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[1983] 15 Taxman 72 (Andhra Pradesh)/[1983] 144 ITR 146 (Andhra

Pradesh)/[1984] 38 CTR 1 (Andhra Pradesh)

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[1983] 15 Taxman 72 (AP)
IN THE HIGH COURT OF ANDHRA PRADESH
Commissioner of Income-tax
v.
Visakhapatnam Port Trust
SEETHARAM REDDY AND JAGANNADHA RAO, JJ.
JUNE 17, 1983

Section 90 of the Income-tax Act, 1961 - Double taxation relief - Agreement with Federal Republic of Germany - Whether
in view of article XVIII of double taxation agreement (the agreement) between Federal Republic of Germany and India
providing remedy of moving competent authority specified therein for claiming benefit of the agreement, jurisdiction of a
domestic court like tribunal to consider applicability of the agreement to a case is ousted - Held, no - Whether provisions
of section 90 prevail over those of sections 4, 5 and 9 and, therefore, even where a business connection is established,
profits of a company would be free from tax if they are covered by a double taxation agreement - Held, yes - Whether
mere supply of a plant by a foreign company whose assembly and erection are undertaken by purchaser under
supervision of engineer deputed by supplier, can amount to foreign company having a 'permanent establishment' in India
within meaning of article II(1)(i)(aa)/(bb) of the agreement so as to make the agreement inapplicable to the payments
made to foreign company - Held, on facts, no - Whether appointment of a sub-contractor in India by foreign company to
effect delivery of plant in India and deputation of an engineer to supervise erection of plant would amount to foreign
company having an agent or a person acting on its behalf in India within meaning of article II(1)(i)(dd) so as to exclude
application of the agreement to its income - Held, on facts, no - Whether where interest is paid by purchaser as part of sale
consideration, it could not be regarded as a debt and hence an income from an independent source for the purpose of
article viii of the agreement- -Held, yes
Words and phrases - 'Permanent establishment' occurring in article II(1)(i) of agreement for avoidance of Double
Taxation between Federal Republic of Germany and India
Facts
The assessee-Port Trust entered into a contract with a German company for the purchase of a plant known as 'Bucket Wheel
Reclaimer', The terms of the contract, inter alia, provided (i) that the German company would supply and deliver to the assessee
the said plant; (ii) that the plant would be assembled and erected by the assessee at its own expense under the supervision of an
engineer-erector to be sent by the German company ; (iii) that the payment - bulk of it in German currency - would be made as
per procedure described in the contract, part of it in twenty instalments ; (iv) that certain interest would be payable cm credit
remaining after payment of each instalment ; and (v) that the German company could employ a sub-contractor or sub-supplier.
Subsequently, an Indian company BWI, which was neither a subsidiary of the German company nor in any way controlled by it,
was employed as a sub-contractor to fabricate a single, thick steel sheet in India and to embed in it some items sent by the
German company. The ITO was of the view that the assessee should have deducted tax at source under section 195 from the
payments made to the German company under the aforesaid contract. The Tribunal, however, accepted the assessee's contention,
raised for the first time before it, that the assessee was immune from any tax liability in view of the Double Taxation Agreement
between India and Federal Republic of Germany (DTAA).
On reference, the revenue contended (i) that it was outside the jurisdiction of the Tribunal to consider the applicability of DTAA
in view of article XVIII contained therein which provides for moving competent authority specified therein ; (ii) that the German
company and BWI had a 'business connection' attracting section 9(1)(i); ( iii) that article II(1)(i)( aa), ( bb) and (dd) of the DTAA
applied to the facts of the case whereby the German company had a 'permanent establishment' in India and hence its income was
taxable in India under the latter part of article III; and (iv) that the interest in question was an independent source of income
taxable under article VIII of the DTAA.
Held
Article XVIII of the DTAA, called the 'Mutual agreement procedure', is based upon article XXV of the Organization of Economic
Co-operation and Development ( OECD) Model Convention which have international acceptance. It provides the remedy of
moving the competent authority specified therein for claiming the benefit of double taxation agreement. According to the well-

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established international judicial opinion, the 'Mutual agreement procedure's in addition to and not in substitution of the
remedies before domestic Courts or Tribunals. Consequently, the Tribunal had the jurisdiction to consider the question of
entitlement to double taxation: relief under the DTAA in question.
The provisions of sections 4 and 5, the charging sections, are expressly made subject to the provisions of the Act, which means
they are subject to the provisions of section and hence, by implication, to the terms of the Double Taxation Avoidance Agreement,
if any, entered into by the Government of India. Therefore, the income arising or accruing to a foreign company through or from
any business connection in India is also subject to the provisions of the Agreement to the contrary. Consequently, even assuming
that all the profits of the German company in the instant case were to be deemed to have accrued or arisen in India by virtue of a
business connection under section 9, the terms of article III of DTAA would prevail over section 9.
Under article HI of DTAA, subject to certain conditions specified therein, the industrial or commercial profits of an enterprise of
one country are not taxable in the other, unless these are derived through a 'permanent establishment' in the other country as
defined in article II( i) of the DTAA. The words 'permanent establishment' postulate the existence of a substantial element of an
enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in
that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into
the soil of another country. In the instant case, it was clear from the forms of the contract between the assessee and the German
company that the German company did not contemplate to have any establishment of a permanent or enduring nature in India
which would amount to a virtual projection of the German company into India. This case was, therefore, not covered by article II(
1)(i)(aa).
Article II(1 )(i)(bb) too was inapplicable as this contract did not contemplate any installation or assembly work by the German
company in India. The German company was only to delegate an expert engineer to supervise the installation work which was to
be done by the assessee. Nor could the German company be said to have got the installation work done through an Indian agent,
i.e., BWI, who did the work relating to the steel plate. There was neither any identity of interest nor identity of character nor of
personality, nor was there any unity in profit making between BWI and German company. BWI was employed as a sup-contractor
and the relationship between the German company and BWI was one of principal to principal, and not that of principal and
agent. Consequently, the 'assembly' or 'installation' insofar as it related to the steel plate work done by BWI could not be
attributed to the German company so as to attract the provisions of sub-clause (bb) or (dd) of the said article. Further, the role of
the German engineer-erector, deputed by the German company under the project did not result in bringing the German company
within sub-clause (bb) or sub-clause (dd) of the aforesaid article.
The words 'any other form of indebtedness' and 'from sources' in the other territory used in article VIII could only mean interest
arising or accruing as a separate source, It could not include interest payable on unpaid purchase money agreed to be part of the
sale consideration. Where, as here, parties enter into an agreement to accept a portion of the purchase money immediately and
the balance to be paid in certain instalments along with interest on the instalment of purchase money, the agreement, though it
vested the property agreed to be sold in the purchaser, does not have the effect of converting the price due into a loan. The
intrinsic nature of the money due to the vendor is an unpaid purchase money and not as debt.
In the instant case, the interest agreed to be paid along with each of the instalments of unpaid purchase money was part of the
sale consideration itself and could not be treated as an independent source of income. Hence, the impugned interest was not
chargeable to tax under article VIII of the Agreement.
For all the foregoing reasons, the assessee was immune from liability to pay tax in view of the provisions of the Double Taxation
Avoidance Agreement between the Federal Republic of Germany and India.
Case review
Judgment of German Federal Supreme Court dated 1-2-1967-I 220/64 (B.St.BI), 1967 III 405, Judgment of Swiss Federal
Tribunal dated 17-3-1967 PCE 98-I 189, Ostime ( Inspector of Taxes) v. Australian Mutual Provident Society [1960] AC 459
(HL).
Judgment of the Supreme Court of Belgium on French-Belgium Treaty (date not given), Judgment of the Swiss Bundesgericht
dated 17-9-1977 on Swiss-Spanish Treaty, U.S. Revenue Ruling No. 72-4-418 on US-German Treaty. Lakshminarayan Ram
Gopal & Son Ltd. v. Govt. of Hyderabad [1954] 25 ITR 449 (SC), Pritchtt & Gold & Electrical Power Storage Co. Ltd. v. Currie
[1916] 2 Ch. D. 515, Mahomed Shaft v. Fazal Din AIR 1930 Lahore 1062, Bharat Heavy Electricals Ltd. v. ITO [1982] Tax
65(6)-12 (Delhi), IRC v. Ballatine [1924] 8 TC 595, Simpson v. Maurice's Executors [1929] 14 TC 580 (CA), Bombay Steam
Navigation Co. [1953] (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC), CIT v. Saurashtra Cement & Chemical Industries Ltd. [1975]
101 ITR 502 (Guj.) and Chittela Venkata Subba Reddy v. Jayanthi Audinarayana [A.S. 446 of 1964 (AP)] followed.
Cases referred to
Bharat Heavy Electricals Ltd. v. ITO [1982] Tax 65(6)-12 (Delhi), Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1965]
56 ITR 52 (SC), Chittela Venkata Subba Reddy v. Jayanthi Audinarayana [A.S. 446 of 1964 (AP)], Hindustan Shipyard Ltd.
[1977] 109 ITR 158 (AP), CIT v. Saurashtra Cement & Chemical Industries Ltd. [1975] 101 ITR 502 (Guj.), T.N.K.
Govindaraju Chetty v. CIT [1967] 66 ITR 465 (SC), IRC v. Ballantine [1924] 8 TC 595, Kesoram Industries & Cotton Mills
Ltd. v. CWT [1966] 59 ITR 767 (SC), Lakhmichand Muchhal v. CIT [1961] 43 ITR 315 (MP), Lakshminarayan Ram Gopal
& Son Ltd. v. Govt. of Hyderabad [1954] 25 ITR 449 (SC), Mahomed Shaft v. Fazal Din AIR 1930 Lahore 1062, Ostime
(Inspector of Taxes) v. Australian Mutual Provident Society [1960] AC 459 (HL), Pritchtt & Gold & Electrical Power Storage
Co. Ltd. v. Currie [1916] 2 Ch. D. 515 (CA), P.C. Ray & Co. (India) (P.) Ltd. v. A.C. Mukherjee, ITO [1959] 36 ITR 365 (Cal.),
Radha Kissen Chamria v. Keshardeo Chamria AIR 1957 SC 743, Shamlal Narula v. CIT [1964] 53 ITR 151 (SC), Simpson v.

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