2011 (10) TMI 27 - HC - Income Tax

Permanent establishment - income escaping assessment - Article 5 of the Double Taxation Avoidance Agreement between India and Netherlands. - The dredging activities commenced in India w.e.f. 27th December 1993 and was completed on 12th June 1994. - Held that - the assessee did not have any permanent establishment in India within the meaning of Article 5 of the Double Taxation Avoidance Agreement entered between India and Netherlands and no part of the revenue earned by the assessee was taxable in India. -

Summary

Issues:
Assessment of permanent establishment for tax liability under the Double Taxation Avoidance Agreement between India and Netherlands for the assessment year 1994-95.

Detailed Analysis:

1. Facts and Background: The appellant, a partnership firm, entered into a sub-contract for dredging and backfilling works with another company. The contract spanned two assessment years, with activities lasting less than six months during the assessment year 1994-95.

2. Initial Claim and Assessment: The appellant claimed that it did not have a permanent establishment in India and, therefore, its revenue was not taxable in India. However, the Assessing Officer reopened the assessment based on the following year's findings, concluding that the appellant had a permanent establishment in India.

3. Appeals and Tribunal Decision: The Commissioner of Income Tax (Appeals) and the Tribunal both ruled in favor of the appellant, stating that no permanent establishment existed in India for the assessment year 1994-95. The Tribunal specifically highlighted that the contract duration was less than six months, as required by the treaty.

4. Legal Interpretation of Treaty Provisions: The Court examined Article 5 of the treaty, which defines a permanent establishment. It noted that a building site or construction project constitutes a permanent establishment only if it continues for more than six months, as per Article 5(3). The Court emphasized that the specific provision of Article 5(3) prevails over the general provision of Article 5(2).

5. Court's Decision: The Court found that the appellant did not have a permanent establishment in India as per the treaty provisions for the assessment year 1994-95. It concluded that no part of the appellant's revenue was taxable in India, aligning with the decisions of the Tribunal and the Commissioner of Income Tax (Appeals).

6. Final Verdict: The Court dismissed the appeal filed by the revenue, emphasizing that the appellant's lack of a permanent establishment in India absolved it from tax liability. The Court held that the specific treaty provision regarding project duration prevailed over the general provision, leading to the non-taxability of the appellant's income in India.

This detailed analysis provides a comprehensive overview of the legal judgment regarding the assessment of a permanent establishment for tax purposes under the Double Taxation Avoidance Agreement between India and Netherlands for the assessment year 1994-95.