Income Tax Appellate Tribunal - Delhi
Foramer S.A. vs Deputy Commissioner Of Income-Tax on 7 November, 1994
Equivalent citations: [1995]52ITD115(DELHI)
ORDER
Vimal Gandhi, Judicial Member
1. The appellant in appeal against order of CIT(A) is a French company which closed its accounts for the assessment year 1987-88 on 31st March, 1987 covering the following contracts awarded by Oil & Natural Gas Commission :-
(a) Contract dated 17th October, 1986 for carrying drilling operations in off-shore Bombay area through appellant's own rig lled' Amsterdam (hereinafter referred for brevity sake IDA); and
(b) contract dated 24th March, 1987 for carrying on manning and management services on the drilship Sagar Vijay owned by ONGC.
2. The assessee maintained regular books of accounts on mercantile basis in respect of operations carried out in India which were duly audited in accordance with law.
3. The assessee made a claim for the benefit of Indo-French Double Taxation Avoidance Treaty (hereinafter referred to as 'treaty') by invoking :-
(a) Article 111 of the Treaty in respect of contract proceeds arising from the operations of Rig IDA and thus tax is chargeable on the net business income derived from the permanent establishment in India.
(b) Article XVI of the Treaty in respect of Sagar Vijay management and manning contract being the technical fees earned on the development of its expatriates which are chargeable to tax on income net of expenses incurred in India.
4. The results of operations of two contracts as per Profit & Loss Account for the period ending 31st March, 1987 were disclosed as under:-
Contract Gross Fees Income Loss IDA 24240987 - 95796011 Vijay Sagar 1823697 236283
Besides above, an amount of Rs. 1,96,205 was recovered from ONGC against expenses specifically incurred on their behalf under IDA Contract.
5. The appellant claimed the set off of loss of IDA against the income of Sagar Vijay Contract and further claimed that the net loss which was mainly on account of depreciation amounting to Rs. 9,55,59,728 should be carried forward.
6. The appellant submitted before the Deputy Commissioner that article 111 of the Treaty being a specific provision applicable to the appellant in respect of IDA Contract, it shall have overriding effect on the deeming provision introduced in Section 44BB by the Finance Act, 1987 with effect from 1-4-1983. The Deputy Commissioner, in the assessment order, held that Section 44BB is more specific than article 111 and thus overrides the Treaty, and applied 10% net profit rate as per Section 44BB of the Income Tax Act. With regard to Sagar Vijay Contract, the appellant submitted that article XVI of the Treaty provides for the taxability of fees for technical services after deduction of all expenses incurred in India including the travel expenses of expatriates and fees paid to the counsels which were incurred in India. The learned Deputy Commissioner applied the provisions of article XVI on Sagar Vijay Contract by treating the proceeds as fees for technical services and restricting the expenses incurred in India.
7. On an appeal before Commissioner of Income-tax, it was submitted:-
(a) That the income from the proceeds of IDA Contract should be computed in accordance with the provisions of article 111 of the Indo-French and not as per deeming Section 44BB in view of article XIX of the Treaty.
(b) That the business income of IDA is to be computed as per Income-tax Act and Rules subject to deduction of all expenses including executive and overhead expenses as per article 111.
(c) That depreciation is a charge against the profits and is to be allowed on the same basis and rates as applicable to residents of India on the principle of non-discrimination as per article XXI of the Treaty.
(d) That the depreciation on the Rig IDA is to be computed at cost as the Rig was neither operated in India before nor any depreciation claimed earlier.
(e) That the loss of IDA is to be set off against the net income of Sagar Vijay contract.
(f) Alternatively the income of Sagar Vijay contract should be taxed on the basis of 10% of deemed income as per Section 44BB if Section 44BB overrides article XVI of the Treaty.
(g) That the Deputy Commissioner was in error in charging interest under Section 217 as no advance tax was payable. Since the entire proceeds were subject to tax deduction at source.
The Commissioner of Income Tax (Appeals) held as under:-
(a) That Section 44BB does not override article 111 of the Treaty for the computation of income of IDA contract.
(b) That industrial or commercial profits arising out of operations carried out through IDA are to be computed as per article 111 after deducting the expenses incurred from the gross proceeds.
(c) That depreciation being the wear and tear of the Rig is an outgoing of the business and is allowable on straightline basis on accounting principle than as per the provisions of Income-tax Act.
(d) That the wear and tear of the rig and its quantification is to be arrived at with reference to its cost, its age, the nature of asset, the condition in which it is used, its maintenance with the age factor being predominant. The wear and tear in each year of the use outside India should be deducted in ariving at the actual state of the rig before its use in India.
(e) That straightline method of determination of depreciation to be adopted without recourse to the provisions of Income-tax Act. The learned CIT(A) set aside the assessment with the above directions.
8. The assessee being still aggrieved has brought the matter in appeal raising several grounds as per memo, of grounds of appeal. At the time of hearing of appeal, Shri Puri, the learned counsel appearing for the assessee submitted that depreciation, while computing income from IDA contract under the treaty, be allowed as per provisions of the Income Tax Act. He further submitted that in case this main submission is found acceptable, the other grounds may be taken as not pressed. Shri Puri drew our attention to various articles of the treaty, provisions of Section 90 of the Act, Circular No. 330 dated 2-4-1992 and to the decision of Hon'ble Supreme Court in the case of CIT v. Strain Products Ltd. [1966] 60 ITR 156.
9. On careful consideration of rival submissions of parties, we are of view that assessee's claim is well founded and should be accepted. We record our reasons for arriving at above conclusion.
10. The following provisions of the Treaty dated March 26, 1969 between the Government of India and the Government of French Republic may be extracted :
Sub-article (2) of Article II:
In the application of the provisions of the present agreement in either Contracting State, any term not otherwise defined in the present agreement shall, unless the context otherwise requires, have the meaning which it has under the laws in force in that Contracting State relating to the taxes which are the subject of the present Agreement.
Sub-article (3) of Article III:
In determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deduction all expenses, wherever incurred, reasonably allocable to such permanent establishment, including executive and general administrative expenses so allocable.
Sub-article (1) of Article XIX :
The law in force in either of the Contracting State will continue to govern the taxation of income in the respective Contracting States except where express provisions to the contrary is made in the present Agreement.
Article XXI:
The nationals one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other Contracting State in the same circumstances are or may be subjected.
In Circular No. 333 dated 2-4-1982 it is provided as under:-
2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income Tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under Section 90 of the Income Tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the country have been made in the agreement.
In the case of CIT v. Davy Ashmore India Limited [1991] 190 ITR626, the Hon'ble Calcutta High Court held as under :-
Thus where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income Tax Act. Whether there is no specific provision in the agreement, it is the basic law, i.e. the Income Tax Act, that will govern the taxation of income.
11. From the above, it is clear that income/loss from operation of IDA was to be computed as per provisions of the Treaty under the head "Industrial or commercial profits". In fact, the learned C1T(A) has held so and his finding to the above fact has not been disputed by either of the parties. It is further not in dispute that the depreciation has to be allowed as an item of expenditure for computing reasonable profits. The quantum of depreciation to be allowed is in dispute. At what rate and on what written down value (WDV) the depreciation is to be computed is to be determined. The learned C1T(A) held that actual "wear and tear of the rig" both in India and outside India should be taken into account for quantification of depreciation. The assessee, on the other hand, contends that depreciation be allowed as per provisions of Income Tax Act. In other words, it is claimed that depreciation be computed with reference to Section 32(1) read with Section 43(6) and allowed as per the rate prescribed in the schedule to the Income Tax Rules. For working out WDV, actual cost of rigs and other machinery be taken into account and not depreciation allowed outside India under any law other than those mentioned in Sub-section (6) of Section 43 of the Indian Income-tax Act. On careful consideration of provision of double taxation treaty and income-tax law, we are inclined to agree with the assessee.
12. The Assessing Officer or CIT(A) in their orders, or learned D.R. during the course of hearing of appeal, could not bring to our notice any provision in the Treaty defining WDV or providing any method for computation of depreciation. On the other hand, Sub-article (2) of article II extracted above, clearly provides that terms not defined in the agreement will have the meaning which these should have under the law in the Contracting State. Here, for our purposes, "Contracting State" is India and relevant law is Income Tax Act, 1961. Thus there is no scope but to refer to the Indian Income-tax Act, 1961 for adopting written down value and rates at which depreciation should be allowed. Sub-article (3) of article III further provides that while determining commercial profits, all reasonable deductions are to be allowed. It is difficult to contend that provisions relating to allowance of depreciation under the Indian Income-tax Act for computing business income do not relate to reasonable deduction. The Circular No. 333 dated 2-4-1982 of CBDT and decision of Hon'ble Calcutta High Court in the case of Davy Ashmore India Ltd. (supra) also enjoin that basic law, i.e., Income-tax Act will govern the taxation of income where there is no specific provision in the agreement governing the situation. The other article XXI relied upon by the assessee also supports the view of the assessee. The said article provides that national of other State cannot be subjected to more burdensome taxation than the national of the Contracting State under similar circumstances. If the assessee was Indian national, the depreciation was required to be allowed at cost or WDV as per the rate prescribed under the Indian Income-tax Act without deduction of depreciation, if any, allowed under the foreign law. Having regard to the article referred to above, there is no question of giving a different treatment to the foreign company and putting on it a heavier burden of tax. Thus, even when commercial profits are determined with reference to Treaty, the depreciation is to be computed and allowed under the Income-tax Act. We, therefore, see no bar or justification for not entertaining the claim of the assessee to allow depreciation under the Indian Income-tax Act.
13. Our aforesaid conclusion is further strengthened by provision of Sub-section (2} to Section 90 of the Act relating to double taxation avoidance treaties inserted by the Finance (No. 2) Act, 1991 with effect from 1-4-1972. The said sub-section provides as under :-
Where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) for granting relief of tax, or as the case may be, avoidance of total taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
[Emphasis supplied] It is clear from the aforesaid sub-section that a foreign national governed by avoidance of double taxation treaty is entitled to ask for application of provision of this Act, "to the extent they are more beneficial to that assessee". The sub-section is applicable only to the cases governed by avoidance of double taxation treaty. There is thus no justification for holding that foreign nationals, having selected to be governed by double taxation treaty cannot ask for application of any provision of the Income-tax Act even when such provision is beneficial to them. The choice of selection is clearly with the foreign nationals and not with revenue authorities. The intention of the Legislature and spirit to grant benefit and choice to the foreign national is manifestly clear. In view of above provision and other reasons recorded earlier, we direct the Assessing Officer to allow depreciation to the assessee as per provisions of the Income-tax Act.
As we have accepted the main ground of the assessee, the other grounds raised in the Memo are not being considered.
14. In the result, assessee's appeal is allowed in terms stated above.