TMI Blog2005 (11) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of non-discrimination has nothing to do with the rate of tax, which is dealt with separately by other articles of the DTAA. Article 25 has deliberately not used the words tax was charged as against other articles, which provide for rates of tax. Curiously article 25 has used expression levy of taxation . In the context of all these articles levy of taxation in the article 25 cannot mean or cannot be construed in the sense of prescribing rate of tax on the total income of the assessee. So far as conflicting provisions of Income-tax Act, 1961 and article 25 are concerned, we do not envisage any conflict. Conflict, if any, must be between two clear and specific provisions of Income-tax Act, 1961 and DTAA. The Income-tax Act, 1961 does not provide the rate at which income tax will be levied. The rates are provided by the Annual Finance Act and are determined by the fiscal policy of the Government. Section 90(2) so does the agreement do override the provisions of the Finance Act by which the rates of tax are fixed annually. The UK agreement makes it clear that the non-discrimination paragraph cannot be interpreted to mean that rate of tax in respect of PE of a UK and an In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 25 of Indo-Korean DTAA is not applicable. Whether new provision is in conflict with DTAA - In our considered view the Explanation introduced in 2001 by Finance Act, 2001 w.r.e.f. 1-4-1962 is no way in conflict with the DTAA with Korea. In fact the DTAA provides for a mechanism for communicating with each other any amendment in law made by one country. It is, thus, evident that DTAA recognizes the fact that the amendments made in the IT Act are not affected in so far or they are not in conflict with the specific provisions of the DTAA. Therefore, we are of the view that the amendment made in section 90(2) by way of insertion of Explanation is applicable insofar as it is not in conflict with the provision of DTAA. - HON'BLE J.P. BENGRA, VICE PRESIDENT AND D.C. AGRAWAL, ACCOUNTANT MEMBER For the Appellant : P.J. Pardiwala For the Respondent : Sangam Srivastava ORDER D.C. Agrawal, Accountant Member. 1. This is an appeal filed by the assessee raising following ground : The CIT(A) erred in law and in facts, in upholding the action of Dy. Director of Income-tax (International taxation) -1(2), Mumbai thereby rejecting the appellant s claim for the benefit of the non-discrimination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1982 also affirm the proposition that differential rate treatment to foreign companies or to their P.E. is not hit by non-discrimination clause. 6. Amendment made in section 90 by way of introduction of Explanation provides to tax non-resident companies at higher rates. The CIT(A) confirmed the order of Assessing Officer by following his orders in earlier years. 5. Before us the learned counsel for the assessee raised following arguments in support of his contention that there is a discrimination against a foreign company and its P.E. by taxing it at a higher rate as compared to taxing the domestic companies (at a lower rates) and such discrimination is hit by article 25 of the DTAA with Korea. His arguments are : 1. Article 25 of DTAA with Korea provides a non- discrimination clause according to which National of Korea shall not be subjected in India to any taxation which is more burdensome than the taxation to which National of India are subjected to. 2. Taxation of P.E. (of Korean Bank) shall not be less favourable than the taxation on an Enterprise of India. 3. The provisions of DTAA would prevail over this provision of the Income-tax Act, 1961. Even though, Income-tax Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the rival submissions, material on record and case laws cited by the parties. In our considered view, the charging of P.E. of the assessee companies at higher rates applicable to non-domestic companies is not hit by non-discrimination clause of article 25 of the DTAA with Korea. The reasons for coming to this conclusion are as under : 1. There is no dispute with the proposition that wherever the provisions of IT Act are in conflict with the provisions of DTAA, the provisions of the DTAA will prevail. It has been held in number of cases decided by Hon ble High Courts : ( i ) In CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP) where the German company carrying on supervision work of installation of bucket wheel reclaimer was held to have no P.E. in India. The assessee-Visakhapatnam Port Trust was not required to effect TDS on such payment to German Co. as per DTAA. It was further held that the provisions of DTAA will prevail over the provisions of IT Act. ( ii ) In CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.) the payment made for import of drawings and designs with approval of RBI was not regarded as Royalty as per terms of the DTAA with U.K. and hence am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar DTAA, the rate of tax which is prescribed in an Annual Finance Act cannot give way to the DTAA. Our view is supported by the careful reading of the provisions of section 90. It reads as under : 90. Agreement with foreign countries. (1) The Central Government may enter into an agreement with the Government of any country outside India ( a ) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or The following clause ( a ) is substituted for the existing clause ( a ) in sub-section (1) of section 90 by the Finance Act, 2003, w.e.f. 1-4-2004. ( a ) for the granting of relief in respect of ( i ) income on which have been paid both income- tax under this Act and income-tax in that country; or ( ii ) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or ( b ) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or ( c ) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparison of section 90 of the IT Act with DTAA, that DTAA will also prevail over the Finance Act, which is to be passed in future by the Parliament. 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 section 2. The Finance Act also creates a distinction between the two on the basis of distribution of dividend. Where a Korean company having a permanent establishment 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 account of distribution of dividend in India. In our view, this distinction does not violate article 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. Indian banks were nationalised by the Acts of the Parliament to promote certain social and economical objects of the State and they have to act for the manipulation of the resources for the common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is implicit in Korean agreement. Whenever required application of rates of taxes on different items of income has been provided in Korean Agreement. For example, para 2 of article 11 provides 15/20 per cent of gross dividend as taxes. In case of interest article 12(2) provides 15 per cent rate on gross interest. Article 13(2) provides rates not exceeding 15 per cent of gross amount of royalties or fee for technical services. Article 9(2) provides taxes not more than 50 per cent of tax chargeable in other State. Therefore, clause 2 of article 25 of the Korean agreement cannot be construed to mean that no tax can be levied on a foreign company at a rate higher than the rate payable by Indian company. Thus, in our considered view, the DTAA in general does not prevail over the Finance Act and hence over the tax rates. Section 90 does not provide so. However, we may add, 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 Income-tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch other similar enterprises of that first-mentioned State are or may be subjected. 5. The provisions of this article shall, notwithstanding the provisions of article 2, apply to taxes of every kind and description. 8. This article 25(1) provides that Contracting States will not discriminate nationals of other Contracting State in the matter of taxation, if that national is working under same circumstances , then taxation on such enterprise will not be less favourable than the taxation on the enterprises of that other State. Based on article 25(1) and article 25(2), the learned counsel for the assessee had submitted that it is discrimination that domestic companies are subjected to lower rates where as the non-resident company (P.E in India of foreign bank) is subjected to higher rates. It is discrimination to tax the PE of foreign bank at higher rates when the Indian Bank and the branch of foreign bank acting as P.E. are engaged in same activities. However, we find that article 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 circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 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 sections 80R and 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution 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 Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 and Tribunal decisions in the cases of Graphite India Ltd. v. Dy. CIT [2003] 86 ITD 3842 (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. 8.2 The concept of discrimination based on nationality was also discussed in explanatory notes on UN Model convention from which the language in most of DTAA s including the Indo Korean DTAA and Indo French DTAA has been borrowed. The relevant article in UN Model convention is article 24. The non-discrimination clause in article 24(1) of UN Model convention and so the article 25(1) of Indo Korean DTAA provided that the term national in article 3( g ) of Indo Korean DTAA showed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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. In the commentary of Klaus Vogel referred above, the place of residence has been considered to be an essential criteria in determining whether two taxpayers are functioning in the same circumstances . Similar views were expressed in the decision by ITAT in Credit Llyonnais s case ( supra ). Another distinction between domestic company and non-domestic company is the declaration of dividend or making arrangement therefor. Indian domestic company has to declare dividend or make prescribed arrangement therefor. But there is no such binding upon the non-domestic company, as they do not have the shareholders in India. Thirdly, the domestic banking company has to abide by the additional conditions imposed by Reserve Bank of India about advances to agriculture or to weaker sections of society. The percentage of advances to priority sector is more in case of domestic banking company as compared to non-domestic banking company. Hence it cannot be said that domestic banking company and non-domestic company are working under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income to tax. Section 2( 23A ) defines a foreign country as a company, which is not a domestic company. 10.2 The non-discrimination clause, in our considered view, can be invoked among the members of the same set of persons . Those 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, we do 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. 11. Now let us see how Explanation to section 90(2) affects the applicability of non-discrimination clause, section 90 has been referred above, elsewhere in this order, Explanation to it was introduced with effect from 1-4-1962 with retrospective effect. It clearly provided that charging of a foreign company at a higher rate will not be regarded as less favourable as compared to domestic company. The Departmental Circular No. 14 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act are beyond the provisions of the Income-tax Act and hence they are not subjected to the provisions of DTAA. The Explanation does not layout a new law but only clarifies the position as it stood earlier also, and which we have discussed in earlier paragraphs that section 90(2) only authorizes Central Government to make agreement with foreign countries in respect of assessability and computation of income and not about rates of taxes on the income so computed as it falls in the domain of Annual Finance Act. Further, the power of Parliament to make amendment in law is not assigned or compromised by virtue of DTAA being in force. It has only to be seen as to whether new provision is in conflict with DTAA. In our considered view the Explanation introduced in 2001 by Finance Act, 2001 w.r.e.f. 1-4-1962 is no way in conflict with the DTAA with Korea. In fact the DTAA provides for a mechanism for communicating with each other any amendment in law made by one country. Article 2 para 4 of DTAA is relevant. It is extracted below : 4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of this Convention in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are in conflict with an Act of Parliament. Comity of co-nations or no municipal law must prevail in case of conflict. National Courts cannot say yes if Parliament has said no to a principle of international law. National courts will endorse international law but not if it conflicts with national law. National courts being organs of the National State and not organs of international law must perforce apply national law if international law conflicts with it. But the Courts are under an obligation within legitimate limits, to so interpret the municipal statute as to avoid confrontation with the comity of nations or the well established principles of international law. But if conflict is inevitable, the later must yield. 11.3 Thus, in the present case, we hold that, firstly there is no conflict of the Explanation with DTAA as : ( i ) The area of operation of Explanation and of Art. 25(1) are in different field. ( ii ) Explanation clarifies the position as it always stood. ( iii ) DTAA did not prescribe any separate or specific rate or any particular criteria to be applied on income of Korean companies assessed in India. ( iv ) Explanation does not deal with assessability of any item o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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