2005 (7) TMI 81 - HC - Income Tax

Failure to fulfuill conditions as required under Agreement for Avoidance of Double Taxation (AADT) - claim in respect of exemption from double taxation - presumptive taxation under section 44BB - Section 44BB contains special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils - 1. Whether, Tribunal has erred in law in holding that the appellants have failed to satisfy the condition that the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other State ? - 2. Whether, Tribunal has erred in law in holding that the appellants are not governed by the provisions of the Agreement for Avoidance of Double Taxation (AADT)? Held that unless the conditions as required under the AADT are fulfilled, the assessee cannot claim the benefit of the same Hence, both the questions are answered in the negative, i.e., in favour of the Department and against the appellants.

Summary

Issues Involved:
1. Interpretation of Article 16 of the Agreement for Avoidance of Double Taxation (AADT) between India and the U.K. and France.
2. Applicability of Section 44BB of the Income-tax Act, 1961.
3. Fulfillment of conditions under AADT for exemption from double taxation.
4. The concept of "chargeable to tax" in the context of AADT.
5. Treaty shopping and its implications.

Issue-wise Detailed Analysis:

1. Interpretation of Article 16 of the Agreement for Avoidance of Double Taxation (AADT) between India and the U.K. and France:
The core issue revolves around the interpretation of Article 16 of the AADT, which deals with "dependent personal services." The relevant clause states that remuneration derived by a resident of a Contracting State in respect of employment exercised in the other Contracting State shall not be taxed in that other State if:
(a) The individual is present in the other State for a period not exceeding 183 days during the fiscal year.
(b) The remuneration is paid by, or on behalf of, an employer who is not a resident of that other State.
(c) The remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other State.

2. Applicability of Section 44BB of the Income-tax Act, 1961:
Section 44BB deals with the computation of profits and gains in connection with the business of exploration, etc., of mineral oils. It specifies that a sum equal to ten percent of the aggregate amounts specified shall be deemed to be the profits and gains of such business chargeable to tax. The court noted that this section applies to non-resident assessees and overrides other charging sections.

3. Fulfillment of conditions under AADT for exemption from double taxation:
The appellants argued that they were entitled to the benefits of the AADT. However, the court observed that all three conditions stipulated in Article 16(2) of the AADT must be fulfilled cumulatively. While the appellants satisfied conditions (a) and (b), they failed to meet condition (c), which requires that the remuneration must not be deductible in computing the profits of an enterprise chargeable to tax in the other State. The appellants could not demonstrate that the remuneration received was chargeable to tax in their resident State.

4. The concept of "chargeable to tax" in the context of AADT:
The appellants contended that "chargeable to tax" does not necessarily mean that tax must be paid on the income; it could also include income exempted from tax. The court agreed with this interpretation but emphasized that the appellants failed to provide any document or statute showing that the remuneration received was chargeable to tax in their resident State, whether exempted or otherwise.

5. Treaty shopping and its implications:
The appellants argued that treaty shopping should not be considered unethical or illegal, as it encourages foreign investment in developing countries. The court acknowledged this perspective but reiterated that the benefit of the AADT cannot be claimed unless the specific conditions of the treaty are met.

Conclusion:
The court concluded that the appellants did not fulfill the necessary conditions under Article 16(2) of the AADT, particularly the requirement that the remuneration must not be deductible in computing the profits of an enterprise chargeable to tax in the other State. Consequently, the appellants were not entitled to the benefits of the AADT. The court also upheld the applicability of Section 44BB for taxing the appellants' income. Both questions raised by the appellants were answered in the negative, favoring the Department, and the appeals were dismissed with no order as to costs.