Issues Involved: 1. Jurisdiction of the Tribunal under Article XVIII of the Agreement. 2. Applicability of Section 9(1) of the Income-tax Act, 1961, in light of Article III of the Agreement. 3. Existence of a "permanent establishment" of the German company in India under Article II(1)(i) of the Agreement. 4. Taxability of interest paid under Article VIII of the Agreement.
Summary:
1. Jurisdiction of the Tribunal under Article XVIII of the Agreement: The court held that Article XVIII of the Indo-German Double Taxation Avoidance Agreement (the Agreement) outlines a "mutual agreement procedure" that is in addition to, and not in substitution of, the remedies available before domestic courts or tribunals. The Tribunal was therefore entitled to consider the applicability of the Agreement.
2. Applicability of Section 9(1) of the Income-tax Act, 1961, in light of Article III of the Agreement: The court ruled that the provisions of Sections 4 and 5 of the Income-tax Act, 1961, are subject to the terms of any Double Taxation Avoidance Agreement entered into by the Government of India u/s 90. Consequently, even if the income of the German company is deemed to have accrued or arisen in India u/s 9, the terms of Article III of the Agreement would prevail, exempting the industrial or commercial profits of the German company from tax unless derived through a "permanent establishment" in India.
3. Existence of a "permanent establishment" of the German company in India under Article II(1)(i) of the Agreement: The court examined whether the German company had a "permanent establishment" in India through its dealings with the Poona company or the German engineer, Mr. Bremer. The court found that the German company did not have a fixed place of business in India and that the Poona company acted as an independent contractor, not an agent. The German engineer's role was limited to supervision and did not establish a "permanent establishment." Therefore, the German company did not have a "permanent establishment" in India.
4. Taxability of interest paid under Article VIII of the Agreement: The court held that the interest payable along with the 20 instalments of unpaid purchase money was part of the sale consideration itself and not an independent source of income. The interest did not arise from any form of "indebtedness" as contemplated in Article VIII of the Agreement. Therefore, the interest specified in the contract was not liable to income-tax in India.
Conclusion: The court agreed with the Tribunal and answered the question in the affirmative, in favor of the assessee (Port Trust) and against the Department, stating that the assessee is immune from liability either wholly or partly to income-tax under the Double Taxation Avoidance Agreement between Germany and India.
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