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Started by bhaveshformals, June 29, 2007, 10:57:29 AM

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My Views on Ishikawajma Harima

The Sc has basically not disputed the finding of facts of the AAR. It merely mentions the fact that the Contract is a turnkey one and a composite one but the consideration is not.

Clause 1 of Article 7 of the DTAA:
·   The profits of an enterprise of a Contacting State shall be taxable only in that Contracting 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 that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment."

Going by the plain words I agree that the Offshore Supply is to be judged under Article 7 because the applicant had a PE in India. However what needs to be examined is that whether the profits are attributable to the PE.

The SC says that the PE was never involved in the transaction because it took place overseas. However that is not the way to look at it. The SC has never considered if the PE was involved in getting the order placed with Ishikawajma. If yes then definitely the profits can be attributable to the PE and the Income may be taxable in India.

Distinction between PE and ' Business Connection'

The SC says that the PE can't be equated to a Business Connection since the former is for the purposes of the DTAA and latter is for the purpose of the Income Tax Act. If one looks at the issue plainly without any complications then the PE in itself is a Business Connection. And yes I am in complete agreement with you that the term 'Business Connection' includes a PE but not vice-versa i.e. there could be a Business Connection without a PE. However if you look at the definition of PE in the DTAA then it virtually includes everything in Business Connection.

Now to determine the taxability under the Act it has to be again proved that the Income was attributable to the Business Connection.

Having established that the PE is a Business Connection now whether the profits can be attributable to the PE i.e. Business Connection is a question of Fact and the SC should have reverted back to the AAR.



You have made a couple of good points: My response:

A court gives its decision on the (undisputed) facts stated in the Petition. The Applicant had stated that the PE had no role to play in the off-shore supply transaction. This was not (could not be – at that point of time) disputed by the revenue and so the decision was given on that basis.

However, if at the stage of making the assessment, the AO finds that the facts are otherwise, he is entitled to refuse to give full or part effect to the ruling under s. 245S (2) which provides that "The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced".

Similarly, u/s 245T, the ruling is void ab initio if it is obtained on a misrepresentation of facts.

Accordingly, there are adequate safe-guards built in.

Incidentally, there is no "finding of fact" by the AAR. It also proceeds on the basis of the averments in the application.

The second point is on the same basis. Yes, it is a question of fact – but one that will have to be determined by the AO at the stage of the assessment proceedings. If the Applicant has stated wrong facts in the application, then he stands the risk of the ruling becoming infructuos.