2012 (12) TMI 788 - AT - Income Tax

Rectification of mistake - the decision on the issue of profit attributable to the PE of the assessee in India has been decided by the Tribunal ignoring or overlooking Article 7(3) of India UK DTAA - Held that - The controversy involved in relation to the issue was correctly understood by the Tribunal and even the reasons given by the CIT(Appeals) to give relief to the assessee on the said issue were identified by the Tribunal. One of the reasons so given by the CIT(A) as identified by the Tribunal was based on Article 7 of the India-UK treaty and the said Article including para 3 thereof was not only reproduced by the CIT(Appeals) in paragraph No. 6.5 of his impugned order but the same was also discussed and dealt with by him in paragraph No. 6.12 of the said order before giving relief to the assessee relying on the same. As clearly mentioned by the Tribunal in paragraph No. 141 of its order, the legal position applicable to the issue was carefully considered by it which obviously included Article 7(3) of the India-UK treaty relied upon by the CIT(Appeals) and after taking the same into consideration, it was held by the Tribunal that the provisions of Article 7(1) in India-UK treaty included the same results as sought to be achieved by Article 7(1)(c) of the UN Model Convention. Accordingly, relying on the UN Model Convention commentary on this issue, a considered view was taken by the Tribunal that the connotation of profits indirectly attributable to permanent establishments did extend to incorporation of the force of attraction rule being embedded in Article 7(1). Keeping in view this text and context of the order of the Tribunal, it cannot be said that the Tribunal has ignored or overlooked Article 7(3) of India-UK treaty while rendering its decision on this issue and that there is any mistake apparent from record in the order of the Tribunal on account of non-consideration of the said article as alleged by the assessee. Contention raised on behalf of the assessee that the scope of Article 7(1)(c) of U.N. Model Convention is limited to activities carried on in India only, it is observed that the Tribunal has taken a considered view on interpretation of the said Article that the entire profit relating to services rendered by the assessee whether rendered in India or outside India, in respect of Indian Project is taxable in India and it is not permissible to review the decision of the Tribunal in the guise of rectification u/s 254(2) - The decision in the present case, thus has been rendered by the Tribunal on its own facts and by applying the provisions of different Treaty. Thus it cannot be straightway inferred that the same is contrary to the decision of the Hon ble Supreme Court in the case of Ishikawajima-harima Heavy Industries Ltd. (2007 (1) TMI 91 - SUPREME COURT ) giving rise to a mistake apparent from record - Miss application dismissed.

Summary

Issues Involved:
1. Application of the force of attraction principle in computing profits attributable to the permanent establishment (PE).
2. Whether the entire income from Indian projects is taxable in India.
3. Consideration of Article 7(3) of the India-UK DTAA and its implications.
4. Alleged mistake apparent from the record in the Tribunal's order.

Issue-wise Detailed Analysis:

1. Application of the Force of Attraction Principle in Computing Profits Attributable to the Permanent Establishment (PE):
The primary issue raised by the Revenue in its appeal was the application of the force of attraction principle in computing profits attributable to the PE. The assessee, a partnership firm of solicitors based in London, contended that only a portion of its services was performed in India, and thus, only that portion of income should be taxed in India. However, the Tribunal upheld the decision of the AO that the entire income from Indian projects is taxable in India under the force of attraction principle embedded in Article 7 of the India-UK DTAA.

2. Whether the Entire Income from Indian Projects is Taxable in India:
The Tribunal's order dated 16th July 2010 held that the entire income earned by the assessee from Indian projects is taxable in India. The assessee argued that only the income attributable to services rendered in India should be taxed, relying on Article 7(3) of the India-UK DTAA. However, the Tribunal accepted the Revenue's stand that the entire income is taxable in India, as the force of attraction principle in Article 7(1) of the India-UK DTAA was applicable. The Tribunal interpreted "profits indirectly attributable to PE" to include all profits from Indian projects, regardless of where the services were performed.

3. Consideration of Article 7(3) of the India-UK DTAA and Its Implications:
The assessee contended that the Tribunal ignored Article 7(3) of the India-UK DTAA, which specifies that only the proportion of profits attributable to the PE should be taxed in India. The Tribunal, however, found that the provisions of Article 7(1) and 7(2) of the India-UK DTAA were akin to the provisions of the UN Model Convention and concluded that the force of attraction principle applied. The Tribunal held that Article 7(3) was not overlooked and that the entire income from Indian projects was taxable in India, as the PE was involved in the activity giving rise to such profits.

4. Alleged Mistake Apparent from the Record in the Tribunal's Order:
The assessee filed a miscellaneous application seeking rectification of the alleged mistake in the Tribunal's order, arguing that the Tribunal overlooked Article 7(3) of the India-UK DTAA. The Tribunal reviewed the relevant portions of its order and the material on record, concluding that it had considered the applicable legal position, including Article 7(3). The Tribunal determined that there was no mistake apparent from the record, as the decision was based on a careful consideration of the facts and applicable legal provisions. The Tribunal dismissed the miscellaneous application, affirming its original decision.

Conclusion:
The Tribunal upheld the application of the force of attraction principle, determining that the entire income from Indian projects is taxable in India. It concluded that Article 7(3) of the India-UK DTAA was considered and that there was no mistake apparent from the record in its original order. The assessee's miscellaneous application seeking rectification was dismissed.