Business Profit Earned by an Entity not having PE in India is not Taxable as per DTAA Provisions: Bombay HC [Read Order]

In a recent ruling, a Division Bench of Bombay High Court ruled business profit earned by an entity not having Permanent Establishment in India is not taxable as per provisions of Double Taxation Avoidance Agreement (DTAA)

The assessee, Colgate Palmolive Marketing SDN BHD, is an entity incorporated in Malaysia and is engaged in the business of marketing, distribution and sale of household products, fabrics and personal care.

The assessee and Colgate Palmolive (India) Limited (CPI) entered into an Agreement with the Assessee for use of the Assessee’s SAP system.

The present appeal was filed by the revenue department against the order of Income Tax Appellate Tribunal (ITAT) which was in favour of the assessee.

Mr. Pardiwalla, the representative of the assessee supported the finding of the Income Tax Appellate Tribunal (ITAT) and submitted that, since the Assessee does not have a Permanent Establishment in India, its business profit would not be taxable in India by virtue of the provisions of Article 7 of the DTAA.

According to the ITAT, Article 7 of the DTAA prohibits a Contracting State's enterprise from subjecting its business earnings to taxation in another Contracting State unless it has a Permanent Establishment there. The payment received by the Assessee from CPI for the use of the SAP system was not taxable in India because the Assessee does not have a Permanent Establishment there.

The bench of Justice Firdosh Pooniwalla and Justice K.R. Shriram supported the decision and view of the tribunal.

Further stated that “Article 7 of the DTAA states that a tax resident of Malaysia would be taxable in India if it carries on business through a Permanent Establishment in India. Further, the enterprises would be taxable only to the extent the profits are attributable to the Permanent Establishment in India.”

As per the bench's interpretation, Article 5 of the DTAA provides a definition of Permanent Establishment which includes various types of establishments such as a place of management, branch, office, factory, warehouse, workshop, and so on. Taking this definition into consideration, the ITAT has reached the decision that the Assessee does not possess a Permanent Establishment in India.

Moreover, as the Assessee does not have a Permanent Establishment in India, by virtue of the provisions of Article 7 of the DTAA, the payment received by it from CPI, which would be business profit, is not taxable in India.

Therefore, the court rejected the appeal since no significant issue arose and there was no requirement to intervene in the ITAT's decision.

To Read the full text of the Order CLICK HERE

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