INTERNATIONAL TAXATION
Dhinal A. Shah Chartered Accountant
During last year the discussion upto Article-5 of DTAA was made. I hope that the information and the relevant material was useful to the readers ! I am extremely thankful to the Chairman of the Journal Committee for again giving me an opportunity to write on this new but fast developing subject. From the current year, the discussion will start from Article- 6 onwards. INCOME FORM IMMOVABLE PROPERTY ARTICLE - 6: 1. Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. 2. The term "immovable property" shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed properly apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats and aircraft s hall not be regarded as immovable properly. 3. The provisions of paragraph 1 shall also apply to income derived from the direct use, letting or use in any other form of immovable property. 4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services. Scope 1.1 Income from immovable property is taxable in the contracting state in which it is situated. Income from agriculture or forestry is also thus taxed. The income is intrinsically related to the ownership of natural resources of a country. Its state is entitled to tax it. Paragraph 2 of article 6 is elaborate in defining immovable property, in addition to what it means under the law of the contracting state where it is located, as including accessory to it and others. Paragraph 3 is an extension of paragraph 1. If income has relation to immovable property in whatever manner, whether it is derived by direct use or by letting or use in any other manner it is taxable in the state of location.
Paragraph 4 extends this principle to an enterprise or in the case of performance of independent personal services, if the income has a source from immovable property. Thus, article 6 deals with the income which a resident of a contracting slate derives from immovable property situated in the other contracting state. If does not apply to income from the property situated in the contracting state of which the recipient is resident within the meaning of article 4 or situated in the third state. Article 6 is based on the fact that there is always a very close economic connection between the source of the income from immovable property and the natural resources of the country where it is situated. Immovable property - Definition 1.2 The definition consists of three parts, referential, inclusive, and, exclusive. The first part defines the expression "immovable property" with reference to the domestic law of the situs state, as having a meaning which it has under its laws. This helps in avoiding difficulty in interpreting as to whether or not an asset or right in respect thereof is an immovable property. Inclusive definition refers to income from property accessory to immovable property, livestock, and equipment used in agriculture and forestry, rights to which the provisions of the general law respecting the landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working or the right to work, mineral deposits, sources and other natural resources. The inclusive definition affirms a view that where the income is received in connection with the ownership of "immovable property", it is intrinsically related to the natural resources of the country. That country has, therefore, the right to tax. Property accessory is deemed to be immovable property, even if such accessory is temporarily separated from it. Livestock and equipment are so considered for their intended use in agriculture or forestry. No distinction is necessary according to whether or not the person is the owner of the immovable property in the exploitation of which the livestock or equipment he owns is employed by him. The exclusive definition excludes ships, boats and aircraft. Immovable property - Defined under the Indian laws 1.3 Under the Indian laws, immovable property has been defined to include land, benefit to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth [General Clauses Act, 1897, section 3(36)]. The Indian Registration Act, 1908 [section 2(6)] defines it to include land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries, or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops, nor grass.
Immovable property - Property accessory 1.4 Article 6 extends to any tangible movable property that has been placed on the immovable property so that it remains permanently attached thereto, and which thereby constitutes property accessory or annexed to the immovable property within the
meaning of the domestic law of the Contracting State in which the property is situated. This article speaks of immovable property and not the claim or right save the right to which the provisions of the general law respecting landed property apply, rights to variable or fixed payments as consideration for the working of the property, or the right to work, mineral deposits, sources and other natural resources. For the purpose of determining whether a movable property attached to an immovable property is an immovable property the enquiry should be not whether the attachment is direct or indirect but what is the nature of the attachment and what is the object and purpose. The degree and nature of attachment no doubt should be a consideration, but the more important consideration should be the object of annexation which is a question of fact to be determined by the circumstances of each case. If a thing is embedded in the earth or attached to what is embedded for the permanent beneficial enjoyment of that to which it is attached, then it is a part of immovable property and if the attachment is merely for the beneficial enjoyment of the chattel itself, then it remain chattel, even though fixed for the time being so that it may be enjoyed and, therefore the question in each case must depend upon the intention of annexation and that such intention may be either express or implied from the circumstances. In the absence of proof one way or the other, the intention to be attributed is that of a person acting from motives of selfinterest. 1.4.1 Immovable property - The following test will determine as to when a movable property fixed to the earth becomes an immovable property - South Indian Bank Ltd. v. Krishna Chettiar &Bros. AIR 1976 Mad. 215. • • • Intention of the parties Mode of affixation and whether the affixation is intended to be permanent Onus of proof that even after annexation the article continues to be movable is on the person who alleges it.
In Carborandum Universal Ltd. v. CIT [1984] 146 ITR 1, the Madras High Court held that the owner of the undertaking has embedded the machinery in the earth for the purpose of working his factory as a press, it should be taken to come within the definition of 'immovable property'. Immovable property - Manner of use is not relevant 1.5 Irrespective of the manner how an immovable property is to be made use of whether by its exploitation as a commercial asset, i.e. by carrying on business by its owner by the employment of such an asset, or as an investment by letting it or renting it out to another on lease or on rental or by using it in any other manner directly or otherwise the income from the immovable property is assessable in the Contracting State in which it is situated.
Paragraph 4 of article 6 states that the provisions of paragraphs 1 and 3 would be applicable to income derived from immovable property used for the performance of professional services. If the source of income is the immovable property, it is liable to tax in the country of the location though under certain circumstances such income is taken to be business income under domestic laws. For example, when an assessee derives any income by exploitation of a commercial assets whether himself or through the agency of another, such income is normally taken to be business income CIT v. Prem ChandJule Mills Ltd. [1978] 114 ITR 769 (Cal.) and CIT v. KatiharJufe Mills (P.) Ltd. [1979] 116 ITR 781 (Cal.). According to this view, the source of income being the business, the article which controls its taxability' would be first article 5 and thereafter article 7. Such income would not be taxable at all if it arises or accrues from the activity which does not fulfil the requisite of permanent establishment in terms of article 5. Even if the enterprise so fulfils, the whole of the income is not taxable. Only that portion is liable which could be attributed to the permanent establishment. Taxability or the non-taxability of income depends on the existence or non-existence of the permanent establishment, and its extent upon how much of it could be attributed to the permanent establishment, if existed. The concept of taxability of income on the basis of location of its source would then be relegated to insignificance. But paragraph 4 makes it clear that the view does not prevail if the source of income is immovable property. Notwithstanding that property belongs to industrial, commercial enterprise, or is used for the performance of independent personal service or used for non-industrial or non-commercial purposes, the income from such property is taxable in the State of source. Thus, the right to tax of the State of source has prevalence over the right of the other State.