Determining the ‘basis’ of share of revenue in a contracting state

[Vivek Jalan]

There is always a question on what is the reasonable basis to determine the share of revenue of a contracting state. Let’s understand the issue and the matter of law or fact involved –

Explanation 1(a) to Section 9(1)(i) states as follows –

“9. Income deemed to accrue or arise in India

(1) The following incomes shall be deemed to accrue or arise in India:

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.

Explanation 1-For the purposes of this clause— (a) in the case of a business other than the business having business connection in India on account of significant economic presence of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.”

“Article 7 of the DTAA between USA and India states as follows –

Business Profits –

1. 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 as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to

(a) that permanent establishment;

(b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or

(c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.”

Under Explanation 1(a), what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India. What portion of the income can be reasonably attributed to the operations carried out in India is a question of fact and has to be determined in each case. Article 7 of the DTAA also lays down the same principle.

Hence once the assessee establishes scientifically through means which can be on the basis of proportion in ‘value of assets’ used in providing service in India or the proportion of ‘manpower’ used in India, then the revenue has to come out with an acceptable argument against the basis ascertained for the Courts to look into the case. The recent decision of The Apex Court in the case of DIRECTOR OF INCOME TAX, NEW DELHI VERSUS TRAVELPORT INC. - 2023 (5) TMI 227 - SUPREME COURT lays down the proposition which can be used by assesses going forward.