Thursday, March 27, 2014

ITAT explains interplay between Article 7 and Article 13 of India-UK DTAA

The Tribunal held as under:
1)  The Para 1 of Article 7 of the India-UK treaty ('DTAA') provides that if an enterprise carries on business in the other Contracting State through a permanent establishment (‘PE’) situated therein, then the profits of the enterprise may be taxed in the other State but only so much of them as are directly or indirectly attributable to that PE;
2)  The effect of Para 9 of Article 7 is that if 'Business profits' include an item of income which falls under any of the specific Articles of the DTAA, such as Royalties and fees for technical services (‘FTS’) under Article 13, then such income shall be excluded from the 'Business Profits' and falls under specific Articles such as Article 13;
3)  Para 6 of Article 13 of DTAA provides that the provisions of paragraphs 1 and 2 of Article 13 shall not apply if the beneficial owner of the royalties or FTS, carries on business in the other Contracting State (in which the royalties or FTS arise) through a PE situated therein and the right, property or contract in respect of which the royalties or FTS are paid is effectively connected with such PE. In such case, the provisions of Article 7 (Business profits) of this Convention, as the case may be, shall apply;

4)  Thus when Article 7 had excluded royalty or FTS to be considered under Article 13 but Para 6 of Article 13 has sent the matter back to Article 7, it was the mandate of Article 7 which would apply on the amount excluded by Para 6 of Article 13. – Dy. DIT v. JC Bamford Excavators Ltd. [2014] 43 343 (Delhi - Trib.)