TMI Blog2004 (5) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of the rubber plantations cannot be taxed in India, because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment has been set up will determine the fiscal domicile. We need not enter into an exercise in semantics as to whether the expression may be will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the treaty in question as a whole, when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant, the treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act. Whether the capital gains should be taxable only in the country in which the assets are situated - HELD THAT:- The contention put forth by the learned Attorn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 (Appeals) and held that (i) since the respondent has no permanent establishment for business in India, the business income in Malaysia cannot be included in his income in India, and (ii) since the property is situated in Malaysia, capital gains cannot be taxed in India. Thereafter, the matter was carried by way of a reference to the High Court. 4. The High Court held that the finding of the Tribunal is in accordance with the provisions of the Agreement for Avoidance of Double Taxation of Income. The High Court took the view that: (i) Where there exists a provision to the contrary in the Agreement, there is no scope for applying the law of anyone of the respective contracting States to tax the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movable 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 same property, (2) by the same State or Government, (3) during the same taxing period, and (4) for the same purpose. There is no double taxation strictly speaking where (a) the taxes are imposed by different States, (b) one of the impositions is not a tax, (c) one tax is against property and the other is not a property tax, or (d) the double taxation is indirect rather than direct. 7. But, we have traveled very far from this stage as the Indian law has developed in this regard. Section 90 of the Indian Income-tax Act, 1961 (hereinafter referred to as the Act ) provides for Agreement with foreign countries in cases where (a) for the granting of relief in respect of income on which have been paid both income-tax under the Act and income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contemplated is the avoidance method; that, on the other hand, whenever the expression used is income may be taxed what is contemplated is the relief or the credit method; that article XXII(2) of the Indo-Malaysian treaty also indicates that the said treaty contemplated the credit method. He submitted that article XXII(2) is not a residuary article in respect of forms of income not otherwise specified in the treaty; that whenever it was intended that there should be a residuary clause, it has been specifically so provided in various other treaties, most treaties, including the OECD Model Treaty and the Indo-Mauritius treaty, have specific residuary clauses in addition to article XXII(2) where it is stated that subject to the provisions of paragraph 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty, 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. 10. So far as business income is concerned, the learned Attorney-General submitted that the argument that income attributable to a permanent establishment is taxable only in the State where the permanent establishment is situated is incorrect; that even in the case of business income the power to tax given to Malaysia is in permissive language, that is may , and it is therefore not correct to contend that in such a case tax can be imposed only by Malaysia; that there is no dispute that the assessees are resident and enterprises of India and in such a situation a reading of article VII(l) makes it clear that ordinarily income of an Indian enterprise shall be taxable only in India unless the enterprise carries on business in Malaysia thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as providing for allotment of the taxing power to either India or Malaysia both of whom could otherwise have taxed the same income by virtue of the tax payer being a resident of one of those countries or by virtue of the source of the income having arisen in one of those countries; that article VI, therefore, allocates the power to tax income from immovable property in the contracting State in which such property is situated; that the agreement of this nature between Governments representing sovereign nations necessarily implies surrender by each of the States to the other State of its taxing power over a particular income for their mutual benefit and for the benefit of their citizens. The respondents seek to distinguish the judgment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 in Malaysia was not to be included in the total income in India subject to certain conditions in the articles of the Agreement; that, therefore, when the treaty came into force the income-tax authorities in India need not insist upon the production of the assessment orders and the receipted tax paid challans and were, therefore, empowered to avoid the income arising in Malaysia; that thus such income arising in Malaysia subject to certain conditions was to be completely excluded from the total income in India. It is further contended that the question whether section 5(1)(c) of the Income-tax Act applies to a resident to whom the income arising in all parts of the world had to be included in the total income in India loses its effect after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 only in the latter part of 1977, while the treaty in question was signed in October 1976; that most of the clauses in the OECD model treaty could not have been in the contemplation of the parties at the time when the treaty in question was signed and the provisions of the OECD model treaty cannot, therefore, be applied to the treaty in question. He further urged that article XXII(2) will apply only when taxes are payable under the laws of Malaysia; that even for granting the tax credit, proof of tax paid in Malaysia has to be furnished and it would thus be similarly necessary to furnish such proof of tax paid in Malaysia even for the purpose of article XXII(2) of the treaty i that in order to avoid conflicts of interest, the treaty between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 either contracting State, he shall be deemed to be a resident of the contracting State in which he has an habitual abode; (c) if he has an habitual abode in both contracting States or in neither of them, he shall be deemed to be a resident of the contracting State of which he is a citizen; (d) if he is a citizen of both contracting States or of neither of them the competent authorities of the contracting States shall determine the question by mutual agreement. 3. Where by reason of the provisions of paragraph 1 of this article a person other than an individual is a resident of both contracting States, then it shall be deemed to be a resident of the contracting State in which its place of effective management is situated. ARTICLE V Permanent establishment 1. For the purposes of this agreement, the term 'permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contracting State, an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he maintains in the first-mentioned contracting State a stock of goods or merchandise belonging to the enterprise from which he regularly fills orders on behalf of the enterprise. 6. An enterprise of one of the contracting States shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business in that other contracting 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. 7. The fact that a company which is a resident of one of the contracting States controls or is controlled by a company which is a resident of the .other contracting State or which carries on business in that other contracting S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. 4. In so far as it has been customary in a contracting State to determine the income or profits to be attributed to a permanent establishment on the basis of an apportionment of the total income or profits of the enterprise to its various parts, nothing in paragraph 2 or paragraph 3 of this article shall preclude such contracting State from determining the income or profits to be taxed by such an apportionment as may be customary ; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this article. 5. No income or profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the purpose of export to the enterprise of which it is the permanent establishment. 6. Where in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion 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 resident of Malaysia the amount which would have been paid if the Indian tax had not been reduced or relieved in accordance with the special incentive measures designed to promote economic development in India- (i) in relation to royalties, as set forth in the relevant annual Finance Act of India; and (ii) in relation to other income as set forth in the following sections of the Income-tax Act, 1961, of India or which may be introduced in future in the Indian tax laws in modification of or in addition to the existing measures, provided that an agreement is made between the two Governments in respect of the scope of the benefit accorded by the said measures : (aa) Section 10(15)(iv)(b) and (c)-relating to exemption from tax of- (a) an approved foreign financial institution in respect of interest on moneys lent by it to an industrial undertaking in India under a loan agreement; and (b) a non-resident in respect of interest on moneys lent or credit fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying 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 affirmed by the High Court. We, therefore, do not propose to re-examine the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of the rubber plantations cannot be taxed in India H because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment has been set up will determine the fiscal domicile. On the first issue, the view taken by the High Court is correct. 18. We need not enter into an exercise in semantics as to whether the expression may be will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the treaty in question as a whole, when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his ..... X X X X Extracts X X X X X X X X Extracts X X X X
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