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DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

ISHIKAWAJMA HARIMA HEAVY INDUSTRIES LIMITED V DIRECTOR

OF INCOME TAX, MUMBAI

CASE CITATION: [2007] 288 ITR 408

DECIDED BY: S.B. SINHA
SUBJECT: CONSTITUTION; INCOME TAX & DIRECT TAXES; PRACTICE & PROCEDURE

VISHNU KUMAR
ASSOCIATE PROFESSOR

DHANVANTH KOTA
2015060_ SEC-B (VIth SEM)
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ACKNOWLEDGE

I would like to put forward my heart full appreciation to our beloved & respected for giving
me a golden opportunity to take up this project regarding “ISHIKAWAJMA HARIMA
HEAVY INDUSTRIES LIMITED V DIRECTOR OF INCOME TAX, MUMBAI I have tried
my best to collect information about the project in various possible ways to depict clear
picture about the given project topic.
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CERTIFICATE

I hereby declare that the project work entitled “[ ISHIKAWAJMA HARIMA HEAVY
INDUSTRIES LIMITED V DIRECTOR OF INCOME TAX, MUMBAI ]”submitted to the
(Damodaram Sanjivayya National Law University), is a record of an original work done
by me (Dhanvanth kota) under the guidance of Faculty VISHNU KUMAR Associate
professor (TAX LAW ). For giving a golden opportunity to me to take up this project and
this project work has not performed the basis for the ward of any Degree or diploma/
associate ship /fellowship and similar project if any.

SIGNATURE OF STUDENT

SIGNATURE OF FACULTY
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CONTENTS

 ABSTRACT
 INTRODUCTION
 HISTORICAL DEVELOPMET OF DOUBLE TAXATION AVOIDANCE
AGREEMENT
 CLASSIFICATION, PATTERN IN INDIA POLICY OF DTAA
 OBJECTVE OF DTAA
 BREIF CASE ANALYSIS
 CONCLUSION
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ABSTRACT

Where the appellant was a member of a consortium which had entered into a contract for
setting up a Liquefied Natural Gas receiving storage and degasification facility in India. The
contract envisaged a turnkey project and the role and responsibility of each member of the
consortium were specified separately.

The contract involved:

 offshore supplies;

 offshore services;

 Onshore supply;

 Onshore services; and

 Construction and erection.

The Authority for Advance Ruling ("AAR") had issued a ruling that the appellant was
liable to income-tax on the profits from off-shore supplies of machinery (sale of which
was completed abroad) even under the DTAA between India and Japan having regard to
Article 5 and 7 thereof as also Clause 6 of the Protocol. As regards the amounts received
or receivable by the appellant for offshore services, the AAR held that the whole of the
technical fee without any deduction is chargeable to tax both u/s 115 A(1)(b)(B) and
Article 12(2) of the DTAA, however, the tax so charged shall not exceed 20% of the
gross amount of royalty or fee for technical services". Aggrieved by the ruling of the
AAR, the appellant challenged the same before the SC.

The judgment of the SC rested on the doctrine of territorial nexus. Tracing the legislative
history to section 42 of the IT Act, 1922 the SC observed that only such part of income as
was attributable to operations carried out in India would be taxable in India. 
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RELEVANT CASE LAWS

 Commissioner of income tax; Tamil nadu vs fried kropp industries 1
 Income tax officer and other vs shriram bearings ltd 2
 Carborandum co. v. commissioner of income-tax, madras 3
 Commissioner of income tax, punjab v. r..d. aggarwal and co.& another 4
 Cit v. mitsui engineering and ship building co. ltd5
 Mazagaon dock ltd. v. cit and excess profits tax6
 Anglo-French textile co. ltd. v. commissioner of income tax, madras 7 
 Barendra Prasad ray v. income tax officer8
 Commissioner of income-tax, A.P. v. toshoku ltd9
 Raghava Reddi & another v. commissioner of income tax, a.p 10
 Vdo tachometer werke, west germany etc. v. commissioner of income-tax, karnataka-i etc 11
 Commissioner of income-tax v. atlas steel co. ltd12
 Income-tax officer and others v. shriram bearings ltd 13
 Commissioner of income tax, bombay v. ahmedbhai umarbhai & co., bombay 14
 Union of India and another v. azadi bachao andolan and another 15
 State of madras v. gannon dunkerley & co. (madras) ltd 16
 N. khadervali sahib (dead) by l.rs. and another v. n. gudu sahib (dead) and others 17
 Hindustan shipyard ltd. v. state of a.p18
 State of Rajasthan v. M/s Man Industrial Corporation Ltd19
 K.S. Subbiah Pillai v. Commissioner of Income Tax20

1
[(1981)128 ITR 27]
2
[(1987) 164 ITR 419]
3
[(1977) 108 ITR 335]
4
[(1965)56 ITR 20]
5
[259 ITR 248]
6
[34 ITR 368]
7
[ 23 ITR 101]
8
[(129)I T R 295]
9
[(1980)125 ITR 525]
10
[(1962)44 ITR 720]
11
[1979] 117 ITR 804(Kar)
12
[(1987) 164 ITR 401]
13
[(1987) 164 ITR 419]
14
[(1950) SCR 335]
15
[(2004)10 SCC 1]
16
[1959 SCR 379]
17
[(2003)) 3 SCC 229]
18
[(2000)6 SCC 579]
19
[(1969) 1 SCC 567]
20
[(1999) 3 SCC 170]
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 Cit vs Hindustan shipyard ltd21

 Udyog ltd vs ram lal and others22
 BSES Ltd. (Now Reliance Energy Ltd.) v. Fenner India Ltd. and Another 23
 Taxation vs kirk24
 Commissioner of Income Tax v. R.M. Muthaiah the Karnataka High Court25

21
[(1968) 4 SCC 16]
22
[(2005) 2 SCC 638]
23
[(2006) 2 SCC 728]
24
[(1900 AC 588]
25
[1993 202 ITR 508 KAR]
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INTRODUCTION

Double Taxation is the imposition of two or more taxes on the same income, asset or
financial transaction. It refers to taxation by two or more countries of the same income, asset
or transaction, for example income paid by an entity of one country to a resident of a different
country. The double liability is often mitigated by tax treaties between countries. 26 Double
Taxation Avoidance Agreements are treaties between two sovereign states. Such Agreements
can also be between two countries which are not “sovereign” states in the full legal sense.
Being Agreements between two contracting states it was found that it would be useful to have
a Model Agreement which could be the basis for discussion between two states
contemplating to conclude a Double Taxation Avoidance Agreement. The League of Nations
for the first time commenced work in this behalf in 1921 and produced in 1928 the first
Model Bilateral Convention.27 It is not unusual for a business or individual who is resident in
one country to make a taxable gain in another. In some cases, this requires that tax be paid in
the country of residence and be exempt in the country in which it arises. In the remaining
cases, the country where the gain arises deducts taxation at source and the taxpayer receives a
compensating foreign tax credit in the country of residence to reflect the fact that tax has
already been paid.
Double Taxation is not specifically forbidden either under domestic law or even under
treaties. Bilateral double taxation treaties tend to avoid double taxation, but where tax benefit
granted by one state are cancelled by the other in absence of any specific provision in the
agreement, there is an economic disadvantage, which is not prohibited in general, a principle
which has been universally accepted. In the modern context, a transaction is not always
confined to two countries, because of value addition in more than one country, whether
natural or because of planning. DTAA does not solve the problem of double taxation in
multinational transactions.

26
Sumeet Kumar, Double Taxation Avoidance Agreements – A Brief Overview, Available At
Http://Www.Legalserviceindia.Com/Article/1304-Double -Taxation-Avoidance-Agreements.Html (Last Visited
On 20th June)
27
Ibid.
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HISTORICAL DEVELOPMENT OF DOUBLE TAXATION AVOIDANCE

AGREEMENT

Genesis of Double Tax Avoidance Agreement is, perhaps, the first step towards a law, which
may ultimately lead to an international society. Agreements between friendly States usually
deal with nonaggression, trading and exchange of information as between them. But they
have not integrated the countries for any length of time, as these agreements can be discarded
easily as they have been formed. International law has been more a matter of law by consent.
An international law to regulate the conduct of nations as between them has always been an
objective of the academicians to establish peace in the world. But what is known as
international law has, by and large, been denoting a system of customary and conventional
rules of conduct, which are expected to regulate the intercourse between civilized
nations.28Jagarmadha Rao, J., in a classic judgment in C.I. T. v. Vishakhapatnam Port Trust 29
had referred to the major developments in the field of tax treaties In this case, the assesse was
itself a Government undertaking engaged in the trading transaction with a non-resident
German Company. It had undertaken to setup a plant in India and the issue related to the
extent of non-residents' Indian income liable to Indian tax and the implication of the Double
Tax Avoidance Agreement as between India and Germany. 30 The judgment, incidentally,
refers to the development of law on DTAA, which have themselves gone through various
changes. Model forms applicable to all countries were first prepared by the fiscal committee
of the League of Nations in 1927. Later the said committee conducted meetings at Mexico
during 1943 and in London in 1946 and proposed several minor variations.

CLASSIFICATION AND PATTERN IN INDIAN POLICY OF DTAA

28
Ibid.
29
(1983) 144 ITR (AP).
30
Supra Note 5 At 1.5
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Double taxation avoidance agreements, depending on their scope, can be classified as

Comprehensive and Limited. Comprehensive Double Taxation Agreements provide for taxes
on income, capital gains and capital, while Limited Double Taxation Agreements refer only
to income from shipping and air transport, or estates, inheritance and gifts. Comprehensive
agreements ensure that the taxpayers in both the countries would be treated equally and on
equitable basis, in respect of the problems relating to double taxation.31

The main object of a Double Taxation Avoidance Agreement is to provide for the tax claims
of two governments both legitimately interested in taxing a particular source of income either
by assigning to one of the two the whole claim or else by prescribing the basis on which tax
claims is to be shared between them.32

OBJECTIVE OF DTAA

The objectives of double taxation avoidance agreements can be enumerated in the following
words: First, they help in avoiding and alleviating the adverse burden of international double
taxation, by laying down rules for division of revenue between two countries; exempting
certain incomes from tax in either country; reducing the applicable rates of tax on certain
incomes taxable in either countries. Secondly, and equally importantly tax treaties help a
taxpayer of one country to know with greater certainty the potential limits of his tax liabilities
in the other country. Still another benefit from the tax-payers point of view is that, to a
substantial extent, a tax treaty provides against non-discrimination of foreign tax payers or
the permanent establishments in the source countries vis-a-vis domestic tax payers.

Double taxation agreements allocate jurisdiction with respect to the right to tax a particular
kind of income. The principle underlying tax treaties is to share the revenues between two
countries. If each country gets a reasonable share of tax revenues, the bilateral and
multilateral trade prospers and the overall tax collection also increases as a result of which
both countries tend to benefit. A double tax avoidance agreement deals by and large with
business income, income from moveable property and from immovable property

:: CASE ANALYSIS WITH RELEVANT TO THE DOUBLE TAXATION ::

31
Supra Note 1.
32
Ibid.
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“ISHIKAWAJMA HARIMA HEAVY INDUSTRIES LIMITED V DIRECTOR

OF INCOME TAX, MUMBAI
CASE CITATION: [2007] 288 ITR 408

FACTS OF THE CASE

Appellant herein is a company incorporated in Japan. It is a resident of the said country. It

pays its taxes in Japan. It is engaged, inter alia, in the business of construction of storage
tanks as also engineering etc. It formed a consortium along with Ballast Nedam International
BV, Itochu Corporation, Mitsui & Co. Ltd., Toyo Engineering Corporation and Toyo
Engineering (India) Ltd. With the said consortium members, it entered into an agreement
with Petronet LNG Limited (hereinafter referred to as "the Petronet") on 19.01.2001 for
setting up a Liquefied Natural Gas (LNG) receiving storage and degasification facility at
Dahej in the State of Gujarat. A supplementary agreement was entered into by the parties on
19.03.2001. The contract envisaged a turnkey project. Role and responsibility of each
member of the consortium was specified separately. Each of the members of the consortium
was also to receive separate payments. Appellant was to develop, design, engineer and
procure equipment, materials and supplies, to erect and construct storage tanks of 5 MMTPA
capacity, with potential expansion to 10 MMTPA capacity at the specified temperatures i.e.
-200 degree Celsius. The arrangement also was to include marine facilities (jetty and island
break water) for transmission and supply of the LNG to purchasers; to test and commission
the facilities relating to receipt and unloading, storage and re-gasification of LNG and to send
out of re-gasified LNG by means of a turnkey fixed lump-sum price time certain engineering
procurement, construction and commission contract. The project was to be completed in 41
months.

The contract indisputably involved:

(i) offshore supply,

(ii) offshore services,
(iii) onshore supply,

(iv) onshore services and

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(v) construction and erection. The price was payable for offshore supply and offshore
services in US dollars, whereas that of onshore supply as also onshore services and
construction and erection partly in US dollars and partly in Indian rupees

ISSUES

whether the amounts, received/receivable by the applicant from Petro net LNG for offshore
supply of equipments, materials, etc. are liable to tax in India under the provisions of the Act
and India- Japan tax treaty?

REASONING

Before the Authority no issue was raised as regards the liability of the appellant to pay
income tax on onshore supply and onshore services and on its activities relating to
construction and erection. The dispute centered round its eligibility to pay tax in respect of
'offshore supply' and 'offshore services'. It is also not in dispute that the Government of India
and the Government of Japan entered into a by-lateral treaty in regard to the tax liabilities.
Contention of the appellant before the Authority was that the contract being a divisible one, it
did not have any liability to pay any tax in regard to offshore services and offshore supply.
Revenue, on the other hand, contended that the contract being a composite and integrated
one, they were so liable.
The Authority referred to a large number of decisions governing the field and opined that
having regard to the provisions contained in Section 5 read with Section 9 of the Act,
following propositions of law would emerge:

 In a case of Income Tax Act, 1961 sale of goods simpliciter by a non- resident to a
resident in India, if the consideration for sale is received abroad and the property in
the goods also passes to the purchaser outside India, no income accrues or arises or
deemed to accrue or arise to the seller in India.
 In a case of transaction of sale of goods by the non-resident to an Indian resident
which is a part of a composite contract involving various operations within and
outside India, income from such sale shall be deemed to accrue or arise in India if it
accrues or arises through or from any business connection in India.
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 In the case of a business of which all operations are not carried out in India, the
deemed accrual or arising of income shall be only such part of the income as is
reasonably attributable to the operations carried out in India.

 Whether there is business connection in India or/and whether all operations of the
business are not carried out in India are questions of fact which have to be determined
on the facts of each case.

Applying the said principles to the facts of the present case, the Authority opined that the
appellant was liable to pay direct tax even under the Treaty having regard to Articles 5 and 7
thereof as also Clause 6 of the Protocol. It was held:

The substance of the protocol quoted above, represents the consensus reached between the
parties to the treaty in regard to the meaning of the phrase "directly or indirectly attributable
to that permanent establishment" employed in paragraph 1 of article 7. Further, profits shall
also be regarded as attributable to the permanent establishment to the extent indicated in the
said protocol even when the contract or order relating to the sale or provision of goods or
services in question is made or placed directly with the overseas head office of the enterprise
rather than with the permanent establishment.

It would be clear that having regard to provisions of article 7(1) of the Treaty read with Para
6 of the protocol supply of equipment of machinery (sale of which was completed abroad,
having placed the order directly overseas office of the enterprise) the same should be within
the meaning of the phrase directly or indirectly attributable to that permanent establishment.

RATIO DECIDENDI

"For a non-resident entity to be taxed in India, it should carry on business through a

permanent establishment in India and income taxed is on basis of extent appropriate to part
played by permanent establishment in those transactions."

"Only such part of the income, as is attributable to the operations carried out in India can be
taxed in India."

"Sufficient territorial nexus between the rendition of services and territorial limits of India is
necessary to make the income taxable."
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"Location of the source of income within India would not render sufficient nexus to tax the
income from that source."

CONCLUSION

Held, sufficient territorial nexus between the rendition of services and territorial limits of
India is necessary to make the income taxable Whatever is payable by a resident to a non-
resident by way of fees for technical services, would not always come within purview of
Section 9(1)(vii) of Act -Whereas a resident would come within purview of Section 9(1)(vii)
of Act, a non resident would not, as services of a non-resident to a resident utilize in India
may not have much relevance in determining whether income of non-resident accrues or
arises in India - If any services have been rendered by the head office of Appellant outside
India, only because they were connected with permanent establishment even in relation
thereto, principle of apportionment shall apply.

BRIEF RELEVANT CASE ANALYSIS

CIT V. MITSUI ENGINEERING AND SHIP BUILDING CO. LTD 33on which reliance
was placed; the contention was that the finding that the contract for designing, engineering,
manufacturing, shop testing and packing up to f.o.b port of embarkation could not be split up
since the entire contract was to be read together and was for one complete transaction. It was
in the said fact situation held that it was not possible to apportion the consideration for design
on one part and the other activities on the other part. The price paid to the assessee was the
total contract price which covered all the stages involved in the supply of machinery.

This case is clearly distinguishable from the facts of the present case, since the payment for
the offshore and onshore supply of goods and services was in itself clearly demarcated and
cannot be held to be a complete contract that has to be read as a whole and not in parts.

The principle of apportionment is also recognized by Clause (a) of Explanation I. Thus, if

submission of the learned Additional Solicitor General is accepted that the contract is a
composite one, then offshore supply would be of equipment designed and manufactured in

33
[259 ITR 248],
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one territory (Japan), and then sold in another tax territory, leading to division of profits
arising in two tax territories, which is not envisaged under our taxation law.

It gives rise to the question as to what would be the meaning of the phrase 'business
connection in India'. Mere existence of business connection may not result in income of the
non-resident assessee from transaction with such a business connection accruing or arising in
India.

MAZAGAON DOCK LTD. V. CIT AND EXCESS PROFITS TAX 34whereupon again
reliance placed is distinguishable. In that case a non- resident carried on business with a
resident, and the issue adjudicated upon by the Court was that whether there was a clear and
close connection between them that produced profits or not, and whether any such income
generated by the non-resident company sending its ships for repairs to the resident company
is taxable, if it amounted to business. The Court answered both questions affirmatively.

The principle laid down therein has no application to the current fact situation because there
was an extremely close connection between the appellant company and non residents in that
the two non-resident (British) companies beneficially owned the entire share capital of the
appellant company. In the present situation there is no such connection, which can be said to
give rise to a business connection between the permanent establishment in India and the
transaction that is sought to be taxed.

 ANGLO FRENCH TEXTILE CO. LTD. V. CIT MADRAS 35in the fact situation
obtaining therein, it was held that when there was a continuity of business relationship
between the person in India who helps make the profits and the person outside who receives
or realizes this profit, a business connection exists.

In that case, the Assessee company incorporated in the UK, owned a textile company in
French Pondichery and had appointed another limited company in Madras to act as its
constituted agents. The same was held to be a business connection within British India. Such
a close connection cannot be envisaged in the present case since it does not involve any such
principle- agent relationship between the PE and the non residents.

34
[34 ITR 368],
35
[23 ITR 101],
 P a g e | 16

BARENDRA PRASAD RAY V. ITO36whereupon reliance has been placed, is not apposite.
Therein, the Court held that the professional relationship of a solicitor, who was a non-
resident, with an Indian firm will be a business connection. There was a connection between
the Indian firm and the British solicitor which was real and intimate and not just a casual one
and the fees earned by the solicitor was only through this connection, and could not have
done so without associating himself with the firm. Thus, the income earned by the solicitor
was subject to tax in India, and payable by the firm as agents of the solicitor.

The principle of this case, is again not applicable in the present scenario since the nature of
the relationship between the permanent establishment, the foreign firms and the Indian firms
are evidently contractual and not professional. And the transaction of sale and supply of
goods offshore have not taken place with the involvement of the permanent establishment,
therefore excluding this transaction from the scope of taxation in India.

COMMISSIONER OF INCOME-TAX V. ATLAS STEEL CO. Ltd 37

The expression "business connection" in the context of the Income-tax Act has come to
acquire a special meaning as laid down by the Supreme Court in R. D. Aggarwal & Co.'s
case. A business connection contemplated under Section 42 of the Indian Income-tax Act,
1922 (corresponding to Section 9 of the Income-tax Act, 1961, involved "a relation between a
business carried on by a non-resident and some activity in the taxable territories which are
attributable directly or indirectly to the earnings, profits or gains of such business". It was laid
down by the Supreme Court that there must be trading activity both outside and within the
taxable territory. In the facts of this case, for the supply of inventions, patents, application for
patents, secret knowledge and know-how, no trading activity had been or was required to be
carried on by the assessee within the taxable territory. Further, on a consideration of the
agreement, it cannot be said that the trading activity which was intended to be carried on by
the assessee as production adviser of Hindustan Steel Ltd., in future was relatable to or
connected with the past supply of the said know-how and other items.

RAGHAVA REDDI & ANOTHER V. COMMISSIONER OF INCOME TAX, A.P38,

36
[129 ITR 295]
37
[(1987) 164 ITR 401],
38
. [(1962) 44 ITR 720]
 P a g e | 17

"It is not possible to hold that the non-resident assessees in this case either received or can be
deemed to have received the sums in question when their accounts with the statutory agent
were credited, since a credit balance without more only represents a debt and a mere book
entry in the debtor's own books does not constitute payment which will secure discharge from
the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or
constructive in the taxable territories during the relevant accounting period."

CARBORANDUM CO. V. CIT39the Supreme Court dealt with a case where the Indian
company (assessee), a manufacturer of abrasive products, entered into an agreement with a
foreign company for getting the benefit of technical know-how in the manufacture.
The assistance was in the shape of furnishing of technical information relating
 the manufacture of bonded abrasive and coated abrasive products;
 providing technical management including factory design and layout, etc ;
 furnishing comprehensive technical information in the manufacture of the special
products;
 providing the Indian company with a resident-factory manager for starting the plant
and superintending its operation during its initial production stages ; and training
Indian personnel to replace the foreign technical personnel as quickly as possible.
With reference to these services, 3% on the net sale proceeds of the products
manufactured by the Indian company was payable to the foreign company.
The ITO held that 5% of the technical fee paid by the Indian company to the foreign
company was earned by the foreign company in India and, therefore, was taxable. The
Commissioner was of the view that at least 75% of the fee had accrued or arisen in India, as
the information was applied in India and the fee was payable mainly on account of the use of
technical know-how, or services rendered by the foreign personnel in India.
The Appellate Tribunal restored the assessment and the order of the Commissioner on the
ground that the service rendered had not been proved to have been rendered in India. On a
reference, the High Court held that the fee received must be taken to be fee that has accrued
or arisen in India from its business connection and was wholly taxable. However, in so far as
the Commissioner had brought to tax only 75%, the High Court pointed out that only 75% of
the profits could be taxed. On further appeal, the Supreme Court held that the service in that
case were rendered outside India and that even assuming there was any business connection,
no part of the activity or operation could be said to have been carried on by the foreign
39
[1977]108ITR335(SC)
 P a g e | 18

company in India. It was held that no part of the fee paid to the foreign company accrued or
arose in India. However, as the ITO had brought to tax 5% of the fees paid by the Indian
company, the assessment to that extent, not having been objected to by the assessee, the
foreign company, was allowed to stand.
BOMBAY HIGH COURT IN CIT V. TATA CHEMICALS LTD. 40 wherein it had been
held that in order to rope in the income of a non-resident, under the deeming provision, it
must be shown by the department that some of the operations were carried out in India in
respect of which the income was sought to be assessed.
CIT V. R. D. AGGARWAL AND CO41
"A business connection...... involves a relation between a business carried on by a non-
resident which yields profits or gains and some activity in the taxable territories which
contributes directly or indirectly to the earning of those profits or gains. It predicates an
element of continuity between the business of the non-resident and the activity in the taxable
territories : a stray or isolated transaction is normally no to be regarded as a business
connection. Business connection may take several forms : it may include carrying on a part of
the main business or activity incidental to the main business of the non-resident through an
agent, or it may merely be a relation between the business of the non-resident and the activity
in the taxable territories, which facilitates or assists the carrying on of that business. In each
case the question whether there is a business connection from or through which income,
profits or gains arise or accrue to a non-resident must be determined upon the facts and
circumstances of the case.

STATE OF MADRAS V. GANNON DUNKERLEY & CO. (MADRAS) LTD.42

The contract in such a case must stipulate that the equipment would be supplied on CRF
basis. It spells out the price for supply of goods, in which event, for the purpose of sales tax,
the contract would involve sale of goods. The principle of Gannon Dunkerly (supra), does not
appear to be of much relevance in the instant case.

UNION OF INDIA AND ANR. V. AZADI BACHAO ANDOLAN AND ANR43

The Agreement provides for allocation of taxing jurisdiction to different contracting parties
in respect of different heads of income. Detailed rules are stipulated with regard to taxing of
40
[1974]94ITR85(Bom)
41
[(1965)56 ITR 20]
42
[1959]1SCR379
43
. [2003]263ITR707(SC)
 P a g e | 19

dividends under Article 10, interest under Article 11, royalties under Article 12, capital gains
under Article 13, income derived from independent personal services in Article 14, income
from dependent personal services in Article 15, directors' fees in Article 16, income of artists
and athletes in Article 17, governmental functions in Article 18, income of students and
apprentices in Article 20, income of professors, teachers and research scholars in Article 21
and other income in Article 22.

COMMISSIONER OF INCOME TAX, BOMBAY V. AHMEDBHAI UMARBHAI &

CO., BOMBAY44, this Court, having regard to the provisions contained in Section 42 of the
Income Tax Act, 1922, held that profits accrued to the assesses of a part of the business in an
Indian State having accrued out of such business carried on in such State are exempted under
the third proviso to Section 5 of the Excess Profit Tax Act.

 CIT V. GULF OIL (GREAT BRITAIN) LTD45

In that case, the assessee who was a dealer of petroleum products and incorporated in
U.K., had a wholly-owned subsidiary in India. The non-resident received indents from
time to time for the supply of the products from the Indian subsidiary and those orders
were honoured by shipment. The prices charged were in c.i.f. terms. Once the goods
were put on ship, there was no reservation of the right of disposal in the goods by the
non-resident. On the question whether these transactions amounted to business
connection and whether any income was derived in India by the foreign company, it was
held that the transaction between the non-resident company and the Indian subsidiary
were on a principal to principal basis and that the Indian subsidiary could not be
regarded as the agent of the non-resident company.

 CIT V. HINDUSTAN SHIPYARD LTD46, the Andhra Pradesh High Court dealt with a
case where the Hindustan Shipyard Ltd. entered into an agreement for the purchase of
diesel engines with accessories from a Polish company. The property in the goods was to

44
[1950]181ITR472(SC)
45
[1977] 108 ITR 874 (Bom).
46
[1977] 109 ITR 158
 P a g e | 20

pass to the purchaser immediately on board the vessel named by the forwarding agents
of the purchaser. The engines were agreed to be erected by the staff of the purchaser
under the supervision of a supervision engineer placed at the disposal of the purchaser
by the Polish company. The foreign company agreed also to supply an erector and an
erecting supervising engineer for a period of 12 months for every ship free of charge and
to provide free of cost one guarantee engineer for a period of six months. There was
also a provision of further guarantee given by the Polish company including training of
technical employees in Poland in batches. The expenses including travelling expenses
were to be borne by the Polish company. It was held that though the Polish company
had agreed to render certain limited services, the services were connected with the
effective fulfilment of the contract of sale and were merely incidental to the contract. It
was held on the facts that there was no business connection and in the course of the
judgment at page 171 it was pointed out that the transaction between the Indian
company and the Polish company was one between principal and principal.
 VDO TACHOMETER WERKE, WEST GERMANY V. CIT47the contract between
the Indian company and the foreign company was arrived at in Germany. The services of
the foreign company were rendered outside India. The drawings, plans, inspection of
goods, raw materials, etc., were delivered abroad. The Indian personnel were also
trained abroad. The technical personnel deputed by the foreign company entered into
contracts of service with the Indian company as approved by the Government of India
and became the employees of the Indian company solely subject to its control and
authority. Under the agreement with the foreign company the Indian company had to
pay 3% of the total turnover of the licensed articles to the German company. A further
1% was payable to the foreign company for being passed on to any company from which
the foreign company itself had taken a licence. The learned judges of the Karnataka High
Court held that no part of the licence fees payable under the agreement in question
could be treated as income which was deemed to have accrued or arisen in India to the
not-resident. The payments were found to be outside the scope of s. 9 of the I.T. Act,
1961.

47
[1979] 117 ITR 804 (Kar),
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CONCLUSION
The regime of international taxation exists through bilateral tax treaties based upon model
treaties, developed by the OECD and the UN, between the Contracting States. India has
entered into a wide network of tax treaties with various countries all over the world to
facilitate free flow of capital into and from India. However, the international tax regime has
to be restructured continuously so as to respond to the current challenges and drawbacks.
Nearly all tax treaties provide a specific mechanism for eliminating double taxation which is
still potentially present. This mechanism usually requires that each country grant a credit for
the taxes of the other country to reduce the taxes of a resident of the country. The treaty may
or may not provide mechanisms for limiting this credit, and may or may not limit the
application of local law mechanisms to do the same.
The basic issue which arises in the interpretation of a Double Taxation Avoidance Agreement
is that of the position where there is a conflict between the provisions of the Act and the
provisions of the applicable Double Taxation Avoidance Agreement. Section 90(2) of the Act
makes it abundantly clear that where an agreement for granting relief of tax or for avoidance
of double taxa`tion has been entered into, then, in relation to the assesse to whom such
agreement applies, the provisions of the Act to the extent that they are more beneficial as
compared to the provisions of the Double Taxation Avoidance Agreement would have to be
applied. It follows that where the provisions of the applicable Agreement are more favorable,
compared to the provisions in the Act, the provisions of the Agreement will prevail.
Hence, on a concluding note it can be stated that the hypothesis formulated by the researcher
has been proved correct partially. India has a comprehensive Double Taxation Avoidance
Agreements with several nations for the benefit granted to the assess.