Assessee is a non-resident banking company with headquarters in UAE and branch offices in Mumbai and Delhi. Assesee filed ITR with a loss however, stated that it has not claimed any deduction on account of head office expenses, since, it has returned loss, but reserves its right to claim deduction at 5 per cent as per s. 44C of the Act. As per Art. 7(3) the DTAA between India and Dubai all expenses incurred for the purpose of business of the PE, including, the executive and administrative expenses, are allowable without applying the restriction imposed under s. 44C of the Act. AO only allowed 5% deduction to the adjusted total income. The Tribunal observed that the purpose of art. 25(1) cannot be expanded to mean the manner of taxing the income in each of the Contracting States but is to reiterate that taxing the income arising in each of the Contracting States should be either under the domestic law or as per the express provisions contained in the convention. This, when read with s. 90(2) of the Act, would mean that the Assessee has option to choose whichever is beneficial to it. Accordingly, art. 25(1) cannot be interpreted to impose restrictions on the manner of computing the tax which is beyond its scope of eliminating double taxation. Articles 25(1) and 7(3) operate in different situations. While art. 25(1) deals with elimination of double taxation, art. 7 deals with taxability of business profits and para 3 of art. 7 lays down the mechanism of computation of business profit of PE. Therefore, while computing the business profit PE under art. 7(3) of the Treaty, the language used/employed therein has to be seen.

 The Tribunal also considered whether the amendment to art. 7(3) of the Treaty, effective from April 2008 retrospectively. The Tribunal held that the provisions of art. 7(3) of the Treaty is a result of a bilateral treaty between two countries and the changes to art. 7(3) have to be interpreted strictly from the date as specified and not any another date. (AY. 2002-03)