This article summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of JCIT v State Bank of Mauritius Ltd. (Taxpayer) [2009-TIOL-712- ITAT-MUM]. The ITAT held that the Taxpayer, a company incorporated in Mauritius, having established a Permanent Establishment (PE) in India, is entitled to the deduction of expenses, incurred for the purpose of the business of the PE, in computing the profits of the PE under Article 7(3) of the India-Mauritius Tax Treaty (Tax Treaty). In view of the specific provisions of the Tax Treaty allowing the deduction for such expenses, such a deduction is not subject to restrictions prescribed under the Indian Tax Law (ITL).
Background and facts of the case
Contentions of the Tax Authority
A part of the expenses incurred by the Taxpayer for traveling and entertainment was disallowable in terms of the specific provisions of the ITL. Hence, the same could not be allowed as a deduction under the ITL.
Contentions of the Taxpayer
Under Article 7(3) of the Tax Treaty, expenses incurred have to be allowed if they are incurred for the purpose of the business of the PE. The restrictions placed under the ITL are not applicable in view of specific provisions of the Tax Treaty.
Ruling of the ITAT
The ITAT held that the Taxpayer was entitled to deduction of the expenses, in computing the profits of the PE, for the following reasons:
This ruling provides that profits of a PE of a taxpayer have to be computed after considering the beneficial computational provisions of an applicable tax treaty. Taxpayers who are governed by the beneficial provisions of an applicable tax treaty are entitled to compute their income taxable in India as per such provisions. Under such circumstances, the computation provisions of the ITL may not be relevant in computing the taxable income of the PE in India.