- (1.) The Court: These two writ petitions are at the instance of two partners of a partnership firm. The petitioner no.1 is the UK based partner while the petitioner no.2 is the partner based in the Netherlands. The partnership is the assessee known as P & O Nedlloyd which suffered issuance of notices under Section 148 of the Income Tax Act, 1961 relating to assessment years 2005-2006 and 2006- 2007. The notices are annexures P-9 and P-13 to the respective writ petitions. The challenge in these writ petitions is to the said notices.
(2.) Mr. Kaka, learned senior Advocate appearing on behalf of the petitioners had drawn attention to the assessment order dated 10th November, 2008 relating to the noticee's assessment year 2006-07. In paragraph 5 of the said order the department was of the view that as per the provisions of the Double Taxation Avoidance Agreement (DTAA), income from operation of ships in international traffic is not liable to tax in India in the hands of either of the two corporate partners. However the department went on to say further that which the petitioners contend, cannot be sustained. " PONP being a partnership firm based in U.K., it is fiscally transparent entity in U.K. and hence outside the ambit of the treaty between India and U.K. Its income is therefore, exigible to tax as per the provisions domestic law. On the other hand the income of a partner in firm is exempt u/s.10(2A) of the Income-tax Act 1961."
(3.) Mr. Kaka submitted, distinction between a partnership and its partners regarding the same income cannot be drawn for the purpose of taxing the partnership in India. He submitted, the DTAA had everything to do with income and avoidance of double taxation on it. The income sought to be made the subject matter of the assessment proposed by the impugned notices, was already accepted as nil in the hands of the partners. That same income could not thereafter be taken to be income exigible to tax in India in the hands of the partnership. He referred to Articles 9(5) and 8A (4) of the respective treaties that India has with the UK and Netherlands. He then submitted the position had been made clear by the Supreme Court in the case of 'Union of India vs. Azadi Bachao Andolan, 2003 263 ITR 706'. He submitted the Supreme Court had interpreted the law on this aspect to be that it was crucial to define fiscal residence of a company very accurately. The State of residence is the one entitled to levy tax on the corporation's worldwide profit. He relied on the following portions of the judgment: " In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words, "liable to taxation", but would have used some appropriate words like "Pays tax". On the language of the DTAC, it is not possible to accept the contention of the respondents that offshore companies incorporated and registered under the MOBA are not "liable to taxation" under the Mauritius Income-tax Act; nor is it possible to accept the contention that such companies would not be "residence" in Mauritius within the meaning of article 3 read with article 4 of the DTAC .;