal provisions of Section 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....
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.... not the place where these services are rendered but where those services are utilized". The source rule thus requires the taxability of an income in the tax jurisdiction in which the services are utilized, whereas residence rule requires taxability in the tax jurisdiction in which service provider has fiscal domicile. It is this conflict of source and residence rules which has been the fundamental justification of mechanism to relieve a taxpayer, whether under a bilateral treaty or under domestic legislations, of the double taxation ‐ either by way of exclusion of income from the scope of taxability in one of the competing jurisdictions or by way of tax credits. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest 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....
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....y partner country i.e. United Kingdom, can be treated as a 'resident of the United Kingdom' within meanings of that term under the India UK tax treaty, and whether, in this view of the matter, the assessee is entitled to the benefits of the tax treaty at all. It was pointed out that unless an assessee is 'resident of one of the contracting states', as defined in the tax treaty, the assessee cannot claim the treaty protection under section 90(2). His attention was also invited to the controversy surrounding the admissibility of tax treaty benefits to fiscally transparent entities, and also to the decision on this issue from South Africa in the case of JJ Grudlingh Vs Commissioner for South African Revenue Service (Case No. A 33/2008 ‐ IBFD database; also reported as Appellant Vs CSARS 10 ITLR 446). He was asked to address 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 proceed....
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.... were taxed as partnership firms in India, as no other purpose can be served by this reference. 25. Learned counsel also submits that as evident from a reading of Hon'ble Bombay High Court's decision in the case of Clifford Chance (supra), Hon'ble Bombay High Court has proceeded on the basis that treaty benefits are available to Clifford Chance, which was also a UK based partnership firm. Our attention is drawn to specific observations of the Hon'ble High Court, which refer to Article 15 of the India UK tax treaty and make a reference to "clause 15 of the DTAA read with section 9 of the Income Tax Act". Learned counsel contends that once Hon'ble Bombay High Court holds, directly or indirectly, that a partnership firm is entitled to treaty benefits, it cannot be open to us to take any other view of the matter. 26. As regards the decision in the case of JJ 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 o....
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....ipping & Travels (198 ITR 1) in support of the proposition that it is duty of the Tribunal to decide the matter in accordance with the law, and that its powers to do so are not fettered by the actions of the authorities below. It is, according to the learned Commissioner, open to us to examine the matter in accordance with the law and on any of grounds whether or not that ground is raised by the parties, as long as the affected parties have been heard on the same. It is pointed out that, under the scheme of the Income tax Act, the Tribunal can pass such orders on an appeal as it thinks fit as long as parties have been heard on the grounds on which the matter is decided by the Tribunal. The grounds of appeal before the Tribunal do thus not fetter the powers of the Tribunal. Learned Departmental Representative further submits that the eligibility or ineligibility of the tax treaty benefits was 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 di....
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....a. We are thus urged to hold that the assessee is not eligible for the benefits of India UK tax treaty. 30. Learned Departmental Representative further submits that when provisions of the tax treaty are clear and unambiguous, there is no occasion for venturing into finding out intentions of the treaty makers and discovering hidden meanings of the terms of the treaty. The principles of interpretation of tax treaties, according to the learned Departmental Representative, are not relevant when words in the treaty are clear and unambiguous, as in the case before us. He also submits that hardship to the assessee or consequences of an interpretation cannot influence the implication of the treaty provisions. 31. We are not inclined to uphold the technical objection raised by the learned counsel. Undoubtedly, in a situation when assessee is in appeal, Tribunal cannot give a finding adverse to the appellant so as to place 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....
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....le to the present case and the respondent (i.e. the Revenue) should be allowed to raise this contention for the first time before the Tribunal". In essence, therefore, one of the qualifying condition, which was not considered by the Assessing Officer or Appellate Commissioner, was disputed for the first time before the Tribunal. It was in this background, and dealing with the powers of the Tribunal under section 33(4) of the 1922 Act, which are exactly the same as under section 254(1) of the present Income Tax Act, 1961, Hon'ble Supreme Court, inter alia, observed as follows: 8.......Tribunal had jurisdiction to permit the question to be raised before it for the first time in appeal. The power of the Tribunal, in dealing with the appeals are expressed in section 33(4) in the widest possible manner....... 9. The word "thereon" in section 33(4) of the 1922 Act, of course, restricts the jurisdiction of the Tribunal to the subject matter of appeal. The words "pass 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....
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....dum of appeal or taken by leave of the Tribunal under this rule. The mandate of the rule is thus clear and unambiguous. While there are restrictions on the appellant as to the issues he can raise in the appeal, there are no restrictions on the Tribunal as to on what grounds the Tribunal decides the appeal. The only rider is, in terms of proviso to Rule 11, that " the Tribunal shall not rest its decision on any other ground unless the party who may be affected there by has had a sufficient opportunity of being heard on that ground". In effect thus, as long as affected parties have an opportunity of having been heard on the ground on which appeal is decided, the Tribunal can decide the appeal on any of the issue - whether raised by the parties or not. It is also important to appreciate that the expressions 'subject matter of appeal' and 'grounds of appeal' cannot be used interchangeably as they have distinct connotations. While the Tribunal cannot enlarge the scope of 'subject matter of appeal' inasmuch 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 Trib....
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....as jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the AAC so long as these grounds are in respect of the subject matter of the entire tax proceedings. Here is a case in which there is no question of any additional ground on an altogether different issue, but the consideration of the same issue from a different angle. 20. Rule 11 of ITAT Rules, 1963 reads as under : "The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule : Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected there by has had a sufficient opportunity of being heard on that ground." (Emphasis supplied by us) 21. There can be no fetter on the power of the Tribunal to examine the subject­matter before it from different angle. As long as the subject­matter continues to remain the sa....
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....the validity of the return from a fresh angle. It is axiomatic that the subject­matter of the appeal is the validity or otherwise of the return. When some facts are open to the naked eye, which have bearing on the subject­matter, it cannot be heard that the Tribunal should act as a mute spectator and let the wrong prevail. In view of the foregoing legal position emanating from the judicial pronouncements and the latter part of r. 11 of ITAT Rules, we are of the considered opinion that there is no jumping of power by us in examining the validity of return from the above angle after specifically putting across the assessee with this point of view and allowing it to make submissions in this regard. 23. Insofar as the reliance of the learned Authorised Representative on certain decisions on the question of putting the assessee in an adverse position is concerned, we find that raising this query does not have the effect of putting the assessee in an adverse position in as much as both the authorities below have held the returns to be invalid. We are hearing the appeal of the assessee on the validity of the returns filed by it. Thus, the only question is the examin....
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....o clear that the AAC was wrong in taking the view that he had no power to enhance the penalty in accordance with law on reaching the conclusion that the computation of penalty made by the ITO was illegal, and that he could only cancel even the lesser penalty which had been imposed by the ITO." 25. In view of the above discussion we are satisfied that there is no substance in the submission made on behalf of the assessee that the Tribunal cannot examine the validity of the return from the point on which clarification was sought from the learned Authorised Representative. We are, therefore, proceeding to dispose of the issue on merits. 33. In view of the above discussions, and respectfully following the esteemed views of the coordinate bench, we reject the preliminary objection raised by the learned counsel, and proceed to deal with the core question whether or not a partnership firm based in United Kingdom is entitled to the benefits of the India UK tax treaty. 34. Let us first take a look at the relevant provisions of the India UK tax treaty so gas as the question of treaty entitlement is concerned: Article 1 ­ Scope of the Convention&n....
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....ot sufficient to hold that the partnership firm is 'liable to taxation' in the residence country. The said report, in paragraph 40, states as follows: .....................for the purposes of determining whether the partnership is liable to tax, the real question is whether the amount of tax payable on the partnership income is determined in relation to the personal characteristics of the partners. If the answer to this question is yes, then the partnership itself would not be considered liable to tax. The fact that the income is computed at the level of partnership, before being allocated to the partners, that the tax is technically paid by the partnership or that it is assessed on partnership will not change that result. (Emphasis supplied by us) 38. As we mention about the above OECD report, and also proceed to deal with the background in which the expression 'liable to tax' is required to be construed, it is useful to stand back for a moment and reflect on the issue, of treaty entitlements to partnerships, in general terms, and the reasons for which it hogged so much of limelight and controversy. That understanding should help us understand the issue requiring ou....
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....99' which has also lead to changes in the Model Convention Commentary. 41. The question then arises whether the tax treaties are at all required to deal with the issue of economic double taxation of this nature, and provide remedy for relieving taxpayers of such economic double taxation, or whether the role of treaties is confined to relieving the taxpayers only juridical double taxation. 42. On a conceptual note, the fundamental purpose of tax treaties, and even unilateral rules for double taxation reliefs, is ensure that cross border economic activity, which is perceived as an essential factor for prosperity of the world economy, is not hindered by ill effects of subjecting the same economic activity to taxation in more than one tax jurisdiction. This problem also arises because of the inherent conflict and overlapping effect of scope of taxation laws being followed by the source and residence jurisdiction. When tax laws of partner tax jurisdictions are applied to a tax object, the results are not harmonious. Tax treaties seek to lay down the rules so as to reconcile between these competing claims of taxability on a tax object. The cause of economic double taxat....
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....t, lack precedence value and are not binding in nature. No judicial precedent, dealing with the question as to whether or not partnership firms are entitled to treaty benefits, has been brought to our notice, nor are we aware of any such domestic judicial precedent. Learned counsel's reliance on Hon'ble Bombay High Court's judgment in the case of Clifford Chance (supra) is thus of no avail so far as the issue of treaty entitlements to partnership firms is concerned. 44. There are, however, a few decisions from foreign Courts which touch upon the issues relating to entitlement of a transparent entity to the tax treaty benefits. 45. In J J Grudlingh's case (supra), Free State High Court Bloemfontein , in South Africa, has held that the treaty benefits cannot be extended to the partnership firms. However, as learned counsel has successfully demonstrated to us, there are indeed some significant peculiar facts, which restrict this decision from being of relevance in the facts before us. As learned counsel rightly points out and as evident from reading the text of the said judgment, that was a case in which 'person', as defined under Article 3(1)(i) of South Africa Lesotho ta....
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....urposively but, in the end, effect must be given to the words chosen". 49. It is not really required of us to set out the factual matrix of this case in complete detail. Suffice to take note of the position that the appellant in this case i.e. TD Securities (USA) LLC was a Delaware corporation, covered by Limited Liability Company Act in the State of Delaware (USA), with a single member as TD Holdings II Inc which was assessed to tax in USA. These single member Delaware corporations seem to be somewhat unique in the sense that while these corporations are distinct from its member, it is only at the choice of the corporation that these corporations are treated as taxable units. It appears that as the appellant did not file election under the "check the box regulation" it was treated as a disregarded entity for the US tax purposes and all its income was taxable to TD Holding II Inc. There was thus no dispute that TD Securities (USA) LLC was not taxed in its own capacity and was not liable to pay tax; tax liability in respect of its entire income was assessed to TD Holdings II Inc. On these facts, the question arose, whether TD Securities USA LLC could be treated ....
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....tation when the interpretation of the treaty otherwise leads to a result which is manifestly absurd or unreasonable. [51] It is fair to say that in this case there is a tension between the ordinary meaning of the terms used in the treaty and its object and purpose. This is a case where it prima facie appears that a strict application of the terms used to define resident of a Contracting State leads to an unreasonable result and thus, regard to supplementary means of interpretation is an appropriate part of the required analysis. The prima facie unreasonableness is demonstrated by, amongst other things, the fact that a strict application of the text would conflict with how both countries have interpreted and applied the treaty to government entities, not for profit organizations, pension funds and, as described below, partnerships which are themselves also fiscally transparent flowthrough entities. [52] In The Queen v. Crown Forest Industries Limited et al., 95 DTC 5389, the Supreme Court of Canada had occasion to consider the appropriate interpretation to be given to the phrase "resident of a Contracting State" in Article IV of the US Treaty and, in particular, wh....
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....nadian income tax law. [58] On the substantive issue of the meaning of the phrases resident of a contracting state and liable to tax by reason of the enumerated criteria, the Supreme Court of Canada in Crown Forest clearly concluded that the definition sought to describe those who are subject to as comprehensive a tax liability as is imposed by a state, which in the US as in Canada is taxation on worldwide income. The Court was not faced in Crown Forest with circumstances where one person's worldwide income was subject to tax in the hands of another related entity resident in the same jurisdiction by virtue of specific US domestic taxing rules. It is nonetheless a strong confirmation that the intended purpose and scope of Articles I and IV of the US Treaty were that the treaty apply to those bearing full tax liability in either of the contracting states based upon the nature and extent of their connections with that country. 51. While this decision cannot be an authority for the proposition that partnership firms or fiscally transparent entities must always be extended treaty benefits available to other taxable entities domiciled in that tax jurisdiction, this decision ....
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....eave no doubt about the fact that merely because a person is tax‐payer in one of the countries which are party to the (tax treaty)........., such a person cannot be treated as 'resident of one of the states' for the purposes of the DTAA. ......... No. doubt, as observed by Dr. Klaus Vogel in his Commentary to the Double Taxation Conventions, the term 'other criterion of similar nature' makes clear that the enumerated criterion of domestic law which attracts tax liability are no more than examples for the rule, but Dr. Vogel has further stated that, "The term should be understood to mean any localityrelated attachment that attracts residence‐type taxation." An illustration given in this commentary refers to "statutory seat which, under German law, serves as an alternative point of attachment in the absence of a place of management within the domestic territory." We are in considered agreement with Dr. Vogel's observation that 'any other criterion of similar nature' should be understood to mean any locality related attachment that attracts residence type taxation. In the light of these discussions, it is clear that only 'locality related attachment which....
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.... such other criterion of similar nature" indicates. 55. What follows thus is that in order that person in one of the contracting states entitles himself to treaty benefits in the other contracting state, income of that person should be subjected to residence type taxation, on account of some locality related attachment, in that contracting state. 56. Modalities or mechanism of taxation may vary from jurisdiction to jurisdiction, as domestic law is a sovereign function and a bilateral tax treaty, or even the need of uniformity in entity classification approach ‐ no matter how desirable someone may consider it to be, does not dictate such modalities of taxation being legislated. The fact of taxation, however, can be decided in an objective and uniform manner. Take, for example, a situation, in which the residence country of partnership does not regard it as a taxable unit and the entire income from partnership is taxed in the hands of the persons constituting such partnership, and some of those partners are not even residents of the tax jurisdiction in which partnership firm is resident. In such a situation, in case partnership firm seeks treaty protection fro....
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....e eligible for treaty entitlements even without fulfilling the conditions set out for such benefits in the amendment. The Court saw the amendment as a limitation placed by the treaty, as evident from their observation that, "The Court recognizes a certain irony in the fact that its decision in this case has been, on a prospective basis, statutorily overridden prior to it having been decided". The two paragraphs which were inserted in Article IV, by the protocol amendments and which were seen as restricting the applicability of Canadian decision, were as follows: 6. An amount of income, profit or gain shall be considered to be derived by a person who is resident of a Contracting State where: (a) The person is considered under the taxation law of that State to have derived the amount through an entity (other than an entity that is a resident of the other Contracting State); and (b) 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 the same as its treatment would be if that amount had been derived directly by that person. 7. A....
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....ved: "........... The treaty ........ is quite unlike any of the enactments we have been accustomed. ............... It lays down general principles. It expresses aims and purposes .... what are English Courts to do when they are faced with a problem of interpretation ? They must follow the European pattern. No longer must they examine the words in meticulous detail. No longer must they argue about the precise grammatical sense. They must look to the purpose or intent ............" 62. Echoing these views and justifying his departure from the plain meaning of the words used in the treaty, Goulding J., in IRC v. Exxon Corporation (1982) STC 356 at p. 359, observed: "In coming to the conclusion, I bear in mind that the words of the convention are not those of a regular Parliamentary draughtsman but a text agreed on by negotiations between the two Contracting Governments. Although I am thus constrained to do violence to the language of the Convention, I see no reasons to inflict a deeper wound than necessary. In other words, I prefer to depart from the plain meaning of language only in the second sentence of art. XV and I accept the consequence (strange though it ....
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.... insofar as the particular items under consideration are concerned." 66. In the said judgment, as noted by Their Lordships at p. 743, the Federal Court of Canada recognized that "we cannot expect to find the same nicety or strict definition as in modern documents, such as deeds, or Acts of Parliament, it has never been habit of those engaged in diplomacy to use legal accuracy but rather to adopt more liberal terms". 67. In Azadi Bacahao Andolan's case (supra), Their Lordships also quoted with approval, Fancis Bennion's certain observations in his work Statutory Interpretation (Butterworths, 1992 Edn. at p. 461). Extracts from the said observations are as follows : "With indirect enactment, instead of the substantive legislation taking a well known form of an Act of Parliament, it has the form of a treaty. In other words, form and language found suitable for embodying an international agreement, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope w....
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....a strictly literal interpretation of ........... but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which .............. appears, because, as pointed out by Judge Hand in the most felicitous language : interpret .... the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create ............. 69. When such are the views of the Hon'ble Supreme Court on the interpretation of taxing statutes, essentially the tax treaties, which are to be subject to much less rigid rules of interpretation, cannot be subjected to literal interpretation in isolation with the objects and purpose for which those provisions are made. 70. In the case of Hindalco Industries Ltd Vs ACIT (94 ITD 242) this Tribunal had an occasion to set out the principles on the basis of which tax treaties are to be interpretated. Summarizi....
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....detailed analysis above, in our considered view, it is the fact of taxability of entire income of the person in the residence state, rather than the mode of taxability there, which should govern whether or not the source country should extend treaty entitlement with the contracting state in which that person has fiscal domicile. In effect thus, even when a partnership firm is taxable in respect of its profits not in its own right but in the hands of the partners, as long as entire income of the partnership firm is taxed in the residence country, treaty benefits cannot be declined. 72. There is one more way of looking at this issue and one more line of reasoning which leads to the same conclusion. 73. A series of decisions of this Tribunal, beginning with ADIT Vs Green Emirates Shipping & Travels (100 ITD 203), on the issue of entitlement of India UAE tax treaty benefits to UAE resident who are not actually liable to pay any personal income tax, also deal with an important facet of this issue. In these cases, it is held that actual payment of tax in one of the contracting States is not a condition precedent to avail the benefits of DTAA in the other Contracting States because ....
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...., place of management, place of incorporation etc. are no more than examples of locality related attachments which attract, residence type taxation, that 'person' is to be treated as resident and this status of being a 'resident' of the Contracting State is independent of the activity of tax on that person. Viewed in this perspective, we are of the considered opinion that being 'liable to tax in the Contracting State by the virtue of an existing legal provision but would also cover the cases where that other Contracting State has the right to tax such persons irrespective of whether or not such a right is exercised by the Contracting State." 74. The view taken by the Tribunal in the case of Green Emirates Shipping & Travels (supra) of the Tribunal has also been confirmed, a few months later, by a Dutch High Court vide judgment dated 15 February 2006. We consider it appropriate to reproduce the observations made by late Prof Klaus Vogel in the Bulletin for International Taxation (Volume 60 No 6 ‐2006 at pages 218‐219) published by the International Bureau of Fiscal Documentation, Amsterdam. Prof Dr. Klaus Vogel, after referring to the Tribunal deci....
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....l as headings of a provision in the statute, were written in red while its body text was written in black. This Latin maxim implies that in the process of interpreting a statute, one must start from the title and interpret the text of the provision with reference to its title. The same approach must holds good for interpretation of a tax treaty as well, because that is where contextual interpretation has an even greater role to play. Viewed thus, the purpose of Article 4 is ascertainment of fiscal domicile of a person, and a fiscal domicile is a factual aspect which cannot oscillate due to peripheral variations in the scheme tax laws of that jurisdiction. It is only elementary that no man can be without a domicile. The same is true for an enterprise, and for a fiscal domicile, as well. The test of fiscal domicile is, as adopted in the international taxation, that a person is treated as fiscally domiciled in a tax jurisdiction in which it has a locality related attachment which leads to residence type taxation. The decisive factor of every type of domicile is a locality related attachment, such as a voting right for a person which again is based on where that person ordi....
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....eriods aggregating totalling in aggregate at least 183 days in the calendar year concerned, and a company, which is incorporated in UAE and which is managed and controlled wholly in UAE". This amendment in the definition of resident of UAE thus accepts the broad proposition that the taxability in one of the Contracting States is not a sine qua non to avail treaty benefits in the other Contracting State. The approach of the learned Departmental Representative to the effect that that a person who is not liable to pay tax under the UK law cannot claim any relief from the tax payable in India under the agreement and that the provisions of tax treaties apply to any cases where the same income is not liable to be taxed twice by the existing laws of both the contracting states is thus no longer backed by the tax administration itself. 77. As we hold that the partnership firm is eligible for treaty benefits in the source country even as it is not taxable in its own right in the residence country, we are alive to the fact that the OECD Report on Partnership does not approve that proposition. As evident from paragraph 40 of the said report - reproduced earlier in the order, even when part....
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....ermanent establishment in India under Article 5(2)(k) 80. The next issue that we have to decide is whether or not the assessee had a permanent establishment in India. 81. The case of the assessee is that the assessee did not have any permanent establishment in India. The attach against the findings of the authorities below rests on two major planks‐ first, that since the conditions under Article 5(1) are not fulfilled, there cannot be any question of existence of permanent establishment even under Article 5(2)(k); and - second, that even if Article 5(2)(k) is to be viewed on standalone basis, since there is no 'furnishing' of services by the assessee, and the assessee has merely 'rendered' services, which has connotations materially distinct from that of 'furnishing' services, even the conditions of Article 5(2)(k) are not fulfilled. 82. Learned senior counsel's basic argument is that Article 5(2)(k) of the India UK tax treaty is not to be construed on standalone basis, and it can only be viewed in conjunction with Article 5(1). Learned counsel's case is the sub clauses in Article 5(2) are no more than illustrations of the situations in which Article 5(1) can a....
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....ticle 5(2)(k) of the Indo UK tax treaty as the assessee is an international professional enterprises rendering services directly to its clients. We are taken through dictionary meanings of expressions 'furnishing' and 'rendering' and efforts are made to demonstrate that these expressions cannot be used interchangeably, since these expressions have significantly different connotations. Learned counsel further submits that the professional services, like that of the lawyers, are dealt with Article 15 of India UK tax treaty. He, however, hastens to add that Article 15 cannot be invoked on the facts of this case anyway, since this provision can only be invoked when professional services are rendered by individuals. It is submitted that the wordings of Article 15 are clear, unambiguous and incapable of any other interpretation. He thus submits that the Assessing Officer is in error in giving a 'without prejudice' finding to the effect that, even if provisions of Article 5(2)(k) are held to be inapplicable, the assessee will still have taxability in India in terms of the provisions of Article 15. Learned counsel concludes by submitting that since the provisions of Article 5 o....
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....firm the findings of the authorities below and decline to interfere in the matter. 85. In rejoinder, learned counsel for the assessee reiterates his submissions on the same line. He submits that Article 5(2)(k) is more of an elaboration on the scope of and restriction on the applicability of Article 5(1), rather than an extension of Article 5(2)(k). He submits that Article 5(2)(k) will not be rendered infructuous in case we are to proceed on the basis that satisfaction of conditions of Article 5(1) is a sine qua non for holding existence of PE, because, in any event, Article 5(2)(k) is no more than an example or illustration of a PE. He once again highlighted the difference between rendering of and furnishing of services and submitted that these differences cannot be simply wished away or held to be of no consequence. On the basis of all these arguments, and relying upon the stand taken by the assessee before the authorities below, he once again urges us to hold that the assessee did not have any permanent establishment in India, and since the assessee did not have any permanent establishment in India, no part of its business income can be taxed in India. 86. We h....
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.... Provided that for the purposes of this paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of, mineral oils in that State. (3) The term "permanent establishment" shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of a....
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....red to be an agent of an independent status for the purposes of this paragraph. (6) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. (7) For the purposes of this Article the term "control", in relation to a company means the ability to exercise control over the company's affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company. 88. Article 5(1) of the India UK tax treaty refers to the requirements of, what is often termed as, basic rule PE. This refers to a fixed place of business through which business of the enterprise is wholly or partly carried out. Elaborating upon the scope of this provision, a co ordinate bench of this Tribunal, in the case of Airline Rotables Ltd UK Vs Joint Director of Income Tax (40 DTR 226) and after analysis of earlier decisions of this Tribunal in ....
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....t more than six months; (b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve­month period. OECD 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, and f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.....
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.... 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, OCED Model Convention Commentary states as follows: " This paragraph provides expressly that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months. Any of those items which does not meet this condition does not of itself constitute a permanent establishment, even if there is within it an installation, for instance an office or a workshop within the meaning of paragraph 2, associated with the construction activity. Where, however, such an office or workshop is used for a number of construction projects and the activities performed therein go beyond those mentioned in paragraph, it will be considered a permanent establishment if the conditions of the Article are otherwise met even if one of the projects involved.......lasts for more than 12 months" (Emphasis supplied by us) 91. It is thus clear that, even as per the OECD Model C....
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.... 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 are not in pari materia with the tax treaty provisions that we are in seisin of. 95. We may also add that similar argument, materially similar to the argument raised by the assessee before us and in respect of materially similar treaty provision, also came up for consideration before Hon'ble Authority for Advance Ruling in the case of XYZ In Re (242 ITR 208). Rejecting this plea, Hon'ble Justice Ranganathan, Chairman ‐ AAR, observed as follows: 23. The learned counsel also submitted that the definition of PE is only what is formulated in Article 5(1) and that Article 5(2) is only illustrative of the cases that fulfill the requirement of paragraph 1 of Article 5. In other words, XYZ cannot be said to have a PE even if the requirements of sub clause (1) are satisfied, unless it has a fixed place of business in India. He relies on paragraph 11 of the Commentary on OECD Model Conventio....
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....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 period. The only exclusion clause envisaged from the services so furnished is when the consideration for such services is taxable in the source jurisdiction under Article 13. In order to invoke this provision, all that is needed is that (a) a resident of other contracting state furnishes services ‐for more than 90 days, within any twelve month period, for any enterprises [excluding an associated enterprises within the meanings of that expression under Article 10(1)], or ‐ for more than 30 days, within any twelve month period, for an associated enterprises within the meanings of that expression under Article 10(1); (b) consideration for services so furnished are not taxable in the source jurisdiction under Article 13 of the India UK tax treaty. 98. There is no dispute about the fact that the assessee has fulfilled ....
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....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 treaty, "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". And object and purpose of Article 5(2)(k) is unambiguously set out in UN Model Convention Commentary which, dealing with Article 5(3)(b), which is in pari materia with Article 5(2)(k) of India UK tax treaty, states that, "[i]t is believed that management and consultancy services should be covered because the provision of such services in developing countries by corporations of industrialized countries often involves very large sums of money". This objective, by n....
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....fessional 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 of the UN Model Convention, will apply, we find guidance from the following observations made in the UN Model Convention Commentary: The Group discussed the relationship between article 14 and subparagraph 3(b) of article 5. It was generally agreed that remuneration paid directly to an individual for his performance of activity in an independent capacity was subject to the provisions of article 14.Payments to an enterprise in respect of the furnishing by that enterprise of the activities of employees or other personnel are subject to articles 5 and 7. The remuneration paid by the enterprise to the individual who performed the activities is subject either to article 14 (if he is an independe....
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....ypothetical 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 the PE, the value of services rendered by the PE is to taken at the market value of such services in India and not the price at which GE has billed the clients. On this basis, he contends that as against the actual billing by the GE to the clients, the revenues of the PE should be taken at the rate of UK Pounds 100 per hour for the partners. And UK Pounds 75 for assistants, which at best is the market price of such services rendered in India. According to the learned counsel, when profits attributable to PE in India are to computed, one has to take into account the revenue that the PE in India would have earned, for rendering these services, at the prevalent m....
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....igures 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 learned counsel, so as to ignore the words "profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length". It is submitted that not carrying out the adjustments in respect of market price will have the effect of these words being ignored for all practical purposes. 111. We have heard the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. In order to adjudicate on the above controversy, what we really need to....
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....ce, 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 or PE‐PE transactions, and it also extends, in whatever limited way, to ensuring that the transaction value between permanent establishments and the general enterprises, to which it belongs, as also with the inter se transactions between permanent establishments of the same general enterprises are reflected at arms length price. 115. In computation of PE profits, recognition of GE PE transactions, as also recognition of transactions between PEs inter se (of PEs belonging to a common general enterprises), at arms length price, has dual role to perform. In the first place, the very recognition ....
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....ganization 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 cannot be allowed in respect of centralized coordination, sales and marketing, because these payments are only payments by self to self, the profit in C jurisdiction end up being only the difference between sales price and cost of raw diamonds. The profits so arrived at will clearly be more than overall profits of the enterprise. The proposition that intra organization transactions cannot be taken into account has been subject matter of litigation in India as well. One could possibly argue that, in view of Hon'ble Calcutta High Court judgment in the case of Betts Hartley Huett & Co Ltd Vs CIT (116 ITR 425) , transactions between head office and branch office (GE and PE, in treaty terms) are to be ignored for the ....
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....ax 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 Fiscal Affairs Committee of the League of Nations approved a "Draft Convention on the Allocation of Business Profits Between States for the Purposes of Taxation". The 1933 Draft Convention is based on the principle that permanent establishments ('PEs') must be treated in the same manner as independent enterprises operating under the same or similar conditions. According to this report, the above principle leads to the corollary that the taxable income of a PE must be determined on the basis of its separate accounts. That is how arms length princi....
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....o 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 length only "with the enterprise of which it is permanent establishment" and the scope of enterprise in this context would include the entire general enterprise, including its other permanent establishments (i.e. GE and other PEs belonging to the same GE). The very concept of adjustment for arms length price relates only to associated enterprise, as, on a conceptual note, an arms length price adjustments, in computation of PE profits, only seek to nullify the impact of PE's proximity and interrelationship with other associated enterp....
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....tra 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 'Klaus Vogel on Double Taxation Conventions', that the connotations of hypothetical independence are confined to, what he terms as, 'restricted independence'. Of course, even in this scenario tax authorities can adjust the transaction values when they find that the same are in consonance with the arms length prices, and, as such, distort the PE profit computation, but the substitution of real transaction value by an ideal transaction value in the perfect market conditions, so as to reflect pro....
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....d 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 that as it may, it is not really necessary to go any deeper into this aspect of the matter, in view of our categorical finding to the effect that the transactions in questions in respect of which revenues are sought to be modified on the basis of arms length principle, on the facts of this case, are transactions with the independent enterprises, whereas arms length principle is relevant only for intra organization transactions or transactions with associated enterprises. Accord....
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....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 of the authorities below and submits that the onus is on the assessee to produce all the evidences of expenditure and that this onus is clearly not discharged by the assessee. 133. Having heard the rival submissions and having perused the material on record, we are inclined to uphold the grievance of the assessee. The reimbursements received by the assessee are in respect of specific and actual expenses incurred by the assessee and donot involve any m....
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.... 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 connection in India, only income related to operations carried out in India is taxable in India"; ‐ second, that "in the case of Clifford Chance (82 ITD 106) the Hon'ble Mumbai Bench of ITAT has held that the income relating to services rendered outside India is not taxable in India"; and - third, that "as per Article 7, only that portion of income, which is attributable to the permanent establishment in India, can be tax....
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....arned 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 attributable to work done in the PE but it is in respect of profits "directly" or even "indirectly" attributable to the permanent establishment. The import of "directly or indirectly attributable to PE" has been clearly ignored. The inclusion of 'profits indirectly attributable to the PE' clearly incorporates a force of attraction principle in the India UK tax treaty, but the CIT(A) has simply not taken note of that....
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....und 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 conducted by the permanent establishment. However, after discussion, it was proposed that the "force of attraction" rule, should be limited so that it would apply to sales of goods or merchandise and other business activities in the following manner: if an enterprise has a permanent establishment in the other Contracting State for the purpose of selling goods or merchandise, sales of th....