Amendment to Article 7(3) of India-UAE DTAA from 1st April, 2008, restricting allowance of head office expenditure, has only prospective effect and does not apply to periods prior to that date.
Facts
The taxpayer was a banking company incorporated in UAE. It was carrying on banking operations in India through two branches. In terms of Article 7 of India-UAE DTAA, the taxpayer had PE in India.
Based on Article 7(3) (prior to its amendment from 1st April, 2008, pursuant to Protocol dated 3rd October, 2007), the taxpayer claimed deduction of all the expenses relating to the PE and contented that the restriction u/s 44C of I T Act on allowability of head office expenditure did not apply to it .
Relying on CBDT Circular No. 202 dated 5th July, 1976, the tax authority observed that the intention behind Article 7 is to ensure that correct profit is brought to tax and accordingly, it restricted the head office expenditure up to the limit prescribed in section 44C. The tax authority further contended that the amendment to Article 7(3) was merely clarificatory and hence, had retrospective operation.
The issue before the Tribunal was whether the amendment provision could apply to the period prior to the amendment.
Before the Tribunal, the taxpayer relied on the decision of ITAT Special Bench in Sumitomo Mitsui Banking Corpn v Dy Director of IT [2012] 145 TTJ 649 (Mum) (SB) and Dalma Energy LLC [2012] 136 ITD 208 (Ahd). As against that, the tax authority relied on the decision in Mashreqbank Psc v Dy Director of IT [2007] 108 TTJ 554 (Mum).
Held
The Tribunal accepted taxpayer’s contentions and held as follows.
(i) Prior to April 1, 2008, Article 7(3) did not restrict allowance of head office and other expenditure attributable to PE. When particular provision in a DTAA is brought in from a particular date, Prima facie, it should be considered prospective unless expressly or impliedly it is provided to have retrospective operation. The parties interpreting a DTAA get vested right under such existing DTAA and any interpretation giving retrospective effect not only impairs the vested rights, but attracts new disability in respect of executed transaction.
(ii) In the present case, interpretation of retrospective operation of Article 7(3) would create new obligation and disturb assessability of the profit of PE.
