The assessee, an Australian company, set up a permanent establishment (PE) in India to render technical services for evaluation of coal deposits and conducting feasibility studies for transportation of iron ore. The AO accepted that the income was business profits under Article 7 of the DTAA but held that as no rate of tax was prescribed in the DTAA and the nature of the income was “fees for technical services”, the income was asses sable u/ss 115A & 44D. This was upheld by the CIT (A). On appeal by the assessee, HELD allowing the appeal:
(i) The assessee was not rendering simple technical or consultancy services but was rendering specific activities through the PE. Accordingly, Article 12 of the DTAA was not applicable. Income attributable to a PE is assessable under Article 7 of the DTAA. Under Article 7(2), the PE is deemed to be a wholly independent enterprise and under Article 7(3) deduction in accordance with the subject to the law relating to the tax in India is allowable. Since Article 7 of the DTAA comes into play, s. 9(1)(vii) is not applicable. Since Article 7 (2) of the DTAA specifies that the PE in India is to be treated as a wholly independent enterprise in India, ss. 44D and 115A will not apply in so far as they relate to foreign companies.