Calcutta High Court
The Bank Of Tokyo Mitsubishi Ltd vs C.I.T.Wb-Iii Cal on 7 August, 2019
Author: Sanjib Banerjee
Bench: Sanjib Banerjee, Suvra Ghosh
O-8
ITR No. 39 of 1998
IN THE HIGH COURT AT CALCUTTA
Special Jurisdiction (Income Tax)
ORIGINAL SIDE
THE BANK OF TOKYO MITSUBISHI LTD.
Versus
C.I.T.WB-III CAL.
BEFORE:
The Hon'ble JUSTICE SANJIB BANERJEE
And
The Hon'ble JUSTICE SUVRA GHOSH
Date : 7th August, 2019.
Appearance
Mr. D.K. Dhar, Adv.
Mr. S. Dhar, Adv.
Mr. I. Karfa, Adv.
...Appellant
Mr. Debasish Chowdhury, Adv.
...Respondent
The Court : The short question involved here is as to the rate of tax
which would be applicable to a permanent establishment of a foreign State which
has contracted with the Government of India to avoid double taxation. At the
time that this reference was entertained, three questions were framed at
paragraph 7 of the order dated November 24, 1997. It is a matter of regret and
shame that the reference has remained pending for such a long time. Paragraph
7 from the relevant order is quoted:-
"7. From the aforesaid facts, the following questions are
referred to the Hon'ble High Court which would, in our
opinion, highlight preciously the legal issue:
2
1. Whether on the facts and in the circumstances of the
case, the tribunal was right in law in holding that the
rate of tax applicable to the assessee would be the rate of
65% and not the rate applicable to a domestic company?
2. Whether on the facts and in the circumstances of the
case, the Tribunal was right in law in holding that in
computing the profits attributable to the permanent
establishment in India of the applicant deduction for
expenses ought to be allowed in accordance with the
provisions of Section 37(2A), 37(3), 37(4) and 40A(3) ?
3. Whether on the facts and in the circumstances of the
case, the Tribunal ought to have held that the provisions
of the Income-tax Act, 1961 relating to the allowability of
expenses in the nature of entertainment, travelling,
business promotion and cash payments exceeding
specified limits could have application on to expenditure
which are 'executive and general administrative' in
nature ?"
Section 90 of the Income Tax Act, 1961 in Chapter IX of the statute
deals with double taxation relief. Section 90(1)(a) of the Act recognises that the
Central Government may enter into an agreement with the Government of any
country outside India for granting relief "in respect of income on which have
been paid both income tax under this Act and income tax in that country." Sub-
section (2) of Section 90 of the said Act provides that where the Central
Government has entered into an agreement with the Government of any foreign
country for granting relief of tax or for 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."
3
There is no dispute that there is a double taxation avoidance
agreement between India and Japan. Article 7 of such agreement permits the
income directly or indirectly attributable to a permanent establishment in the
foreign country to be taxed by the foreign country. In other words, if there is a
foreign establishment of an Indian entity in Japan, the direct and indirect
income attributable to that permanent establishment of the Indian entity in
Japan may be taxed in accordance with the laws of taxation in Japan. Likewise
for a Japanese entity having a permanent establishment in India. Article 23 of
the said agreement provides for the laws in force of the contracting State to
govern the taxation of income in the respective contracting State except where
there is any express provision to the contrary in the agreement. Article 24(2) of
the double taxation avoidance agreement provides the key to the legal questions
raised here and should be seen in its entirety:
" Article 24.
...
2. The taxation on a permanent establishment which an 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 enterprises of that other Contracting State carrying on the same activities."
It may have been possible for the language of the agreement not to be so convoluted. In simpler language, the clause means that when there is a permanent establishment of a foreign origin in the other contracting State, such permanent establishment will not be taxed on less favourable terms than enterprises carrying on the same activities in the relevant contracting State. That would imply that if a bank of either country had a permanent 4 establishment in the other country then such permanent establishment in the other country would be subjected to tax at a rate not less favourable than the tax applicable on banking companies in such other country. So much is clear from the relevant clause.
By virtue of Section 90(2) of the Act, since there is a double taxation avoidance agreement between India and Japan, the provisions of the Act shall apply to a permanent establishment of a Japanese entity in India 'to the extent they are more beneficial to that assessee.' Also, in terms of the mandate of clause 24(2) of the agreement, 'the taxation on a permanent establishment...in the other Contracting State shall not be less favourably levied...than the taxation levied on enterprises...carrying on the same activities.' By virtue of Clause 24(2) of the said agreement and the statutory recognition thereof in Section 90(2) of the Act, the permanent establishment of a Japanese entity in India could not have been charged tax at a rate higher than comparable Indian assessees carrying on the same activities.
In the instant case, it is evident from the order of the Commissioner as affirmed by the Tribunal by the impugned order of March 31, 1997 that in respect of assessment year 1991-92, the assessee herein was assessed as not being a domestic company. There is no dispute that an Indian company which was a domestic company would have been charged tax at a lower rate than the 65% imposed on the assessee by virtue of the assessee not being regarded as a domestic company. The disparity between the rates applicable to Indian and foreign companies is not in issue. However, since clause 24(2) of the agreement between the two countries provides that a permanent establishment of an entity of one country in the other country shall not be subjected to less favourable 5 terms than an assessee carrying on similar activities in the other country, the assessee in this case was liable to pay tax at the same rate as Indian companies carrying on the same activities were liable to for the relevant assessment year. The effect of the legal fiction envisaged in Article 24(2) of the agreement was that for the purpose of applying the appropriate rate, the permanent establishment of the Japanese entity had to be regarded as a domestic company. That is the effect of the expression 'taxation...not be less favourably levied...than the taxation levied on enterprises of that other Contracting State carrying on the same activities,' in Article 24(2) of the bilateral agreement between India and Japan.
The stand taken in the Tribunal's order cannot be appreciated or accepted since a similar clause in the double taxation avoidance agreement between India and the Netherlands was interpreted by the Central Board for Direct Taxes and a circular issued thereupon. The Tribunal held, in the present case, that since there was no similar circular, the benefit as available to a permanent establishment of ABN Amro Bank in India could not be extended to this assessee.
When there is no dispute that there is a double taxation avoidance agreement in place between India and the country of origin of the assessee in the present case and when such agreement contains a lucid clause as apparent from Article 24(2) thereof quoted above and when Section 90 of the Act itself recognises such an agreement and creates a special status for the relevant permanent establishments, there was no room for either the Commissioner to wait for any dictat from the high command of the CBDT or for the Tribunal to demonstrate similar servile conduct in not appropriately interpreting and giving effect to the clear words of the agreement between the two countries. 6
The reference is concluded by answering the first question raised as follows:-
The Tribunal was incorrect in holding that the rate of tax applicable to the assessee was 65%. The Tribunal ought to have held that the rate applicable to the assessee was such rate as applicable to a domestic company carrying on similar activities. In the light of such answer, the two other questions need not be addressed since paragraph 8 of the order admitting the reference recognised that the answer to the first question would cover the entire matter.
ITR 39 of 1998 stands disposed of.
There will be no order as to costs.
(SANJIB BANERJEE, J.) (SUVRA GHOSH, J.) sg/kc/bp.