Income Tax Appellate Tribunal - Mumbai
Credit Llyonnais vs Deputy Commissioner Of Income Tax on 28 February, 2004
Equivalent citations: [2005]94ITD401(MUM), (2005)94TTJ(MUM)1074
ORDER
Pramod Kumar, A.M.
1. This is an appeal filed by the assessee and is directed against the order, dt. 31st March, 1995, passed by the CIT(A) in the matter of assessment Under Section 143(3) of the IT Act, 1961, for the asst. yr. 1991-92.
2. By way of this appeal, the assessee has raised following grievance :
Based on the facts and in the circumstances of the case, the appellant respectfully submits that the learned CIT(A) erred on the following grounds :
1. In disallowing the licence fees of Rs. 5,00,000 paid to the SEBI.
2. In disallowing the broken period interest of Rs. 3,40,02,853.
3. In disallowing the deduction claimed Under Section 80M amounting to Rs., 2,70,91,836.
3. We will first take up assessee's grievance against CIT(A) confirming the disallowance of deduction Under Section 80M amounting to Rs. 2,70,91,836. This is the main issue in this appeal, since for the reasons we shall set out later in this order, the remaining issues are the issues covered by the binding judicial precedents.
4. There is no dispute about the position under the IT Act to the effect that deduction Under Section 80M is available only to the domestic companies. As far as the provisions of the IT Act are concerned, the assessee-company being admittedly a foreign company within meanings of that expression Under Section 2(23A) of the Act is not eligible for deduction Under Section 80M. The assessee's contention is that in view of the provisions of Article 21 of the applicable India France Double Taxation Avoidance Agreement (DTAA) regarding non-discrimination and in view of the fact that provisions of Section 80M seek to discriminate against foreign companies by allowing this deduction only for domestic companies, the deduction Under Section 80M is required to be extended to the foreign companies covered by the India France DTAA. This is a purely legal contention. The AO has rather summarily rejected this contention by relying on the plain wordings of the statute and by stating the legal position that concession is given to the foreign companies by charging the tax at a lower rate Under Section 115A. The CIT(A) has also rejected the contention. In his brief order he has observed as follows :
"I have carefully considered the submissions. As regards the decision the same is not directly applicable. Otherwise also, I am of the view that a specific provision normally overrules general provision. Since Section 80M which is specifically applicable for domestic companies, if this benefit is not allowed to the appellant bank, which is a foreign company, the question of discrimination does not arise. No interference is, therefore, necessary with the action of the AO."
The assessee is not satisfied with the orders of the authorities below and is in further appeal before us.
5. We have heard the rival contentions and perused the material on record. We have also duly considered the legal position in the light of the provisions of the applicable India France DTAA and the IT Act, 1961.
6. The applicable India France DTAA is India France DTAA, dt. 26th March, 1969 [reported in (1970) 76 ITR (St) 1]. In this tax treaty, Article 21 provided as follows :
"Article 21 The nationals of one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirements 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 particular, the citizens of one Contracting State who are subjected to tax in the other Contracting State shall be entitled to the same extent as the citizens of that other Contracting State, to any exemption, deduction, credit or other allowance accorded in consideration of the family circumstances."
A plain reading of the above tax treaty provision makes it clear that it deals with discrimination on the ground of nationality alone. To put it in simple words, it provides that nationals of France in India will not be subjected to any taxation or any requirement connected with such taxation, which is more burdensome than similar taxation or requirement in connection therewith on an Indian national in India. The same principle would naturally also apply on Indian nationals in France vis-a-vis French nationals in France. As second limb of the non-discrimination clause lays down, this non-discrimination clause is particularly aimed at "exemption, deduction, credit or other allowance accorded in consideration of the family circumstances", such as, allowances in respect of dependents, etc., which anyway do not find place in the Indian tax laws. The non-discrimination clause seeks to ensure that the Contracting States do not decline any such allowance only on the ground of taxpayer's nationality. That will be the situation, for example, in a case in which dependent's allowance in computation of total income is allowed only to the nationals of that country and the same is not extended to the nationals of the other country who are residents in the first country. In the Indian perspective, such a situation may arise when, for example, deduction Under Section 80DD, for deduction in respect of maintenance of a dependant with disability, is restricted to Indian nationals only. In such an eventuality, in view of the provisions of Article 21, the benefits of that provision would have been available to the French nationals as well. Another situation in which the provisions of Article 21 may affect the provisions of the IT Act is perhaps the entitlement for deduction Under Section 80R which is available only to an Indian citizen. Since one of the necessary conditions for entitlement of deduction Under Section 80R, in respect of remuneration from certain foreign incomes in the case of professors and teachers, etc. is an Indian citizenship, this section appears to discriminate on the ground of nationality. It is interesting to note that while Sections 80R and 80RRA deal with the citizenship also, in many similar sections such as Section 80QQB, Section 80RR, Section 80RRB, there is no reference to citizenship and the requirements are only with respect of residence. It is also very important to appreciate that such Indian and French nationals, as are compared for the purpose of finding out whether or not taxation, etc., of one of which is more burdensome than the other, must be 'in the same circumstances'. Elaborating upon the scope of expression 'in the same circumstances', OECD commentary, inter alia, observes as follows :
"The expression 'in the same circumstances' refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of ordinary taxation laws and regulations, in substantially similar circumstances both in law and on fact..... The expression 'in the same circumstances' would be sufficient by itself to establish that a taxpayer who is a resident of a Contracting State and one who is not a resident of a Contracting State are not in the same circumstances. In fact, whilst the expression 'in particular with respect to residence' did not appear in the 1963 Draft Convention or in 1977 Model Convention, the member countries consistently held that, in applying and interpreting the expression 'in the same circumstances', the residence of the taxpayer must be taken into account. However, in revising the Model Convention, the Committee on Fiscal Affairs felt that a specific reference to the residence of taxpayer would be useful clarification as it would avoid any possible doubt as to the interpretation to be given to the expression 'in the same circumstances' in this respect."
In the light of the above, in applying this non-discrimination clause, what is to be really seen is whether two persons who are residents of the same State are being treated differently solely by reason of having a different nationality, because differential tax status on the ground of residence of the taxpayer cannot be construed as non-discrimination. In other words, when different tax treatments are being given to the assessees on the basis of criterion connected with requirements regarding residence of the taxpayer, it will not be covered by the scope of non-discrimination clause. This is so stated in the authoritative commentary issued by the OECD itself which is one of the bodies making immense contribution to the development of standardisation of tax treaties and thus developing, what is often termed as, 'international tax language'. The importance of OECD commentary in interpretation of tax treaties can hardly be overemphasised. This proposition finds support from the judgment of Hon'ble Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust v. CIT (1983) 144 ITR 146 (AP) and Tribunal decisions in the cases of Graphite India Ltd.. v. Dy. CIT (2003) 78 TTJ (Cal) 418 : (2003) 86 ITD 384 (Cal) and Dy. CIT v. ITC Ltd. (2003) 83 TTJ (Cal) 798 : (2003) 85 ITD 162 (Cal). In any event, on a plain reading of the provision also, it is unambiguous that it deals with discrimination on account of nationality alone. It is so stated in clear words of the DTAA.
7. The question then is as to on what basis is a company classified as a domestic company and a foreign company under the IT Act. Is it based on the nationality simplicitor or is it on the basis of some other criterion ? Does this classification depends on requirements connected with residence, or is it the nationality of a company which decides such company being classified as a 'domestic company' or a 'foreign company'. This question is very important because the contention of the assessee is that a foreign company, is not entitled to deduction Under Section 80M and that the said deduction is available only to the domestic companies. The availability or non-availability of deduction Under Section 80M is entirely dependent on in which of these mutually exclusive categories an assessee-company falls. It is, therefore, important to ascertain whether this classification is dependent on the nationality of a company because that will be the only situation in which non-discrimination clause can be invoked. In other words, in order to invoke the non-discrimination clause in Article 21 reproduced above, it is sine qua non that the aforesaid non availability of deduction Under Section 80M has to be on the ground of nationality alone and nothing more than that.
8. Section 2(22A) of the IT Act describes a domestic company as "an Indian company, or any other company (emphasis, in italicized in print, supplied by us now) which, in respect of its income liable to tax under this Act has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income". Section 2(23A), on the other hand, describes a foreign company as "a company which is not a domestic company". The very definition of 'domestic company' admits non-Indian companies to be treated as 'domestic companies'. Under Section 2(17)(ii), company also includes, in addition to Indian companies, 'any body corporate, incorporated by or under the laws of a country outside India'. Such a company, by definition, is very well entitled to be treated as a domestic company on satisfying the condition laid down Under Section 2(22A) of the Act. It is thus clear that even a company incorporated under the laws of France can be, in certain situations, treated as a domestic company which is entitled to deduction Under Section 80M of the Act. Therefore, the crucial factor for deciding whether a company is a domestic company or a foreign company, is certainly not the nationality. Even a French company, which has made the prescribed arrangements, for the declaration and payment within India, of the dividends (including dividends on preference shares) payable out of such income can be treated as a domestic company under the Indian IT Act and the deduction Under Section 80M will then be available to such French company. The true test for deciding whether or not a company is eligible for deduction Under Section 80M is not the 'nationality of the said company, but it is whether or not it has made the prescribed arrangements for the declaration and payment within India, of the dividends (including dividends on preference shares) payable out of such income. This kind of a classification, under the scheme of non-discrimination clause in the applicable India France DTAA, cannot be considered as a discrimination on the ground of nationality.
9. During the course of hearing before us, we shared our, prima facie impression with the learned Representatives that the discrimination so far as non-availability of Section 80M to the foreign companies is concerned, if at all that can be termed as a discrimination, is not on the ground of nationality but is on the ground as to whether or not the company in question has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of income liable to tax in India have not been made. Learned counsel's reply was that since the appellant company does not have any shareholders in India, there is no question of making any prescribed arrangements for the declaration and payment, within India, of the dividends. It thus implies that conditions Under Section 2(22A) of the Act, for being classified as a domestic company, are satisfied.
10. This argument, however, does not impress us. We are not at present dealing with the question as to whether the assessee is required to be treated as a domestic company or not. It is an admitted and undisputed position that the assessee is a foreign company. It is not open to us to go into that question. In any event, once prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of income liable to tax in India, the company in question cannot be treated as a domestic company. It follows that when income of a company is not covered by declaration and payment, within India, of the dividend out of such income, such a company cannot be treated as a domestic company. This criterion for a company being treated as a 'domestic company' under the Indian IT Act, in our humble understanding, is based on requirements connected with residence and not nationality. The only question raised before us and which is the question that was required to adjudicate upon, is whether or not the provisions of Section 80M are indiscriminatory provisions vis-a-vis French companies assessed to tax in India, and, therefore, in view of the provisions of Article 21 of the applicable India France DTAA, the same should also be extended to French companies assessed to tax in India. For the reasons set out above, we are of the considered view that the provisions of Article 21 only deal with the cases of discrimination on the ground of nationality and non-availability of deduction Under Section 80M to the foreign companies, i.e., companies which are not domestic companies, have nothing to do with nationality of a company. On the contrary, this classification is at best relatable to requirements connected with residence, which, as stated in the OECD commentary extracted earlier in this order, cannot be a reason enough for invoking the non-discrimination clause, We may add that the provisions of Article 26(1) of the present India France DTAA [(1994) 209 ITR (St) 130] is materially similar in scope. Accordingly, non-discrimination clause in the India France DTAA cannot be invoked in the cases where provisions of Indian IT Act are more favourable to the domestic companies vis-a-vis foreign companies. Once we come to this conclusion, it follows that the case of non-availability of deduction Under Section 80M cannot be covered by the non-discrimination clause under the India France DTAA. We, therefore, see no need to address ourselves to the merits of assessee's grievance about discrimination against foreign companies, even if such a discrimination actually exists.
11. The assessee's grievance against CIT(A) declining the deduction of Rs. 2,70,91,836 Under Section 80M and assessees reliance on Article 21 of the applicable India France DTAA, in support of such a grievance, is not sustainable in law. We, therefore, reject the same.
12. As regards the disallowance of licence fees of Rs. 5,00,000 paid to the Securities and Exchange Board of. India, it is an undisputed position that the said fees is paid for "membership of assessee-bank's merchant banking division" and the disallowance has been made on the ground that "membership of SEBI is an asset of enduring nature". Learned Representatives agree that this issue is now covered in favour of the assessee by Tribunal's decisions in the cases of Asstt. CIT v. Marvel Equity (P) Ltd. (ITA No. 271/Bom/2000, asst. yr. 1996-97 order dt. 21st Aug., 2001 and Dy. CIT v. Magnum Equity Broking (P) Ltd. (ITA No. 1765/Bom/2000, asst. yr. 1997-98, order dt. 4th March, 2002). In these decisions, it is held that the membership fees paid for OTC Exchange of India Ltd. is revenue expenditure in nature. By following the ratio of these decisions, the payment made to the SEBI for membership of the merchant banking division is also required to be treated as revenue expenditure. Learned Departmental Representative, however, relied upon the order of the AO and supported the same.
13. We see no reasons to take any other view of the matter than the view taken by the Tribunal in the cases of Marvel Equity (P) Ltd. (supra) and Magnum Equity Broking (P) Ltd. (supra). Respectfully following the same, we direct the AO to delete the disallowance of Rs. 5,00,000 in respect of SEBI membership fees. The grievance of the assessee is justified and is upheld. The appellant gets relief accordingly.
14. Coming to the assessee's grievance regarding disallowability of broken period interest of Rs. 3,40,02,853, the learned representatives fairly agree that the said issue is covered in favour of the assessee by Hon'ble Bombay High Court's judgment in the case of American Express Banking Corporation v. CIT (2002) 258 ITR 601 (Bom). Learned Departmental Representative, however, placed reliance on the order of the AO.
15. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, we direct the AO to delete the disallowance of Rs. 3,40,02,853 on account of broken period interest and give the consequential effect in terms of the said judgment in the case of American Express Banking Corporation (supra). This grievance of the assessee is, therefore, upheld in principle. The AO will give effect accordingly.
16. In the result, the appeal is partly allowed.