Mumbai ITAT rules deductibility of PE expenses under India- Mauritius Tax Treaty

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

1. The Taxpayer, a company incorporated in Mauritius, has established a PE in India. The Taxpayer incurred certain traveling and entertainment expenses in relation to the PE. A part of these expenses was disallowed by the Tax Authority in view of restrictions placed under the ITL on the allowability of such expenses.
2. Article 7(3) of the Tax Treaty permits deduction of all expenses which are incurred for the purpose of the business of the PE.
3. The first appellate authority deleted the addition made by the Tax Authority on the ground that the latter had allowed deduction for similar expenses to the Taxpayer in its earlier orders.
4. The Tax Authority appealed to the ITAT against the ruling of the first appellate authority.

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:

1. Article 7(3) of the Tax Treaty prescribes the expenses which are allowed as deductions in computing the profits of the PE. As per Article 7(3) of the Tax Treaty, in determining the profits of the PE, a deduction should be allowed in respect of expenses incurred for the purpose of the business of the PE.
2. Any restriction on the allowability of expenses, incurred for the purpose of the PE, would need to be specifically provided in the Tax Treaty itself e.g. Article 7(3)(a) of the India-France Tax Treaty provides for deduction for expenses incurred for the purposes of the PE, subject to and in accordance with the limitations prescribed under the tax laws of the country in which such a PE is situated.
3. A restriction on the allowability of expenses, as provided in the India-France Tax Treaty, is not provided in the India- Mauritius Tax Treaty. Hence, expenses incurred by the Taxpayer are not subject to the restrictions imposed under the ITL.

Comments

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.

NF