Income Tax Appellate Tribunal - Mumbai
Mashreq Bank Psc vs Dy. Director Of Income Tax on 13 April, 2007
ORDER
Pramod Kumar, A.M.
1. This is an appeal filed by the assessee and is directed against the order dated 10-1-2001 passed by the Commissioner (Appeals), in the matter of assessment under Section 143 (3) of the Income Tax Act, 1961, for the assessment year 1996-97.
2. In the first ground of appeal, the main grievance raised by the assessee is that the Commissioner (Appeals) erred in confirming the action of the assessing officer "of not accepting the appellant's contention that in view of the provisions of art ' 7(3) of the Convention between the Government of United Arab Emirates and the Government of India (hereinafter referred to as 'the tax treaty'), no disallowance is required to be made in computing the total income in respect of expenses attributable to its PE in India".
3. Briefly stated, the material facts, so far as relevant to this grievance of the assessee, are like this. The assessee is a non-resident banking company incorporated in the United Arab Emirates. The assessee is carrying on business in India- through its permanent establishment, i.e. branches (PE, in short), and is admittedly assessable to tax in India in respect of the profits attributable to the PE. In the course of scrutiny assessment proceedings in respect of its such income taxable in India, the assessing officer disallowed Rs. 2,22,309 out of travelling expenses, under Section 37(3) r/w. r. 6D, Rs. 2,88,494 out of entertainment expenses under Section 37(2A) of the Act, Rs. 72,746 out of employer's contribution to provident fund, under Section 43B of the Act, added Rs. 72,746 on account of employees contribution to the provident fund account under Section 36(l)(va) read with Section 2(24)(x) of the Act, and Rs 6,809 out of payments disallowable under Section 40A(3) of the Act. These disallowances were made apparently on the basis of information furnished by the assessee himself, and there is no specific discussion in respect of the same in the assessment order. When the assessment was carried in appeal before the Commissioner (Appeals), the assessee raised a specific ground of appeal raising grievance against the above disallowances on the ground that in view of the provisions of art. 7(3) of India UAE tax treaty, "all expenses, attributable to business carried on in India by the assessee, are allowable as deduction, without restricting the allowance of such expenses under various provisions of the Income Tax Act". The details of the expenses disallowed were also set out in the statement of facts. The assessee made elaborate submissions in respect of this plea before the Commissioner (Appeals) and also filed copies of orders passed by the co-ordinate Benches of this Tribunal in the cases of Income Tax Officer v. Degremont International (1985) 11 ITD 564 (Jp), Banque Indosuez (ITA Nos. 2089 to 2091/Bom/1991) and Banque Nationale de Paris (ITA No. 1341/Bom/1987 and 1380/Born/1989) wherein it was held that various restrictions prescribed under the Income Tax Act would not be applicable while computing the profits of PE, and that computation of profits of the PE is to take into account all the expenses attributable to the PE - whether in India, or outside India. The Commissioner (Appeals) was, however, not impressed with the stand of the assessee. He was of the view that the profits attributable to the PE, in terms of art. 7(3) of the India UAE tax treaty, will have to be determined in accordance with the domestic laws of India and all restrictions on allowance of various business expenses, as contained in the Indian Income Tax Act, will, accordingly, apply. The assessee is not satisfied with the conclusion so arrived at by the Commissioner (Appeals) and is in further appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. We find that all the three orders passed by the co-ordinate Benches, which have been cited at the bar by the learned Counsel, dealt with the issue as to whether or not artificial disallowances under the Indian Income Tax Act can be made while computing the profits attributable to a PE under the old India France tax treaty ((1970) 76 ITR (St) 1). In the first order in the case of Degremont International (supra), which has been subsequently followed in other orders cited at the bar, the co-ordinate Bench was dealing with the question whether restriction on deduction of head office expenses under Section 44C is to be viewed as contrary to the provisions of the India France tax treaty. A note was taken of art. 111(3) of the treaty which provided that, as summarised in the said order, 11 whatever is reasonably allocable out of the expenditure incurred in both the countries, should be allocated and allowed as deduction". In the immediately following sentences and in the same breath, the co-ordinate Bench concluded that "We consider it a very specific provision in computing the income of a non-resident having activities in India and France. Therefore, the provisions of Section 44C will not be applicable". In the present case, we are not concerned with Section 44C. In any event, having carefully gone through this decision, we find that the attention of the Tribunal was apparently not invited to the provisions of art. XIX(1) of the same treaty which specifically provided that "the laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting State except where specific provisions to the contrary is made in the present agreement". The provisions of art. 111(3) of India France treaty obviously cannot be read in isolation with other relevant provisions of the treaty. Iiowever, since attention of the Tribunal was never invited to art. XIX(1), nor did the Tribunal have any occasion to deal with the same, the conclusion arrived at by the Tribunal did not take into account provisions of the treaty as a whole. In a later decision by another co-ordinate Bench of this Tribunal, i.e. in the case of Dy. CIT v. Mitsubishi Heavy Industries Ltd. (1988) 61 'M (Del) 656, took note of similar provision in Indo Japan tax treaty, and, in view thereof, rejected the contentions of the assessee by observing as follows .-
Ground No. 5 relates to the findings given by the Commissioner (Appeals) holding that in view of art. 111(3) of DTA with Japan, no disallowance can be made under r. 61), Section 40A(3), Section 40A(12), Section 37(2A) and Section 43 B of the Income Tax Act, 1961 ................
Article HI(3) in the relevant DTA relating to the year under consideration only provides that in determining the industrial or commercial profits of a PE, there shall be allowed as deduction all expenses, wherever incurred, reasonably allocable to such PE. It does not expressly provide that the provisions of domestic income-tax law governing the allowability of various expenses Will be subject to limitations and conditions prescribed in the relevant provisions contained in the Income Tax Act, 1961. We, however, find in Art. XI(1), it has been clearly provided as under:
Article XI : The laws in force in either of the Contracting States will continue to govern the taxation of income in respective Contracting State except where provisions to the contrary are made in the present agreement.
In view of the aforesaid clause, the provisions of the Income Tax Act, 1961, relating to computation of taxable income will apply in the case of the assessee except where the provisions contained in the DTA are contrary to the conditions specifically mentioned in the Income Tax Act. Therefore, the Commissioner (Appeals) was not justified in deleting the aforesaid disallowances on the ground that all the provisions will not be applicable in the case of the assessee...
6. In this view of the matter, Tribunal's decision in the case of Degremont International (supra) was not applied in subsequent decisions in the context of the tax treaties where specific provisions are made to the effect that the laws in force in either of the Contracting States will continue to govern the taxation of income in respective Contracting State except where express provisions to the contrary are made in such agreement. The decision in Mtsubishi's case (supra) is a later decision, is arrived at after taking into account all the relevant provisions and not only art. 111(3) in isolation, and is specifically in the context of artificial disallowances under Section 40A(3), Section 40A(12), Section 37(2A) and Section 43B etc. We have to accept the fact, as clearly discernable from unequivocal stand taken by another co-ordinate Bench in Mtsubishi's case (supra), that Degremont international (supra) was rendered by oversight and oblivious of the provisions of art. XIX(1) of old India France tax treaty. In. any event, it does not have precedence value in the context of India UAE tax treaty, particularly as we take note of the provisions of art. 25(l) of the tax treaty read with observations made by another co-ordinate Bench in Mtubishi's case (supra). The provisions in India UAE tax treaty are specific and admit no ambiguity on question of applicability of domestic tax laws in the absence of specific provisions to the contrary under the tax treaty.
7. When this was pointed out to the learned Counsel, our attention was drawn to the decision of Kolkata Special Bench in the case of ABN Arnro Bank v. Asstt. Director of IT (2005) 98 TTJ (Kol)(SB) 295 : (2005) 97 ITD 89 (Kol)(0) wherein, on materially identical provision, the Special Bench has held that provisions of Section 40(a)(i) are not applicable in the case of interest paid by the banks. In our considered view, however, the ABN Amro Special Bench decision (supra) is certainly not an authority for the proposition that disallowance under Section 40(a)(i) are impermissible under the provisions of India Japan tax treaty. As a matter of fact, in the said decision, the Special Bench held that the provisions of Section 195 do not come into play in the case of Branch Head office transactions because these are transactions from self to self. The Special Bench, inter alia, observed as follows:
30. The assessee in this case is the corporate body and its branches are paying interest to its Head office and other offshore Branches i.e., the payment is by one wing of the assessee to its other wing or so to say by one hand to another. The tax is to be deductible under Chapter XVU-B of the Act and in case of a payment to non-resident it is Section 195 of the Income Tax Act. This section provides that "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries') shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force." The Branch/PE of the assessee in India is not a person in legal terminology. The person is the Corporate Body-ABN Arnro bank NV and not its Branch or the PE. This is also evident from the fact that assessment in this case is made on the Corporate Body ABN Amro bank NV and not on its Branch or PE. We, therefore, find force in the assessee's contention that the provisions dealing with deduction of tax at source under Section 195 presupposes the existence of two distinct and separate entities which is absent in the present case. On both the grounds therefore Section 40(a)(i) does not come into play. Disallowance of interest on this by invoking the provisions of this section would not be justified. "
8. As regards the question of impermissibility of artificial disallowances by virtue of the provisions of art. 7(3), there is no specific finding by the Special Bench. We reproduce below the entire paragraph, on which learned Counsel has placed the reliance, for ready reference:
50. On a close reading of these provisions, we find that clauses 1, 2, 5, 6 and 7 of art. 7 of the Japanese DTAA are similarly worded as clauses 1, 2, 4, 5 and 6 of Netherlands DTAA. Clause 3 of the Japanese DTAA merely incorporates the first part of Clause 3(a) of Netherlands DTAA and the proviso placing a restriction by the law of the State in which PE is situate are not incorporated. Again, Clause 3(b) of Netherlands DTAA which prohibits allowance of certain expenditure is also missing in Japanese DTAA. There is no other material difference between the two treaties. As pointed out by the learned Counsel of the assessee, there are no restrictive covenants in art. 7 for allowance of expenses incurred for the purposes of PE either by the prefix of the words "in accordance with the provisions of the law of that State" or by the suffix words "and subject to limitations of taxation laws of that State". Ms may be one of the other alternate reasons for not invoking the provisions of Section 40(a)(i) of the Income Tax Act for disaflovving the payment of interest in computing the income of the assessee through the PE. However, here also, the deeming fiction of treating the PE as a different and separate entity dealing wholly independently with the enterprise in Clause 2 of the art. 7 of Japanese DTAA or for the specific purpose of computing the income attributable to the PE and not for any other purposes. Therefore, for the reasons stated above while dealing with the Netherlands DTAA, we hold that no tax was required to be deducted under Section 195 of the Act from the payment of interest by the PE to its head offlce or other offshore branches of the assesseeenterprise, bank of Tokyo. We, therefore, uphold the order of the Commissioner (Appeals) in vacating the order under Section 201 of the Act by holding that the assessee was not in default in deducting the tax at source.
(emphasis by underlining, italicized in print, supplied by us)
9. A plain reading of the above paragraph indicates that while the Special Bench has indeed taken note of the argument that in terms of the provisions of art. 7(3), the provisions of Section 40(a)(i) do not apply, the decision of the Special Bench rests on the principle, as laid down while dealing with Netherlands treaty, that payments from self to self cannot saddle the assessee with tax withholding liability. We are in respectful agreement with the principle so laid down by the Special Bench. We have noted that the Tribunal has not given any finding - direct or even indirect - approving the argument that artificial disallowances are not permissible under the provisions of the India Japan tax treaty. The Special Bench has merely speculated about the reasons of the assessing officer's stand about non-deduction of tax at source, and has not adjudicated upon the same. The Special Bench did not see, and very appropriately so, any need to adjudicate on this ground, because irrespective of whether or not provisions of Section 40(a)(i) laying down disallowance of expenditure in respect of which tax withholding liability is not discharged by the assessee, apply to the assessee, there was no tax withholding requirement on payments from branch office to head office, or vice versa. The -question about applicability of Section 40(a)(i), therefore, was entirely academic in this context. Merely because the Special Bench has noted an argument, even though it has not adjudicated upon the same, it cannot be inferred that the Special Bench has approved the said argument. We reject the plea of the learned Counsel. The next line of defence by the learned Counsel is his reliance on the Tribunal's decision in the case of Siemens Aktiengesellschaft v. ITO (1986) 26 TTJ (Bom)(SB) 566 : (1987) 22 ITD 87 (Bom)(SB). It is submitted that in this decision, the Tribunal has held that definition of 'royalty' under the Income Tax Act will not have any bearing in deciding the scope of expression 'royalty' for the purposes of the tax treaty. We are in respectful agreement with the views so stated by the Tribunal, but we are unable to comprehend as to how this proposition can enable us to ignore the specific provisions of the India UAE tax treaty. Article 25(l) of the applicable India UAE tax treaty ((1994) 117 CTIR (St) 227 : (1994) 205 ITR (St) 49)) specifically provides that "the laws in force in either of the Contracting States will continue to govern the taxation of income in respective Contracting State except where express provisions to the contrary are made in the present agreement". We are, therefore, not persuaded by the submissions of the learned Counsel to the effect that provisions of the Income Tax Act have no application in the matter. In view of this specific provision being a part of the India UAE tax treaty, it cannot be said that by virtue of art. 7(3) of the treaty which provides that "in determining the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the PE, including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere", the provisions of Indian Income Tax Act will not apply with regard to deductibility of expenses. In this view of the matter, and respectfully following the Mitsubishi decision (supra), we hold that the provisions of domestic tax laws in India as also in UAE will continue to apply except to the extent specific contrary provisions are set out in the India UAE tax treaty. The assessee thus derives no advantage from the provisions of art. 7(3) so far as freedom from artificial disallowances under Section 40A(3), Section 40A(12), Section 37(2A) and Section 43B is concerned. As there is no specific contrary provision in the treaty, these and similar other restrictions on deductibility of expenses under the Indian Income Tax Act continue to be applicable, in computation of profits attributable to Indian PEs of UAE tax residents. The plea of the assessee is thus devoid of legally sustainable merits.
10. The Canadian Federal court had an occasion to deal with the question whether a tax treaty, when providing that 'in determining the profits of a PE, there shall be allowed as deduction, expenses which are incurred for the purposes of the PE, including executive and general administrative expenses so incurred, whether in the state in which PE is situated or elsewhere' enable the deduction of items not permitted by domestic law, so that non-residents are better off than residents. Even without the aid of a provision similar to one which exists in art. 25(l) of the India UAE tax treaty, the court answered this question in negative and decided, the issue against the taxpayer. In the case of Utah Mines v. The Queen 92 DTC 6194, (1992) 1 CTC 306, and while dealing with the issue whether in view of the provisions of art. 7(3) of Canadian US tax treaty, royalties paid by PE of US company to the provincial Government, which were not tax deductible under the Canadian domestic tax law, could be allowed as deduction, the court observed:
The interpretation proposed by the appellant, on the other hand, would have the effect of giving a US taxpayer with a PE in Canada a more favourable tax treatment than its Canadian competitor engaged in the same business in this country. Such a result would not be in accordance with the policy expressed in the preamble to the Convention and indeed would be contrary to it, It would take much clearer language than a simple reference to 'all expenses' to bring it about. "
11. In a situation, therefore, in which a specific provision like the one in art. 250) in India UAE tax treaty exists, there cannot be any occasion to ignore the limitations on deduction of expenses under the domestic tax legislation. That would be a case of, what can be termed as, reverse discrimination. Just as much a discrimination against a non-resident assessee is undesirable, a discrimination against the resident assessee is also not desirable. As is the underlying philosophy of the tax treaties, there should be a level playing ground for everyone, which must include domestic enterpris6s as well. When we put this to the learned Counsel, it was submitted that it is not clear as to what was the language in the relevant DTAA and whether the Government of Canada has used different terminology in different tax treaties. Learned counsel also submitted that ihis 'reverse discrimination', as we term it, is not only permissible under the tax treaties, it is also permissible under the Income Tax Act. Our attention was then invited to the provisions of Section 10(15) which provides for certain exemptions only to non-residents, as also the provisions of Section 115A which provides for lower rates of taxes for certain category of incomes of the non-residents. Learned counsel has also invited our attention to different phraseology employed in different treaties, and contended that a uniform meaning given to all these different expressions will make differentiation in expression meaningless. It is also contented that once a tax treaty is legally entered into by a Contracting State, it is duty of the Contracting State to apply the same in letter and in spirit. Our attention is invited to the CBDT circular No. 333 (0982) 81 CTR MT) 18)) which is also referred -to by some of the Tribunal decisions cited by the learned Counsel. Learned counsel submits that it cannot be open to a Contracting State to shy away from implementing a tax treaty on the ground that the consequences of its implementation could be contrary to the intentions of the treaty. We are thus urged to interpret the provisions of art. 7(3) to mean that all the expenses, irrespective of the limitations under the domestic tax laws, incurred by the PE are to be allowed as deduction in computing the taxable profits of the PE.
12. We are not impressed with this line of reasoning either. As far as learned Counsel's reference to exemptions 'available to non-resident taxpayers, under the Indian Income Tax Act, is concerned, it is important to bear in mind that an exemption for aliens essentially seeks to restrict host country's jurisdiction to tax, and it is well settled that, as has also been observed by Prof. Kees Van Raad, "while nationality is virtually unconditionally employed as a ground of non-discrimination, it is not related to the use of nationality as jurisdictional basis for income-taxes..." (Non dischmination in IT law--Prof Kees Van Raad, at p. 15). Therefore, non-taxability of any of an aliens' income sourced in the host country cannot be viewed as discrimination in his favour. It is, therefore, too far-fetched to suggest that availability of certain tax exemptions to aliens shows that reverse discrimination is generally permissible under the scheme of Indian Income Tax Act. We reject this proposition. As far as learned Counsel's reference to Section 115A is concerned, this is also fallacious inasmuch as it does not take into the fact that the related incomes are taxed on gross basis in the hands of the non-resident taxpayers and net basis in the hands of the resident taxpayers. Dealing with this aspect of the matter, a co-ordinate Bench of this Tribunal, in the case of Dy. CIT v. Boston Consulting Group (P) Ltd (2005) 93 TTJ (Mumbai) 293 : (2005) 94 ITD 31 (Mumbai) has observed as follows:
19. Section 44D was brought on the statute, with effect from 1-4-1976, by the Finance Act, 1976. By the same Finance Act, Section 115A was also introduced. Section 44D, as we have already seen, provides for taxation of royalties and fees for technical services on gross basis and without allowing any deduction for expenses incurred in earning the said income. Section 11 6A, on the other hand, provides for a special rate of tax on certain incomes including the income from royalties and fees for technical services. The provisions of these two sections are required to be read together inasmuch as while one section lays down that no deductions are permissible in computation of income from, inter alia, royalties and fees for technical services, the other section provides for a lower rate of tax from the said income. These are complementary provisions in that sense. These two sections are to be read in conjunction and not in isolation. Explaining the scope and nature of these sections, Board Circular No. 202, dated 5-7-1976 (1976) 105 ITR (SC) 171 stated that Special provision for computing income by way of royalues and technical service fees in tbe case of foreign companies-New Section 44D.
26.1 Hitherto, income by way of royalties received under agreements made after the 31-3-1961, and approved by the Central Government was taxed in the hands of foreign companies at the rate of 52.5 per cent (income-tax 50 per cent plus surcharge 2.5 per cent). Income by way of technical service fees received under agreements made after the 29-2-1964, and approved by the Central Government was also taxed at the same rate. In either case, the taxable income was determined on net basis i.e. after allowing deduction in respect of costs and expenses incurred for earning the income ........
26.2 The Finance Act has inserted a new Section 44D in the Income Tax Act, 1961, which lays down special provisions for computing income by way of royalties and fees for technical services received by foreign companies from Indian concerns....
26.3 As regards royalties and technical service fees received under agreements made on or after the 1-4-1976 (other than agreements which though made on or after that date or regarded as having been made before that date as explained in para 26.2) no deduction will be allowed in computing the income from the aforesaid sources, regardless of whether the agreement has been....
36.1 Income by way of royalty or fees for technical services received by them from Indian concerns in pursuance of approved agreements made on or after the 1-4-1976, will now be charged to tax at flat rates applicable on the gross amount of such income. The rates of income-tax to be applied in respect of such income have been specified in new Section 115A of the Income Tax Act and are as follows
(iii) Income by way of fees for technical sei-vices received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1-4-1976, will be charged to tax at the rate of 40 per cent on the gross amount of such fees. "
(Emphasis, italicised in print, supplied) The periodic changes in Section 44D have been accompanied by the corresponding changes in Section 115A. It is thus clear that non deduction of expenses under Section 44D, which means that the taxability is on gross basis, is coupled with a special rate of tax for such incomo on gross basis under Section 11 5A ......
13. In this view of the matter, the comparison of lower tax rates under Section 115A, for the non-resident taxpayers, with higher tax rates under the Finance Act, for resident taxpayers, is irrelevant. In the case of non-residents, there were restrictions for deduction of expenses incurred for earning dividend, interest and royalty incomes. It is also interesting to note that when the restrictions under Section 44D ceased to be effective from 1-4-2003, the corresponding income, i.e. income from royalties and fees for technical services, was also taken out of the ambit of lower tax rate under Section 115A. Therefore, taxability of incomes at a lower rate under Section 115A cannot be viewed in isolation. The relevant incomes are taxed on net basis in the former case, while taxability is on the net basis in the latter. When tax base is not the same, the comparison of tax rates is meaningless.
14. Let us also not forget the fact that principles governing a tax treaty are quite different vis-a-vis principles governing a tax legislation. Honble Supreme Court, in the case of Union of India v. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) had an occasion to deal with the principles governing the interpretation of tax treaties. In this regard, Hon'ble Supreme Court held that the principles adopted in the interpretation of treaties are not the same as those adopted in the interpretation of statutory legislation. Their Lordships quoted, with approval, following passage from the judgment of the Federal court of Canada in the case of N. Gladden v. Her Majesty the Queen 85 DTC 5188, at p. 6190 wherein the emphasis is on the 'true intentions' rather than literal meaning of the words employed:
Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular items under consideration are concerned."
In the said judgment, as noted by their Lordships at p. 743, the Federal court of Canada recognized that "we cannot expect to find the same nicety or strict definition as in modern documents, such as deeds, or Acts of Parliament, it has never been habit of those engaged in diplomacy to use legal accuracy but rather to adopt more liberal terms."
15. It is thus clear that one of the basic principles governing the interpretation of tax treaties is that a tax treaty must be interpreted in good faith. Article 31(l) of the Vienna Convention governing the interpretation of tax treaties also lays down that, " a treaty shall be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its objects and purpose". It is therefore important that undue emphasis should not, in any event, be given to a legalistic and literal approach in interpreting a tax treaty; the effort should always be made to harmonise the interpretation of the words of the treaty with its object and purpose. Viewed in this perspective, in our considered view, it is not possible to proceed on the basis that a discrimination in favour of the non-resident taxpayer by the host country, without any specific provision to that effect, can be inferred. It is only elementary that a tax treaty is required to be read as a whole and, when the India UAE tax treaty is read as a whole, the scheme of non- discrimination is clearly discernable from the scheme of things. It would, therefore, be quite inappropriate to read the provisions of the treaty in such a manner so as to result in discrimination against residents of one of the Contracting States; there cannot be any justification for exception to this underlying object of the treaty by reading the provisions of tax treaty in such a manner as to permit discrimination against residents of PE host country. When a treaty explicitly seeks to ensure that there is no discrimination by the host country against a non-resident, who is resident of the other Contracting State, it is really incongruous to interpret the treaty in such a manner that host country has to discriminate against its own residents vis-a-vis the residents of the other Contracting State. Such an interpretation will not only be contrary to the provisions of the Vienna Convention but also contrary to the law laid down by the Hon'ble Supreme Court of India, which, in turn, has concurred with Canadian Federal court on the principles governing tax treaties. For this reason also, the proposition advanced by learned Counsel does not meet our approval.
16. The next thing that needs our consideration is learned Counsel's suggestion that different phraseology employed in the Indian tax treaties warrant an interpretation in such a manner that a uniform meaning is not given to all these different expressions because differentiation in expression will then be rendered meaningless. Unlike a piece of tax legislation, which is creature of a Sovereign State, a tax treaty is a result of bilateral negotiations. Therefore, the wordings of a tax treaty are essentially dependent on the priorities of, and acceptability by, the Contracting States, parties to such a tax treaty. It is only elementary that these factors vary from one set of Contracting. States to another set of Contracting States. The same purpose, therefore, can indeed be intended even by radically different phraseology employed in tax treaties to which a particular country is one of the parties. In the case of tax legislation, however, things are quite different, because, as we have emphasized earlier, tax legislations are unilateral acts of the law making bodies, and when a law making body makes even slightest departure from the expression it used earlier, the normal inference is that such deviation, being a unilateral act, has some specific intent and purpose. The tax treaties being product of bilateral negotiations, deviation in language of the tax treaties entered into' by a country, does not necessarily indicate a deviation in objectives and purpose that these tax treaties seek to achieve. It is also not common that some of the Contracting States are too conservative in their approach and insist on certain provisions as a measure of abundant caution (ex abudanti coutela). As regards learned Counsel's contention that once a Contracting State enters into a tax treaty it cannot be open to that Contracting State to shy away from implementing such a tax treaty on the ground that the consequences of its implementation could be contrary to the intentions of the treaty, we quite agree with the learned Counsel. However, what is needed to be implemented is a clear and unambiguous provision. At best, if there is an ambiguity in the provisions, it needs to be resolved by way of harmonious construction in accordance with the well settled principles of tax treaties. It cannot be, in any event, open to anyone to embark upon the voyage of discovery in search of hidden meanings or intent of parties, not supported by the specific expressions to articulate the same, and then proceed to give life to these inferences- that too in a manner contrary to the scheme of the tax treaty. We do not find any specific provision in the tax treaty which supports learned Counsel's understanding about the scope of art. 7(3) ; in fact, we find, as we have elaborated earlier, specific provision in the treaty which is quite to the contrary. We, therefore, reject this contention as well.
17. In United Kingdom, revenue's International Tax Handbook (IH 859) uses exactly the same argument, as was taken by the Federal court of Canada in the case of Utah Mnes (supra), and states that:
We take the view that neither the business profit article in general nor the specific provision concerning the expenses in particular requires us to allow expenses which are not admissible in United Kingdom domestic law. For example, we could not allow capital expenses or entertaining expenses. We say that each Contracting State is entitled to apply its own general principles and rules in computing the profits it has right to tax. It would be inequitable to permit a non-resident trading in a territory though a PE to deduct items that a resident competition would not be permitted to deduct."
18. Once again, here also the applicability of domestic law restrictions on deduction of expenses is on an independent reading of art. 7(3) and without recourse to a treaty provision analogous to the provision of art. 25(l) in India UAE tax treaty. The case Pefore us is much more favourable to the revenue because there is a specific provision for the applicability of the domestic law in the light of the provisions of the art. 25(l) of the India UAE tax treaty.
19. Well known international tax scholar Prof. Klaus Vogel, in his book 'Eaus Vogel on Double Taxation Conventions' has taken note of some of the tax treaties which contain, in art. 7(3), a specific provision to the effect that allowability of expenses incurred for the purposes of PE has to be "according to the domestic law of the Contracting State in which the PE is situated" and, in this specific context, observed as follows:
.... And the additional phrase that the deductible expenses shall be determined according to the domestic law of the State of the PE is merely a clarificatory one, since such profits of a PE as are subject to tax would have to be determined under the domestic law of the State of PE even if this were not expressly stipulated.. .......
20. In this view of the matter, unless there is a specific provision to the effect that restrictions under domestic tax laws on deduction of expenses are to be ignored, the same will have application in computation of PE profits. The specific provisions in some of the treaties (such as India Australia tax treaty for example) to the effect that profits are to be computed according to the domestic law of the Contracting State in which a PE is situated, is, according to the learned scholar, no more than clarificatory in nature. A school of thought thus exists that specific mention of the applicability of domestic law limitations in computation of profits of the PE is justified as a measure of abundant caution and is made ex abudanti coutela. It is, however, not necessary to go into that aspect of the matter any further at this stage.
21. In view of the above discussions, and particularly bearing in mind the provisions of art. 25(l) 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 art. 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 Commissioner (Appeals) meets our approval. We confirm the same and decline to interfere in the matter.
22. In the result, first ground of appeal is dismissed.
23. As regards ground of appeal No. 2, as also ground of appeal No. 5, learned Counsel submits that he does not wish to press these grounds of appeal.
24. Ground Nos. 2 and 5 are thus dismissed as withdrawn.
25. In ground No. 3, the assessee has raised the following grievance:
The Commissioner (Appeals) erred in upholding the Asst. CIT's action of not allowing the appellant's claim that the tax rate applicable to its business income is 46 per cent and not 55 per cent being the rate applicable to foreign companies for the year under appeal.
The appellant submits that in view of art. 26 of the tax treaty i.e. nondiscrimination clause, read with Section 90(2) of the Income Tax Act, the business income is chargeable to tax @ 46 per cent as is applicable to domestic companies."
26. At the outset, learned Counsel fairly accepts that post 2004 amendments in Explanation to Section 90(2) of the Income Tax 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 visa-vis Indian co-operative societies. He, therefore, confined his arguments on this aspect of the matter. Learned counsel invites our attention to the wordings of Section 90(2) as they exist now, and points out that what is not to be regarded as discrimination, or 'less favourable charge or levy of tax', is charging the rate of tax in respect of a foreign company higher than the rate at which domestic company is chargeable to tax. The discrimination of tax rates between domestic companies vis-a-vis foreign companies is thus specifically taken out of ambit of impermissible non-discrimination under the tax treaties. He then invites our attention to the provisions of art. 24(2) of the India UAE tax treaty which provides for non-discrimination between the PE of a Contracting State operating in the other Contracting State vis-a-vis enterprises of that other Contracting State carrying on the same activities in the same circumstances or under the same conditions. It is thus submitted that the non-discrimination clause is activity based and not form of ownership based. In other words, according to the learned Counsel, as long as PE and the enterprise of the other Contracting State are carrying on 'the same activities in the same circumstances or under the same conditions, there cannot be any discrimination between the two. Our attention is then invited to the provisions of Section 2(19) and Section 2(22A) which define the expression co-operative society' and 'domestic company' respectively. It is pointed out that the definition of the expression 'co-operative society' covers only such co-operative societies as are registered in India, the definition of expression I company' also includes a company incorporated abroad. Learned counsel submits that a co-operative society incorporated in UAE, or for that purpose, anywhere abroad, cannot be assessed as such in India. Learned counsel again emphasises that non-discrimination sought to be prevented by art. 24(2) is not dependent on the form of organization and it only refers to the activity of the PE vis-a-vis activity of the enterprise of the other Contracting State in which PE is situated. We are thus urged to hold that, notwithstanding amendment in Explanation to Section 90(2) of the Act, non-discrimination clause under art. 24(2) of India UAE treaty will apply on the facts of this case as the assessee company is paying higher tax rate than what is payable by Indian co-operative societies carrying out the same activity. Learned CIT departmental Representative, however, vehemently relies upon the orders of the authorities below and justified the same. We were taken through the orders passed by the assessing officer as also by the Commissioner (Appeals). Reliance was also placed on Tribunal's decision in the case of Chohung Bank v. Dy. TTJ (2006) 104 TTJ (Mumbai) 612: (2006) 102 1TD 45 (Mumbai). On the strength of these arguments, we are urged to confirm the stand of the authorities below and decline to interfere in the matter.
27. We have conscientiously heard the rival contentions, carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
28. It is also important to bear in mind that provisions of a tax treaty override domestic law in India, by the virtue of specific provision to that effect in the Income Tax 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 Section 90 of the Act. Now, this enabling provision itself clarifies that differential tax rate between a domestic company vis-a-vis foreign company shall not be construed as 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. Article 26(2) of the India UAE tax treaty provides that, "the taxation of a PE which an enterprise of a, Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprise of that other carrying on the same activities in same circumstances or under similar conditions". In our view, 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. To that extent, we agree with the learned Counsel. However, we do not think that for the purpose of this comparison, it is possible to ignore the form of ownership. A comparison can only be made with comparables. Under art. 3(1)(g), the expression 'enterprise of a Contracting State' has been defined 'as an enterprise carried on by the resident of that Contracting State'. And, on the basis of definition of resident' under art. 4(1) and of 'person' under art. 3(1)(e), the expression resident' refers to "any individual, a company, and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States, who, under the laws of that State, is liable to tax therein by the reason of his domicile, residence, place of management, place of incorporation or any other criterion of similar nature". 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. Therefore, in a case PE belongs to a banking company formed in UAE, and taxable units of that banking company is 'company', such PE can only be compared with a domestic enterprise in India which is assessed as 'company' and carries on the same business. In the present case, the assessee before us 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. The plea of the assessee, therefore, does not meet our approval.
29. Prof. Kees van Raad, a very well-known international tax scholar, in his book "Non-discrimination in International Tax Law", published by Kluwer Law International (ISBN 90 6544 2669), has, at p. 135, has observed that a foreign entrepreneur who resides in State 'B' as individual, his tax position in State 'A' in respect of PE income must be compared with that of a resident individual of State 'A' who operates a similar enterprise in State 'A'. And if the foreign enterprise is operated by a corporation, its tax position must be compared with that of an 'A' State resident corporate taxpayer.
30. Prof. Raad has made the above observations in the context of art. 24(3) of the OECD Model Convention which provides that " the taxation of a PE which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprise of that other carrying on the same activities". The observations will, therefore, apply with equal force in the context of art. 24(2) of India UAE tax treaty. We are in considered agreement with the views so expressed by this eminent international tax scholar.
31. Prof. Vogel, another distinguished international tax scholar, also makes some interesting observations in this regard. In his book 'Vogel on Double Taxation Conventions' and in the context of art. 24(3) of the OECD Model Convention, he observes, at p. 1315, as follows:
Since tax burdens often depend on the legal form of the enterprise to be taxed, this criterion should be taken into account additionally when determining the enterprise with which to compare the PE. Since the latter is only a part of the enterprise that has its head office in another State and no independent legal status, the comparison should attach to the legal set up of that enterprise..."
32. We agree with the distinguished scholar. It would thus follow that comparison of a PE of one State carrying on business in the other Contracting State, with enterprise in the other Contracting State is not activity specific alone, it must bear in mind the form of ownership as well. The question of comparing tax rates applicable on PE with that of the domestic co-operative societies carrying on the same business can only arise when the enterprise of which it is, a PE also the same form of ownership i.e. co-operative society,
33. We would also like to refer to another interesting observation made by Prof. Vogel, which is relevant in the context of issue in appeal before us. On the same page i.e. 1315, Prof. Vogel has also observed as follows:
Protection against discrimination does not include special tax privileges granted to public bodies of taxing State and non-profit institutions, provided that their activities are performed for the purposes of public benefit exclusively specific to that State. In those cases, a comparison with activities of a PE aiming to make profits for its own account is impossible. This restriction, which MC Commentary expressly refers to in connection with non-discrimination of nationals applies mutatis mutandis to the rule of non-discrimination for PE."
34. The views so expressed by Prof. Vogel are quite appropriate; we share his perception. It will indeed be unreasonable to expect parity in taxation of profit making organisations with non-profit making organisations, and taxation of local public welfare bodies in a State with taxation of bodies which are transnational in their operations.
35. In view of the above discussions, and for the detailed reasons set out above, we hold that 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. We, therefore, reject the grievance of the assessee as unsustainable in law.
36. Ground No. 3 is also thus dismissed.
37. That leaves us with ground No. 4 which is reproduced below for ready reference:
The Commissioner (Appeals) erred in confirming the action of the Assistant Commissioner of not allowing a deduction in the year under appeal interest of Rs. 1,25,360 levied under Section 12B of the Interest-tax Act, 1974, vide order under Section 8(2) dated 19-3-1999 for interest-tax assessment year 1996-97. "
38. Having heard the rival contentions and having perused the material on record, we find that the plea of the assessee deserves to be accepted. The learned Commissioner (Appeals) has rejected the deduction only on the ground that Section 18 of the Interest-tax Act, 1974, provides for deduction in respect of only 'interest-tax payable', and since interest levy for deferment of advance interest-tax payable is not a part of 'interest-tax payable', deduction in respect of the same cannot be allowed. We see no merits in this objection. Section 18 of the Interest-tax Act cannot be viewed as a disabling clause; all it provides is that " notwithstanding anything contained in the Income Tax Act", deduction in respect of interest-tax payable is to be allowed in computation of income of the credit institution assessable in respect of the same. It does not, therefore, restrict the scope of deduction otherwise allowable to the assessee. Quite to the contrary, Section 18 enables the deduction in respect of interest-tax even if any restrictions are imposed by the Income Tax Act, in respect of deductions in respect of the same. When interest-tax itself is allowed as a deduction, and interest levy. under Section 12B is admittedly a compensatory levy for delay in advance payment of interest-tax, there cannot be any good reasons to decline deduction to interest levy under Section 12B.
39. For the reasons set out above, we uphold the grievance of the assessee. Accordingly, we direct the assessing officer to delete the disallowance of Rs 1,25,960 so sustained by the Commissioner (Appeals). The assessee gets the relief accordingly.
40. Ground No. 4 is thus allowed. 41. In the result, appeal is partly allowed.