1          Introduction

As discussed in earlier parts of this mini-series, for the purpose of The Income Tax Act, 1961 (“the Act”), there cannot be a legally valid transaction between a head office and a permanent establishment. That is the case because a permanent establishment as well as the head office belong to the same enterprise (legal entity). By virtue of Sec. 90(2) of the Act, the provisions of the Act should prevail over an applicable tax treaty to the extent the former are more beneficial for a taxpayer.

But the Indian tax authorities, at least in few cases, have attempted to apply tax treaty provisions that were burdensome (for taxpayer) compared to the implications under the Act. In some cases, the Indian Income Tax Appellate Tribunal (ITAT) approved that approach.

In this article, we examine as to whether a tax treaty can indeed give rise to adverse tax implications for a taxpayer.