Income Tax Appellate Tribunal - Mumbai
Banque National De Paris, Mumbai vs Assessee on 5 December, 2012
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" BENCH, MUMBAI
Before Shri B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI VIJAY PAL RAO, JUDICIAL MEMBER
ITA Nos.8693/Mum/1995 & 507/Mum/2000
(Assessment years: 1991-92 & 1994-95)
BNP Paribas SA Vs. Dy.CIT/Jt.CIT, Aayakar
(formerly known as Banque Bhavan, Room No.613,
Nationale de Paris), Special Range-27
French Bank Building, Mumbai 400020
62, Homji Street,
Mumbai 400001
(Appellant) (Respondent)
Assessee by: Shri Farrokh V. Irani
Department by: Shri Mahesh Kumar, DR
Date of Hearing: 05/12/2012
Date of Pronouncement: 28/02/2013
ORDER
Per B. Ramakotaiah, A.M.
These two appeals are against the orders of the CIT(A) XIII Mumbai, dated 28.8.1995 and the CIT (A) XLVI Mumbai, dated 22.10.1999 respectively, for the assessment years 1991-92 and 1994-95. Since common issues are involved, the cases were heard together and decided by this common order.
2. As seen from the record, the appeals were being posted number of times and assessee vide the application dated 4th December, 2009 made a request for constitution of a Special Bench on the issue of non discrimination clause in view of the provisions of Article-XXI of the DTAA between India and the Republic of France on the issue of claim of deduction under section 80M. The learned Counsel at the outset stated that the issue is to be referred to the Page 1 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Special Bench on certain contentions raised which the learned DR objected to stating that there are no conflicting orders and so constitution of Special Bench is not required. Therefore, we have proceeded hearing the appeal keeping in mind the request of assessee for constitution of Special Bench on various legal principles and therefore, the issue of deduction of section 80M was elaborately discussed and findings are given in this order. There are other issues also which are agitated by assessee. Therefore, for the sake of clarity the grounds raised by assessee in both the years are extracted as under:
Grounds- A.Y 1991-92: (ITA No. 8693/Mum./1995)
1."In confirming the disallowance of deduction of `1,09,29,533 under section 80M of the Income Tax Act, 1961 (hereinafter referred to as "the Act") made by the Assessing Officer (hereinafter referred to as "the A.O"). Your Appellant submits that on the facts and in the circumstances of the case and having regard to the provisions of the Double Taxation Avoidance Agreement between India and France (hereinafter referred to as "the DTA"), the CIT(A) ought to have held that your Appellant was entitled to deduction under section 80M of the Act, as claimed.
2. In confirming the disallowance of Rs 42,47,986 made by the A.O in respect of provision for interest on bad and doubtful debts. Your Appellant submits that on the facts and in the circumstances of the case and having regard to the provisions of the Act and the DT A, the CIT(A) ought to have held that the said amount was allowable deduction in computing your Appellant's total income.
3. In confirming disallowance of Rs 6,39,000 being expenditure on repairs and maintenance of flats and premises having failed to appreciate that the liability in respect of the said sum had been incurred by the Appellant during the previous year in question. Your Appellant submits that on the facts and in the circumstances of the case, the CIT(A) ought to have allowed deduction of the said sum of Rs 6,39,000 in computing your appellant's total income.Page 2 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay
4. In concluding that the evidence produced in support of call money and securities transactions, based on which the DC gave the remand report, were inadequate and in not accepting the remand report of the Assessing Officer. We submit that at the time of completing the assessment the assessing officer relied on documents and evidences to make the additions on account of call money and securities transactions. However, during the appeal proceedings, the learned CIT(A) directed the Assessing Officer to verify the call money and securities transactions and when the Assessing Officer relied on documents and evidences similar to the one produced at the time of assessment in support of the transactions, the learned CIT(A) considered them as inadequate.
5. In restoring the issue relating to additions on account of securities and call money transactions to the Assessing Officer, inspite of offering explanation to the satisfaction of the assessing officer according to Chapter VI of the Income tax Act, 1961. The A.O had pursuant to the remand order of CIT(A) verified these transactions and had reported that the Appellant had entered into such transactions with the counterparties. In these circumstances, the Appellant submits that the direction of the CIT(A) to the A.O to verify the transactions with the original records of the counterparties would be futile, tedious and time consuming exercise which is wholly unnecessary".
Grounds - A.Y 1994-95: (ITA No.507/Mum/2000) "1. In setting aside and restoring the case back to the learned Assessing Officer to decide on the question of allowability of the following expenses in light of the recent decision in appellant's own case enunciated by the Authority for Advance Ruling ('AAR') in 236 ITR 103.
of travel under Rule 6D - 99,627
of gift expenses under Rule 6B - 6,221
of entertainment expenses under section 37(2)- 5,28,387 under section 43B - 5,01,477 of 50 percent in respect of payments made to clubs- 60,070
2. In disallowing the claim for deduction under section 80M of the Act amounting to `.3,92,89,504 on the ground that the deduction is available only to domestic companies and not to non-resident companies such as the appellant".
Page 3 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay ITA No.8693/Mum/1995: AY 1991-92
3. Ground no 1 is on the issue of claim of deduction under section 80M. The facts leading to the issue are as under. Assessee is a company incorporated in France and is engaged in the business of banking. In India, the assessee operates through branch offices under a banking licence issued by the Reserve Bank of India. By virtue of being granted this licence, the Appellant is included in Schedule II of the Reserve Bank of India Act, 1934 as a scheduled bank.
3.1 The Assessee is a 'foreign company' within the meaning of section 2(23A) of the Income-tax Act, 1961 and is a tax resident of France. In respect of AYs 1991-92 and 1994-95,the assessee filed its return of income claiming the benefits of the Double Taxation Avoidance Agreement between India and the Republic of France, executed on March 26, 1969 and notified vide GSR No 260 dated February 18, 1970 ('the Old India-France tax treaty') which was in force during AYs 1991-92 and 1994-95.
3.2 Article XXI of the India-France tax treaty deals with non- discrimination. The Assessee submits that, on the basis of Article XXI of the India-France tax treaty, the Assessee ought to be granted deduction under section 80M of the Act.
4. The Assessee had raised this contention at the assessment and the first appellate stages; however, at both these stages, the contention of the Assessee was rejected. The Assessee therefore raised the following ground of appeal in respect of AYs 1991-92 :
Page 4 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay "Based on the facts and circumstances of the case, the Assessee respectfully submits that the learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of deduction of Rs 10,929,533 under section 80M of the Income-tax Act, 1961 made by the Assessing Officer."
5. AO as well as the CIT (A) rejected assessee's claim on the reason that the provisions of section 80M are applicable to the 'domestic company' and assessee being a 'foreign company' cannot claim the deduction specifically provided to the domestic companies.
Request for reference to Special Bench:
6. Assessee's contentions particularly with reference to the referring to the Special Bench on a question of law are as under:
• Assessee is a 'national' of France and Indian Scheduled Banks are 'nationals' of India.
• In respect of AYs 1991-92 and 1994-95 deduction under section 80M was available only to 'nationals' of India.
• Denial of deduction under section 80M of the Act to assessee (being a national of France) resulted in assessee being subjected to a more burdensome taxation than Indian Scheduled Banks (nationals of India in the same circumstances).
• This has been specifically prohibited by Article XXI of the Old India France Tax Treaty, further by virtue of section 90(2) of the Act, provisions of the Old India-France tax treaty must prevail over the provisions of the Act.
• Therefore, the discrimination contemplated under section 80M of the Act can be applied to assessee and assessee Page 5 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay must be allowed deduction under section 80M of the Act for AYs 1991-92 and 1994-95.
• All the above arguments of assessee have been considered and held in assessee's favour in the Standard Chartered Bank vs. IAC 39 ITD 57 by Mumbai ITAT. Assessee also places reliance on the ratio laid down in the following rulings:
a) State Trading Corporation of India AIR 1963 S.C. 1811
b) Decca Survey Overseas Ltd. In ITA.No.3604/Bom/94
c) Bank International Indonesia vs. JCIT in ITA.No.3013/M/2001.
d) ABN Amro Bank NV vs. JCIT in ITA.No.692/Cal/2000
7. Elaborating each of the arguments, it was submitted that assessee is a 'national' of France and Indian Scheduled Banks are 'nationals' of India and since the deduction under section 80M was available only to the 'nationals' of India, there is discrimination. The applicability of Article XXI of France treaty is therefore, invoked and referred to the Article XXI.
"The nationals of one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other Contracting State in the same circumstances are or may be subjected. In 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".
8. Further, referring to the judgment of the Hon'ble Supreme Court of India in the case of State Trading Corporation of India vs. CTO (AIR 1963 Supreme Court 1811), which was referred to by the ITAT Page 6 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Mumbai in the case of Standard Chartered bank vs. IAC (39 ITD 57), it was the contention that foreign company is to be considered as national of other contracting state as per Article XXI. It was the submission that the deduction under section 80M was available only to the nationals of India that too domestic companies. It was the contention that no company incorporated outside India should have ever qualify as a 'domestic company' and there is discrimination between the 'nationals' of India and 'nationals' of other contracting state as far as this deduction is concerned. Continuing further, it was submitted that even though the Act defines the 'domestic company', 'foreign company' and 'Indian company', the rules never prescribed any arrangements for the declaration of payment of dividend within India as applicable to foreign company. For all practical purposes, the domestic company means an Indian company. Therefore, even though reference to section 80M is with reference to the domestic company to the extent it relates to the 'company other than an Indian company' has not been activated by the Legislature as neither Rule 27 referred to section 2(22)A, nor any other rules are prescribed in the context of this section. This plea was already noticed by the ITAT in the case of Income Tax Officer vs. Decca Survey Overseas Ltd in ITA No.3604/Bom/94 in the context of section 90 as it stood then. This decision was followed in subsequent case of Bank International Indonesia vs. JCIT in ITA No.3013/M/2001 and also by ABN Amro Bank NV vs. JCIT in ITA No.692/Cal/2000. In view of this it was submitted that as discrimination was prohibited by Article XXI of India-France treaty and as assessee was placed at a disadvantageous position as far as this deduction was concerned, the deduction under section 80M is allowable.
9. Assessee's working pertains to this claim is as under:
Page 7 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Amount (`.) Particulars Indian Assessee Scheduled Banks Dividend 100 100 Less: Deduction under section 80M of 60 -
the Act Taxable dividends (subject to tax at 40 100 the following rates:
-Indian Scheduled Banks @ 57.5 per cent
- The Assessee at the rate of 25 per cent) Effective rate 23 25 As the tax rate is more to the assessee bank, it was the submission that there is discrimination which should be avoided.
10. The learned Counsel further referred to the case of Credit Llyonnais vs. DCIT, 94 ITD 401 to submit that this decision, which held deduction under section 80M allowed to domestic company can not be allowed to foreign company on the basis of the Article XXI, is not on the basis of nationality but is based on whether or not a company has made a prescribed arrangement for declaration and payment of dividend, therefore, provisions of Article- XXI could not be invoked. It was the contention that this order is per incuriam as it has not considered the binding precedent in the case of Standard Chartered bank (supra) and also not considered the ruling on Decca Survey Overseas Ltd (Supra) that no prescribed arrangements have been stated under the rules and therefore, for all practical purposes, a domestic company means an Indian Company which is an Indian national. Therefore, in the light of the decision in the case of Standard Chartered Bank, Decca Survey, Bank International Indonesia followed by ABN Amro, the decision of the Page 8 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Credit Llyonnais cannot be relied on as it was per incuriam, therefore, reference to the Special Bench is required.
11. The learned Counsel submitted that the decision in Standard Chartered Bank was in the context of DTAA between India and UK, wherein the provisions of non-discrimination are similar. The comparative chart placed is as under:
India UK Tax Treaty India-Netherlands India France Article 23 Article 24 Article XXI
1. The nationals of a 1. Nationals of one of the The nationals of one Contracting State shall not States shall not be of the Contracting be subjected in the other subjected in the other States shall not be Contracting State to any State to any taxation or subjected in the taxation or any any requirement other Contracting requirement connected connected therewith State to any therewith which is other or which is other or more taxation or any more burdensome than burdensome than the requirement the taxation and taxation and connected connected connected requirements to requirements to which therewith, which is which nationals of that nationals of that other other or more other State in the same State in the same burdensome than circumstances are or may circumstances are or may the taxation and be subjected. be subjected. These connected provisions shall, requirements to
2. The taxation on a notwithstanding the which nationals of permanent establishment provisions of Article 1 the other which an enterprise of a also apply to persons who Contracting State in Contracting State has in are not residents of one or the same the other Contracting both of the States. circumstances are State shall not be less 2. Except where the or may be favourably levied in that provisions of paragraph 3 subjected. In other State than the of Article 7 apply, the particular, the taxation levied on taxation on a permanent citizens of one enterprises of that other establishment which an Contracting State State carrying on the same enterprise of one of the who are subjected activities in the same States has in the other to tax in the other circumstances or under State shall not be less Contracting State the same conditions. This favourably levied in that shall be entitled to provision shall not be other State than the the same extent as construed as preventing a taxation levied on the citizens of that Contracting State from enterprises of that other other Contracting charging the profits of a State carrying on the State, to any permanent establishment same activities. exemption, which an enterprise of the 3. The provisions of deduction, credit or other Contracting State paragraph 2 shall not be other allowance has in the first mentioned construed as obliging one accorded in State at a rate of tax which of the States to grant to consideration of the is higher than that residents of the other family imposed on the profits of a State any personal circumstances.
similar enterprise of the allowances, reliefs and first mentioned reductions for taxation Page 9 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Contracting State, nor as purposes on account of being in conflict with the civil status or family provisions of Paragraph 4 responsibilities which it of Article 7 of this grants to its own Convention. residents.
3. Nothing contained in 4. Except where the this Article shall be provisions of paragraph 1 construed as obliging a of Article 9, paragraph 9 Contracting State to grant of Article 11, or to individuals not resident paragraph 9 of Article 12, in that State any personal apply, interest, royalties allowances, reliefs and and other disbursements reductions for taxation paid by an enterprise of purposes which are by law one of the States to a available only to resident of the other State individuals who are so shall, for the purpose of resident. determining the taxable profits of such enterprise,
4. Enterprises of a be deductible under the Contracting State, the same conditions as if they capital of which is wholly had been paid to a or partly owned or resident of the first controlled, directly or mentioned State.
indirectly, by one or more Similarly, any debts of an residents of the other enterprise of one of the Contracting State, shall States to a resident of the not be subjected in the other State shall, for the first mentioned purpose of determining Contracting State to any the taxable capital of taxation or any such enterprise, be requirement connected deductible under the therewith which is other or same conditions as if they more burdensome than had been contracted to a the taxation and resident of the first connected requirements to mentioned State.
which other similar 5. Enterprises of one of enterprises of that first the States, the capital of mentioned State are or which is wholly or partly may be subjected. owned or controlled, directly or indirectly, by
5. In this Article, the term one or more residents of "taxation" the other State, shall not be subjected in the first mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first mentioned State are or may be subjected.
Page 10 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay It was the stressed that the issue requires adjudication by a special bench as there are conflicting orders.
12. Countering the arguments of the learned AR, the learned CIT (DR) submitted that assessee's contentions are not correct. Non discrimination clause of Article-XXI can only be invoked if two assessees are placed "in the same circumstances", notional discrimination cannot be considered. It was submitted that a foreign bank operating in India cannot be considered as assessee in 'the same circumstances' vis-à-vis scheduled banks in India which are governed by the RBI guidelines with reference to loans to priority sector, rural branches etc. So this cannot be considered as operating in the same circumstances and relied on the AAR decision in the case of ABC Inre 236 ITR 103 with reference to the principles therein. Then the learned DR referred to the provisions of section 80M as it existed before when the foreign companies were also getting deduction, but tax rates were very high, and the amendment brought out subsequently by the Finance Act, 1976 wherein foreign companies were not specifically allowed the deduction and the tax rate was reduced drastically in the cases of foreign companies. Even though it was submitted that the DTAA agreement was entered way back in 1975-76 when foreign companies were eligible for deduction, subsequent amendment in reduction of tax has to be considered. He relied on coordinate bench decision in the case of Credit Llyonnaise (supra) where in this issue was discussed and no contrary decision on this treaty was there. The Ld. CIT DR then referred to the case of Chohung Bank Vs. Deputy Director of Income-tax (Int. taxation) - 1(2), Mumbai, 102 ITD 45 wherein the same principle was followed. He then referred to Article IX, Article XIX(3)(c) and various other articles to submit that assessee is not covered by the Article-XXI of non discrimination clause. He referred to the decision of Gramaphone India, AIR 1984 (SC) 687 discussed Page 11 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay in Para 11.2 of the decision of Chohung Bank Vs. Dy.Dir (IT) to submit that Parliament has supreme powers to change domestic law and so the deduction was not allowed to a foreign company, but only to the domestic company.
13. With reference to the contention that the Indian Company is to be considered as 'domestic company' and there is discrimination between an Indian Company and the Foreign company, the learned DR referred to section 2(17) the definition of the 'companies' and section 2(33)A of the 'foreign company', Section 2(22)A of 'domestic company' and section 2(26) of 'Indian Company' and more particularly for declaration of any foreign company to be an Indian Company by the CBDT under section 2(17). It was submitted that because of this express provision, domestic company does not mean only Indian Company. A foreign company can also be declared as Indian company so the discrimination sought on nationality is not correct.
14. The learned DR then referred to the principles on invoking the discrimination clause and referred to the observations of third Member in the case of ABN Amro NV vs. JCIT (ITA No.692/Cal/2000) to submit that the decision in Decca Survey is no longer applicable. He then referred to the order of the ITAT on the miscellaneous application in the case of Abu-Dhabi Commercial Bank Ltd. Vs. Joint Commissioner of Income-tax, Special Range-27, 18 SOT 169 and Credit Agricole Indosuez Vs. Joint Commissioner of Income-tax, Spl. Rg. 27, Mumbai, 14 SOT 246 about the powers of Parliament and interpretation of discrimination of clause. He further submitted that by virtue of Article IXX(1), it was agreed that the domestic laws shall prevail and relied on the M.A. order in the case of Abu-Dhaby Commercial Bank (Supra) and Mashreqbank PSC Vs. Deputy Director of Income-tax (International Taxation), Range 3(2) 14 SOT 1, DCIT vs. Mitsubishi Heavy Industries Ltd, 61 TTJ 656.
Page 12 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay
15. Learned CIT DR then referred to the protocol entered by the Govt. of India with the French Republic and the revised DTAA to submit that the Article 26 in the revised DTAA is different from old Article XXI to submit that 'enterprises of one Contracting State' has been specifically referred in the later DTAA, so they cannot be considered as nationals under the old DTAA so as to come under the non discrimination clause, even though the Hon'ble Supreme Court held that the nationals may be included juridical persons also. Then he referred to the CBDT clarification on credit available for giving Tax relief and Article XXII for mutual agreement procedure provided under the DTAA which were not availed by assessee. He submitted that all other case law relied upon by assessee are not applicable in the context of Indo-French DTAA and relied on the decision of coordinate Bench in the case of Credit Llyonnais (supra) which is the only decision on the issue and is applicable fully to the facts of the case. He then referred to the chart furnished by assessee with reference to discrimination to submit that it is only 2% rate which is charged extra from assessee and if assessee's contention of deduction under section 80M is considered and tax rate is applied, there will be discrimination to the Indian Companies and not to the foreign companies. He supported the orders of AO and the CIT (A) in not allowing the deduction under section 80M and submitted further that there is no need to refer to Special Bench.
16. We have considered the issue and rival arguments. In order to understand the contentions, it is necessary to extract section 80M as applicable for the year under consideration which as under:
"Section 80M:
"(1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of Page 13 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to,-
(i) in the case of a scheduled bank or a public financial institution or a State financial corporation or a State industrial investment corporation or a company registered under section 25 of the Companies Act, 1956 (1 of 1956), sixty per cent of the income by way of dividends from another domestic company;
(ii) in the case of any other domestic company, so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first-mentioned domestic company on or before the due date.
(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under clause (ii) of sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.
(3) Where the dividend distributed is in respect of any period comprised in the previous year ending on the 31st day of March, 1990, no deduction shall be allowed in respect of such dividend.
Explanation: For the purposes of this section, the expressions-
(i) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) and which is a domestic company;Page 14 of 75
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(ii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956).
(iii) "State financial corporation" and "State Industrial Investment Corporation" shall have the same meaning as in section 43B.
(iv) "due date" means the date for furnishing the return of income under sub section (1) of section 139".
17. Originally upto 1976 'foreign companies' were eligible for deduction at 80% of such income in respect of income by way of dividends received by it from 'an Indian Company which is not a company as is referred to section 108 and it is mainly engaged in a priority industry'. Most of the foreign companies were allowed deduction at 65% of dividend income from other than those specified above whereas the domestic company was allowed deduction at 60% of dividend income. In the result, only 35% percent of net dividend income was charged to tax at the rate of 73.5%, which gives an effective rate of 25.725% on the dividend income included in taxable income in the case of foreign companies, Indian companies are taxed at normal rate prescribed to them. By the Finance Act 1976, section 80M has been substituted. The result was that deduction from income by way of dividend from Indian company shall not be available to foreign companies from assessment year 1977-78. This modification was a consequence of reduction of effective tax rate to a foreign company. Till the assessment year 1976-77, the dividends received by a foreign company from an Indian company were taxed on 'net basis' i.e. after allowing deduction in respect of expenses incurred by the company in earning such income. Consequent to the withdrawal of benefit under section 80M, no deduction was allowed to foreign companies from the dividend income under 80M and under section 115A the gross amount of such dividend is being charged @ flat rate of 25%.
Page 15 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay As submitted by assessee, the tax rate applicable for these years is at 25% only on gross basis. Assessee's illustration depicting the tax rates applicable to the Assessee vis-à-vis Indian scheduled Banks in respect of dividend income of `.100 is as under:
(Amount in `.) Particulars Indian Scheduled Assessee Banks Dividend 100 100 Less: Deduction 60 -
under section 80M
of the Act
Taxable dividends 40 100
(subject to the tax
at the following
rates - Indian
scheduled Banks
@ 57.5%.
- The Assessee @
25%
Effective tax rate 23 25
18. Assessee's contention is that the effective tax rates on dividend is higher in the case of Assessee vis-à-vis Indian Scheduled Bank by 2% and therefore, assessee a 'national' of French is being subjected to a more burdensome taxation than the Indian Scheduled Banks (Nationals of India). On the fact of this above Table, it looks apparently that there is higher rate of 2% in the case of foreign bank vis-à-vis Indian Scheduled Bank, but on this basis alone, deduction under section 80M allowable to domestic company cannot be extended to the foreign company, as otherwise the following scenario will arise:Page 16 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay (Amount in `.) Particulars Indian Scheduled Assessee Banks Dividend 100 100 Less: Deduction 60 60 under section 80M of the Act Taxable dividends 40 40 (subject to the tax at the following rates - Indian scheduled Banks @ 57.5%.
- The Assessee @ 25% Effective tax rate 23 10
19. If assessee's contentions were to be accepted, the dividend income will be taxed at 10% being the effective tax rate vis-à-vis Indian Scheduled Bank at 23%. This works in a reverse discrimination to the Indian banks. Thus the prima facie, rate difference of 2% in the effective tax rate alone cannot be considered as a discrimination vis-à-vis Indian Scheduled Bank, so as to allow the deduction under section 80M which is not otherwise allowable under the Act.
Provisions applicable to taxation of Dividends in DTAA:
20. The DTAA applicable in impugned years was Double Taxation Avoidance Agreement between India and the Republic of France, executed on March 26, 1969 and notified vide GSR No 260 dated February 18, 1970 ('the Old India-France tax treaty'). The relevant articles applicable to Dividends are as under:
Article IX Dividends paid by a company which is a resident of one of the Contracting State to a resident, the other Contracting State may be taxed in both the Contracting States.
Article XIX Page 17 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay (1) The law in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where express provision to the contrary is made in the present Agreement. However, a company which is a resident of India and has a permanent establishment in France and which is liable to the tax on income from movable capital under article 109.2 of the General Code of Taxes of France shall not be charged to that tax on income exceeding the profits attributable to such permanent establishment in accordance with Article III of the present Agreement.
(1) Subject to the provisions of Article VI and paragraph (1) above, where, in the case of a resident of India, any income from sources within France is subjected to tax both in India and in France, India shall allow against the Indian tax payable in respect of such income and within the limit of such Indian tax, a credit of French tax payable in respect of such income; so however, that where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance, against the income tax payable by the company, in India and, as to the balance, if any, against the surtax payable by it in India. Subject to the provisions of Article VI and paragraph (1) above, in respect of income subject to tax in both the Contracting States, tax shall be determined in the case of a resident as follows:
(a) On royalties mentioned in Article VII derived from sources within India and which have been subjected to tax in India, France shall allow, against the French tax payable in respect of such royalties and within the limit of such French Tax, a credit of Indian tax payable in respect of such royalties.
(b) On interest mentioned in Article VIII derived from sources within India:
(i) In cases where such interest has been subjected to tax in India, France shall allow, against the French tax payable in respect of such interest and within the limit of such French tax, a credit of Indian tax payable in respect of such interest;Page 18 of 75
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(ii) In cases, where, owing to the operation of section 10(15)(iv) of the Income tax Act, 1961, no Indian tax is payable on such interest France shall reduce the French Tax payable in respect of such interest by an amount equal to fifty per cent thereof.
(c) On dividends, mentioned in Article IX, derived from sources within India, France shall allow, against the French tax payable in respect of such dividends and within the limit of such French tax, a credit of an amount equal to thirty per cent of the gross amount of such dividends. In computing the French tax, on such dividends in cases where the Indian tax thereon has been reduced or exempted by the operation of section 80J, 80K and 80M of the Income Tax Act, 1961, it shall be deemed that the amount by which the Indian tax has been reduced or exempted has been actually paid in India.
4) Income which, in accordance with the provisions of the present Agreement, is not to be subjected to tax in any Contracting State, may be included in the amount of income to be taken into account for calculating the rate of tax to be imposed in that Contracting State.
CLARIFICATRION ISSUED BY THE CBDT VIDE CIRCULAR NO.39 DATED 13TH APRIL, 1970.
A comprehensive agreement for the avoidance of double taxation of income between India and the Republic of France was signed by the representatives of the two countries on 26th March, 1969, and a notification under section 90 an section 24A of the Companies (Profits) Surtax Act, to give effect to the provisions of the Agreement, has been issued on February, 1970. In India, the agreement will be applicable in respect of income of the previous year beginning on or after 1st January, 1970. Thus, in a case where the accounts are maintained on the basis of the calendar year or financial year, the Agreement will be effective for the assessment year 1971-72 and later years, while in a case where the previous year ends on any earlier date, say, on 30th June, this will have effect from the assessment year 1972-73 onwards.
Page 19 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay The Agreement is based on the principles which have been adopted by India in the agreements concluded by her so far with other West European countries. It provides, in substance, that the country in which the income from a particular source arises will be primarily entitled to tax that income and if such income is also taxable in the home country under the operation of its laws, double taxation will be relieved by the home country. For this purpose, either the income is exempted from tax in the home country of the recipient of the income or the tax charged on that income in the source country is given credit for against the home country's tax. In relieving double taxation by the latter method, the home country gives credit not only for the tax actually charged on such income in the source country but also the tax spared in that country under the special concessional provisions in taxation laws for encouraging investment and promoting industrial development. In the French Agreement, both these methods have been used.
As regards industrial and commercial profits derived by an enterprise of one country in another country, the same are taxable in the source country if and to the extent that they derived from a "permanent establishment" of the enterprise in the country of sources. As regards income from investments, viz, dividends, interest and royalties, such income to be taxed in both the countries i.e. the country of residence as well as the country of residence. Thus, royalty, dividends and interest paid by an Indian enterprise to a French enterprise may be taxed in both the countries. In such cases, France will allow credit against French tax payable by a French enterprise in respect of such income on the following:
In respect of royalty income an amount equal to the tax charged in India on such income, subject to a maximum of the tax payable in France under the French law. In respect of interest income-
a) Where the interest has been subjected to tax in India, an amount equal to the tax charged in India on such income, subject to a maximum of the tax payable in France under the French law;
b) Where the interest is exempt from tax under section 10(15)(iv) an amount equal to 50 per cent of the tax payable on such interest in France under the French law.
1. In respect of dividends, an amount equal to 30 per cent of the gross amount of dividends, subject to a Page 20 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay maximum of the tax payable in France under the French law. In computing the French tax for this purpose, tax spared in India under section 80J, 80K and 80M shall be presumed to have been actually paid in India.
The provisions of DTAA between India and France allow source country (India) to tax the amount and host country (France) allows tax credit upto 30% whether tax was paid or not. It also specifically allows that the law in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where express provision to the contrary is made in the present Agreement. These provisions were elaborately discussed by the CIT (A) as under :
"2.4. The argument of the learned counsel is that since an Indian Bank is entitled to deduction u/s.80M, then the appellant which is a foreign bank may also be allowed deduction u/s.80M in view of Article XXI of the Treaty for double taxation avoidance agreement between Indian and France. The learned Counsel also referred to Article XIX(3) of the Treaty between India and France. Under Article XIX (3)(c) deduction is provides that France shall allow against the French tax payable in respect of such dividends and within the limit of such French tax, a credit of an amount equal to 30% of the gross amount of such dividends. In computing the French tax on such dividends in cases where the Indian tax thereon has been reduced or exempted by the operation of section 80J, 80K and 80M of the Income Tax Act it shall be deemed that the amount by which the Indian tax has been reduced or exempted has been actually paid in India. In view of these provisions of Article XIX (3)(c) of the Double Taxation Avoidance Agreement (hereinafter Page 21 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay referred to as DTAA) it is argued by the learned counsel that deduction u/s. 80M was intended by the DTAA.
2.5. This argument of the learned counsel is not correct. If by operation of section 80J, 80K and 80M Indian tax on dividend has been reduced, then it shall be deemed that the amount by which the Indian tax has been reduced or exempted has been actually paid in India. This provision of Article XIX(3)(c) does not provide for deduction u/s. 80M but it only provides for considering certain amount actually paid in India if by operation of section 80M, 80J and 80K tax in India has been reduced or exempted in respect of dividend income. Article XIX(3)(c) does not indicate application of 80M in the case of foreign non- resident company. There may be a case where even deduction u/s. 80M can be available to a foreign non resident bank also. For instance a domestic company is defined as an Indian co. u/s.2(22A) of the I.T.Act or any other company which in respect of its income liable to tax under income-tax has made prescribed arrangement for the declaration and payment within India of the dividend out of such income. U/s. 2(26) of the I.T.Act an Indian company has been defined as a company formed and registered under the Companies Act, 1966 and interalia includes any institution or association or body which is declared by the Board to be a company under clause 17 of section 2 of the I.T. Act. Under section 2(17) of the I.T. Act the CBDT has been empowered to declare any institution, association or body whether incorporated or not and whether Indian or non-Indian, by general or special order of the Board to be a company. Therefore CBDT has been fully empowered to Page 22 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay declare any institution, association or body whether incorporated or not as a company for the purpose of income tax and such a company after declaration would be an Indian company and therefore a domestic company is also considered as an Indian company. Therefore in case of appellant also the provisions of section 80M can be made applicable only if the CBDT declares the appellant as a company for the purpose of Indian Income Tax Act and after such declaration of the Board the appellant would be deemed to be an Indian company and therefore a domestic company. In such a case the provisions of Article XIX(3)(c) of the DTAA would be applicable. Therefore the arguments of the learned counsel that under Article XIX(3)(c) of DTAA the appellant can claim deduction u/s. 80M has no force.
2.6. The arguments of the learned counsel that since the banks in India are entitled to deduction u/s. 80M, the appellant bank should also be allowed deduction u/s.80M of the I.T. Act also does not have any force because every scheduled bank is not entitled to deduction u/s. 80M. Only those scheduled banks are entitled to deduction u/s.80M which are mentioned in Explanation 2 to section 80M and which is a domestic company as mentioned in the said Explanation itself. For instance various Cooperative Banks have been mentioned in the Schedule to the RBI Act. If a Cooperative Bank has made investment in shares of a company which are not part of business of the Cooperative Bank, such a cooperative Bank will not be entitled to deduction u/s. 80M of the I.T.Act because cooperative Bank is not a domestic company though it is Page 23 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay a scheduled bank. Therefore the appellant cannot claim parity with those scheduled banks which are domestic company because there is no such provision in the DTAA between India and France.
2.7. It may also be mentioned that provisions contained in Article XXI of DTAA between India and France are general in character whereas provisions of section 80M are specific and applicable only in the case of domestic co. It is well established that such general provision in Treaty do not derogate from special provision of law. There is no dispute between specific provision of section 80M of I.T. Act and Article XXI of DTAA between India and France but even in case of disputes between general and specific provisions, special provisions have to be applied. This principle is contained in the maxim "generalia specialibus non derogant" which means that general words or things do not derogate from special. This expression was explained to mean that when there is conflict between a general and special provision, the latter shall prevail or the general provisions must yield to the special provision. The maxim is regarded as a cardinal principle of interpretation and is characterized as a well recognized principle. In view of the fact that there is no specific provision in the DTAA between India and France regarding deduction u/s. 80M of the I.T. Act specific provisions of section 80M would prevail. Since deduction u/s. 80M is admissible in the case of domestic company only and there is no force in the argument of the learned counsel, this ground of appeal is dismissed.
Page 24 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 2.8. It may also be mentioned that Article XIX of the Treaty provides as under :
"The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting states except where express provision to the contrary is made in the present agreement. .......
This Article XIX of the DTAA specifically lay down that the laws in force in either of the Contracting States will continue to govern the taxation of income in the respective states. It is clear from Article XIX that unless and until there is a specific provision in the DTAA regarding deduction u/s. 80M the provisions of section 80M of the I.T. Act will apply. Under the provisions of section 80M the assessee bank being not a domestic company is not entitled to deduction out of dividend income. On this ground also this ground of appeal is dismissed."
We agree with the opinion expressed by the learned CIT(A) with reference to the above Articles.
21. It was the contention that the prescribed arrangement as per Rule 27 is not applicable to foreign company, therefore, for all practical purposes the Indian company is a domestic company and being a national of France (following the principles laid down by the Hon'ble Supreme Court in the case of State Trading Corporation (Supra)), there is discrimination between Indian Company and Foreign Company. In relation to interpretation of the term 'national' the assessee relied on the following observations of Page 25 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay the Mumbai ITAT in the case of Standard chartered Bank vs. IAC 39 ITD 57.
"As observed by the Supreme Court in State Trading Corpn. Ltd.'s case, the Corporation have nationality in accordance with the country of their incorporation. The Supreme Court specifically distinguished between 'nationality' and 'citizenship' and stated that nationality has reference to the jural relationship which may arise, for consideration under international law. The assessee herein being incorporated in U.K. is a national of one of the Contracting States, namely, the U .K. Since our country has a DTA agreement with the U.K. any national of that State cannot be subjected to a higher burden of tax than a national of the Indian State."
In this respect, reliance is also placed on the following observations of the Mumbai ITAT, in the case of ITO vs. Decca Survey Overseas Ltd (ITA.No.3604/Bom/94). The Decca Survey Ruling was issued in the context of Explanation to section 90 of the Act, which, as it stood then, made reference to foreign companies making the prescribed arrangements for declaration and payment of dividend. In Decca Survey Ruling, the Mumbai ITAT observed :
"Rule 27 of the Income Tax Rules, to which our attention was drawn by the department lays down as to what would be the prescribed arrangement for declaration and payment of dividends within India, but that is only for the purpose of sections 194 and 236 of the Act. This rules does not refer to section
90. The department was not able to draw our attention to any rule in the Income Tax Rules framed for the purpose of section 90 listing out the prescribed arrangements within the meaning of the section. The Explanation, thus not having been activated, is incapable of being applied. There are no guidelines framed in the Income Tax Rules as to what would be the prescribed arrangements for the purpose of the Explanation. The Explanation thus remains a dead letter and no reliance can be placed on the same by the department."Page 26 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay The Decca Survey Ruling was followed by the Mumbai ITAT and its subsequent ruling in the case of Bank International Indonesia vs. JCIT (ITA. No. 3013/M/2001) and it was held that the Explanation to section 90 of the Act has not been activated by the legislature and is incapable of being applied. The Kolkata ITAT, in the case of ABN Amro Bank NV vs. JCIT (ITA.No.692/Cal/2000) observed :
"....Shri Dastur tries to argue in this connection that, as it is not possible for banks incorporated outside India having their activities spread over different countries (including India) to comply with the provisions of Rule 27 of the I.T. Rules, from the view point of sheer plausibility, so far as the banking companies are concerned, the entity of a domestic company would essentially mean Indian companies alone.
He thus argues that although on the face of it, the Finance Act 1996 does not discriminate between Indian companies and non-Indian companies as such, actually, so far as the banking companies are concerned, the distinction turns out to be between an Indian company and non-Indian company.
We find sufficient strength in the arguments of Shri Dastur upto this point. We are also of the opinion that due to practical difficulties tantamounting to almost impossibility regarding fulfillment of Rule 27, it would be near impossible for non-Indian companies to come within the purview of 'domestic' companies. Hence, so far as mostly national companies vis-à-vis non-Indian companies like the foreign banking companies are concerned, the term 'Indian company' and 'domestic company' may be considered to be synonymous."Page 27 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay These arguments are apparently acceptable in the context in which these decisions were rendered, but the fact was that they are given in different context. The Standard Chartered Bank decision has come in the context of Indo-U.K. Treaty and on the deduction available under section 36(1)(vii)a with reference to computation of business income r.w. Article 23. The special rates applicable under section 115A are not applicable for the business income. Therefore, the principle laid down while computing the business income being taxed at higher rate invoking the non discrimination clause cannot be applied when the tax on dividend in the case of a foreign company is specially charged under section 115A at a tax rate, lesser than tax on Indian companies. We are not convinced that the above decisions will apply to the case of income from Dividends which are governed by special provisions both under domestic law and also under DTAA.
22. Explanation 1 to section 90 is as under:
Explanation 1 to section 90 "Explanation 1.--For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.
23. This explanation is available under section 90 w.e.f. 01-04- 1962 (inserted by Finance Act 2001 and modified by Finance Act 2004, to be effective from that date). In view of this, since the only difference for invoking the non discrimination clause is the rate alone that cannot be considered as a discrimination of foreign company vis- a- vis the Indian company. This opinion was supported by various decisions of ITAT.
A) The decision in the case of ABN AMRO BANK NV vs. Jt. CIT (2005) 96 TTJ (Cal)(TM) 1041:
Page 28 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay "Double Taxation relief-Agreement between India and Netherlands - Rate of tax for a foreign company - It is only when there is a conflict between the provisions of the agreements in contrast with the provisions of the IT Act that the beneficial treatment is to be given as per section 90(2) and not otherwise-There being no definition of "less favourable charge" in the DTAA, Explanation to section 90(2) inserted retrospectively w.e.f. 1st April, 1961, cannot be said to be in conflict with the provisions of the DTAA in regard to non-discrimination-Once the law is amended any circular issued earlier automatically gets superseded-Therefore, Explanation to section 90(2) is attracted and the letters issued by the CBDT stands superseded by the Explanation-Accordingly, assessee, a bank incorporated in Netherlands, is taxable in India at the rate applicable to foreign companies-Article 25 of DTAA is not attracted.
Explanation to section 90 inserted retrospectively w.e.f. 1st April, 1962 specifically provides that the charge of tax in respect of the foreign company at the rate higher than the rate at which a domestic company is chargeable shall not be regarded as less favourable charge. In the DTAA, there is no definition of "less favourable charge". Therefore, the Explanation to section 90 cannot be said to be in conflict with the provisions of the DTAA. On the facts and in the circumstances of this case, there is no escape from the conclusion that there is no conflict between the provisions of the DTAA and the IT Act, 1961, in regard to the non discrimination. The DTAA recognizes the fact that the amendments effected by the respective legislatures after the execution of the Page 29 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay DTAA are not affected in so far as they are not repugnant to the specific provisions of the DTAA. In this view of the matter, the amendment in section 90 is applicable with retrospective effect in so far as it is not in conflict with the provisions of DTAA. The contention advanced on behalf of assessee that the said Explanation to section 90 is un-implementable because of inappropriate language, does not appeal. The Explanation provides for two eventualities. One is the charge of tax in respect of a foreign company vis-à-vis an Indian company (i.e. a domestic company). The second category as per Explanation is the foreign company vis-
à-vis the domestic company other than Indian company. Even under the Finance Act, the domestic company is recognized as Indian company and any other company having made arrangement for declaration of dividends payable on such income. Therefore, the language of the Explanation to section 90 is not in appropriate. Moreover in so far as there is no doubt about the category of the foreign company vis-à-vis the Indian company having been specified in the Explanation, one need not ascertain as to whether in any case the second category of the companies would at all exist".
B) Similar opinion was also expressed in the case of Abu-Dhabi Commercial Bank Ltd vs. Jt. Commissioner of Income Tax (2007), 18 SOT 169 (Mum):
"Double taxation relief-Agreement between India and UAE-Taxation under art. 26(2) of DTAA-For comparing the tax rate of a foreign entity and an Indian entity for purposes of art. 26(2) of DTAA, not only carrying on the same activity is required to be considered Page 30 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay but also the circumstances and conditions including the constitution have to be compared-Tax rate of a foreign company has to be compared with tax rate of a domestic company for purposes of art. 26(2) of DTAA between India and UAE-Further, in the light of Explanation to s. 90, charging of higher rate of tax to any foreign company cannot be regarded as less favourable charges or discrimination whether the treaty contains any specific provision in this regards or not-Assessee being a UAE banking company, Tribunal was justified in applying the tax rate of 55 per cent as applicable to a domestic company and not as applicable to a co- operative bank while applying art. 26(2) of the DTAA between India and UAE.
The first contention is that in view of the provisions of art. 26(2) of India-UAE tax treaty, rate chargeable to the assessee company should be compared with the rate chargeable to co-operative bank in India because co- operative bank in India is also carrying on the same activities as being carried on by the assessee. There is no merit in this contention of the assessee because art. 26(2) of the tax treaty between India and UAE does not provide that rate of tax to be charged to a company has to be compared with any other entities carrying on the same activity. If that be so, then in case of a company of UAE currying on the business of retail trade, it can be claimed that rate of tax to be charged to it should be compared with an individual in India because individual in India is also carrying on the same activity of retail trade and is charged with low rate of tax along with initial exemption of certain amount in each year.Page 31 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Article 26(2) of Indo-UAE treaty reads "The taxation on a PE which enterprise of a contracting state has in the other contracting state shall not be less favourably levied in that other contracting state than the taxation levied on enterprise of that contracting state carrying on the same activities in the same circumstances or under the same conditions." From the above provisions of art. 26(2), it can be seen that for comparing the tax rate of foreign entity, and an Indian activity not only carrying on the same activity is required to be compared but also the circumstances and conditions should be the same. Circumstances and conditions to be compared includes the constitution of entity and hence, foreign company has to be compared with the domestic company and therefore, there is no force in this contention of the assessee and that in the present case, rate of tax to be charged to the present assessee should be compared with rate of tax being charged to co-operative bank in India. Now, the second contention of the assessee that Explanation to :;. 90 would not be applicable to the assessee's case; as it only seeks to allow discrimination between a domestic company and a foreign company; and since, co- operative bank is not a domestic company, the Explanation would not apply. It is also contended that the assessee company is also 'national' as per art. 3(h) and hence as per art. 26(1) of the DTAA, higher rate of tax cannot be charged. There is no force in these arguments of the assessee also because, only comparable can be compared and rate of tax to be charged to foreign company has to be compared with the Page 32 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay rate of tax being charged to domestic company and the same cannot be compared with the co-operative bank. In view of Explanation to s. 90, the second argument regarding charging of higher rate of tax to foreign national also has no substance. Prior to insertion of Explanation to s. 90, Government of India took precaution to provide specifically in these tax treaties with various countries that charging of higher rate of tax will not amount to discrimination. In the absence of this Explanation to s. 90, this can be argued that in such cases, where there is no such specific provision in the treaty, charging of higher rate of tax will amount to discrimination; but in the light of this Explanation to s. 90, no such argument can be raised. It is also to be noted that tax treaties are entered into by the Central Government of India with Government of outside India as per authorities given by the same s. 90; and hence, insertion of Explanation in s. 90 or amendment in s. 90 cannot be overlooked or ignored. With regard to tax treaties with 4. countries, which are subsequent to insertion of this Explanation to s. 90 by the Finance Act, 2001, in spite of insertion of this Explanation in s. 90, insertion of such clause in tax treaties with the outside countries is always advisable to avoid any confusion; but that does not mean that if there is no such specific provision in the tax treaty with any country, this Explanation to s. 90 will not apply and hence, this contention of the counsel of the assessee also fails that because of the reason that the treaty of India with UAE does not contain specific provision to the effect that charging of higher rate of tax will not amount to discrimination, no such higher rate of Page 33 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay tax can be charged to the assessee company. In the light of this Explanation to s. 90, charging of higher rate of tax to any foreign company shall not be regarded as less favourable charge or discrimination whether the treaty contains any specific provision in this regard or not.
Conclusion :
Assessee being a UAE banking company, Tribunal was justified in applying the tax rate of 55 per cent as applicable to a domestic company and not as applicable to a co-operative bank while applying art. 26(2) of the DTAA between India and UAE".
C) In Chohung Bank vs. DDIT (IT), 102 ITD 45 (Mum)2006, ITAT held as under :
"Double taxation relief-Agreement with Korea Rate of tax for a foreign company vis-a-vis non-discrimination clause- Charging of the assessee foreign banking company at higher rate applicable to non-domestic companies was not hit by non-discrimination clause of art. 25 of the DTAA with Korea-Clause (2) of art. 25 could not be construed to mean that no tax could be levied on a foreign company at a rate higher than the rate payable by Indian company-Where no rates on an income or a category of income on the status of an assessee have been prescribed in DTAA,. then there cannot be any conflict with the IT Act-The DTAA in general does not prevail over the Finance Act and hence over the tax rates- Further, domestic banking company and non- domestic banking company do not function under 'same circumstances' and, hence, discrimination clause in art.Page 34 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 25 is not applicable- Explanation to s. 90(2) introduced- by the Finance Act, 2001 retrospectively w.e.f. 1st April, 1962, provides that charging of a foreign company at a 'higher rate will not be regarded as less favourable as compared to domestic company-This clarifies the position and is no way in conflict with the DTAA with Korea".
The charging of PE of the assessee-company at higher rates applicable to non- domestic companies is not hit by non-discrimination clause of art. 25 of the DTM with Korea. It is one thing to say that provisions of agreement will prevail over the provisions of IT Act insofar as assessability of an item is concerned and it is different thing to say that the agreement (DTAA) will also control the applicability of Finance Act which provides the rates for different assessable entities. The DTM gets the trade off only with the provisions of the IT Act and unless so specifically provided in a particular DTA, the rate of tax which is prescribed in an Annual Finance Act cannot give way to the DTAA. Indian tax laws created a distinction between a domestic and a non-domestic company. That distinction is on the basis of its definition provided in s. 2. The Finance Act also creates a distinction between the two on the basis of distribution of dividend. Where a Korean company having a PE. in India declares and distributes dividend in India, it is to be treated as domestic company and is liable to be taxed accordingly. The dividend distributed in India lead to accrual of income in the hands of the recipients. This will lead further levy of tax on Page 35 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay account of distribution of divider d in India. This distinction does not violate art. 25 of the DTAA in any way. The activities of Indian banks and Korean bank are similar. Both carry banking operations but the activities of the two are not same or identical. The DTAA in general does not prevail over the Finance Act and hence over the tax rates. Sec. 90 does not provide so. However, wherever DTAA has provided the taxation of a particular category of income at certain rates, then charging of that income at different rates as per IT Act, 1961 may come in conflict with DTAA and hence the taxes over that category of income will be levied at that rates so provided in DTAA. But where no such rates on an income or a category of income on the status of an assessee have been prescribed in DTAA then, there cannot be any conflict with the IT Act, 1961. Therefore, DTAA as such will not prevail over IT Act, 1961 and hence rates as applicable to domestic companies cannot be applied to non- domestic companies. In the present case, no rates for charging non-domestic companies have been provided in DTAA with Korea. Hence, it cannot be said that DTAA is in conflict with IT Act, 1961. In fact, no such real conflict has been demonstrated.
Art. 25(1) contains some important words/phrases which testify as to when and under what circumstances this non-discrimination clause would be applicable, One is 'nationals' and the other is 'in the same Circumstances'. Corporate bodies are not covered in the definition of nationals. Since 'legal Page 36 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay person' come side by side with individual in the above definition, then from the principle of noscitur a sociis, the legal person' would not be a corporate body. Further, 'other entity' as used in Art. 3(g) would a so not include 'corporate bodies' unless they are declared nationals under the law of that State. For the sake of argument presuming that the assessee-company is a national of the Contracting State (i.e. Korea), it still cannot be said that it is functioning in India under the same circumstances like a domestic company. The place of residence has been considered to be an essential criterion in determining whether two taxpayers are functioning 'in the same circumstances'. Another distinction between domestic company and non-domestic company is the declaration of dividend or making arrangement therefore. Thirdly, the domestic banking company has to abide by the additional conditions imposed by RBI about advances to agriculture or to weaker sections of society, Domestic banking company and non-domestic banking company do not function under 'same circumstances' and hence discrimination clause in art. 25 of Indo Korean DTAA is not applicable. Further, s. 2(22A) says that not only Indian company but also any other company can be termed as domestic company provided it has made prescribed arrangement for distribution of dividend (including dividend on preference shares) payable out of income to tax. Sec. 2(23A) defines a foreign company as a company, which is not a domestic company. The non-discrimination clause can be Page 37 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay invoked among the members of the 'same set of persons'. Thos domestic companies, which belong to one set and those, which are not domestic companies fall into other set. A non-resident company who falls in the definition of domestic company by virtue of its having made prescribed arrangement for distributing dividend, cannot be discriminated. From this definition also, one does not find any case of discrimination as Indian domestic company and non-resident company fall in two different sets, Within the group (or set) there should not be any discrimination on the basis of nationality.-Credit Llyonnais vs. I!Y. CIT(2005) 94 TTJ (Mumbai) 1074 : (2005) 94 ITD 401 (Mumbai) relied on.
Explanation to s. 90(2) provides that so far as applicability of tax rates is concerned applying higher rate to a non-domestic company would not be treated as less favourable. This is an exception to the general exception that assessees who are non- resident and with whose countries India has DTAA, will be treated as favourably or equally vis-a-vis, the resident taxpayers. In other words, in the event of· allegation of discrimination on the basis of rates on companies, the Explanation clarifies the position. This Explanation confirms to proposition that rates of taxes, which are provided by Annual Finance Act are beyond the provisions of the IT Act and hence they are not subjected to the provisions of DTAA. The Explanation does not lay out a new law but Page 38 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay only clarifies the position as it stood earlier also. The Explanation to s. 0(2) introduced in 2001 by Finance Act, 2001 with retrospective effect from 1st April, 1962 is no way in conflict with the DTAA with Korea. Therefore, the amendment made in s. 90(2) by way of insertion of Explanation is applicable insofar as it is not in conflict with the provision of DTAA. The words 'less favourable' have not been defined either in the DTAA or in IT Act. Therefore, it cannot be construed to mean that levy of higher. rate on the income of non-domestic company would be 'less favourable'. Art. 25 (2), as per Model Convention is designed to curb the discrimination in the treatment of PE as compared with resident enterprises belonging to the same sector of activities. Even though, broadly Indian domestic bank and PE of the assessee-bank are engaged in banking activities but the activities are not the same, they may only be similar.
Conclusion:
Charging of assessee foreign banking company at higher rate applicable to non domestic companies was not hit by non discrimination clause of art.25 of the DTAA with Korea.
D) In the case of MashreqBank PSC vs. Dy. Director of Income Tax (IT) (2007) 14, SOT 1(Mum), it was held :
"Double taxation relief-Agreement between India and UAE-Rate of tax for a foreign company vis-a-vis non- discriminatory clause-Basic mandate of art. 26(2) of the DTAA is that a PE, in one State, of a non-resident Page 39 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay enterprise must not be taxed any los favourably than the enterprise of that State-However, for the purpose of this comparison, form of ownership cannot be ignored- Ownership characteristics of a PE have to be the same as that of the enterprise of which it is a PE-In the instant case, assessee is admittedly a banking company incorporated in UAE-Therefore, for the purposes of art. 26(2), PE of the assessee can only be compared with a domestic company carrying on same activities in the same circumstances or similar conditions-Simply because the Indian PE, of the assessee is being taxed at a rate higher than the rate at which Indian co-operative societies carrying on the same business activity are taxed, provisions of art. 26(2) cannot be invoked Held:
At the outset, counsel fairly accepts that post 2004 amendments in Explanation to s. 90(2) of the IT Act, there are decisions against the assessee on this issue by various Benches of the Tribunal. He; however, submits that in none-of these decisions, any of the co- ordinate Benches had an occasion to deal with the issue of discrimination of foreign companies vis-a-vis Indian co-operative societies. Provisions of a tax treaty override domestic law in India, by the virtue of specific provision to that effect in the IT Act. Therefore, this superior position of the tax treaties vis-a- vis domestic law is subject to the conditions so laid down in the enabling provision set out under s. 90. Now, this enabling provision itself clarifies that differential tax rate between a domestic company vis-a- vis foreign company shall not be construed as Page 40 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay discrimination against the foreign companies. To that extent, therefore, overriding effect. of the tax treaty provisions is nullified, and the provisions of art. 26(2) of India UAE tax treaty have to be construed in the light of this limitation. The basic mandate of art. 26(2) of India UAE tax treaty is that a PE, in one State, of a non-resident enterprise must not be taxed any less favourably than the enterprise of that State. However, for the purpose of this comparison, it is not possible to ignore the form of ownership. A comparison can only be made with comparables. The form of ownership, therefore, becomes relevant. An enterprise cannot be considered in isolation with the person (i.e. individual, company or co- operative society etc.) which carries it on. It is also important to bear in mind that a PE has no distinct form of ownership; the ownership characteristics of a PE have to be the same as that of the enterprise of which it is a PE. In the present case, the assessee is admittedly a company incorporated in the UAE, and, therefore, for the purposes of art. 26(2), PE of the assessee can only be compared with a domestic company carrying on the same activities in the same circumstances or similar conditions. Just because Indian PEs of foreign banking companies are taxed at a rate higher than the rate at which Indian co-operative societies carrying out the same business activity are taxed, the provisions of art. 24(2), dealing with non-discrimination in taxation of PE, cannot be invoked".Page 41 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Even though the above decisions were given while interpreting various DTAAs, but the context is with reference to Section 90 post amendment retrospectively.
Foreign bank and Indian bank; are they operating under similar circumstances:
24. As rightly pointed by the learned DR, foreign bank and the Indian Scheduled Banks is not operating under similar circumstances. This issue was discussed by the Coordinate Bench in the case of Credit Llyonnais Vs. Deputy Commissioner of Income-
tax, 94 ITD 401 wherein similar issue was elaborately discussed and considered as under:
"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 Double Taxation Avoidance Agreement and the Income-tax Act, 1961.
6. The applicable India France Double Taxation Avoidance Agreement is India France DTAA dated 26th March, 1969 (reported in 76 ITR Statute 1). In this tax treaty, Article XXI provided as follows:
Article XXI 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 Page 42 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 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-á- 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 dependants 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 tax payer's nationality. That will be the situation, for example, in a case in which dependant 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 XXI, the Page 43 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay benefits of that provision would have been available to the French nationals as well. Another situation in which the provisions of Article XXI may affect the provisions of the Income-tax 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 section 80R and 80RRA deal with the citizenship also, 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 resident of a Contracting State and one who is not a resident of a Contracting State are not in the same Page 44 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 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', that 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 tax payer 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 tax payer, 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 standardization 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 overemphasized. This proposition finds support from the judgment of Hon'ble Page 45 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 1461 and Tribunal decisions in the cases of Graphite India Ltd. v. Dy. CIT [2003] 86 ITD 384 (Kol.) and Dy. CIT v. ITC Ltd. [2003] 85 ITD 162 (Kol.). 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 Income-tax Act. Is it based on the nationality simplicitor or is it on the basis of some other criterion? Does this classification depend on requirements connected with residence, or is it the nationality of a company which decide 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, it 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 that 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 Page 46 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay deduction under section 80M has to be on the ground of nationality alone and nothing more than that.
8. Section 2 (22A) of the Income-tax Act describes a domestic company as 'an Indian company, or any other company (Emphasis 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, therefore, 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 Income-tax Act, and Page 47 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 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 French DTAA, cannot be considered as a discrimination on the ground of nationality.
9. During the course of hearing before us, we shared our, then 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.
Page 48 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay
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 Income-tax 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 we are required to adjudicate upon, is whether or not the provisions of section 80M are in discriminatory provisions vis-á-vis French companies assessed to tax in India, and, therefore, in view of the provisions of Article XXI 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 XXI 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, has nothing to do with nationality of a company. On the contrary, this Page 49 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay classification is at best relatable to requirements connected with residence, which, as stated in the OECD commentary extracted earlier in this order, can not 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 (209 ITR Statute 130) is materially similar in scope. Accordingly, non- discrimination clause in the Indian France DTAA cannot be invoked in the cases where provisions of Indian Income-tax Act more favourable to the domestic companies vis-á-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)'s declining the deduction of Rs. 2,70,91,836 under section 80M, and assessee's reliance on Article XXI of the applicable India France DTAA, in support of such a grievance, is not sustainable in law. We, therefore, reject the same".
Many of the arguments raised before us were considered and discussed in the above decision, so we are not repeating the same. Suffice to say that, we also agree with the above decision in all respects.
Page 50 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay DTAAs :
25. Many of the decisions relied upon by the learned Counsel are given in the context of various DTAAs and assessee submits that all these agreements are similar in nature. However, according to assessee's own chart furnished, there are variations in non discrimination clause itself.
India UK Tax India-Netherlands India France Treaty Article 23 Article 24 Article XXI
1. The nationals of a 1. Nationals of one of The nationals of one of Contracting State shall the States shall not be the Contracting States not be subjected in the subjected in the other shall not be subjected in other Contracting State State to any taxation or the other Contracting to any taxation or any any requirement State to any taxation or requirement connected connected therewith any requirement therewith which is other which is other or more connected therewith, or more burdensome burdensome than the which is other or more than the taxation and taxation and connected burdensome than the connected requirements requirements to which taxation and connected to which nationals of nationals of that other requirements to which that other State in the State in the same nationals of the other same circumstances are circumstances are or Contracting State in the or may be subjected. may be subjected. These same circumstances are provisions shall, or may be subjected. In
2. The taxation on a notwithstanding the particular, the citizens permanent provisions of Article 1 of one Contracting State establishment which an also apply to persons who are subjected to tax enterprise of a who are not residents of in the other Contracting Contracting State has in one or both of the State shall be entitled to the other Contracting States. the same extent as the State shall not be less citizens of that other favourably levied in that 2. Except where the Contracting State, to other State than the provisions of paragraph any exemption, taxation levied on 3 of Article 7 apply, the deduction, credit or enterprises of that other taxation on a permanent other allowance State carrying on the establishment which an accorded in same activities in the enterprise of one of the consideration of the same circumstances or States has in the other family circumstances.
under the same State shall not be less conditions. This favourably levied in that provision shall not be other State than the construed as preventing taxation levied on a Contracting State enterprises of that other from charging the State carrying on the profits of a permanent same activities.
establishment which an 3. The provisions of enterprise of the other paragraph 2 shall not be Contracting State has in construed as obliging the first mentioned one of the States to State at a rate of tax grant to residents of the Page 51 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay which is higher than other State any personal that imposed on the allowances, reliefs and profits of a similar reductions for taxation enterprise of the first purposes on account of mentioned Contracting civil status or family State, nor as being in responsibilities which it conflict with the grants to its own provisions of Paragraph residents.
4 of Article 7 of this Convention.
3. Nothing contained in this Article shall be 4. Except where the construed as obliging a provisions of paragraph Contracting State to 1 of Article 9, paragraph grant to individuals not 9 of Article 11, or resident in that State paragraph 9 of Article any personal 12, apply, interest, allowances, reliefs and royalties and other reductions for taxation disbursements paid by purposes which are by an enterprise of one of law available only to the States to a resident individuals who are so of the other State shall, resident. for the purpose of determining the taxable
4. Enterprises of a profits of such Contracting State, the enterprise, be capital of which is deductible under the wholly or partly owned same conditions as if or controlled, directly or they had been paid to a indirectly, by one or resident of the first more residents of the mentioned State.
other Contracting State, Similarly, any debts of
shall not be subjected in an enterprise of one of
the first mentioned the States to a resident
Contracting State to any of the other State shall,
taxation or any for the purpose of
requirement connected determining the taxable
therewith which is other capital of such
or more burdensome enterprise, be
than the taxation and deductible under the
connected requirements same conditions as if
to which other similar they had been
enterprises of that first contracted to a resident
mentioned State are or of the first mentioned
may be subjected. State.
5. Enterprises of one of
5. In this Article, the the States, the capital of
term "taxation" which is wholly or partly
owned or controlled,
directly or indirectly, by
one or more residents of
the other State, shall
not be subjected in the
first mentioned State to
any taxation or any
requirement connected
therewith which is other
Page 52 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay or more burdensome than the taxation and connected requirements to which other similar enterprises of the first mentioned State are or may be subjected.
26. As can be seen from the above, as far as Indo-French DTAA is concerned, Article -21 refers to only the nationals of one Contracting State without referring to any permanent establishment of an enterprise which has specifically referred to in other agreements. The Sub-Articles 2 to 5 in UK Treaty and Netherlands Treaty were not incorporated in Treaty with France. Therefore, prima facie, even though the foreign companies may get included as nationals of France by virtue of Supreme Court decision (State Trading Corporation supra), since the permanent establishment of foreign company is not specifically referred to, as in other DTAAs, we are of the view that the decisions given with reference to other DTAAs interpreting the relevant provisions cannot be applied to this case. The revised DTAA entered with French Republic and notified on 07.09.1994 as amended by notification dated 10.07.2000 has this non discrimination clause as Article 26:
"Article 26 : Non-discrimination
1. Nationals of one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of the other Contracting State in the same circumstances are or may be subjected. The provision shall, notwithstanding the provisions of Article I, also apply to persons who are not residents of one or both of the Contracting States.Page 53 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay
2. Except where the provisions of paragraph 3 of Article 7 apply the taxation on a permanent establishment which an enterprise of one of the Contracting States has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities.
3. The provision of paragraph 2 shall not be construed as obliging one of the Contracting States to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.
4. Except where the provisions of Article 10, paragraph 7 of Article 12 or paragraph 8 of Article 13, apply, interest, royalties and other disbursements paid by an enterprise of one of the Contracting States to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first- mentioned Contracting State. Similarly, any debts of an enterprise of one of the Contracting States to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned Contracting State.Page 54 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay
5. Enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned Contracting State are or may be subjected".
27. This is very elaborate provision wherein not only the national of one contracting State was mentioned, but permanent establishment of an enterprise is also specifically mentioned. Therefore, the inclusion of permanent establishment of an enterprise in the later agreement do indicate that these are not considered as part of the original agreement by which we can invoke non discrimination clause for permanent establishment of foreign banks, that too, for rate difference alone.
28. By virtue of non discriminate clause of Indo France DTAA, a foreign national has to be treated at par with the Indian national so far as taxation or any requirement connected therewith under the Indian Income Tax Act. In such a case, foreign national has to be taxed if it were an Indian assessee and accordingly would be entitled for the deduction under section 80M subject to the compliance of terms and conditions as prescribed under the said section. Since the Indian assessee can avail the deduction under section 80M only after the fulfillment of the conditions as prescribed under section 80M, the benefit of non discriminate clause of DTAA can be available by the foreign national under the similar circumstances and therefore, the conditions which are required to be fulfilled by the Page 55 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Indian national are also required to be fulfilled by the foreign national. Assessee cannot claim a deduction under section 80M without fulfilling the conditions as required under the said section. Assessee before us admittedly does not fulfill the conditions prescribed under section 80M and therefore, cannot claim deduction under section 80M.
29. Since there is only one direct decision given by a Coordinate Bench interpreting the non discrimination clause in the case of foreign Bank in the case of Credit Llyonnais Vs. Deputy Commissioner of Income-tax, 94 ITD 401 and as there is no other contradictory decision under the same DTAA, we are of the view that the Coordinate Bench decision has to be followed. The decision relied upon by both the parties in other cases are not applicable to the DTAA between India and France, even though some principles laid down therein are taken support of by both the parties to support and object to the contentions. Even when there is a diversion of views by the different Benches on same issue, then the decision which laid down the principles more elaborately and logically after considering the latest statutory provisions as applicable has to be followed as held by the full Bench of Hon'ble Andhra Pradesh High Court in the case of Ushodaya Enterprises Ltd vs. Commissioner of Commercial Taxes, reported in (1998) 111 STC
711.
30. The learned Counsel relied on the decision of the ITAT E Bench of the Kolkata in the case of ABN Amro NV in assessment year 1996-97 to contend that domestic company be considered as Indian Company as the prescribed arrangement in Rule 27 have not been notified. The order of the ITAT however, ultimately holds that Article-24(2) of the DTAA between India and Netherland can be invoked where there is taxation in a less favourable manner than Indian banking companies. However, the dispute in that case Page 56 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay was with reference to taxation of some private Indian Bank at a lower rate of taxes i.e. 40% applicable to the domestic companies as against 67% or so being charged in the foreign Banks case. However, in the case before us is different as the dividend is taxed in the case of a domestic company after giving deduction @ 57.3% whereas the assessee company rate of tax is only 25% on the gross dividend. If the deduction so claimed is allowed then the rate of tax will become 10% only. Since the provisions of section 115A are specifically applicable to foreign company prescribed by the statute, we cannot reduce the rate of tax to 10% on net dividend, in case this argument of assessee of discrimination is to be considered.
31. As discussed earlier, the reduction of tax rate way back in 1976 itself is after withdrawing the deduction under section 80M specifically to the foreign companies and further allowance of deduction as contested by assessee would result in a reverse discrimination of the Indian company vis-à-vis tax rate of foreign company, in our view does not come under the definition of non discrimination. We are not convinced with the contention of assessee with reference to the reduction rate under section 80M. Since there is no discrimination as held by the Coordinate Bench in the case of Credit Llyonnais Vs. Deputy Commissioner of Income- tax, 94 ITD 401, with which we agree, we affirm the order of the CIT(A). We also see no reason to constitute a Special Bench on this issue when there is no other contradictory order analyzing the Indo- French DTAA particularly invoking non- discrimination clause while taxing dividends under section 115A at a reduced rate. In view of this, we affirm the order of AO and the CIT (A) and reject assessee's contentions. Ground no 1 is dismissed.
32. Ground No.2 is with reference to the provisions of interest of bad and doubtful interest. AO had observed that the provisions for Page 57 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay interests of Rs.42,47,986 on account of bad and doubtful debts has been made for meeting future contingent liability. AO did not allow the reduction. It was argued before the learned CIT (A) that the basis of accounting for these revenues/expenses are in keeping in tune with the RBI Circular No. DBOD/BP.BC.133/C469(W)89, dated 25.5.89 which states that interests earned on bad and doubtful debts are not to be taken into income account on accrual basis and may be accounted on cash basis. The learned CIT (A) discussing the provisions of section 36(1)(viia) and 36(1)(vii) confirmed the amount as he was of the opinion that since assessee charged the amounts, the income accrues to assessee. The learned Counsel at the outset fairly submitted that this issue is to be restored to the file of AO consequent to the orders of the ITAT in earlier years, more so on the order for assessment year 1989-90, Para No.8 which is as under:
"8. We are of the view that the matter has to be restored back to the file of the learned CIT (A) with a direction to re-decide the issue after considering the factual aspect of the matter as stated above and also in the light of the decision of the Hon'ble Bombay High Court in assessee's own case for A.Y 1975-76 cited supra. The second ground is allowed for statistical purposes".
32.1. In view of this ground is restored to the file of AO to examine afresh and to take a consistent stand as in earlier years keeping in mind the principles laid down by the Hon'ble Supreme Court in the case of UCO Bank. v. Commissioner of Income-tax, 237 ITR 889.
33. Ground No.3 is on the issue of repairs. The facts pertaining to this ground are that AO disallowed expenditure of `.11,38,183 in connection with the flats and premises on the ground that this is capital in nature. Further there is a contention that assessee did Page 58 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay not furnish details required by AO. The learned CIT (A) examined the issue and allowed an amount of `.4,99,182 as admissible expenditure where the balance amount of `.6,39,000 was confirmed by stating as under:
"10. The 10th ground of appeal is that AO erred in disallowing expenditure of `.11,38,183 incurred in connection with flats and premises on the ground that it is capital in nature. Assessee did not furnish details required by AO and therefore the expenditure was treated as capital expenditure by AO. The appellant has incurred expenses of `.4,02,427 and `.96,555 in respect of premises at Bombay on various items like curtains and towels, paintings, renovation etc. The appellant has also made provisions for expenses of `.5,84,000 in respect of properties at Bombay. Similarly the appellant has also made provisions for expenses of `.55,000 in respect of properties in New Delhi. Therefore, total expenses of `.11,38,183 includes provision for expenses of `.6,39,000. It is seen that the appellant Bill No.46 dated 8.8.1991 from Mehra Trading Corpn. for painting of doors and windows, cupboards etc. Therefore, the liability to make payment arose after the receipt of the bill in the month of August, 1991. Upto 31.3.1991 the amount of `.55,000 was only a provision. Neither the appellant has incurred the expenses nor the liability to pay has arisen in respect of Delhi premises. Therefore, the sum of `.55,000 cannot be considered as the expenditure incurred by the appellant because the liability to pay has not arisen. Similarly, provision for expenses amounting to `.5,84,000 in respect of Bombay property is only in the nature of provision and no Page 59 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay liability to pay has arisen before 31.3.1991. Since the liability to pay has not arisen the appellant is not entitled to deduction of `.5,84,000 + 55,000 totaling to `.6,39,000 which is not admissible. The balance amount of `.4,99,182 (`.11,38,182 - `.6,39,000) is admissible to the appellant on account of actual expenses incurred on flat. AO is therefore, directed to allow `.4,99,182. The appellant gets a relief of `.4,99,182. This ground of appeal is partly allowed".
34.1. It was the contention that the bills pertaining to the above expenditure has come in the later year, however the liability to pay has arisen in this year. Therefore, following the principles of Hon'ble Bombay High Court in the case of Commissioner of Income- tax Vs. United Motors (India) Ltd, 181 ITR 347, the expenditure is allowable in the year of liability. We are unable to examine the issue on facts as no bills were placed on record with reference to the expenditure and there is also no finding that the said expenditure was not claimed in the later years or claimed as previous year expenditure in later year. Since complete facts are not available on record, it is very difficult to establish whether liability to pay has occurred in this year or not. Therefore, in the interest of justice, we restore this issue to the file of AO with a direction to assessee to furnish necessary bills and details of the repairs undertaken so that these can be examined by AO and allow according to the facts and law. The ground is considered allowed for statistical purposes.
35. Ground Nos. 4 & 5 pertaining to call money and security transactions were not pressed in the course of the arguments.
36. In the result the appeal is partly allowed.
ITA No. 507/Mum/2000 AY 1994-95:37. In this appeal, there are only two grounds.
Page 60 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay
38. The ground No 1 is with reference to the claim of deduction u/s 80M. The assessee raised the following ground:
"Based on the facts and circumstances of the case, the Assessee respectfully submits that the learned Commissioner of Income-tax (Appeals) erred in disallowing the claim for deduction under section 80M of the Income Tax Act, 1961 amounting to `.3,92,89,504 on the ground that the deduction is available only to domestic companies and not to non resident companies such as the Appellant".
The above ground is similar to the ground No 1 discussed in ITA 8693 /M/95 for AY 1991-92 above. For the reasons stated there in the deduction under section 80M to the foreign company can not be allowed. The ground is dismissed.
39. The ground No 2. is with reference to disallowance of amounts under Rules 6D, 6B, 37(2) and 43B and payment to clubs. It was the contention that these artificial disallowances/statutory disallowances need not be made, as ITAT in earlier years following the DTAA, decided in favour of assessee that such disallowances need not be made. However, consequent to the decision of the AAR 236 ITR 103 in assessee case, the CIT (A) set aside the issue to the file of AO to apply the ratio of the decision by the AAR. It was the contention of assessee that AO may be directed to follow the orders of the ITAT in earlier years.
40. We have considered the rival contentions and examined the provisions of the Act along with the DTAA. Assessee's contentions that DTAA which is more beneficial should be applied and deductions/ disallowances under the above sections as per the Income Tax Act should not be made while allowing general and Page 61 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Administrative expenditure. This contention of assessee is acceptable considering the Article-III of the Indo-French DTAA as applicable in the relevant assessment year. (The agreement as notified on 18.02.1970). Article-III(3) is as under:
"3. In determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deductions all expenses, wherever incurred reasonably allocable to such permanent establishment, including executive and general administrative expenses so allocable".
Vide new agreement with French Republic notified on 07.09.1994, Article-III has been revised as under:
"Article 7: business profits
1. . . . . .
2. ........
3(a) In determining the profits of a permanent establishment, there shall be allowed as deductions expense which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation law of that Contracting State. Provided that where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention, Agreement or Protocol signed after 1st January, 1990 between that Contracting State and a third State which is a member of the OECD, the competent authority of that Page 62 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Contracting State shall notify the competent authority of the other Contracting State of the terms of the corresponding paragraph in the Convention, Agreement or Protocol with that third State immediately after the entry into force of that Convention, Agreement or Protocol and, if the competent authority of the other Contracting State so requests, the provisions of that paragraph shall apply under this Convention from that entry into force."
41.2. As can be seen from the above provisions, the word "in accordance with the provisions of and subject to the limitations of the taxation laws of that contracting state" has been incorporated in the revised agreement, which makes it subject to the Indian Tax laws. This aspect was elaborately discussed by the Coordinate Bench with reference to the Indo-UAE DTAA wherein originally there was no such restriction in the agreement and subsequently it was revised with incorporating the above stated words. The limitations of the Indian Tax laws are made applicable while allowing the executive and general administrative expenses. The decision of the Coordinate Bench in the case of Abu-Dhabi Commercial Bank vs. Dy. Director of Income Tax (I.T) in ITA No.3462/Mum/20110 for assessment year 1995-96 and others, vide order dated 20.07.2012 is as under:
10. We have heard the rival submissions and perused the material placed on record. Here in this case, the entire controversy is whether in determining the profits of PE in India, the expenses incurred for the purpose of PE is to be computed by applying the provisions of section 44C of the Act (i.e., under the domestic law in which PE is situated) on an interpretation of Article 7(3) r/w Article 25(1) of the Page 63 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay India-UAE DTAA as was prevalent in the relevant assessment year. The other corollary to this issue are:-
i) Whether on a true and correct interpretation of Article 7(3), (at the relevant time), the limitation clause of applicability of domestic laws of the State in which PE situated, (herein in this case, India), should be construed to be available from Article 25(1);
(ii) Whether the limitation clause inserted in Article 7(3), by way of amendment brought by Protocol vide notification No.282/2007 , dated 28-11-2007, w.e.f. 1.04.2008, regarding applicability of domestic law, can be said to have come into force, w.e.f. 1st day of April, 2008 or can be held to be clarificatory in the nature, hence, to have retrospective effect.
10.1. The department's case has been, wherever, there has been no specific provision in Article 7(3) for computing the profit of PE as per domestic laws, the same should be interpreted in view of the provisions of Article 25(1) of the DTAA which provides that the laws in force in either of the contracting States shall continue to govern the taxation of income in the respective contracting State except for expressly provided in the agreement. The ld. CIT(A) has observed that most of the Treaties entered into by India with various countries, it has been specifically provided that computation of profit of PE in Article 7(3) would be as per domestic laws of that State in which PE is situated and wherever there is no such specific provision, Article 25(1) enables the applicability of the domestic law. He has referred to commentary by 'Klaus Vogel', wherein he mentions that "while explaining the provision of Article Page 64 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 7(1) of the OECD/UN Model Convention that the meaning of term profit of a permanent establishment and how the profits are determined is always governed by the domestic laws of the contracting state concerned, though it may happen sometimes that certain provisions of domestic law do not apply to the foreign permanent establishment." He also relied upon the CBDT Circular No.202, which lays down intention behind interpretation of Section 44C. The protocol dated 3-10-2007, which has amended the Article 7(3) w.e.f. 1-4-2008 only clarifies the department's stand that the expenses pertaining to executive and administrative nature are to be allowed in accordance with the provisions of domestic law i.e. 44C and this amendment is only clarificatory in nature. The assessee's stand on the other hand, has been that in the relevant assessment year, the Article 7(3) as it stood, cannot be interpreted in such a manner that the limitation clause of applicability of domestic law should be read into. The protocol amending Article 7(3) has been brought w.e.f. 1-4- 2008 which cannot have a retrospective effect. Before us, both the parties have given decision of ITAT in their favour on this point. The Department has heavily relied upon the judgment of Mashreqbank psc(supra), and the assessee has relied upon the case of M/s Dalma Energy Ltd. (supra).
11. The relevant provisions contained in Article 7(3) of Indo-UAE DTAA prior to 1-4-2008 which was based on OECD model, reads as under :-
"3. In determining the profits of a permanent establishment, there shall be allowed as deductions Page 65 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 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."
From the above, it is apparent that in determining the profits of PE,
i) all expenses incurred for the purposes of the business of the PE shall be allowed as a deduction in determining profits of PE;
ii) such expenses include executive and general administrative expenses; and
iii) such expenses could be incurred within or outside the state in which the PE is situated.
Thus, there is no restriction on allowing of head office expenses and other expenses attributable to PE. The said article has now been amended by the Protocol entered into by the India-UAE on 3-10-2007 which has been notified on 28-11-2007, effective from 1st April, 2008. The Article 2 of the Protocol, has amended the Article 7(3),which reads as under :
"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."Page 66 of 75
ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 11.1. Now, with the insertion of phrase, "in accordance with the provisions of and subject to the limitations of the tax laws of that State", the mandate of applicability of the domestic law has been provided, in allowing the deduction of expenses of the PE and determination of profit under the Income Tax Act. Consequently section 44C becomes applicable. The issue before us is, whether such a limitation clause can be said to have retrospective effect. It is a cardinal principle, when two sovereign nations enter into an agreement and have come to an understanding regarding the terms, views expressed in the agreement, such terms cannot be unilaterally changed. Once the Government of India and Government of UAE had not used the limitation clause of applicability of domestic law in determining the profits and deduction of expenses of PE under Article 7(3), the same cannot be read into even impliedly, that such a provision existed. One has to see the merits of the word and its meaning understood when the two high contracting parties, herein in this case, two sovereign nations entered into an agreement. When a particular provisions in the agreement has been brought from a particular date, it has to be, prima facie, taken to be prospective in operation, unless it is expressly or by necessary implication provided or made to have retrospective operation, because the parties interpreting such agreement gets vested right under such existing agreement and any such interpretation giving retrospective effect not only impairs the vested right but attracts the new disability in respect of transactions Page 67 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay already entered in the past. Here in this case, if any such interpretation is given for retrospective operation of this Article, it creates new obligation and disturbs the assessability of the profit of the PE. The retrospective operation cannot be taken to be intended unless by necessary implication it has been made to have the retrospective effect. Thus, the amendment brought in Article 7(3) w.e.f. 1-4-2008, will not apply retrospectively, prior to such date as it would impose a new obligation or a liability to tax which was not made by the two Contracting States.
12. A lot of stress has been given by the department and the learned DR that such an exception already existed by virtue of Article 25(1) which provides that, "The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except where express provisions to the contrary are made in this Agreement."
Article 25 which is similar to Article 23 of other treaties, deals with the Elimination of double taxation and it is for this purpose, it has been provided that the 'laws in force' in either of the Contracting States shall continue to govern the taxation of the income unless express provision to the contrary are made in this Agreement. Further paragraphs of Article 25 provide for deductions or credit of the taxes paid in either of the states. Various countries in their agreements based on different models have adopted different method of credit of taxes or deductions or exemptions to eliminate the incidents of double taxation in Page 68 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay their domestic laws. Article 25 per se does not provide any rules on the mechanism for computing relief. Hence for this purpose, the domestic laws may have to be referred. Interpretation of Article 25 that it extends to Article 7 for applicability of domestic law will not be correct. If a computation of profit has been provided in a certain manner in Article7, restrictions cannot imported therein by virtue of Article25.
13. The case of Mashreqbank psc(supra), which has been relied upon heavily by the department, first of all, was rendered prior to the amendment brought by the Protocol. However in this case it has been interpreted that Article 25(1) of Indo-UAE Treaty should be read in Article7(3) for applicability of domestic law. After detail analysis and discussion, the relevant observations given in the said decision are as under :-
"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."
This view of Mashreqbank psc(supra), stands impliedly overruled by the latest decision of ITAT Special Bench in the case of M/s Sumitomo Mitsui Banking Corp.(supra), wherein while interpreting a similar provision of Article 23(1) of Indo-Japan DTAA, which is materia to Article 25(1) of Indo-UAE Treaty, has observed and held as under :-
Page 69 of 75ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay "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 assessee like the one in the present case to whom the double tax avoidance treaty entered into by the Page 70 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 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 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 assessee under the treaty. The decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) fully supports this view."
13.1 The view taken by the Special Bench in a way negates the view of Mashreq Banks case. If such an interpretation of Article 25(1) is to be given in Page 71 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay Article 7(3), then there was no need of bringing the amendment by way of protocol from a particular date. The amendment itself shows there was no such intention by the two Contracting States at the time when they entered into the agreement. This amendment by way of protocol and Article 7(3) has been duly considered by the ITAT Ahmedabad Bench in the case of Dalma Energy LLC (supra), wherein the applicability of Section 44C in Article 7(3) for the earlier assessment years has been interpreted in the following manner:-
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 United Arab Emirates vide Notification No.282/2007, dated 28/11/2007 which is effective from 1st day of April, 2008, paragraph 3 Page 72 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay 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 upto 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 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 provision of section 44C has Page 73 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay been enforced, nevertheless with effect from 1st day of April, 2008."
14. Thus, in view of our above finding, we hold that, firstly, in the assessment year involved, limitation clause of applicability of income-tax Act will not apply in Article 7(3) and consequently provisions of sections 44C will not be applicable; secondly, the amendment brought by way of Protocol by which article 7(3) has been amended and limitation clause has been brought in, will apply from 1st April, 2008 and will not have any retrospective effect; thirdly, the judgment of Mashreqbank psc(supra), is no longer relevant in view of the decision of the Special Bench in the case of M/s Sumitomo Mitsui Banking Corp.(supra).and Lastly, from the above conclusions, it is held that computation of income and disallowance of expenses relating to head office cannot be made by invoking the provisions of Section 44C of IT Act. Thus, in view of the above conclusions, we hold that income of the PE of the assessee should be computed as business income after allowing all the expenses attributable to its business in India including the head office expenses".
41.3 As can be seen from the above, the case law relied by both parties have been considered in the above decision. The provisions of DTAA being same and since modifications brought later are also similar, we have no hesitation to follow the same. Moreover the AAR decision relied by CIT(A) has been set aside by the Hon'ble Supreme Court, so the same cannot be relied on. In view of the above, we Page 74 of 75 ITA Nos.8693 of 1995 and 507 of 2000 Banque Nationale DE Paris Bombay allow assessee's contentions and modify the orders of AO and the CIT (A) on this issue. The ground is allowed.
42. In the result both the appeals are partly allowed.
Order pronounced in the open court on 28th February, 2013 Sd/- Sd/-
(Vijay Pal Rao) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated February, 2013.
Vinodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "L " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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