Facts
Telecommunications Consultants India Ltd, („taxpayer‟) is a public sector undertaking was engaged in business of providing full range of consultancy, design and engineering services in all the fields of telecommunication in India as well as abroad.
For the assessment years 2005-06 and 2006-07 the taxpayer has executed projects in Oman, Mauritius, Netherlands and Tanzania. The income arising from these projects had not been included in the taxable income in India by the taxpayer on the ground that the same are exempted from the tax in India under the provisions of respective the Double Taxation Avoidance Agreement (DTAA).
The taxpayer claimed that in case of a PE outside India, the income attributable to the PE shall be taxable only in the country of source according to Article 7. In such cases the criteria of „residence‟ would not be determinative for taxing the income attributable to the PE. Further, the phrase 'may be taxed' in Article7 of the respective DTAAs would mean that the Contracting States permitted only the other Contracting State i.e. State of source of income to tax such income.
The taxpayer also claimed that the primary objective of DTAA entered into by India was avoidance of double taxation and not relief from double taxation. Further the mechanism of providing relief in the form of credit would be applicable only when in accordance with the provisions of the DTAA, double taxation could not be avoided.
Issues before the Tribunal
Whether the income attributable to the Permanent Establishment(s) of the taxpayer located in Oman, Mauritius, Netherlands and Tanzania, was liable to income tax in India?
Observations and Ruling of the Tribunal
„h Two rules are devised in DTAAs to avoid double taxation:
¡V One is by providing for 'Distributive Rules' which allocate taxing rights between contracting states with respect to various kinds of incomes.
¡V Second rule is to put state of residence under an obligation to give either credit for taxes paid in source state or to exempt the income taxed in source state.
„h The distributive rules use the words, 'shall be taxable only', 'may be taxed' and 'may also be taxed'. If a contracting state is to be given exclusive right to tax a particular kind of income, then relevant article of convention uses the phrase 'shall be taxable only'. As a rule, such exclusive right is given to state of residence, though there are a few articles where exclusive right to tax is given to state of source also. This phrase precludes the other contracting state from taxing that income.
„h In respect of income where the attribution of right to tax is not exclusive, the convention uses the phrase 'may be taxed'. Therefore, if an item of income is 'may be taxed' in state of source and nothing is mentioned about taxing right of state of residence in convention itself, then state of residence is not precluded from taxing such income. In such a case, the resident state can tax the income using inherent right of state of residence to tax global income of its resident.
„h Article 7 of all the DTAAs applicable in the case of the taxpayer are similarly worded: "The profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If the enterprise carries on business aforesaid, the profits of the enterprise ¡§may be taxed¡¨ in the other state but only so much of them as is attributable to that permanent establishment".
„h The first sentence of this article consists of two parts. The first part gives exclusive right to taxation of business income to state of residence as it uses phrase 'shall be taxable only'. The second part states that if there is PE in another contracting state i.e. state of source, then right to taxation of state of residence is not exclusive but inherent right to tax of state of residence is not lost, as it uses phrase 'may be taxed'.
„h The combined reading of these sentences of Article 7 means that state of source has non-exclusive right to tax business income attributable to PE and therefore it may tax it as per its domestic laws. However, this non-exclusive right of state of source does not extinguish inherent right of state of residence to tax global income of its resident. In a situation where state of residence had given up its right to tax the income of the PE, the second sentence of Article 7 would have used phrase 'shall be taxable only'. The second sentence uses phrase 'may be taxed., therefore inherent right of India to tax global income of its resident is not lost.
„h As per the provisions of Income-tax Act, 1961 (.Act.), the taxpayer is a resident of India. Hence, India has inherent right to tax the global income of the taxpayer as per provisions of Section 5 of the Act.
„h In view of the above, in the taxpayer.s case, the phrase used in the Article 7 of the respective DTAAs is ¡§may be taxed¡¨ and in such cases, the state of residence would have the power to tax such income which has also been provided in the DTAA itself. The domestic law also provides for taxing such income. Thus there seems to be no contradiction between the provisions of DTAA and the domestic tax laws.
„h India has not waived all the rights to tax under Article 7 of the relevant DTAA and accordingly India shall give credit for the taxes paid in the country of source.
The Tribunal also distinguished the decision in P.V.A.L. Kulandagan Chettiar on the basis that the Supreme Court had not expressed any opinion on the aspect and scope of the expression “may be taxed”.
Conclusion
Article 7 of the DTAA using the words “may be taxed” provides that the Source state would have the right to tax business income to the extent the same is attributable to the PE in that State. However, providing such right to tax does not exclude the Resident state from taxing such business income based on its domestic laws and under the DTAA.
Source: Telecommunications Consultants India Ltd. vs. Addl CIT (ITA Nos. 1293 & 1294/Del./2009 dated 29th March 2012)
Telecommunications Consultants India Ltd, („taxpayer‟) is a public sector undertaking was engaged in business of providing full range of consultancy, design and engineering services in all the fields of telecommunication in India as well as abroad.
For the assessment years 2005-06 and 2006-07 the taxpayer has executed projects in Oman, Mauritius, Netherlands and Tanzania. The income arising from these projects had not been included in the taxable income in India by the taxpayer on the ground that the same are exempted from the tax in India under the provisions of respective the Double Taxation Avoidance Agreement (DTAA).
The taxpayer claimed that in case of a PE outside India, the income attributable to the PE shall be taxable only in the country of source according to Article 7. In such cases the criteria of „residence‟ would not be determinative for taxing the income attributable to the PE. Further, the phrase 'may be taxed' in Article7 of the respective DTAAs would mean that the Contracting States permitted only the other Contracting State i.e. State of source of income to tax such income.
The taxpayer also claimed that the primary objective of DTAA entered into by India was avoidance of double taxation and not relief from double taxation. Further the mechanism of providing relief in the form of credit would be applicable only when in accordance with the provisions of the DTAA, double taxation could not be avoided.
Issues before the Tribunal
Whether the income attributable to the Permanent Establishment(s) of the taxpayer located in Oman, Mauritius, Netherlands and Tanzania, was liable to income tax in India?
Observations and Ruling of the Tribunal
„h Two rules are devised in DTAAs to avoid double taxation:
¡V One is by providing for 'Distributive Rules' which allocate taxing rights between contracting states with respect to various kinds of incomes.
¡V Second rule is to put state of residence under an obligation to give either credit for taxes paid in source state or to exempt the income taxed in source state.
„h The distributive rules use the words, 'shall be taxable only', 'may be taxed' and 'may also be taxed'. If a contracting state is to be given exclusive right to tax a particular kind of income, then relevant article of convention uses the phrase 'shall be taxable only'. As a rule, such exclusive right is given to state of residence, though there are a few articles where exclusive right to tax is given to state of source also. This phrase precludes the other contracting state from taxing that income.
„h In respect of income where the attribution of right to tax is not exclusive, the convention uses the phrase 'may be taxed'. Therefore, if an item of income is 'may be taxed' in state of source and nothing is mentioned about taxing right of state of residence in convention itself, then state of residence is not precluded from taxing such income. In such a case, the resident state can tax the income using inherent right of state of residence to tax global income of its resident.
„h Article 7 of all the DTAAs applicable in the case of the taxpayer are similarly worded: "The profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If the enterprise carries on business aforesaid, the profits of the enterprise ¡§may be taxed¡¨ in the other state but only so much of them as is attributable to that permanent establishment".
„h The first sentence of this article consists of two parts. The first part gives exclusive right to taxation of business income to state of residence as it uses phrase 'shall be taxable only'. The second part states that if there is PE in another contracting state i.e. state of source, then right to taxation of state of residence is not exclusive but inherent right to tax of state of residence is not lost, as it uses phrase 'may be taxed'.
„h The combined reading of these sentences of Article 7 means that state of source has non-exclusive right to tax business income attributable to PE and therefore it may tax it as per its domestic laws. However, this non-exclusive right of state of source does not extinguish inherent right of state of residence to tax global income of its resident. In a situation where state of residence had given up its right to tax the income of the PE, the second sentence of Article 7 would have used phrase 'shall be taxable only'. The second sentence uses phrase 'may be taxed., therefore inherent right of India to tax global income of its resident is not lost.
„h As per the provisions of Income-tax Act, 1961 (.Act.), the taxpayer is a resident of India. Hence, India has inherent right to tax the global income of the taxpayer as per provisions of Section 5 of the Act.
„h In view of the above, in the taxpayer.s case, the phrase used in the Article 7 of the respective DTAAs is ¡§may be taxed¡¨ and in such cases, the state of residence would have the power to tax such income which has also been provided in the DTAA itself. The domestic law also provides for taxing such income. Thus there seems to be no contradiction between the provisions of DTAA and the domestic tax laws.
„h India has not waived all the rights to tax under Article 7 of the relevant DTAA and accordingly India shall give credit for the taxes paid in the country of source.
The Tribunal also distinguished the decision in P.V.A.L. Kulandagan Chettiar on the basis that the Supreme Court had not expressed any opinion on the aspect and scope of the expression “may be taxed”.
Conclusion
Article 7 of the DTAA using the words “may be taxed” provides that the Source state would have the right to tax business income to the extent the same is attributable to the PE in that State. However, providing such right to tax does not exclude the Resident state from taxing such business income based on its domestic laws and under the DTAA.
Source: Telecommunications Consultants India Ltd. vs. Addl CIT (ITA Nos. 1293 & 1294/Del./2009 dated 29th March 2012)
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