Supreme Court of India
COMMISSIONER OF INCOME TAXversusP.V.A.L. KULANDAGAN CHETTIAR (DEAD) THROUGH LRS.
- Citation
- 2004 INSC 382
- Decided
- 26 May 2004
- Disposal
- Dismissed
- Bench
- S RAJENDRA BABU
Holding
Under the India‑Malaysia DTA, business income and capital gains from immovable property situated in Malaysia, where the assessee has no permanent establishment in India, are not taxable in India; the treaty prevails over the Income Tax Act, and capital gains are treated as income within Article VI.
Summary
The assessee, a firm owning rubber estates in Malaysia, earned business income and short‑term capital gains from the Malaysian property. The Income Tax Officer in India taxed both incomes, but the Commissioner of Income Tax (Appeals) held, relying on Article VII(1) of the India‑Malaysia Double Taxation Avoidance Agreement (DTA), that without a permanent establishment in India the business income could not be taxed in India, and likewise the capital gains could not be taxed. The ITAT and the Madras High Court affirmed this view. On appeal, the Supreme Court held that the DTA, applied under Section 90 of the Income Tax Act, 1961, prevails over domestic provisions; the income from immovable property situated in Malaysia and the related capital gains are taxable only in Malaysia, and capital gains are treated as ‘income’ within the meaning of the treaty. Consequently, the appeals by the Commissioner were dismissed.
Issues considered
- Whether income earned from rubber estates in Malaysia is taxable in India under the India‑Malaysia DTA.
- Whether capital gains arising from the sale of immovable property situated in Malaysia are taxable in India.
- Whether the expression ‘may be taxed’ in the treaty confers a mandatory taxing right or merely an option.
- Whether Section 90 of the Income Tax Act, 1961, gives the treaty precedence over domestic tax provisions.
Legislation cited
- Income Tax Act, 1961s. 2(24), s. 4, s. 5, s. 90, s. 90(2), s. 91(1)
Subjects
double taxationtax treatyIndia‑Malaysia DTApermanent establishmentcapital gainsSection 90fiscal domicileimmovable propertybusiness incometreaty interpretation
Judgment
COMMISSIONER OF INCOME TAX A
v.
P.V.A.L. KULANDAGAN CHETTIAR (DEAD) THROUGH LRS.
MAY 26, 2004
B
[S. RAJENDRA BABU, CJ. AND G.P. MATHUR, J.]
Agreement ofAvoidance ofDouble Taxation ofIncome and Prevention
of Fiscal Evasion of Tax between India and Malaysia:
Article V//(1)-Income Tax-Double Taxation-Assessee, who was a C
resident of India, owned rubber estates in Malaysia-Assessee had
permanent establishment in Malaysia but not in India-Assessee derived
business income and capital gains in Malaysia-Liability to income tax
Held: In view ofthe closer economic relationship between the assessee and
Malaysia where his permanent establishment is set up, such business D
income and capital gains could not be taxed in India.
Income Tax Act, 1961:
Section 90-Scope and ambit of-Held: Enables the Government to E
formulate its policy through treaties entered into by it-The Avoidance of
Double Taxation Treaty which treats the fiscal domicile in one State or the
other prevails over other provisions of the Income Tax Act-Hence, it is
not necefsary to refer to the terms ofOrganisation for &onomic Cooperation
and Development.
F
Words & Phrases:
"May be"-Meaning of-In the context of Art. VII(J) of Agreement
of Avoidance of Double Taxation of Income and Prevention of Fiscal
Evasion of Tax between India and Malaysia. G
The respondent-assessee was a firm owning immovable properties
at Malaysia. During the course of the assessment year, the respondent
assessee earned a certain income from rubber estates at Malaysia. The
respondent-assessee also earned a certain amount as short-term capital H
697
698 SUPREME COURT REPORTS (2004] SUPP. 2 S.C.R.
A gains from sale of property at Malaysia.
The Income Tax Officer assessed that both the incomes are
assessable in India and brought the same to tax. Tbe respondent filed
an appeal before the Commissioner of Income Tax (Appeals) who held
B that under Article VIl(l) of the Agreement of Avoidance of Double
Taxation of Income and Prevention of Fiscal Evasion of Tax between
India and Malaysia unless the respondent had a permanent
establishment of the business in India such business income in Malaysia
could not be included in the total income of the assessee and, therefore,
no part of the capital gains arising to the respondent in the foreign
C country could be taxed in India. The Income Tax Appellate Tribunal
(IT AT) confirmed this order. The High Court upheld the findings of
the ITAT.
The following questions arose before the Court:
D
(a) Whether the Malaysian income cannot be subjected to tax in
India on the basis of the Agreement of Avoidance of Double Taxation
of Income and Prevention of Fiscal Evasion of Tax between India and
Malaysia?
E (b) Whether the capital gains should be taxable only in the
country in which the assets are situated?
Dismissing the appeals, the Court
HELD: 1. The traditional view in regard to the concept of'double
F taxation' is that to constitute double taxation, objectionable or
prohibited, the two or more taxes must be (I) imposed on the same
property, (2) by the same State pr Government, (3) during the same
taxing period, and (4) for the same purpose. There is no double
taxation strictly speaking where (a) the taxes are imposed by different
G States, (b) one of the impositions is not a tax, (c) one tax is against
property and the other is not a property tax or (d) the double taxation
is indirect rather than direct. [703-G-H)
2. But the Indian law has developed in that regard. Section 90 of
H the Income Tax Act, 1961 provides for "Agreement with foreign
C.l.T. v. P.V.A.L.K. CHETTIAR 699
countries" for the purposes specified in Section 90(l)(a), (b), (c) and A
(d). By virtue of the provisions of Section 90(2), in relation to the
assessee to whom such agreement applies, the provisions of the Act
would apply to the extent they are more beneficial to that assessee.
(704-A-D)
B
3. The provisions of an agreement as stipulated in Section 90 of
the Act cannot fasten a tax liability where the liability is not imposed
by a local Act. (704-F)
4. The immovable property in question is situate in Malaysia and C
income is derived from that property. Further, it has also been held
as a matter of fact that there is no permanent establishment in India
in regard to carrying on the business of rubber plantations in Malaysia
out of which income is derived and that finding of fact has been
recorded by all the authorities and affirmed by the High Court. It is,
therefore, not necessary to re-examine the question whether the finding D
is correct or not. Proceeding on that basis, it is held that the business
income out of rubber plantations cannot be taxed in India because of
closer economic relations between the assessee and Malaysia in which
the property was located and where the permanent establishment had
been set up will determine the fiscal domicile. (720-F-H; 721-A) E
5. It is not necess11ry to determine whether the expression "may
be" occurring in Article VIl(l) of Agreement of Avoidance of Double
Taxation of Income and Prevention of Fiscal Evasion of Tax between
India and Malaysia will mean allocation of power to tax or is only one F
of the options and it only grants power to tax in that State and unless
tax is imposed and paid no relief can be sought. Reading the Treaty
in question as a whole it is intended that even though it is possible for
a resident in India to be taxed in terms of Sections 4 and 5 of the Act,
if he is deemed to be a resident of a contracting State where his
personal and economic relations are closer, then his residence in India G
will become irrelevant. The Treaty will have to be interpreted as such
and prevails over Sections 4 and 5 of the Act. (721-B-C)
6. The appellant's contention that capital gains is not income and,
therefore, is not covered by the Treaty cannot be accepted at all H
700 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A because for the purposes of the Act, capital gains is always treated as
income arising out of immovable property though subject to different
kind of treatment. In terms of the Treaty wherever any expression is
not defined the expression defined in the Income Tax Act would be
attracted. The definition of Income' would, therefore, include capital
B gains. Thus, a capital gain derived from immovable property is income
and, therefore, Article VI of the Treaty would be attracted. (721-D-F)
7. The question as to whether by reason of the sale of the property
not having been used whether such income is covered by the Treaty,
C in the treaty it is specifically provided in Article 11(2) that the
Agreement shall also apply to any other taxes ofa substantially similar
character to those referred to in the paragraphs preceding it imposed
in either contracting State after the date of signature of the Agreement.
And income tax is specifically set out in Article II(l)(b). Tax is levied
on capital gains and certainly when capital gains is treated as one
D kind of income tax it also becomes income and assumes substantially
similar character of tax referred to in the paragraphs preceding
Article 11(2). [721-F-H]
8. Taxation policy is within the power of the Government and
E Section 90 of the Income Tax Act enables the Government to formulate
its policy through treaties entered into by it and even such treaty treats
the fiscal domicile in one State or the other and thus prevails over the
other provisions of the Income Tax Act, it would be unnecessary to
refer to the terms addressed in Organisation for Economic Cooperation
F and Development or in any of the decisions of foreign jurisdiction or
in any other agreements. (722-A-B)
Chong v. Commissioner of Taxation, (2000) FCA 635; Commissioner
of Taxation v. Lamesa Holdings BV, (1997) 77 FCR 597 and CIT v.
Muthaiah, (2000) ITR 508, referred to.
G
CIVIL APPELLATE JURISDICTION Civil Appeal Nos. 5752,
5754-5756/1997.
From the Judgment and Order dated 15.3.1994 of the Madras High
H Court in T.C. Nos. 264 of 1983, 789, 790, 840 and 841 of 1984, 135 of
C.l.T. v. P.V.A.L.K. CHEmAR [RAJENDRA BABU, CJ.] 701
1985 and 72 of 1987. A
WITH
Civil Appeal Nos. 5761/1997, 5760/1997, 6229/1997, 2006/2000,
2451/2000 and 5746/1997.
B
Soli J. Sorabjee, Attorney General, R.P. Bhatt, T.L.V. Iyer Joseph
Vellapally and Prateesh Kapur, Y.P. Mahajan, B.V. Balramdas, K.K. Mani,
R. Balasubramanian, Ms. Manika Pandey, Ms. Maya, J. Nichani, Thomas
Vellapally, Sanjeev Kapoor, Kamal Budhiraja, Umesh Kumar Khaitan,
Sanjay Kunur, Ramesh N. Keshwani, Ramlal Roy, P.P.S. Janardhana Raja, C
V. Ramasubramaniam and F.R.Kumar for the appearing parties.
The Judgment of the Court was delivered by
RAJENDRA BABU, CJ. : These appeals involve following two D
questions for our consideration although several other questions were
considered by the High Court :
(a) Whether the Malaysian income cannot be subjected to tax in India
in the basis of the agreement of avoidance of double taxation entered E
into between Government of India and Government of Malaysia?
(b) Whether the capital gains should be taxable only in the country in
which the assets are situated?
The facts leading to these appeals are that the respondent is a firm
F
owning immovable properties at Ipoh, Malaysia; that during the course of
the assessment year the assessee earned income of Rs. 88,424 from rubber
estates; that the respondent sold property, the short term capital gains of
which came to Rs. 18,113; that the Income Tax Officer assessed that both
the incomes are assessable in India and brought the same to tax; that the G
respondent filed an appeal before the Commissioner of Income Tax
(Appeals) who held that under Article 7(1) of the Avoidance of Double
Taxation of Income and Prevention of fiscal Evasion of Tax unless the
respondent has a permanent establishment of the business in India such
business income in Malaysia cannot be included in the total income of the H
702 SUPREME COURT REPORTS (2004] SUPP. 2 S.C.R.
A assessee and, therefore, no part of the capital gains arising to the respondent
in the foreign country could be taxed in India.
This order was carried in appeal to the Tribunal. The Tribunal, after
examining various contentions raised before it, confirmed the order of the
Commissioner of Income Tax (Appeals) and held that (i) since the
B respondent has no permanent establishment for business in India, the
business income in Malaysia cannot be included in his income in India,
and (ii) the property is situated in Malaysia, capital gains cannot be taxed
in India. Thereafter, the matter was carried by way of a reference to the
High Court.
c The High Court held that the finding of the Tribunal is in accordance
with the provisions of the Avoidance of Double Taxation of income. The
High Court took the view that :
(i) where there exists a provision to the contrary in the agreement, there
D is no scope for applying the law of any one of the respective
contracting States to tax the income and the liability to tax has to be
worked out in the manner and to the extent permitted or allowed
under the terms of the agreement.
E (ii) if there is no specific provision, the local tax law governing the levy
of income tax in the respective States shall be applicable and if in the
course of such application, assessment and determination of the tax
liability double taxation results or has been brought about of the
entirety of the paiticular category of income in both countries, than
the tax credit or relief contemplated in the other provision of Article
F XXII would get attracted and have to be applied.
(iii) In respect of some categories of income total exemption or elimination
is not contemplated and in certain other cases, the exemption depends
upon the fulfilment of certain conditions and in all such cases, the
exemption depends upon the fulfilment of certain conditions and in
G all such cases only tax credit or relief can only be accorded to the
extent permissible under the various provisions of the agreement in
order to avoid double taxation.
(iv) The stand taken by the Revenue that for rate purposes and the
H determination of the total income derived from a source in Malaysia
C.l.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 703
shall first be taken into consideration in computation does not merit A
acceptance and allowing the Department to do so would amount to
permitting flagrant violation oflaw as also the agreement entered into
in these cases with the Government of Malaysia.
(v) The contention urged on behalf of the Revenue that wherever the B
enabling words such as "may be taxed" are used there is no
prohibition or embargo upon the authorities exercising powers
under the Indian Income Tax Act, 1961 from assessing the category
or class of income concerned cannot be accepted as of substance or
merit.
c
(vi) The High Court rejected the application of commentaries on the
Article of the Model Convention of 1977 presented by the Organisation
for Economic Co-operation and Development (for shot 'OECD') as
it would not be a safe or acceptable guide or aid for such construction.
D
(vii) Disposal of the property or the capital asset itself is as much a form
or method of use of the immovable property as such, and the words
'direct use....... or use in any other form' are sufficiently wide enough
to include within its scope the transfer, sale or taxcharge of the
property. E
(viii) The provision of Article VI alone would apply and govern the
assessment of capital gains also derived from the immovable property
situated at Malaysia.
Before we embark upon the examination of contentions raised in
F
these cases, we shall briefly notice the legal position in regard to the
provisions relating to double taxation and the reliefs granted therein.
The traditional view in regard to the concept of 'double taxation' is
that to constitute double taxation, objectionable or prohibited, the two or G
more taxes must be (I) imposed on the same property, (2) by the same State
or Government, (3) during the same taxing period, and (4) for the same
purpose. There is no double taxation strictly speaking where (a) the taxes
are imposed by different States, (b) one of the impositions is not a tax, (c)
one tax is against property and the other is not a prope1iy tax or (d) the H
704 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A double taxation is indirect rather than direct.
But, we have travelled very far from this stage as the Indian law has
developed in this regard. Section 90 of the Indian Income Act, I 96 I
(hereinafter referred to as 'the Act') provides for "Agreement with foreign
B countries" in cases where (a) for granting of relief in respect of income
on which have been paid both income-tax under the Act and income tax
in that country, or (b) for the avoidance of double taxation of income under
the Act and under the corresponding law in force in that country, or (c)
for exchange of information for the prevention of evasion or avoidance of
C income tax chargeable under the Act or under the corresponding law in
force in that country, or investigation of cases of such evasion or
avoidance, or (d) for recovery of income tax under the Act and under the
corresponding law in force in that country. But virtue of provisions of sub-
section (2) thereof it is provided that where such agreement has been
entered into for granting relief of tax, or as the case may be, avoidance
D of double taxation, then in relation to the assessee to whom such agreement
applies, the provisions of this Act shall apply to the extent they are more
beneficial to that assessee.
Where liability to tax arises under the local enactment provisions of
E Sections 4 and S of the Act provide for taxation of global income of an
assessee chargeable to tax thereunder is subject to the provisions of an
agreement entered into between the Central Government and Gcwemment
of a foreign country for avoidance of double taxation as envisaged under
Section 90 to the contrary, if any, and such an agreement will act as an
F exception to or modification of Sections 4 and 5 of Income Tax Act. The
provisions of such agreement cannot fasten a tax liability where the liability
is not imposed by a local Act. Where tax liability is imposed by the Act,
the agreement may be resorted to either for reducing the tax liability or
altogether avoiding the tax liability. In case of any conflict between the
provisions of the agreement and the Act, the provisions of the agreement
G would prevail over the provisions of the Act, as is clear from the provisions
of Section 90(2) of the Act. Section 90(2) makes it clear that "where the
Central Government has entered into an agreement with the Government
of any country outside India for granting relief of tax, or for avoidance
ofdouble taxation, then in relation to the assessee to whom such agreement
H applies, the provisions of the Act shall apply to the extent they are more
C.l.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 705
beneficial to that assessee" meaning thereby that the Act gets modified in A
regard to the assessee in so far as the agreement is concerned if it falls
within the category'stated therein.
The learned Attorney General urged that an agreement can give
different types of reliefs either by way of'avoidance' or by way of'credit' B
to eliminate double taxation; that 'credit' method as well as 'avoidance'
method will have to be decided with reference to the provisions in the
agreement; that wherever the expression used in the treaty is "income shall
be taxable only in" or "shall not be taxed in" or "shall be exempt from
tax in", what is contemplated is the avoidance method; that, on the other C
hand, whenever the expression used is "income may be taxed" what is
contemplated is the relief or the credit method; that Article XXII(2) of the
Inda-Malaysian Treaty also indicates that the said Treaty contemplated the
credit method. He submitted that Article XXI1(2) is not a residuary Article
in respect of forms of income not otherwise specified in the Treaty; that
whenever it was intended that there should be a residuary clause, it has been D
specifically so provided in various other Treaties, most Treaties, including
the OEDC Model Treaty and the Inda-Mauritius Treaty, have specific
residuary clauses in addition to the Article XXII(2) where it is stated that
subject to the provisions of paragraph 2 of Article XXII items of income
of a resident of a Contracting State, wherever, arising, which are not E
expressly dealt with the foregoing articles of this Convention, shall be
taxable only in that Contracting State. Therefore, he submitted that if the
said Article XXIJ(2) was meant to operate as a residuary clause covering
heads of income not specifically mentioned, there was no need for such
a specific Article in the other Treaties; that Article XXII(2) of the Indo- F
Malaysian Treaty itself makes it clear that it applies only when tax is
payable "in accordance with the provisions of this Agreement" which
means it applies only where tax is payable in accordance with or is relatable
to one of the Articles of the Agreement. He refuted the contention that the
Treaty would be meaningless and would serve no purpose since this
contention overlooks the basic fact that under section 91 ( 1) the assessee G
can seek relief only if he provides that he had paid tax in the other country
and on the other hand, under Article XXII(2) of the Treaty relief is
available whenever tax is payable under the laws of Malaysia; that the
words "tax actually paid" and "tax payable" are two different concepts;
that, in this context, this Court in 263 ITR 706 recognised this aspect of H
706 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A the matter. He further urged that tax on capital gains is a different kind
of tax though brought within the fold of income tax law in this country;
that under the principles of international law the fiscal jurisdiction of a
State to tax any form of income generally arises from either the location
of the source of income within its territory or by virtue of the residence
B of the assessee within its territory. However, in contrast to the State where
income is sourced, the country is residence is entitled to tax the assessee
on its global income and in other words, the assessee is subject to unlimited
liability in the State of residence. Similar view has been taken by Karnataka
High Court in 202 !TR 508. Thus, the State of which the assess is a resident
has inherent jurisdiction to tax the assessee's income from property
C situated in another State. However, since if is generally recognised that
the State of source in respect of immovable property has a closer
economic connection with the income from that property, the
Treaties generally provide that tax which may be impose by the State of
source in respect of such property and shall be allowed be as a credit in
D the State of residence; that it needs to be emphasised that there is no bar
under the international law for the State of residence to impose tax on
income from property situated in another State and whether there is such
a bar under the Treaty depends upon the correct interpretation of its
provisions.
E
So far as business income is concerned, the learned Attorney general
submitted that the argument that income attributable to a permanent
establishment is taxable only in the State where the permanent establishment
.
is situated is incorrect; that even in the case of business income the power
F to tax given to Malaysia is in permissive language, that is, 'may' and it
is therefore not correct to contend that in such a case tax can be imposed
only by Malaysia; that there is no dispute that the assessees are resident
and enterprises oflndia and in such a situation a reading of Article 7( I)
makes it clear that ordinarily income of an Indian enterprise shall be taxable
only in India unless the enterprise carries on business in Malaysia through
G a permanent establishment situated therein in which case tax may be
imposed in Malaysia though only to the extent of income attributable to
that permanent establishment; that the Treaty in question employees
different expressions in respect of different forms of income under different
situation and there is intrinsic evidence in the Treaty that where the Treaty
H sought to bar the jurisdiction of one State in respect of a particular item
C.l.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 707
of income it has said so expressly; that the argument of the respondent that A
the expression "may be taxed in" means "shall be taxed only in" a
particular State is not permissible. He further contended that the Treaty
does not confer power on any State to levy tax because the power to tax
being derived from the domestic law of the respective States including the
power to tax the global income of a resident; that thus; in the absence of B
clear bar or exclusion of jurisdiction to levy tax by virtue of the Treaty
tax can always be imposed by either State under its domestic laws and bar
or embargo on the jurisdiction of a country to levy tax has to be express
and cannot be read into a Treat by implication; that, moreover, when a
Treaty specifically employees different expressions such as "shall only be
taxable" and "may be taxed" such expressions will necessarily have to be c
given different meanings. He further urged that in any event capital gains
is not one of the aspects covered by the Treaty inasmuch as there is no
specific provision under the Treaty providing for the treatment of such
income and the High Court has sought to bring the same within the ambit
of Article 6. Further, he contended that it may be noted that scope of D
A1ticle 6( 1) is restricted by the words of Article 6(3) which provides
that the provisions of the said Article shall apply only to income
derived from the use of immovable property; that the expression 'capital
gains' is a well defined concept and the taxable event is 'transfer' or
'alienation' of property and capital gains cannot arise from the use of E
property because 'transfer' and 'use' being different legal concepts since
use of property postulates the continues existence of the property whereas
on transfer of property, the property ceases to be the property of the owner.
Therefore, he contended, capital gains is the profit arising from the transfer
of the property as distinct from the profits arising from the use of the F
property.
On behalf of the respondents it is submitted that there is a distinction
between the agreements for avoidance of double taxation of income falling
under clause (b) of Section 9i of the Act and agreements for granting relief .
in respect of income on which tax has been paid in more than one country G
falling under clause (a) of that Section; that Articles 6 to 21 of the treaty
must be read as providing for allotment of the taxing power to either India
or Malaysia both of whom could otherwise have taxed the same income
by virtue of tax payer being a resident of one of those countries or by virtue
of the source of the income having arisen in one of those countries; that H
708 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A Article 6, therefore, allocates the power to tax income from immovable
property in the contracting State in which such property is situated; that
agreement of this nature between Governments representing sovereign
nations necessarily implies surrender by each of the States to the other State
of its taxing power over a particular income for their mutual benefit and
B for the benefit of their citizens. The respondents seek to distinguish the
judgment of the Federal Court of Australia in Chonq v. Commissioner of
Taxation, (2000) FCA 635, on which reliance was placed by the learned
Attorney General. The learned counsel appearing on behalf of the
respondents adverted to the decisions in Commissioner of Taxation v.
C Lamesa holdings BV. (1997) 77 FCR 579. It is contended that income from
the alienation of real property is allocated to the State in which that
property is situated. The income in question in the present appeals in
relation to business arises from the activities relating to rubber plantations
which would clearly fall both within Article 6 and Article 7. Rubber
plantations being immovable property even business income therefrom is
D admittedly derived from use of such property as contemplated in Article
6 and, therefore, it is submitted, in view of sub-article (6) of Article 7 this
kind of income has to be taxed based on source of income in terms of
Article 6. The learned counsel further submitted that in the respondent's
own assessment prior to the assessment in appeal for the assessment year
E 1970-80 and for many subsequent year assessments have been finalised
pursuant to the law laid down by the Karnataka High Court in CIT v. R.M
Muthaiah, (2000) !TR 508; that the parties have arranged their affairs and
accounts have been finalised for more than three decades based on the
understanding of the law and any change in law now after three decades
F would put them in great difficulty.
Shri T.L. Vishwanatha lyar, learned senior Advocate appearing on
behalf of the respondents in some of these appeals, submitted that Treaty
in question came into force from the assessment year 1973-74 though the
Treaty was signed in October 1976; that prior to 1973-74 the procedure
G adopted was to allow only tax credit on the income taxes both in India and
Malaysia; that this procedure was found to be extremely difficult and
cumbersome and the assessees have to produce even for the purpose of
claiming the tax credit not only the assessment orders passed by the
concerned authorities in Malaysia but also the receipted tax paid challans
H evidencing payment of tax in Malaysia; that in the recent years, the Income
C.l.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 709
Tax Authorities in Malaysia have dispensed with the procedure of issuing A
any assessment orders and even the taxes are paid directly into the Bank
and this has resulted in there being no assessment order passed by these
authorities in Malaysia or any receipted tax paid challans being issued; that
this again resulted· in considerable difficulty in the matter of completing
the assessments in India. It is submitted that to avoid such difficulties B
experienced by the assessees the Government of India and Malaysia
entered into an Agreement for the "Avoidance of Double Taxation"
between the two countries which in effect meant that the income arising
in Malaysia was not to be included in the total income in India subject to
certain conditions in the Articles of the Agreement; that, therefore, when
the Treaty came into force the income tax authorities in India need not have C
to insist upon the production of the assessment orders and the receipted
tax paid challans and were, therefore, empowered to avoid the income
arising in Malaysia; that thus such income arising in Malaysia subject to
certain conditions was to be completely excluded from the tot.al income
in India. It is further contended that the question whether Section S(c) of D
the Income Tax Act applies to a resident to whom the income arising in
all parts of the world had to be included in the total income in India loses
its effect the coming into force of the Treaty between the two countries;
that circular dated April 2, 1982 was issued by the Central Board of Direct
Taxes indicating that whenever there is conflict between the provisions of E
the Income Tax Act and the provisions of the Treaty only the provisions
of the Treaty would prevail. Therefore, it was submitted that after the
Treaty was signed by the two countries the Income Tax Act could no longer
be the law governing the taxability of such income in the two countries
but only the Treaty governs such taxability and thus th~ provisions of F
Section 4 or 5 or 6 of the Income Tax Act could no longer be looked into
for this purpose. In regard to Article VI of the Treaty regarding taxability
of income tax from immovable properties, it is urged on behalf of the
respondents that the word 'may' would also mean in that context 'must'
or 'shall' because the situs of the property has to be considered and ifthe
situs of the property is situated in Malaysia, the income from the property G
can be assessed to tax only in that country and again under the provisions
of the Treaty in question, such income cannot be included in the total
income in India. Further, clause 3 of Article VI refers to income derived
from the direct use, letting, or use in any oth~r form of immovable property.
Inasmuch as direct use could be used in any manne• and the letting could H
710 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A be used by letting out the property, the use in any other form could only
refer to capital gains since such use is made by the assessee till date of
sale of the property and the capital gains is also an income arising out of
that property. He submitted that for certain category of income capital gains
is also income as per Section 2(24) of the Income Tax Act and the decision
B of the Karnataka High Court in 202 !TR 508 has accepted this kind of
reasoning and since no appeal has been filed to this Court against the
decision of the Karnataka High Court reported in 202 !TR 508, the law
declared therein has been applicable to the assessees to whom treaty
applies. In regard to Article VII relating to income from business, it is
submitted, the importance has to be the place where the permanent
C establishment is situate and if the assessee earns business profits through
a permanent establishment situate in Malaysia, such income could be said
do arise only in Malaysia and such income cannot be included in the total
income in India. The importance of Article XXII(2) of the Treaty is that
it is applicable to income arising to an assessee other than those mentioned
D in Article VI to XX! of the Treaty and also a situation where any income
that has not been referred to therein become taxable in either country at
a much later date. He further argued that OECD model treaty came into
existence only in the latter part of 1977, while the Treaty in question was
signed in October 1976; that most of the clauses in the OECD model treaty
E could not have been in the contemplation of the parties at the time when
the Treaty in question was signed and the provisions ofOECD model treaty
cannot, therefore, the applied to the Treaty in question. He further urged
that Article XXIl(2) will apply only when taxes are payable under the laws
of Malaysia; that even for granting the tax credit, the proof of tax paid in
F Malaysia has to be furnished and it would thus be similarly necessary to
furnish such proof of tax paid in Malaysia even for the purpose of Article
XXII(2) of the Treaty; that in order to avoid conflicts of interest, the Treaty
between India and Malaysia was signed and under the Articles of the Treaty
the income arising in Malaysia has to be totally excluded while computing
the. income in India, subject to the conditions prescribed therein.
G
Agreement between the Government of India and the Government of
Malaysia for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with respect to taxes on income was entered into on
\ .4.1977. This Agreement is applicable to persons who are resident of one
H or both of the contracting States. Under Article 11 taxes which are the
C.l.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 711
subject of the Agreement are as follows : A
IN MALAYSIA :
(i) the income tax;
(ii) the supplementary income tax, that is, profits tax, development B
tax and timber profits tax; and
(iii) the petroleum income tax;
IN INDIA c
(i) the income tax and any surcharge on income tax imposed
under the Income Tax Act, 1961 (43 of 1961);
(ii) the surtax imposed under Companies (Profits) Surtax Act, D
1974 (7 of 1964)
This agreement also applies to any other taxes of a substantially
similar character to those referred to in the preceding paragraph imposed
in either contracting State after the date of signature of the Agreement
in question. Articles IV, V, VI, VII and XXII of the Agreement read as E
under :
"ARTICLE IV
Fiscal Domicile
F
I. In this Agreement, unless the context otherwise requires :
(a) the term "resident of Malaysia" means
(i) an individual who is ordinarily resident in Malaysia; or
G
(ii) a person other than individual who is resident in
Malaysia;
for the basis year for a year of assessment for the purpose
of Malaysian tax; H
712 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A (a) the term "resident of India" means a person who is treated
as a resident of India in the previous year for the relevant
assessment year for the purpose of Income tax:
(b) the terms "resident of one of the Contracting States" and
B "resident of the other Contracting State" mean a resident of
Malaysia or a resident of India, as the context requires.
2. Where by reason of the provisions of paragraph I of this Article an
individual is a resident of both Contracting States, then his residential status
C be determined in accordance with the following rules :
(a) he shall be deemed to be a resident of the Contracting State
in which he has a permanent home available to him. If he
has a permanent home available to him in both Contracting
States, he shall be deemed to be a resident of the Contracting
D State with which his personal and economic relations are
closer;
(b) if the Contracting State with which his personal and economic
relations are closer cannot be determined, or if he has not
E a permanent home avdilable to him in either Contracting
State, he shall be deemed to be a resident of the Contracting
State in which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States or in
F neither of them he shall be deemed to be a resident of the
Contracting State of which he is a citizen;
(d) if he is a citizen of both Contracting State or of neither of
them, the competent authorities of the Contracting States
G shall determine the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 of this Article a person
other than an individual is a resident of both Contracting States, then it shall
be deemed to be a resident of the Contracting States, then it shall be deemed
H to be a resident of the Contracting State in which its place of effective
C.l.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.) 713
management is situated. A
ARTICLE V
Permanent Establishment
1. For the purposes of this Agreement, the term "permanent establishment" B
means a fixed place of business in which the business of the enterprise is
wholly or partly carried on.
2. The term "permanent establishment" shall include especially :
(a) a place of management;
c
(b) a branch;
(c) an office;
D
(d) a factory;
(e) a workshop;
(f) a warehouse;
E
(g) a mine, oil well, quarry or other place of extraction of natural
resources;
(h) a building site or construction, installation or assembly
project which exists for more than six months;
F
(i) a farm or plantation;
(j) a place of extraction of timber or forest produce.
(3) The term "permanent establishment" shall not be deemed to include G
(a) the use of facilities solely for the purpose of storage, display
or delivery of goods or merchandise belonging to the
enterprise. H
714 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A (b) the maintenance of a stock of goods or merchandise belonging
to the enterprise solely for the purpose of storage, display
or delivery.
( c) the maintenance of a stock of goods or merchandise belonging
B to the enterprise solely for the purpose of processing by
another enterprise;
(d) the maintenance of a fixed place of business solely for the
purpose of purchasing goods or merchandise or collecting
C information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the
purpose of advertising, for the supply of information, for
scientific research or for similar activities which has a
preparatory or auxiliary character, for the enterprise.
D
4. An enterprise of one of the Contracting States shall be deemed to
have a permanent establishment in the other Contracting State if :
(a) it carries on supervisory activities in that other Contracting
E State for more than six months in connection with a
construction, installation or assembly project which is being
undertaken in that other Contracting State;
(b) it carries on a business which consists of providing the
F services of public entertainers (such as stage, motion picture,
radio or television artistes and musicians) or athletes in that'
other Contracting State unless the enterprise is directly or
indirectly supported, wholly or substantially, from the public
funds of the Government of the first-mentioned Contracting
G State in connection with the provision of such services.
5. Subject to the provisions of paragraph 6 of this Article, a person
acting in one of the Contracting States on behalf of an enterprise of the
other Contracting State shall be deemed to be a permanent establishment
H in the first-mentioned Contracting Stati! if :
C.I.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 715
(a) he has, and habitually exercises in that first-mentioned A
Contracting State, an authority to conclude contracts on
behalf of the enterprise unless his activities are limited to the
purchase of goods or merchandise for the enterprise; or
(b) he maintains in the first-mentioned Contracting State a stock B
of goods or merchandise belonging to. the enterprise from
which he regularly fills orders on behalf of the enterprise.
6. An enterprise ofone of the Contracting States shall not be deemed
to have a permanent establishment in the other Contracting State merely
because it carries on business in that other Contracting State through a C
broker, general commission agent or any other agent of an independent
status, where such persons are acting in the ordinary course of their
business.
7. The fact that a company which is a resident of one of the D
Contracting States controls or is controlled by a company which is a
resident of the other Contracting State or which carries on business in that
other Contracting State whether through a permanent establishment or
otherwise shall not of itself constitute either company a permanent
establishment of the other: E
CHAPTER III
TAXATION OF INCOME
ARTICLE VI
Income from Immovable Property
F
I. Income from immovable property may be taxed m the
Contracting State in which such property is situated.
2. The tenn "immovable property" shall be defined in accordance G
with the law of the Contracting State in which the property in
question is situated. The term shall in any case include property
accessory to immovable property, livestock and equipment used
in agriculture and forestry, rights to which the provisions of
general law respecting landed property apply, usufruct of H
716 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A immovable property and rights to variable or fixed payments as
consideration for the working of, or the right to work, mineral
deposits, oil wells, quarries and other places of extraction of
natural resources or of timber or forest produce. Ships, boats and
aircraft shall not be regarded as immovable property.
B
3. The provisions of paragraph I, of this Article shall apply to
income derived from the direct use, letting, or use in any other
form of immovable property.
4. The provisions of paragraph I and 3 of this Article shall also
c apply to the income from immovable property of an enterprise.
ARTICLE VII
Business Profits
D I. The income or profits of an enterprise of one of the
Contracting States shall be taxable only in that Contracting State,
unless the enterprise carries on business in the other Contracting
State though a permanent establishment situated therein. If the
enterprise carries on business as aforesaid, tax may be imposed
E in that other Contracting State on the income or profit of the
enterprise but only on so much of that income or profit as i~
attributable to that permanent establishment.
2. Where an enterprise of one of the Contracting State carries
on business in other Contracting State though a permanent
F establishment .situated therein, there shall be in each Contracting
State be attributed to that permanent establishment the income or
profits which it might be expected to make if it where a distinct
and separate enterprise engaged in the same or similar activities
under the same or similar conditions and dealing wholly
G independently with the enterprise of which it is a permanent
establishment.
3. In the determinaticn of the Income or profits of a pennanent
establishment, there shall be allowed as deductions expenses
H which are incurred for the purposes of the permanent establishment
C.I.T. v. P.V.A.L.K. CHETTIAR (RAJENDRA BABU, CJ.] 717
including executive and general administrative expenses so A
incurred, whether in the State in which the permanent establishment
is situated or elsewhere.
4. In so far as it has been customary in a Contracting State to
determine the profits to be attributed to a permanent establishment B
on the basis of an appointment of the total income or profits of
the enterprise to its various parts, nothing in paragraph 2 or
paragraph 3 of this Article shall preclude such Contracting State
from determining the income or profits to be taxed by such an
apportionment as may be customary; the method of apportionment
adopted shall, however, be such that the result shall be in C
accordance with the principles laid down in this Article.
5. No income or profits shall be attributed to a permanent
establishment by reason of the mere purchase by that permanent
establishment of goods or merchandise for the purpose of export D
to the enterprise of which it is the permanent establishment.
6. Where income or profits include items of income which are
dealt with separately in other Articles of this Agreement, then the
provisions of those Articles shall not be affected by the provisions E
of this Article.
CHAPTER IV
ELIMINATION OF DOUBLE TAXATION
ARTICLE XXII
F
1. The laws in force in either of the Contracting States will
continue to govern the taxation of income in the respective
Contracting States except where provisions to the contrary are
made in this Agreement.
G
2. (a) The amourit of Malaysian tax payable, under the laws of
Malaysia, and in accordance with the provisions of this Agreement,
whether directly or by deduction, by a resident oflndia, in respect
of income from sources within Malaysia, which has been subjected
to tax both in India and Malaysia shall be allowed as a credit H
718 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A against the India tax payable in respect of such income but in an
amount not exceeding that proportion of Indian tax which such
income bears to the entire income chargeable to Indian tax.
(b) For the purposes of the credit referred to in sub-paragraph
(a) above, there shall be deemed to have been paid by the resident
B of India :
(i) the amount of tax which would have been paid in
respect of royalties but for the exemption provided in
paragraph 2 of Article 13; and
c
(ii) the amount of tax which would have been paid if the
Malaysian tax had not been reduced or relieved in
accordance with the special incentive means as designed
to promote economic development in Malaysia -
D (aa) which are set forth in section 21, 22 and 26 of the
.-Investment Incentives Act, 1968 of Malaysia; or
(bb) which may be introduced in future in the Income
Tax Act, 1967, Supplementary Income Tax Act,
E 1967, Petroleum (Income Tax) Act, 1967 or
Investment Incentives Act, 1968 in modification •
of or in addition to the existing measures;
Provided an agreement is made between the two
F Contracting States in respect of the scope of the benefit
accorded by the said measures.
3. (a) The amount of Indian tax payable, under the laws oflndia
and in accordance with the provisions of this Agreement, whether
directly or by deduction, by a resident of Malaysia, in respect of
G income from sources within India which has been subjected to
tax both in India and Malaysia, shall be allowed as a credit
against Malaysian tax payable in respect of such income, but in
an amount not exceeding that proportion of Malaysian tax which
such income bears to the entire income chargeable to Malaysian
H tax.
C.J.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 719
(b) For the purposes of the credit referred to it in sub- A
paragraph (a) above, there shall be deemed to have been paid by
the resident of Malaysia the amount which would have been paid
if the Indian tax had not been reduced or relieved in accordance
with the special incentive measures designed to promote economic
development in India - B
(i) in relation to royalties, as set forth in the relevant annual
Finance Act of India, and
(ii) in relation to other income as set forth in the following
sections of the Income-tax Act, 1961 of India or which may c
be introduced in future in the India tax laws in modification
of or in addition to the existing measures, provided that an
agreement is made between the two Government in respect
of the scope of the benefit accorded by the said measures :
D
(aa) Section 10(15)(iv)(b) and (c) - relating to examination
from tax of(a) an approved foreign financial institution
in respect of interest on moneys lent by it to an
industrial undertaking in India under a loan agreement;
and (b) a non-resident in respect of interest on moneys E
lent or credit facilities allowed by him to an industrial
undertaking in India for the purchase outside India of
raw materials or capital plant and machinery;
(bb) Section 33 - relating to development rebate in respect
off ships, machinery or plant;
F
(cc) Section 80-J - relating to deduction in respect of profits
and gains from eligible industrial undertaking or ships
or hotels;
G
(dd) Section 80-K - relating to deduction in respect of
dividends attributable to profits and gains from eligible
industrial undertakings or ships or hotels; and
( ee) Section 80-M - relating to deduction in respect of H
720 SUPREME COURT REPORTS [2004) SUPP. 2 S.C.R.
A certain dividends received by a company from a
domestic company. This sub-clause shall apply in
relation to a company which is a resident of Malaysia
only if such company beneficially holds shares (either
singly or together with any company controlling it or
any company controlled by it) carrying not less than ten
B
per cent of the voting power in the domestic company
and the domestic company is an industrial company.
(i) any other incentive measure as may be agreed from time to
time between the two Contracting States."
c
Now, we shall first deal with the argument advanced on behalf of the
Union of India by the learned Attorney General.
Here in these appeals we are concerned with income arising from
D immovable property. We will proceed on the basis that fiscal connection
arises in relation to taxation either by reason of residence of the assessee
or by reason of the location of the immovable property which is the source
of income. In the clauses which we have set oi;t above fiscal domicile is
set out in Article IV which states that in a case where the person is a
E resident in both the contracting States fiscal domicile will have to be
determined with reference to the fact that if the contracting State with
which his personal and economic relations are closer he shall be deemed
to be a resident o( the contracting State in which he has an habitual abode.
This implies that tax liability arises in respect of a person residing in both
F the contracting State has to be determined with reference to his close
personal and economic relations with one or the other.
The immovable property in question is situate in Malaysia and
income is derived from that property. Further, it has also been held as a
matter of fact that there is no permanent establishment in India in regard
G to carrying on the business of rubber plantations in Malaysia out of which
income is derived and that finding of fact has been recorded by all the
authorities and affirmed by the High Court. We, therefore, do not propose
to re-examine the question whether the finding is correct or not. Proceeding
on that basis, we hold that business income out ofrubber plantations cannot
H be taxed in India because of closer economic relations between the assessee
C.I.T. v. P.V.A.L.K. CHETTIAR [RAJENDRA BABU, CJ.] 72I
and Malaysia in which the property is located and where the permanent A
establishment has been set up will determine the fiscal domicile. On the
first issue, the view taken by the High Court is correct.
We need not to enter into an exercise in semantics as to whether the
expression "may be" will mean allocation of power to tax or is only one B
of the options and it only grants power to tax in that State and unless tax
is imposed and paid no relief can be sought. Reading the Treaty in question
as a whole when it is intended that even though it is possible for a resident
in India to be taxed in terms of Sections 4 and 5, if he is deemed to be
a resident of a contracting State whether his personal and economic C
relations are closer, then his residence in India will become irrelevant. The
Treaty will have to be interpreted as such and prevails over Sections 4 and
5 of the Act. Therefore, we are of the view that the High Court is justified
in reaching its conclusion, though for different reasons from those stated
by the High Court. --
D
The contention put forth by the learned Attorney General that capital
gains is not income and, therefore, is not covered by the Treaty cannot be
accepted at all because for purposes of the Act capital gains is always
treated as income arising out of immovable property though subject to
different kind of treatment. Therefore, the contention advanced by the E
learned Attorney General that it is not a part of the Treaty cannot be
accepted because in the terms of Treaty wherever any expression is not
defined the expression defined in the Income Tax Act would be attracted.
The definition of 'income' would, therefore, include capital gains. Thus,
capital gains derived from immovable property is income and therefore F
Article 6 would be attracted.
The question as to whether by reason of the sale of the property not
having been used whether such income is covered by the Treaty, in the
Treaty it is specifically provided in sub-clause (2) of Article II that the
agreement shall also apply to any other taxes of a substantially similar G
character to those referred to in the preceding paragraphs imposed in either
contracting State after the date of signature of this agreement. And Income
tax is specifically set out in sub-clause (b) of clause(!) of Article II. Tax
is levied on capital gains and certainly when capital gains is treated as one
kind of income tax it also becomes income and assumes substantially H
722 SUPREME COURT REPORTS [2004] SUPP. 2 S.C.R.
A similar character of tax referred to in the preceding paragraph.
Taxation policy is within the power of the Government and Section
90 of the Income Tax Act enables the Government to formulate its policy
through treaties entered into by it and even such treaty treats the fiscal
B domicile in one State or the other and thus prevails over the other
provisions of the Income Tax Act, it would be unnecessary to refer to the
terms addressed in OECD or in any of the decisions of foreign jurisdiction
or in any other agreements.
In this view of the matter, it is unnecessary to refer to the decisions
C cited before us since we have taken the view with reference to clauses set
out under the Agreement. We, therefore, find ro merit in these appeals and
they stand dismissed.
v.s.s. Appeals dismissed.
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