Income Tax Appellate Tribunal - Mumbai
Mashreq Bank Psc., Mumbai vs Assessee on 15 January, 2016
I.T.A. No. 1342/Mum/2006
Assessment year: 2002-03
Page 1 of 25
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI L BENCH, MUMBAI
[Coram: Pramod Kumar AM and Pawan Singh JM]
I.T.A. No. 1342/Mum/2006
Assessment year: 2002-03
Mashreq Bank PSC ................................Appellant
1305 Raheja Centre, Nariman Point,
Mumbai 400021 [PAN: AAACM4303M]
Vs.
Deputy Director of Income Tax,
International Taxation 3(2), Mumbai ...........................Respondent
Appearances by:
M Agarwal for the appellant
Jasbir Chauhan for the respondent
Date of concluding the hearing : January 7, 2016
Date of pronouncing the order : January 15, 2016
O R D E R
Per Pramod Kumar, AM:
1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 15th April, 2005 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2002-03. The appeal is time barred by 7 days but the assessee has moved a condonation petition. Having heard perused the same and having considered the rival contentions on the same, we are inclined to condone the delay and proceed to decide the matter on merits.
2. In the first ground of appeal, grievance of the assessee is that the CIT(A) erred in upholding the disallowance of "deduction of head office expenses of Rs 1,78,07,340 allocated to Indian branches", that "entire amount of Rs 1,78,07,340 should be allowed as per the provisions of Article 7(3) of the convention between the Government of India and the Government of UAE", and that "in computing the taxable income in India, the tax treaty allows a deduction for all the expenses wherever incurred and reasonably allocated to the permanent establishment, including its share of executive and general administrative expenses".
3. This issue requiring our adjudication is set out in a rather narrow, but somewhat peculiar, set of facts. The assessee before us is a banking company incorporated in, and tax resident of, the United Arab Emirates which is also carrying on business in India through its branches in New Delhi and Mumbai. During the course of the assessment proceedings, the Assessing Officer noted that while the assessee has not claimed deduction under section 44C, which is restricted to 5% of its profits, as there was no profit in the current year, it was noted that the assessee has contended, in a note appended to the income tax return, "the I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 2 of 25 claim is made without prejudice to their claim that as per Article 7 of the Double Taxation Avoidance Agreement between the Governments of India and UAE, all expenses incurred for the purpose of the business of the, including the executive and administration expenses, are allowable without applying the limit of 5% prescribed in section 44C of the Income Tax Act". It was noted that, according to the certificate issued by the auditors of the assessee company, the assessee's share of head office expenses was Rs 1,78,07,340. While the assessee stated his claim in document attached to, and forming part of, the income tax return, no such claim was actually made in the income tax return. The Assessing Officer noted this claim of the assessee but, consistent with the treatment accorded to similar claim in the preceding assessment years, rejected the same. Aggrieved, assessee carried the matter in appeal but without any success. Learned CIT(A) rejected the claim by observing, inter alia, as follows:
4. I have carefully examined the appellant's submissions. I find that in the preceding assessment year 2001-02, a similar ground was considered in para 4 and 5 by CIT(A) in which it was observed that on the identical facts, the issue has been decided against the appellant in the earlier years continuously from assessment year 95-96, 96-97 and 97-98. The extract of the order dated 14.3.2000 for assessment year 1995-96 was also given in which it was held as follows:
As there is no express provision in the DTAA which prohibits application of Section 44C of the Income Tax Act, there is no reason to hold that the provisions of Section 44C would not be applied to the case of the appellant. Considering these facts, the order of the AO allowing the head office expenses at 5% of the total income in order is confirmed
5. The facts remaining the same in AY 2002-03, the AO's action in not accepting the claim of the allowance of Head Office expenses of Rs 1,78,07,340 is confirmed....
4. The assessee is aggrieved and is in appeal before us.
5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
6. The short issue that we are thus required to adjudicate is whether or not the disallowances set out under section 44C, or for that purpose- any artificial disallowances under the provisions of the Income Tax Act as applicable to a resident assessee, will come into play in computation of taxable income of the assessee under Article 7 also. This issue had come up consideration before a coordinate bench of this Tribunal, in assessee's own case for the assessment year 1996-97, and, vide order dated 13th April 2007, the issue was decided against the assessee. This decision is a reported decision and the relevant citations is Mashreq Bank Vs JDIT [(2007) 14 SOT 1 (Mum)]. In this decision, the coordinate bench had observed, inter alia, as follows:
6. ......... .......we take note of the provisions of Article 25(1) of the tax treaty read with observations made by another co-ordinate bench in Mitsubishi's case I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 3 of 25 (supra). The provisions in India UAE tax treaty are specific and admit no ambiguity on question of applicability of domestic tax laws in the absence of specific provisions to the contrary under the tax treaty.
7. When this was pointed out to the learned counsel, our attention was drawn to the decision of Kolkata Special Bench in the case of ABN Amro Bank Vs ADIT (97 ITD SB 89) wherein, on materially identical provision, the Special Bench has held that provisions of Section 40(a)(i) are not applicable in the case of interest paid by the banks. In our considered view, however, the ABN Amro Special Bench decision (supra) is certainly not an authority for the proposition that disallowance under section 40(a)(i) are impermissible under the provisions of India Japan tax treaty. As a matter of fact, in the said decision, the Special Bench held that the provisions of Section 195 do not come into the play in the case of Branch Head office transactions because these are transactions from self to self. The, Special Bench, inter alia, observed as follows:
30. The assessee in this case is the corporate body and its branches are paying interest to its Head office and other offshore Branches i.e., the payment is by one wing of the assessee to its other wing or so to say by one hand to another. The tax is to be deductible under Chapter XVII-B of the Act and in case of a payment to non-resident it is section 195 of the IT Act. This section provide that "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries' shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force." The Branch/PE of the assessee in India is not a person in legal terminology. The person is the Corporate Body-
ABN Amro Bank NV and not its Branch or the PE. This is also evident from the fact that assessment in this case is made on the Corporate Body ABN Amro Bank NV and not on its Branch or PE. We, therefore, find force in the assessee's contention that the provisions dealing with deduction of tax at source under section 195 presupposes the existence of two distinct and separate entities which is absent in the present case. On both the grounds therefore section 40(a)(i) does not come into play. Disallowance of interest on this by invoking the provisions of this section would not be justified.
8. As regards the question of impermissibility of artificial disallowances by the virtue of the provisions of Article 7(3), there is no specific finding by the Special Bench. We reproduce below the entire paragraph, on which learned counsel has placed the reliance, for ready reference:
50. On a close reading of these provisions, we find that clauses 1, 2, 5, 6 and 7 of Article 7 of the Japanese DTAA are similarly worded as clauses 1, 2, 4, 5 and 6 of Netherlands DTAA. Clause 3 of the Japanese DTAA merely I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 4 of 25 incorporates the first part of clause 3(a) of Netherlands DTAA and the proviso placing a restriction by the law of the State in which PE is situate are not incorporated. Again, clause 3(b) of Netherlands DTAA which prohibits allowance of certain expenditure is also missing in Japanese DTAA. There is no other material difference between the two treaties. As pointed out by the learned counsel of the assessee, there are no restrictive covenants in Article 7 for allowance of expenses incurred for the purposes of PE either by the prefix of the words "in accordance with the provisions of the law of that State"
or by the suffix words "and subject to limitations of taxation laws of that State". This may be one of the other alternate reasons for not invoking the provisions of section 40(a)(i) of the Income-tax Act for disallowing the payment of interest in computing the income of the assessee through the PE. However, here also, the deeming fiction of treating the PE as a different and separate entity dealing wholly independently with the enterprise in clause 2 of the Article 7 of Japanese DTAA or for the specific purpose of computing the income attributable to the PE and not for any other purposes. Therefore, for the reasons stated above while dealing with the Netherlands DTAA, we hold that no tax was required to be deducted under section 195 of the Act from the payment of interest by the PE to its head office or other offshore branches of the assessee-enterprise, Bank of Tokyo. We, therefore, uphold the order of the CIT(A) in vacating the order under section 201 of the Act by holding that the assessee was not in default in deducting the tax at source. (emphasis by underlining supplied by us).
9. A plain reading of the above paragraph indicates that while the Special Bench has indeed taken note of the argument that in terms of the provisions of Article 7(3), the provisions of Section 40(a)(i) donot apply, the decision of the Special Bench rests on the principle, as laid down while dealing with Netherlands treaty, that payments from self to self cannot saddle the assessee with tax withholding liability. We are in respectful agreement with the principle so laid down by the Special Bench. We have noted that the Tribunal has not given any finding - direct or even indirect - approving the argument that artificial disallowances are not permissible under the provisions of the India Japan tax treaty. The Special Bench has merely speculated about the reasons of the Assessing Officer's stand about non deduction of tax at source, and has not adjudicated upon the same. The Special Bench did not see, and very appropriately so, any need to adjudicate on this ground, because irrespective of whether or not provisions of section 40(a)(i) laying down disallowance of expenditure in respect of which tax withholding liability is not discharged by the assessee, apply to the assessee, there was no tax withholding requirement on payments from branch office to head office, or vice versa. The question about applicability of section 40(a)(i), therefore, was entirely academic in this context. Merely because the Special Bench has noted an argument, even though it has not adjudicated upon the same, it cannot be inferred that the Special Bench has approved the said argument. We reject the plea of the learned counsel. The next line of defence by the learned counsel is his reliance on the Tribunal's decision in the case of Siemens AG Vs ITO (22 ITD SB
87). It is submitted that in this decision, the Tribunal has held that definition of I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 5 of 25 'royalty' under the Income tax Act will not have any bearing in deciding the scope of expression 'royalty' for the purposes of the tax treaty. We are in respectful agreement with the views so stated by the Tribunal, but we are unable to comprehend as to how this proposition can enable us to ignore the specific provisions of the India UAE tax treaty. Article 25(1) of the applicable India UAE tax treaty [(1994) 205 ITR (St) 49] specifically provides that "the laws in force in either of the contracting state will continue to govern the taxation of income in respective contracting state except where express provisions to the contrary are made in the present agreement". We are, therefore, not persuaded by the submissions of the learned counsel to the effect that provisions of the Income Tax Act have no application in the matter. In view of this specific provision being a part of the India UAE tax treaty, it cannot be said that by the virtue of Article 7(3) of the treaty which provides that "in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere", the provisions of Indian Income Tax Act will not apply with regard to deductibility of expenses. In this view of the matter, and respectfully following the Mitsubishi decision (supra), we hold that the provisions of domestic tax laws in India as also in UAE will continue to apply except to the extent specific contrary provisions are set out in the India UAE tax treaty. The assessee thus derives no advantage from the provisions of Article 7(3) so far as freedom from artificial disallowances under section 40A(3), s.40A(12), s.37(2A) and s. 43 B is concerned. As there is no specific contrary provision in the treaty, these and similar other restrictions on deductibility of expenses under the Indian Income Tax Act continue to be applicable, in computation of profits attributable to Indian PEs of UAE tax residents. The plea of the assessee is thus devoid of legally sustainable merits.
10. The Canadian Federal Court had an occasion to deal with the question whether a tax treaty, when providing that 'in determining the profits of a PE, there shall be allowed as deduction, expenses which are incurred for the purposes of the PE, including executive and general administrative expenses so incurred, whether in the state in which PE is situated or elsewhere' enable the deduction of items not permitted by domestic law, so that non residents are better off than residents. Even without the aid of a provision similar to one which exists in Article 25(1) of the India UAE tax treaty, the Court answered this question in negative and decided the issue against the tax payer. In the case of Utah Mines Vs The Queen [ 92 DTC 6194, (1992) 1 CTC 306 ], and while dealing with the issue whether in view of the provisions of Article 7(3) of Canadian US tax treaty, royalties paid by PE of US company to the provincial government, which were not tax deductible under the Canadian domestic tax law, could be allowed as deduction, the Court observed:
The interpretation proposed by the appellant, on the other hand, would have the effect of giving a US taxpayer with a permanent establishment in Canada a more favourable tax treatment than its Canadian competitor engaged in the same business in this country Such a result would not be in accordance with I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 6 of 25 the policy expressed in the preamble to the Convention and indeed would be contrary to it. It would take much clearer language than a simple reference to 'all expenses' to bring it about.
11. In a situation, therefore, in which a specific provision like the one in Article 25(1) in India UAE tax treaty exists, there cannot be any occasion to ignore the limitations on deduction of expenses under the domestic tax legislation. That would be a case of, what can be termed as, reverse discrimination. Just as much a discrimination against a non resident assessee is undesirable, a discrimination against the resident assessee is also not desirable. As is the underlying philosophy of the tax treaties, there should be a level paying ground for everyone, which must include domestic enterprises as well. When we put this to the learned counsel, it was submitted that it is not clear as to what was the language in the relevant DTAA and whether the Government of Canada has used different terminology in different tax treaties. Learned counsel also submitted that this 'reverse discrimination', as we term it, is not only permissible under the tax treaties, it is also permissible under the Income Tax Act. Our attention was then invited to the provisions of Section 10(15) which provides for certain exemptions only to non residents, as also the provisions of section 115A which provides for lower rates of taxes for certain category of incomes of the non residents. Learned counsel has also invited our attention to different phraseology employed in different treaties, and contended that a uniform meaning given to all these different expressions will make differentiation in expression meaningless. It is also contented that once a tax treaty is legally entered into by a Contracting State, it is duty of the Contracting State to apply the same in letter and in spirit. Our attention is invited to the CBDT circular no 333 which is also referred to by some of the Tribunal decisions cited by the learned counsel. Learned counsel submits that it cannot be open to a Contracting State to shy away from implementing a tax treaty on the ground that the consequences of its implementation could be contrary to the intentions of the treaty. We are thus urged to interpret the provisions of Section 7(3) to mean that all the expenses, irrespective of the limitations under the domestic tax laws, incurred by the PE are to be allowed as deduction in computing the taxable profits of the PE.
12. We are not impressed with this line of reasoning either. As far as learned counsel's reference to exemptions available to non resident tax payers, under the Indian Income tax Act, is concerned, it is important to bear in mind that an exemption for aliens essentially seeks to restrict host country's jurisdiction to tax, and it is well settled that, as has also been observed by Prof Kees Van Raad, "while nationality is virtually unconditionally employed as a ground of non discrimination,....., it is not related to the use of nationality as jurisdictional basis for income taxes..." (Non discrimination in Income Tax Law - Prof Kees Van Raad, at page 15). Therefore, non taxability of any of an aliens income sourced in the host country can not be viewed as discrimination in his favour. It is, therefore, too far fetched to suggest that availability of certain tax exemptions to aliens shows that reverse discrimination is generally permissible under the scheme of Indian Income Tax Act. We reject this proposition. As far as learned counsel's reference to Section 115 A is concerned, this is also I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 7 of 25 fallacious inasmuch as it does not take into the fact that the related incomes are taxed on gross basis in the hands of the non residents taxpayers and net basis in the hands of the resident tax payers. Dealing with this aspect of the matter, a co ordinate bench of this Tribunal, in the case of DCIT Vs Boston Consulting Group Pte Ltd (94 ITD 31) has observed as follows:
19. Section 44D was brought on the statute, w.e.f. 1st April 1976, by the Finance Act, 1976. By the same Finance Act, section 115A was also introduced. Section 44D, as we have already seen, provides for taxation of royalties and fees for technical services on gross basis and without allowing any deduction for expenses incurred in earning the said income. Section 115A, on the other hand, provides for a special rate of tax on certain incomes including the income from royalties and fees for technical services. The provisions of these two sections are required to be read together inasmuch as while one section lays down that no deductions are permissible in computation of income from, inter alia, royalties and fees for technical services, the other section provides for a lower rate of tax from the said income. These are complementary provisions in that sense. These two sections are to be read in conjunction and not in isolation. Explaining the scope and nature of these sections, Board Circular No 202 dated 5th July, 1976 (105 ITR Statute 17) stated that:
"Special provision for computing income by way of royalties and technical service fees in the case of foreign companies - New section 44D.
26.1 Hitherto, income by way of royalties received under agreements made after the 31st March, 1961, and approved by the Central Government was taxed in the hands of foreign companies at the rate of 52.5 per cent (income-tax 50 per cent plus surcharge 2.5 per cent). Income by way of technical service fees received under agreements made after the 29th February, 1964, and approved by the Central Government was also taxed at the same rate. In either case, the taxable income was determined on net basis, i.e., after allowing deduction in respect of costs and expenses incurred for earning the income.
26.2 The Finance Act has inserted a new section 44D in the Income- tax Act, 1961, which lays down special provisions for computing income by way of royalties and fees for technical services received by foreign companies from Indian concerns. . . .
26.3 As regards royalties and technical service fees received under agreements made on or after the 1st April, 1976 (other than agreements which though made on or after that date or regarded as having been made before that date as explained in paragraph 26.2) I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 8 of 25 no deduction will be allowed in computing the income from the aforesaid sources, regardless of whether the agreement has been. . . .
36.1 . . . income by way of royalty or fees for technical services received by them from Indian concerns in pursuance of approved agreements made on or after the 1st April, 1976, will now be charged to tax at flat rates applicable on the gross amount of such income. The rates of income-tax to be applied in respect of such income have been specified in new section 115A of the Income-tax Act and are as follows:
** **
(iii) Income by way of fees for technical services received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1st April, 1976, will be charged to tax at the rate of 40 per cent on the gross amount of such fees."
[Emphasis supplied] The periodic changes in section 44D have been accompanied by the corresponding changes in section 115A. It is thus clear that non deduction of expenses under section 44D, which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under section 115A...."
13. In this view of the matter, the comparison of lower tax rates under section 115A, for the non resident tax payers, with higher tax rates under the Finance Act, for resident tax payers, is irrelevant. In the case of non residents, there were restrictions for deduction of expenses incurred for earning dividend, interest and royalty incomes. It is also interesting to note that when the restrictions under section 44D ceased to be effective from 1st April 2003, the corresponding income, i.e. income from royalties and fees for technical services, was also taken out of the ambit of lower tax rate under section 115A. Therefore, taxability of incomes at a lower rate under section 115 A cannot be viewed in isolation. The relevant incomes are taxed on net basis in the formal case, while taxability is on the net basis in the latter. When tax base is not the same, the comparison of tax rates is meaningless.
14. Let us also not forget the fact that principles governing a tax treaty are quite different vis-a-vis principles governing a tax legislation. Hon'ble Supreme Court, in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706" had an occasion to deal with the principles governing the interpretation of tax treaties. In this regard, Hon'ble Supreme Court held that the principles adopted in the interpretation of treaties are not the same as those adopted in the interpretation of statutory legislation. Their Lordships quoted, with approval, following passage from the judgment of the Federal Court of Canada in the case of N. Gladden v. Her Majesty I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 9 of 25 the Queen 85 DTC 5188, at page 5190 wherein the emphasis is on the 'true intentions' rather than 'literal meaning of the words employed':
"Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular items under consideration are concerned."
In the said judgment, as noted by their Lordships at page 743, the Federal Court of Canada recognized that "we cannot expect to find the same nicety or strict definition as in modern documents, such as deeds, or Acts of Parliament, it has never been habit of those engaged in diplomacy to use legal accuracy but rather to adopt more liberal terms."
15. It is thus clear that one of the basic principles governing the interpretation of tax treaties is that a tax treaty must be interpreted in good faith. Article 31(1) of the Vienna Convention governing the interpretation of tax treaties also lays down that, " a treaty shall be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its objects and purpose". It is therefore important that undue emphasis should not, in any event, be given to a legalistic and literal approach in interpreting a tax treaty; the effort should always be made to harmonise the interpretation of the words of the treaty with its object and purpose. Viewed in this perspective, in our considered view, it is not possible to proceed on the basis that a discrimination in favour of the non resident tax payer by the host country, without any specific provision to that effect, can be inferred. It is only elementary that a tax treaty is required to be read as a whole and, when the India UAE tax treaty is read as a whole, the scheme of non discrimination is clearly discernable from the scheme of things. It would, therefore, be quite inappropriate to read the provisions of the treaty in such a manner so as to result in discrimination against residents of one of the Contracting States; there can not be any justification for exception to this underlying object of the treaty by reading the provisions of tax treaty in such a manner as to permit discrimination against residents of PE host country. When a treaty explicitly seeks to ensure that there is no discrimination by the host country against a non resident, who is resident of the other Contracting State, it is really incongruous to interpret the treaty in such a manner that host country has to discriminate against its own residents vis-a-vis the residents of the other Contracting State. Such an interpretation will not only be contrary to the provisions of the Vienna Convention but also contrary to the law laid down by the Hon'ble Supreme Court of India, which, in turn, has concurred with Canadian Federal Court on the principles governing tax treaties. For this reason also, the proposition advanced by learned counsel does not meet our approval.
16. The next thing that needs our consideration is learned counsel's suggestion that different phraseology employed in the Indian tax treaties warrant an interpretation in such a manner that a uniform meaning is not given to all these different expressions I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 10 of 25 because differentiation in expression will then be rendered meaningless. Unlike a piece of tax legislation, which is creature of a sovereign state, a tax treaty is a result of bilateral negotiations. Therefore, the wordings of a tax treaty are essentially dependent on the priorities of, and acceptability by, the Contracting States parties to such a tax treaty. It is only elementary that these factors vary from one of set of Contracting States to another set of Contracting States. The same purpose, therefore, can indeed be intended even by radically different phraseology employed in tax treaties to which a particular country is one of the parties. In the case of tax legislation, however, things are quite different, because, as we have emphasized earlier, tax legislations are unilateral acts of the law making bodies, and when a law making body makes even slightest departure from the expression it is used earlier, the normal inference is that such deviation, being a unilateral act, has some specific intent and purpose. The tax treaties being product of bilateral negotiations, deviation in language of the tax treaties entered into by a country, does not necessarily indicate a deviation in objectives and purpose that these tax treaties seek to achieve. It is also not common that some of the Contracting States are too conservative in their approach and insist on certain provisions as a measure of abundant caution (ex abudanti coutela). As regards learned counsel's contention that once a Contracting State enters into a tax treaty it cannot be open to that Contracting State to shy away from implementing such a tax treaty on the ground that the consequences of its implementation could be contrary to the intentions of the treaty, we quite agree with the learned counsel. However, what is needed to be implemented is a clear and unambiguous provision. At best, if there is an ambiguity in the provisions, it needs to be resolved by way of harmonious construction in accordance with the well settled principles of tax treaties. It cannot be, in any event, open to anyone to embark upon the voyage of discovery in search of hidden meanings or intent of parties, not supported by the specific expressions to articulate the same, and then proceed to give life to these inferences- that too in a manner contrary to the scheme of the tax treaty. We donot find any specific provision in the tax treaty which supports learned counsel's understanding about the scope of Article 7(3) ; infact, we find, as we have elaborated earlier, specific provision in the treaty which is quite to the contrary. We, therefore, reject this contention as well.
17. In United Kingdom, Revenue's International Tax Handbook (IH 859) uses exactly the same argument, as was taken by the Federal Court of Canada in the case of Utah Mines (supra), and states that:
We take the view that neither the Business Profit Article in general nor the specific provision concerning the expenses in particular requires us to allow expenses which are not admissible in United Kingdom domestic law. For example, we could not allow capital expenses or entertaining expenses. We say that each contracting state is entitled to apply its own general principles and rules in computing the profits it has right to tax. It would be inequitable to permit a non resident trading in a territory though a permanent establishment to deduct items that a resident competition would not be permitted to deduct.
I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 11 of 25
18. Once again, here also the applicability of domestic law restrictions on deduction of expenses is on an independent reading of Article 7(3) and without recourse to a treaty provision analogous to the provision of Article 25(1) in India UAE tax treaty. The case before us is much more favourable to the revenue because there is a specific provision for the applicability of the domestic law in the light of the provisions of the Article 25(1) of the India UAE tax treaty.
19. Well known international tax scholar Prof Klaus Vogel, in his book 'Klaus Vogel on Double Taxation Conventions' has taken note of some of the. tax treaties which contain, in Article 7(3), a specific provision to the effect that allowability of expenses incurred for the purposes of PE has to be "according to the domestic law of the contracting state in which the permanent establishment is situated" and, in this specific context, observed as follows:
"....And the additional phrase that the deductible expenses shall be determined according to the domestic law of the State of the permanent establishment is merely a clarificatory one, since such profits of a permanent establishment as are subject to tax would have to be determined under the domestic law of the State of permanent establishment even if this were not expressly stipulated......"
20. In this view of the matter, unless there is a specific provision to the effect that restrictions under domestic tax laws on deduction of expenses are to be ignored, the same will have application in computation of PE profits. The specific provisions in some of the treaties (such as India Australia tax treaty for, example) to the effect that profits are to be computed according to the domestic law of the contracting state in which a PE is situated, is, according to the learned scholar, no more than clarificatory in nature. A school of thought thus exists that specific mention of the applicability of domestic law limitations in computation of profits of the permanent establishment is justified as a measure of abundant caution and is made ex abudanti coutela. It is, however, not necessary to go into that aspect of the matter any further at this stage.
21. In view of the above discussions, and particularly bearing in mind the provisions of Article 25(1) of the India UAE tax treaty, we are of the considered view that the limitations under the domestic tax laws are to be taken into account for the purposes of computing profits of a PE under Article 7(3) of the India UAE tax treaty. The plea of the assessee is incompatible with overall scheme of the tax treaties, particularly India UAE tax treaty. Accordingly, the conclusion arrived at by the CIT(A) meets our approval. We confirm the same and decline to interfere in the matter.
7. Around the same time when this decision was delivered, a protocol, amending the Indo UAE tax treaty, has been entered into. This protocol has since been notified by the Government of India vide Notification No. 282 of 2007, dated 28th November 2007 (213 CTR Statues 64). This protocol had two major changes - first, with respect to definition of 'a resident of contracting state' and thus settling controversy about treaty entitlements in the case of residents who donot actually pay tax in the UAE; and - second, with respect to I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 12 of 25 restrictions under the domestic tax law specifically extending to the computation of taxable profits under article 7. There is, of course, one more change in the treaty protection in respect of certain capital gains and dividends, but that is not material in the context of the present discussion. Coming back to these two major changes, by the time this protocol was notified, coordinate benches had expressed views on both of these issues. On the first issue, the issue was settled in favour of the assessee, by the coordinate bench decision in the case of ADIT Vs Green Emirates & Travels [(2006) 100 ITD 203 (Mum)], and, on the second issue- which is also issue in this appeal before us, was settled in favour of the revenue, by the coordinate bench decision in the case of Mashreq Bank Vs JDIT [(2007) 14 SOT 1 (Mum)]. The views of the Tribunal were on both of these issues, in principle, were the same as reflected in the protocol amendment. So far as the first issue, i.e. treaty entitlements in the case of persons who donot actually pay taxes in the UAE, despite the treaty amendment being effective from 1st April 2008, the Tribunal consistently followed the same stand, as it did in the Green Emirates decision (supra), in a number of cases even so far as period prior to 1st April 2008 was concerned. These cases include reported decisions in the cases of Meera Bhatia Vs ITO [(2010 38 SOT 95 (Mum)], Hindustan Petroleum Corp Ltd Vs ADIT [(2010) 130 TTJ 518 (Mum)], ITO vs Ramesh Kumar Goenka [(2010) 39 SOT 132 (Mum)], Linklaters LLP Vs ITO [(2011) 9 ITR Tribu 217 (Mum)], ASIT Vs Resource Connections [(2010 42 SOT 23 (Mum)], ITO Vs Manu Mahvirchand Mehta [(2011) 45 SOT 137 (Mum)], ADIT Vs ICICI Bank Ltd [(2012) 149 TTJ 797 (Mum)], ADIT Vs Mediterranean Shiiping Co SA [(2015) 54 taxmann.com 112 (Mum)], KPMG Vs JCIT[(2013) 142 ITD 323 (Mum)], ADIT Vs Simatech shipping Forwarding LLC [(2014) 146 ITD 48 (Mum)], as also a large number of other reported and unreported decisions. As for the facets of the protocol amendment on this aspect which were left untouched by the Tribunal decisions and on which there were no binding precedents, obviously these aspects were held to be applicable from the date on which protocol came into force.
8. In effect thus, the protocol made the legal provision, with respect to tax liability in UAE not being sine qua non to avail the treaty benefits in India, unambiguous and without any doubt. What was implicit in the treaty earlier, was made explicit by the protocol later. That is the view the coordinate benches and has been consistently taken all along. Hon'ble Bombay High Court has also approved the decision so taken, for the pre 1st April 2008 period, in judgment reported as DIT Vs ICICI Bank Limited [(2015) 370 ITR 17 (Bom)].
9. On the question of limitations under the domestic law being implicit in the application of article 7 read with article 25(1) also, the coordinate bench, in assessee's own case for the assessment year, had decided the issue. It was held that these limitations are implicit in article 25(1). However, when this issue came up before Ahmedabad A bench of this Tribunal in the case of ADIT Vs Dalmas Energy LLC [(2012) 150 TTJ 70 (Ahd)], the Mashreq Bank decision (supra) was not brought to the notice of the coordinate bench. The bench did not have the benefit of knowing that even without the assistance of the protocol amendment, the Tribunal had come to the conclusion that the limitations of domestic law in computing profit under article 7 was implicit by the virtue of article 25(1) of the India UAE tax treaty. Oblivious of the earlier direct decision on this issue, the coordinate bench concluded as follows:
I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 13 of 25
14. To conclude the legal aspect of this issue, we have already reproduced Article 7 (in para 12.1 above) and on careful perusal, we have noted that in determining the profits of a PE the expenses which are incurred for the purposes of the business of the said PE, including general administrative expenses is to be allowed. At this stage of argument, we have categorically raised a question that if executive and general administrative expenses of a PE is to be allowed having been incurred for the purposes of the business of a PE, then what is the utility of the introduction of section 44C of the IT Act. Ld.AR Mr.Milin Mehta has answered that keeping in mind the controversy an amendment took place in the Articles and vide a protocol amending the agreement between the Government of the Republic of India and the Government of the United Arab Emirates vide Notification No.282/2007 dated 28/11/2007 which is effective from 1st day of April-2008, paragraph 3 of Article 7 (Business Profits) has been replaced by the following:-
"3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State."
(emphasis given) 14.1. In view of the aforesaid amendment, now the admitted legal position is that the admissibility of expenditure is to be governed by Article 7 (3) of the Treaty up to the date from which the new amended provisions of the Treaty shall be applicable i.e. w.e.f. 1.4.2008. It can, inter alia, be summed-up that the contracting States have kept in mind the provisions of the tax laws of the contracting States and to avoid any conflict in the provisions of the tax laws vis-à-vis the provisions of Treaty, as also to streamline the applicable provisions of law, it was decided to incorporate that, for the purposes of determining the profits of a permanent establishment, there shall be allowed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore by this amendment in the Article the applicability of provisions of section 44C has been enforced, nevertheless with effect from 1st day of April- 2008.
10. While so rendering the decision, the bench had no occasion to take note of earlier direct decision on this issue in the case of Mashreq Bank (supra) or the provisions of Article 25(1) of India UAE tax treaty. As to what could be the impact of such an omission, we find guidance from a full bench decision of Hon'ble Andhra Pradesh High Court in the case of CIT Vs B R Constructions [(1993) 202 ITR 222 (AP FC)] as was summarized by a coordinate bench decision in the case of JKT Fabrics Vs DCIT [(2005) 4 SOT 84 (Mum)] as follows:
I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 14 of 25
5. As far as Tribunal's decision in the case of Prince SWR Systems (P) Ltd. (supra) is concerned, we have noted that the Tribunal has not followed the co-ordinate Bench decision in Plastiblends India Ltd.'s case (supra), and has decided the case against the assessee by following the Bombay High Court judgment in the case of Indian Rayon Corpn. Ltd. vs. CIT (2003) 182 CTR (Bom) 247 : (2003) 261 ITR 98 (Bom).
What is missed out, however, is the fact that in Plastiblends India Ltd.'s case (supra), the co-ordinate Bench had duly considered Indian Rayon Corpn. Ltd.'s case (supra) and then came to the conclusion that Indian Rayon Corpn. Ltd.'s case (supra) decision has no bearing on the question before the Tribunal. Once a co-ordinate Bench comes to this conclusion, it is not open to another co-ordinate Bench to come to any other conclusion on that issue. This is so held by the Hon'ble Supreme Court in the case of Union of India vs. Paras Laminates (P) Ltd. (1990) 87 CTR (SC) 180. To that extent, Tribunal's decision in the case of Prince SWR Systems (P) Ltd. (supra) appears to be in our humble understanding, per incuriam. In the case of Paras Laminates (P) Ltd. (supra), Hon'ble Supreme Court has, inter alia, observed as follows :
"It is true that a Bench of two Members must not lightly disregard the decision of another Bench of the same Tribunal on an identical question. This is particularly true when the earlier decision is rendered by a larger Bench. The rationale of this rule is the need for continuity, certainty and predictability in the administration of justice. Persons affected by decisions of Tribunals or Courts have a right to expect that those exercising judicial functions will follow the reason or ground of the judicial decision in the earlier cases on identical matters. Classification of particular goods adopted in earlier decisions must not be lightly disregarded in subsequent decisions, lest such judicial inconsistency would shake public confidence in the administration of justice. It is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger Bench."
6. In the case of Venus Jewels (supra), the co-ordinate Bench held the issue in favour of the Revenue on the basis of Hon'ble Bombay High Court's judgment in the case of Indian Rayon Corpn. Ltd. (supra) and on the basis of the Hon'ble Rajasthan High Court's judgment in the case of Vijay Industries vs. CIT (2004) 190 CTR (Raj) 90 : (2004) 270 ITR 175 (Raj). What is held in Vijay Industries' case (supra) is the same thing as held in Indian Rayon Corpn. Ltd.'s case (supra) but then Plastiblends India Ltd.'s case (supra) having considered the school of thought emerging from these materially similar decisions, has come to the conclusion that where the assessee has not claimed the depreciation in its books of account, the same cannot be thrust upon the assessee for the purpose of computing the deduction under s. 80- IA. Following the Hon'ble Supreme Court's judgment in Paras Laminates (P) Ltd.'s case (supra) it was not open to the Bench to take any other view of the matter than I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 15 of 25 the view taken by the co-ordinate Bench. The decision in Venus Jewels' case (supra) also appears to be per incurium.
7. No doubt that when a co-ordinate Bench doubts the correctness of decision of another co-ordinate Bench, a reference can be made to the Hon'ble President for constitution of a larger Bench. However, as far as the issue before us is concerned, a request for constitution of larger Bench was already been turned down. We see no necessity to make yet another request considering that Hon'ble President has, in a considered decision, turned down earlier request to that effect. In our opinion, the issue does not call for a reconsideration at this stage.
8. As to what should be the binding effect of a per incurium decision, we can do no better than to quote the Hon'ble Andhra High Court in the case of CIT vs. B.R. Constructions (1993) 113 CTR (AP)(FB) 1 : (1993) 202 ITR 222 (AP)(FB). In his inimitable style, Justice S.S.M. Quadri (as he then was) has articulated the views of the Full Bench of Hon'ble Andhra Pradesh High Court as follows :
"In a country like ours which is governed by rule of law, law has to be certain and uniform which is fundamental to the rule of law. In Mamleshwar vs. Kanahaiya Lal AIR 1975 SC 907, Krishna Iyer, J., speaking for the Supreme Court, observed :
'Certainty of the law, consistency of rulings and comity of Courts all flowering from the same principle, converge to the conclusion that a decision once rendered must later bind like cases.' In this concurring judgment in State of U.P. vs. Synthetics & Chemicals Ltd. (1991) 4 SCC 139, 163, the observation of Sahai, J. on this aspect is :
'Uniformity and consistency are the core of judicial discipline.' That is why the doctrine of stare decisis is part of our judicial system. This doctrine means 'to abide by former precedents'. Blackstone elucidated the doctrine thus :
'For it is an established rule to abide by former precedents, where the same points come again in litigation : as well as to keep the scale of justice even and steady and not liable to waiver with every new Judge's opinion, as also because the law in that case being solemnly declared and determined, what before was uncertain, and perhaps indifferent, is now become a permanent rule, which it is not in the breast of any subsequent Judge to alter or vary from, according to his private sentiment. . . .' The ratio decidendi of a judgment is a binding precedent. The hierarchy of authority with regard to binding precedent is summed up in para 28 at p. 158 of 'Salmond on Jurisprudence', Twelfth Edition, as follows :
'The general rule is that a Court is bound by the decision of all Courts higher than itself. A High Court Judge cannot question a decision of the Court of Appeal, nor can I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 16 of 25 the Court of Appeal refuse to follow judgments of the House of Lords. A corollary of the rule is that the Courts are bound only by decisions of higher Courts and not by those of lower or equal rank. A High Court Judge is not bound by a previous High Court decision, though he will normally follow it on the principle of judicial comity, in order to avoid conflict of authority and to secure certainty and uniformity in the administration of justice. If he refuses to follow it, he cannot overrule it; both decisions stand and the resulting antimony must wait for a higher Court to settle.' The principles applicable to Courts in India were laid down by Subba Rao, J. (as he then was) in Dr. K.C. Nambiar vs. State of Madras AIR 1953 Mad 351, which were approved by a Full Bench of our High Court in Subbarayudu vs. State AIR 1955 AP 87 (FB) : (1955) 11 ALT (Cri.) 53. They are as follows :
'A single Judge is bound by a decision of a Division Bench exercising appellate jurisdiction. If there is a conflict of Bench decisions, he should refer the case to a Bench of two Judges who may refer it to a Full Bench. A single Judge cannot differ from a Division Bench unless a Full Bench or the Supreme Court overruled that decision specifically or laid down a different law on the same point. But he cannot ignore a Bench decision, as I am asked to do on the ground that some observations of the Supreme Court made in different context might indicate a different line of reasoning. A Division Bench must ordinarily respect another Divisional Bench of co- ordinate jurisdiction but if it differs, the case should be referred to a Full Bench. This procedure would avoid unnecessary conflict and confusion that otherwise would prevail.' The effect of binding precedents in India is that the decisions of the Supreme Court are binding on all the Courts. Indeed, Art. 141 of the Constitution embodies the rule of precedent. All the subordinate Courts are bound by the judgments of the High Court. A single Judge of a High Court is bound by the judgment of another single Judge and a fortiori judgments of Benches consisting of more Judges than one. So also, a Division Bench of a High Court is bound by judgments of another Division Bench and Full. A single Judge or Benches of High Courts cannot differ from the earlier judgments of co-ordinate jurisdiction merely because they hold a different view on the question of law for the reason that certainty and uniformity in the administration of justice are of paramount importance. But, if the earlier judgment is erroneous or adherence to the rule of precedents results in manifest injustice, differing from the earlier judgment will be permissible. When a Division Bench differs from the judgment of another Division Bench, it has to refer the case to a Full Bench. A single Judge cannot differ from a decision of a Division Bench except when that decision or a judgment relied upon in that decision is overruled by a Full Bench or the Supreme Court, or when the law laid down by a Full Bench or the Supreme Court is inconsistent with the decision.
It may be noticed that precedent ceases to be a binding precedent :
(i) if it is reversed or overruled by a higher Court, I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 17 of 25
(ii) when it is affirmed or reversed on a different ground,
(iii) when it is inconsistent with the earlier decisions of the same rank,
(iv) when it is sub silentio, and
(v) when it is rendered per incuriam.
In para 578 at p. 297 of Halsbury's Laws of England, Fourth Edition, the rule of per incuriam is stated as follows :
'A decision is given per incuriam when the Court has acted in ignorance of a previous decision of its own or of a Court of co-ordinate jurisdiction which covered the case before it, in which case it must be decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.' In Punjab Land Development & Reclamation Corpn. Ltd. vs. Presiding Officer, Labour Court (1990) 3 SCC 682 : (1990) 77 FJR 17 (SC), the Supreme Court explained the expression 'per incuriam' thus :
'The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a previous decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court.' As has been noticed above, a judgment can be said to be per incuriam if it is rendered in ignorance or forgetfulness of the provisions of a statute or a rule having statutory force or a binding authority. But, if the provision of the Act was noticed and considered before the conclusion arrived at, on the ground that it has erroneously reached the conclusion the judgment cannot be ignored as being per incuriam. In Salmond on Jurisprudence, Twelfth Edition, at p. 151, the rule is stated as follows :
'The mere fact that (as is contended) the earlier Court misconstrued a statute, or ignored a rule of construction, is no ground for impugning the authority of the precedent. A precedent on the construction of a statute is as much binding as any other, and the fact that it was mistaken in its reasoning does not destroy its binding force.' In Choudhry Bros. vs. CIT (1987) 60 CTR (AP) 151 : (1986) 158 ITR 224 (AP), as noticed above, the Division Bench treated the judgment in Ch. Atchaiah vs. ITO (1979) 116 ITR 675 (AP), as per incuriam on the ground that the earlier Division Bench did not notice the significant changes the charging s. 3 has undergone by the omission of the words 'or the partners of the firm or the members of the association individually'. In our view, this cannot be a ground to treat an earlier judgment as per incuriam. The change in the provisions of the Act was present in the mind of the Court which decided Ch. Atchaiah's case (supra). Merely because the conclusion I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 18 of 25 arrived at on construing the provisions of the charging section under the old Act as well as under the new Act did not have the concurrence of the latter Bench, the earlier judgment cannot be called per incuriam.
Though a judgment rendered per incuriam can be ignored even by a lower Court, yet it appears that such a course of action was not approved by the House of Lords in Cassell & Co. Ltd. vs. Broome (1972) 1 All ER 801, wherein the House of Lords disapproved the judgment of the Court of Appeal treating an earlier judgment of the House of Lords as per incurium. Lord Hailsham observed :
'It is not open to the Court of Appeal to give gratuitous advice to Judges of first instance to ignore decisions of the House of Lords in this way'.
It is recognised that the rule of per incuriam is of limited application and will be applicable only in the rarest of rare cases. Therefore, when a learned single Judge or a Division Bench doubts the correctness of an otherwise binding precedent, the appropriate course would be to refer the case to a Division Bench or Full Bench, as the case may be, for an authoritative pronouncement on the question involved as indicated above. The abovesaid two questions are answered as indicated above."
9. It is thus beyond dispute that a decision which is per incuriam is not a binding judicial precedent. It is also well-settled that when it is not open to a High Court Bench to differ from the decision of a Bench of equal strength, it cannot also be open to a Bench of this Tribunal to differ from the view taken by a co-ordinate Bench of equal strength. The only option in case one doubts the correctness of such a decision is to refer the matter for constitution of a larger Bench. A decision ignoring this rule of precedent, which is duly approved by the Hon'ble Courts from time to time, cannot but be viewed as per incuriam. Therefore, following the Hon'ble Andhra Pradesh High Court Full Bench decision in the case of B.R. Constructions (supra), such a decision of the co-ordinate Bench has no precedence value.
[Emphasis supplied]
11. In the light of the settled legal position as above by full bench decision of Hon'ble Andhra Pradesh High Court and as elaborated above, the decision of Dalma Energy LLC (supra) lacks precedence value for the simple reason that the bench had no occasion to deal with, or take into account, an earlier binding decision on the same issue. The matter, however, does not end there. In the case of Abu Dhabi Commercial Bank Ltd Vs ADIT and vice versa, another coordinate bench of this Tribunal had the occasion to consider the same question. This time, the coordinate bench did take note of the Mashreqbank decision (supra) as also of the Dalmas Energy LLC decision (supra) but the coordinate bench was of the view that the decision of Mashreq Bank stands "impliedly" overruled by a five member bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation Ltd Vs. DDIT [(2012) 136 ITD SB 66 (Mum)]. The coordinate bench thus ignored the Mashreq Bank decision and followed the Dalmas Energy LLC (supra) and held that the domestic law limitations on deductions are applicable only with effect from 1st April 2008. The issue was thus decided, I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 19 of 25 contrary to earlier direct decisions on the issue, in favour of the assessee. As we have already noted, Dalmas Energy LLC decision (supra), in the light of Hon'ble Andhra Pradesh High Court's full bench decision in the case of B R Constructions (supra), is not a binding precedent. Therefore, if we are to traverse the same path as was traversed by the coordinate bench in the case of Abu Dhabi Commercial Bank (supra), we have to be satisfied that the Mashreq Bank decision was indeed reversed by the five member bench in the case of Sumitomo Mitsui Banking Corporation (supra).
12. As we do so, we have to bear in mind the fact that a judicial precedent holds good for what is decided by the judicial precedent and not what follows from the same. Our jurisdictional High Court, in the case of CIT Vs Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], has held that "It is well-settled that the ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein". Quite clearly, therefore, a judicial precedent holds good in law as long as it is not specifically reversed or disapproved a higher judicial forum, as long as a higher judicial forum has not held anything directly and clearly contrary to the ratio decidendi of the said judicial precedent, and unless, of course, such a judicial precedent itself is held to be per incurium on the basis of the well settled legal principles. In view of this discussion, our humble understanding is that a binding judicial precedent does not cease to be good law merely because some observations have been made by a higher forum which may, by a long drawn process of reasoning and inference, be construed as contrary to the reasoning adopted by such a judicial precedent. That precisely, however, is at best the case before us.
13. The observations made in Abhu Dhabi decision (supra), which, according to the learned counsel, overrule the Mashreq Bank decision (supra), are as follows:
"60. First we shall deal with the arguments of Shri Girish Dave based on the relevant provisions of the Indo-Japanese treaty. He has, inter alia, relied on article 23 of Indo- Japanese treaty which provides that the laws in force in either of the contracting State shall continue to govern the taxation of income in respective contracting state except where express provisions to the contrary are made in the convention. According to him, article 11 read with article 7 of the treaty contains such express provision and make the interest payable by the PE in India to the GE abroad the income of the GE chargeable to tax in India. Before we consider this argument of Shri Girish Dave in the light of the relevant provisions of the article 7 and 11 of the Indo-Japanese treaty, it is pertinent to discuss certain basic aspects of the matter which are relevant in this context
61. Section 90(2) of the Income-tax Act, 1961 provides that where the Central Government has entered into an agreement with the Government of any country outside India or specific territory outside India, as the case may be, section (1) for granting relief of tax, or as the case may be, avoidance of double 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. This specific provision contained in section 90(2) makes it abundantly clear that in relation to the I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 20 of 25 assessee like the one in the present case to whom the double tax avoidance treaty entered into by the Indian government applies, the provisions of Income-tax Act shall apply to the extent they are more beneficial to him. It, therefore, follows that if the provisions of the domestic law are more beneficial to the assessee than the provisions of the relevant tax treaty, the provisions of the domestic law shall override and prevail over the provisions of the treaty. Article 23 of the Indo-Japanese treaty therefore cannot be interpreted in a way as sought by Shri Girish Dave because if such interpretation is assigned to article 23 and the interest income which is otherwise not taxable in India as per the domestic law is held to be taxable relying on the provisions of the treaty, the same will run contrary to the provisions of section 90(2). Such interpretation, therefore, cannot be assigned to article 23 and the only interpretation which, in our opinion, can be assigned to the said article so as to make the provisions thereof in consonance with section 90(2) of the domestic law is that if there is an express provision made in the convention giving benefit to the assessee which is contrary to the domestic law, then the provisions of treaty can be relied upon which shall override and prevail over the provisions of the domestic law to give any benefit expressly given to the assessee under the treaty. The decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) fully supports this view."
14. We have carefully gone through the above observations. What we could make out from these observations is this. The argument of the learned DR was that since there is a specific provision regarding taxation of interest income in article 7 read with article 11 of the Indo Japanese tax treaty, to that extent the provisions of the Income Tax Act, 1961 are not applicable. Interestingly, if the provisions of the Act were to be applied in this case, as were eventually applied, interest income received from self to self would not have been taxable. It was in this context that the five member bench held that such a contention is contrary to the scheme of the law inasmuch as what is not taxable under the domestic tax law cannot be held to be taxable under a tax treaty because section 90(2) provides that the tax treaties will apply only to the extent, the provisions of the treaties are beneficial to the assessee. The benefit given under the domestic law, as held by the five member bench, cannot be declined because the treaty has a harsher provision. These observations were made in the context of taxation of an income. Under the domestic income tax law in India, an income from oneself is not taxable in the hands of an assessee. However, under the Indo Japanese treaty provisions, even when a bank is earning income from its own office, it is taxable in the hands of the bank. These approaches are diametrically opposed to each other and the bench was of the considered view that there is no way of reconciling these approaches in the context of the questions before the five member bench. The questions, which came up for adjudication before the five member bench and as set out in the first paragraph of the five member bench order, were as follows:
1. Whether or not, on the facts and in the circumstances of the case, the CIT(A) was justified in holding that interest payable by the Indian PE of the foreign bank to its HO and other overseas benches, is not deductible in computing its total income
2. Whether or not, on the facts and in the circumstances of the case and in law, CIT(A) erred in holding that interest income payable by Indian PE of a foreign bank to I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 21 of 25 its HO and branch offices abroad cannot be taken into account for the purposes of computing the income of HO liable to be taxed in India. ting the income of HO liable to be taxed in India.
15. It was in this context that the above observations were made about the treaty provisions overriding the domestic law provisions. While making the above observations, the five member bench had no occasion to deal with, or even refer to, Mashreq Bank decision which was in altogether a different context. The five member bench decision was in the context of taxability of interest income received from various units of the assessee bank itself, whereas Mashreq Bank decision was in the context of admissibility of disallowances under the Income Tax Act in computation of income under article 7 when there are no specific contrary provisions in the treaty. The five member bench had no occasion to even remotely deal with the question which was adjudicated by the division bench in Mashreq Bank's case nor that decision was even cited before the five member bench.
16. In our considered view, the observations made by the five member bench cannot be considered to be reversing, disapproving or even dealing with the ratio decidendi of Mashreq Bank decision.
17. That apart, the very concept of a binding precedent being "implied overruled" is a myth. A binding precedent is either overruled by another precedent from the higher forum, or it is not overruled. The concept of a binding precedent being "impliedly overruled", in our humble understanding, would amount to rejecting a binding precedent on the basis of what logically follows from another binding precedent of a higher forum, but then this such a process of rejecting the judicial precedents is contrary to the principles laid down by Hon'ble jurisdictional High Court in the case of Sudhir Jayantilal Mulji (supra).
18. What follows from the entire discussion is this. Reverse discrimination, which would have resulted by not restricting the deductions in the light of the provisions of the Act for non- residents assessees, was not permissible under the Indo UAE treaty prior to the protocol amendment in question, as was held by the Mashreq Bank decision (supra), and such a reverse discrimination is permissible even now as specifically provided for in the said protocol amendment in the Indo UAE tax treaty itself. That is what is clearly discernable from the Indian tax treaty approach and is completely in harmony with the judicial precedents and the best practices in well developed international tax jurisdictions- as discussed at length in the Mashreq Bank decision.
19. On a conceptual note, every specific amendment to the law or a treaty, particularly when it is disadvantageous to the taxpayers and is enacted ex abundanti cautela (as a measure of abundant caution) is generally, fraught with, what tax academicians and policymakers term as, the risk of its 'kill effect'. The risk is that when a specific provision, to make the things clear and beyond any doubt, is enacted with respect to a particular point of time and a particular consequence is envisaged by the provision, interpretation of the law or I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 22 of 25 treaty will invariably be inclined to draw to the inference that no such consequence was envisaged by the legislature or the treaty prior to the amendment coming into force. Dalmas Energy decision (supra) typically exemplifies this approach. That is a common and fairly well accepted approach. There is, however, a rider. The rider is that even on the first principles and in a situation in which a binding judicial precedent or judicial analysis of the pre amendment legal or treaty provision has already come to the same conclusions, as indicated by the specific amendment as a measure of abundant caution, such a "kill effect" is ruled out. That precisely is the situation before us. In such cases, the impact of amendment remains confined to the areas on which either (i) on the areas on which, with the help of pre- amendment provisions, the judicial conclusions are at variance with the conclusions arrived at with the help of amendment; or (ii) such areas have remained intact from the judicial precedent.
20. In our considered view, therefore, the issue is squarely covered by the decision of this Tribunal, in assessee's own case for the assessment year 1996-97. This stand has now been specifically accepted in the protocol to the India UAE tax treaty. Just because there is a more specific and more unambiguous provisions post the protocol amendment, one cannot come to the conclusion that the judicial precedent, rendered by a coordinate bench, even without these specific and unambiguous expressions, cases to hold good. That will be stretching the things too far and will also be contrary to approach adopted by a very large number of judicial precedents set out earlier in this order. As to the impact of different wordings in the pre and post amendment treaty provisions, we can do no better than to quote once again from the decision of Mashreq Bank as follows:
The next thing that needs our consideration is learned counsel's suggestion that different phraseology employed in the Indian tax treaties warrant an interpretation in such a manner that a uniform meaning is not given to all these different expressions because differentiation in expression will then be rendered meaningless. Unlike a piece of tax legislation, which is creature of a sovereign state, a tax treaty is a result of bilateral negotiations. Therefore, the wordings of a tax treaty are essentially dependent on the priorities of, and acceptability by, the Contracting States parties to such a tax treaty. It is only elementary that these factors vary from one of set of Contracting States to another set of Contracting States. The same purpose, therefore, can indeed be intended even by radically different phraseology employed in tax treaties to which a particular country is one of the parties. In the case of tax legislation, however, things are quite different, because, as we have emphasized earlier, tax legislations are unilateral acts of the law making bodies, and when a law making body makes even slightest departure from the expression it is used earlier, the normal inference is that such deviation, being a unilateral act, has some specific intent and purpose. The tax treaties being product of bilateral negotiations, deviation in language of the tax treaties entered into by a country, does not necessarily indicate a deviation in objectives and purpose that these tax treaties seek to achieve. It is also not common that some of the Contracting States are too conservative in their approach and insist on certain provisions as a measure of abundant caution I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 23 of 25 (ex abudanti coutela). As regards learned counsel's contention that once a Contracting State enters into a tax treaty it cannot be open to that Contracting State to shy away from implementing such a tax treaty on the ground that the consequences of its implementation could be contrary to the intentions of the treaty, we quite agree with the learned counsel. However, what is needed to be implemented is a clear and unambiguous provision. At best, if there is an ambiguity in the provisions, it needs to be resolved by way of harmonious construction in accordance with the well settled principles of tax treaties. It cannot be, in any event, open to anyone to embark upon the voyage of discovery in search of hidden meanings or intent of parties, not supported by the specific expressions to articulate the same, and then proceed to give life to these inferences- that too in a manner contrary to the scheme of the tax treaty. We donot find any specific provision in the tax treaty which supports learned counsel's understanding about the scope of Article 7(3) ; infact, we find, as we have elaborated earlier, specific provision in the treaty which is quite to the contrary. We, therefore, reject this contention as well.
21. Our conclusion, as such, is not the same as arrived at by the coordinate bench decision in the case of Abu Dhabi Commercial Bank (supra). Normally, we should have referred this matter to a special bench of this Tribunal but we did not do so because Abu Dhabi Commercial Bank decision itself follows a decision in the case of Dalma Energy LLC (supra) which, though inadvertently as it was never brought to the notice of the bench, ignored the earlier binding precedent, and was thus per incurium, and adopted an approach which was contrary to the law laid down by Hon'ble jurisdictional High Court in the case of Sudhir Jayantilal Mulji (supra). With greatest respect to the coordinate bench decision in Abu Dhabi Commercial Bank's case (supra), the approach adopted by this coordinate bench is appears to be in conflict with the law laid down by Hon'ble jurisdictional High Court and also by a full bench of Hon'ble Andhra Pradesh High Court, as elaborated above. It is also important to bear in mind the fact that just because something else has been decided on a comparable set of facts, normally the earlier decision, in assessee's own case, can not be ignored. If at all the subsequent bench had doubts on correctness of these views, the matter could have been referred to a special bench but, for the reasons which are not discernable from our reading of the order, that course was not adopted. However, because of this deviation and particularly as we have no doubts about correctness of our approach which is also adopted in a large number of judicial precedents as set out in earlier in this order and which now has the approval of Hon'ble jurisdictional High Court, we see no reasons to refer this issue to a special bench; none of the parties before us had prayed for recommending constitution of a special bench anyway. In any case, the decision followed by us is almost a decade old and it is only a matter of time now that we will have the benefit of guidance from Hon'ble High Court's adjudication on assessee's appeal against this order. As we have been given to understand, the matter is now pending before the Hon'ble Bombay High Court. Multiplicity of proceedings before various forums and at this stage cannot serve any meaningful purpose. The constitution of special bench would not have been appropriate for this reason also. In the light of all these reasons, we see no need to recommend constitution of a special bench on this issue.
I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 24 of 25
22. In view of the above discussions, and bearing in mind the entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. The claim made by the assessee, by way of note to the income tax return, is rejected. As the assessee has incurred loss in this year, no part of head office expenses is allowable under section 44C. As the assessee has not anyway claimed any deduction in the income tax return in this respect, no disallowance is warranted.
23. Ground no. 1 is dismissed.
24. In ground no. 2, the assessee is aggrieved of learned CIT(A) sustained the disallowance of Rs 86,033 on account of provision for gratuity.
25. Learned representatives fairly accept that whatever is decided on ground no.1 will apply mutatis mutandis on this ground of appeal as well, since the disallowance is admittedly on the basis of specific disabling provisions under the domestic law i.e. the Income Tax Act. Vide our adjudication above, we have rejected the first ground of appeal, and the same fate must, therefore, follow for this ground of appeal as well.
26. Ground no. 2 is also dismissed.
27. As for ground no. 3, learned counsel for the assessee submits that, in view of the fact that the assessee has already been allowed deduction for entire payment for VRS, he assessee does not wish to pursue this ground of appeal.
28. Ground no. 3 is thus dismissed as not pressed.
29. In ground no. 4, the assessee is aggrieved of the Assessing Officer disallowing the deduction of Rs 3,58,421 under section 37 of the act, being specifically incurred outside India for the Indian branches and thereby processing the same under section 44C of the Act.
30. In respect of this ground of appeal as well, learned counsel for the assesse fairly accepts that whatever is decided on ground no.1 will apply mutatis mutandis on this ground of appeal as well, since the disallowance is admittedly on the basis of specific disabling provisions under the domestic law i.e. the Income Tax Act. Vide our adjudication above, we have rejected the first ground of appeal, and the same fate must, therefore, follow for this ground of appeal as well.
31. Ground no. 4 is also thus dismissed.
32. So far as ground no. 5 is concerned, learned counsel for the assessee submits that the basic issue that is required to be adjudicated, as specifically raised by an additional ground of appeal, is whether the provisions of Section 115 JB will apply to the assessee. It is submitted that this issue is covered, in favour of the assessee, in principle, by a number of decisions in the cases beginning with Krung Thai Bank PCL Vs JDiT [(2012) 49 SOT 70 (Mum)]. Learned Departmental Representative does not have anything specific to say on this aspect and he graciously leaves the matter to us.
I.T.A. No. 1342/Mum/2006 Assessment year: 2002-03 Page 25 of 25
33. We find that, in the case of Krung Thai Bank (supra), a coordinate bench of this Tribunal has, inter alia, held that the provisions of Section 115JB come into play only when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Act, but then since banking companies, under Section 211(2) of the Act, are not covered by this requirement, the provisions of Section115JB cannot be applied in the case of the banking companies. Of course, there is an amendment in Section 115JB which extends applicability of this section to the cases in which the accounts are not prepared in accordance with the Schedule VI requirements as well, but then this amendment is effective from 1st April 2013. The assessment year before us is 2002-03 and it remains unaffected by this legislative amendment. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee. We, accordingly, direct the Assessing Officer to delete the impugned levy of MAT under section 115 JB. The assessee gets the relief accordingly.
34. The Additional Ground of appeal is thus allowed, and ground no. 5, which deals with the merits of the adjustments made in computation of book profit under section 115JB, is rendered infructuous.
35. In the result, the appeal is partly allowed in the terms indicated above. Pronounced in the open court today on the 15th day of January 2015.
Sd/- Sd/-
Pawan Singh Pramod Kumar
(Judicial Member) (Accountant Member)
Dated: 15th day of January, 2016.
Copies to: (1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order etc
Assistant Registrar
Income Tax Appellate Tribunal
Mumbai benches, Mumbai