By GEETA JANI | DHISHAT B. MEHTA
Chartered Accountants
9. DDIT vs. Unocol Bharat Ltd
ITA Nos.: 1388/Del/2012
Date of Order: 5th October, 2018
A.Y.: 1998-99
Article 7(3) of India-Mauritius DTAA – in absence of DTAA
providing any restrictions on deduction of expenses, domestic law restrictions on deductibility
cannot be imported into DTAA
Facts
The Taxpayer was a company
incorporated in Mauritius. It was engaged in business of development and
promotion in the energy sector in India for its parent company. The Taxpayer
was pursuing certain projects in India. It had constituted a PE in India.
Accordingly, it was offering its income on net basis. During the relevant year,
the Taxpayer had incurred certain expenses relating to operating contract,
employee salaries and travel and entertainment but did not earn any income.
Thus, Taxpayer incurred losses in the relevant year.
According to the AO, the Taxpayer
had not produced appropriate documentary evidences in respect of the said
expenses. Further, it had also not withheld any tax from such payments.
Accordingly, the AO, relying on Supreme Court decision in Transmission Corporation
vs. CIT, 239 ITR 587 (SC), concluded that the expenditure was not allowable
and further invoked the provisions of section 40 (a)(i) to disallow the
expenditure.
Before CIT(A), the Taxpayer
contended that having regard to the short stay exemption under Article 15 of
India-USA DTAA, employee salaries were not taxable in India. The Taxpayer also
furnished information relating to expenses incurred. Further, compared to DTAAs
with other countries, Article 7(3) of India-Mauritius DTAA is worded differently.
In other DTAAs not only there is restriction on deduction of expenses but
deduction is also subject to the limitation of domestic tax law. In support of
its contention, the Taxpayer relied on the decision in JCIT vs. State Bank
of Mauritius Limited 2009 TIOL 712. The Taxpayer also contended that it had
furnished sufficient details to the AO to support its claim. Thereafter, to
disallow the expenses, the onus was on the AO to point out errors/omission. The
CIT(A) held in favour of the Taxpayer.
Held
The contention of the AO that the
Taxpayer has not furnished details of expenditure is untenable. Further, the
amount paid to employees was eligible for short stay exemption under the DTAA.
Further, relying on Mumbai Tribunal decision in JCIT vs. State Bank of
Mauritius Limited 2009 TIOL 712, the Tribunal held that:
- Article 7(3) of
India-Mauritius DTAA provides for determining profits of a PE after deduction
of expenses (including executive and general administrative expenses) incurred
for the business of the PE. Accordingly, all expenses, which were incurred for
the purpose of the business of the PE were to be allowed.
- The language in Article
7(3) of India-Mauritius DTAA is different from that in other treaties.
Illustratively, Article 7(3) of India-US DTAA provides deduction subject to the
limitation of domestic tax laws. After the Protocol, India-UAE DTAA also
incorporates similar restriction.
- In absence of such
restriction in DTAA, any limitation under the Act cannot be imported into DTAA.
Accordingly, if the expenditure was incurred for the purpose of the business of
PE, it had to be allowed fully without any restriction that may have been
provided under the Act.
