Madras High Court
Commissioner Of Income Tax vs Lakshmi Textile Exporters Ltd. on 28 July, 1997
Equivalent citations: (1999)153CTR(MAD)444
ORDER THAMEKKA CHALAM, J.
In this tax case petition the Department requires this Court to direct the Tribunal to refer the following question of law for the opinion of this Court under s. 256(2) of the IT Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that income derived from Sri Lanka cannot be taxed in India ?
2. During the previous year relevant to the asst. yr. 1984-85 the assessee entered into a joint venture with the National Textiles Corporation owned by the Government of Sri Lanka. By an agreement dt. 22nd June, 1980 the assessee was to provide a technical know-how for producing textiles. During the previous year relevant to the asst. yr. 1984-85 the assessee received Rs. 2,80,838 as technical service charges and Rs. 2,10,629 as management service charges totalling Rs. 4,91,467.
3. The assessee claimed that the amount received from Sri Lanka under the agreement and repatriated to India was exempt from income-tax in India because of the provisions of the agreement for avoidance of double taxation between India and Sri Lanka. This claim was negatived by the Assessing authority by order dt. 24th March, 1980 that since the income had not suffered tax in Sri Lanka there will be no question of any double taxation. The CIT(A) held that the assessee will be entitled to appropriate abatement of tax by granting credit for the Sri Lankan tax payable on the income received in Sri Lanka. He however did not agree with the claim of the assessee that it had a permanent establishment in Sri Lanka and hence the entire income was exempt. Aggrieved the Department filed further appeal before the Tribunal. The Tribunal gave the following reasons for accepting the case put forward by the assessee. Under cl. (5) of the Double Taxation Avoidance Agreement a permanent establishment has been defined to include a factory. Sub-cl. 4 of that article further states that a person acting on behalf of an enterprise in a contracting state shall be deemed to be a permanent establishment if he has and habitual exercises in that state an authority to contract in the name of the enterprise. The pugoda factory was established in Sri Lanka and that in the joint venture agreement the assessee was fully in management with a permanent resident Manager representing it. Under art. 12(4) where royalties arise through a permanent establishment it is treated as business profits falling with art. 7. That article provides that profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in other contracting State through a permanent establishment situated therein. In that event, the profit has to be taxed in the other state but only so much of them as it attributable to that permanent establishment. In the resent case the Sri Lankan Government has accepted that the assessee had a permanent establishment in Sri Lanka. In the decision CIT vs. Visakapatnam Port Trust (1984) 38 CTR (AP) 1 : (1983) 144 ITR 146 (AP) the Andhra Pradesh High Court in the case of Vishakapatnam Port Trust has held that where the Government has accepted that an assessee has a permanent establishment in a particular State, that decision will be binding on the other Government. Therefore, the Revenue cannot dispute the fact that the assessee had a permanent establishment in Sri Lanka and that the entire income accruing from Pugoda Textile Mills in Sri Lanka arose only in Sri Lanka and could be taxed only in Sri Lanka. The fact that it was exempted by the Lanka Government would not give rise to tax the same under the Indian IT Act. Under art. 24(1) when income or capital is subject to tax in both contracting States, relief from double taxation is to be given in accordance with sub-cl. (2). In the present case the income arose in Sri Lanka and it is taxable only in Sri Lanka. The fact that it was not taxed at Sri Lanka would not give rise to taxing the same by the Indian Government especially when the Sri Lanka Government itself declared that the assessee is having permanent residence in that country in view of the foregoing facts we consider that there is no infirmity in the order passed by the Tribunal in accepting the case put forward by the assessee. Accordingly, we see no referable question arising in this case.
4.In the result, the tax case petition is dismisse. No costs.