TMI Blog1998 (12) TMI 612X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of the agreement for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital entered into by the Government of the Republic of India and the Government of the French Republic, whether the applicant is chargeable to tax in respect of income earned from business, as computed under article 7 of the treaty from the assessment year 1996-97, at the rate applicable to a domestic company, in so far as is beneficial to the applicant. The Revenue has raised a preliminary point. Whether this application made, can be entertained at all. The objection raised on the behalf of the Revenue is that the applicant is carrying on banking business in India for the past several years. It is regularly filing its returns as per the Income-tax Act and is being assessed accordingly. Therefore, this applicant is precluded from making this application for advance ruling. The expression advance ruling has been defined in section 245N in the following manner. 245N. In this Chapter, unless the context otherwise requires,- (a) advance ruling means the determination, by the Authority, of a question of law or fact specified in the application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prescribed rate for payment of tax by a domestic company is lower than the rate of tax applicable to a non-domestic company. This is violative of article 26 of the DTAA. Domestic company has been defined by section 2(22A) of the Income-tax Act, 1961, to mean an Indian company, or any other company 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. Foreign company has been defined by section 2(23A) of the Income-tax Act to mean a company which is not a domestic company. Indian company has been defined by section 2(26) of the Income- tax Act to mean a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes- (i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union Territories specified in sub-clause (iii) of this clause ; (ia) a corporation established by or under a Central, State or provincial Act ; (ib) any institution, association or bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. of the total income ; II. In the case of a company other than a domestic company, (i) on so much of the total income as consists of (a) royalties received from Gov ernment or an Indian concern in pursu ance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961, but before the 1st day of April, 1976, or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agree ment made by it with the Government or the Indian concern after the 29th day of February, 1964, but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government. 50 per cent. ; (ii) on the balance, if any, of the total income 55 per cent. Surcharge on income-tax The amount of income-tax computed in accordance with the provisions of this paragraph or section 112 shall, in the case of every domestic company having a total income exceeding seventy-five thousand rupees, be increased by a surcharge calculated at the rate of fifteen per cent. of such income-tax. Finance Act, 1996 Paragraph E of Part I of the First ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it will be treated as a domestic company. This distinction between a domestic company , Indian company and a foreign company has been in existence for a long time in the Indian income-tax law. For example, section 85A as it stood on April 1, 1966 was as under : 85A. Deduction of tax on intercorporate dividends.-Where the total income of an assessee being a company includes any income by way of dividends received by it from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, the assessee shall be entitled to a deduction from the income-tax with which it is chargeable on its total income for any assessment year or so much of the amount of income-tax calculated at the average rate of income-tax on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of twenty-five per cent. thereof : Provided that in the case of a company which has not made the prescribed arrangements for the declaration and payment of dividends within India and whose total income includes any inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me for the previous year is not less than fifty-one per cent. of such gross total income. The Finance (No. 2) Act, 1971, which substituted the following for clauses (a) and (b) of sub-section (1) of section 80M and deleted the Explanation, with effect from 1st April, 1972, provided thus : (a) sixty per cent. of such income, where the assessee is a domestic company ; (b) sixty-five per cent. of such income, where the assessee is a foreign company. Section 80MM, however, spoke of Indian companies and 80N dealt with foreign companies. However, what is important to note is that section 80M prescribed different rates of tax for domestic and foreign companies. With full knowledge of this well known and long standing distinction between an Indian company, domestic company and a foreign company, the non-discrimination clause in the DTAA (article 26) was drafted. It did not prohibit the long standing distinction in Indian tax laws between a domestic company and a non-domestic company. Therefore, it will not be right to contend as has been done before us on behalf of the applicant that discrimination has been made between a French company and an Indian company in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under-banked rural and semi-urban areas. There has also been a progressive increase in the deployment of bank resources for the neglected sectors and weaker sections of society. 2. The Government are committed to implement the 20-point programme vigorously. In pursuance of this objective, the public sector banks have undertaken to increase their credit to priority sectors to 40 per cent. of their total advances over a period of five years. 3. In order further to control the heights of the economy, to meet progressively, and serve better, the needs of the development of the economy and to promote the welfare of the people, in conformity with the policy of the State towards securing the principles laid down in clauses (b) and (c) of article 39 of the Constitution, six Indian private sector banks, each having deposits of ₹ 200 crores or more on 14th March, 1980, were nationalised by the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1980, promulgated by the President on the 15th April, 1980. The Ordinance was also considered necessary for providing larger credit to priority sectors, for establishing a more effective and meaningful direction and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , service charges are levied. In other words, the foreign bank confines its business to the more affluent section of the society who can afford to keep a large amount of money deposited with the bank. This practice restricts the number of depositors and enables the bank to have the use of the deposits for gainful purposes. It has no social obligation to open branches in unprofitable areas or to make its services available to the common people of humble means who cannot make a large initial deposit. Moreover, as has been stated in the objects clause of the Act of 1980, after nationalisation, there has been a progressive increase in the deployment of resources of the nationalised banks for the neglected sectors and weaker sections of the society. Forty per cent. of the resources are invested in the priority sector. On behalf of the applicant, this argument was countered by saying that a foreign banking company is not permitted to carry on business in the agricultural sector. That may be so. But a nationalised bank has to open branches in the agricultural and semi-urban sectors even though such branches may not be profitable. The overriding idea is to provide banking services to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no breach of the non-discrimination article if special tax rate schedules are available only to resident nationals since a non-resident is not in the same circumstances. In the case before us, distinction has been made on the basis of distribution of dividends in India. We are of the view that the applicant has failed to establish that there has been discrimination under article 26(1). Moreover, the protocol to the DTAA set out earlier in this ruling clearly recognises that a French company and an Indian company are not deemed to be in the same circumstances. The question is whether the Indian banks have been placed in a more favourable position than French banks by the annual Finance Acts. The case of the applicant is that the French banks have to pay tax at a higher rate than the Indian banks although they are carrying on the same activities. This argument is of little merit. The activities of the Indian and French banks are similar in that both carry on banking operations. However, the activities of the Indian and French banks are not identical. As we have noted earlier, large Indian banks were nationalised by the two Acts of Parliament to promote certain socia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities of the nationalised banks and the foreign banks are quite different. They are carrying on the same activities in the sense that they are carrying on banking operations but the main purpose and object of carrying on banking operations by the nationalised bank is to help the neglected and weaker sections of the society by deployment of their resources. That was the whole purpose of nationalisation from which the foreign banks were expressly excluded. A nationalised bank has to be an instrument of the Government policy in the implementation of the 20-point programme for economic development of the country. Forty per cent. of the advances have to be reserved for such purposes only. These banks have to act in furtherance towards implementation of article 39 of the Constitution. It has also to ensure that the material resources of India are so distributed as to subserve the common good. The activities which will have to be carried out by the nationalised bank will be towards achieving the objectives set out in the objects clause of the Nationalisation Acts. In fact, these were the reasons why the large Indian private banks were nationalised. The foreign banks were specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us, the French and the Indian companies have to pay income-tax. The grievance of the applicant is that they have to pay tax at a higher rate. Clauses 1 and 2 of article 26 have used the word taxation in preference to tax which has been used in most of the other articles of the agreement. The meaning of the expression taxation as given by New Webster s Dictionary and Thesaurus [1992] is as under : The imposition of a tax : the system by which taxes are imposed : the revenue obtained by imposing taxes. The meaning of the expression taxation as given in Black s Law Dictionary is the process of taxing or imposing a tax. Taxation does not mean rate of tax and has not been used in article 26 in that sense at all. In the DTAA between India and France, the words taxation and tax have been used in a number of articles. Both taxation and tax have been used in the objects clause of the agreement where the purpose has been stated to be avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital . Taxation has again been used in articles 25 and 26. Article 25 deals with the elimination of double taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of an enterprise in France shall be taxable in France unless it carries on business in India through a permanent establishment in India. The income of a permanent establishment in India is taxable in India only to the extent to which it is attributable to that permanent establishment. There are special rules provided in article 7 for computation of business profits. Special provisions have been made for taxing certain categories of business expenditure. Article 8 deals with air transport. Article 9 deals with shipping. Article 10 deals with associated companies. Various reliefs have been provided as to the rate of tax and also computation of quantum of such business profits. Dividend which falls under the head Income from other sources is taxable at a concessional rate. Under certain special circumstances, interest is dealt with by article 12. The manner of taxation at a special concessional rate of tax is laid down in that article. Similarly, royalties and fees for technical services are dealt with in article 13 and the upper limit of rate of tax is provided for taxing the gross amount of such royalties, fees and payments. Article 14 also contains rules of computation of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been mentioned in these articles, the language employed has been the tax so charged shall not exceed the percentage specified in those articles. Having regard to the context in which the words levy and taxation have been used, we are of the view that clause 2 of article 26 does not place an embargo on imposing a higher rate of tax on the French concern than on the Indian concern. In this connection, it should also be noted that section 4 of the Income- tax Act also, inter alia, uses the words. . . . income-tax at that rate or those rates shall be charged. It has to be borne in mind in this connection that under the Income-tax Act, a large number of concessions are given to a foreign company which are not available to an Indian company. An Indian company pays tax on its total world income whereas a foreign company is liable to pay tax only in respect of income which accrues or arises in India. There are various other concessions given to a foreign company. Section 115A contains special provisions for tax on dividends, royalties and technical services fees in the case of a foreign company. Special concessions have been given to non-resident sportsmen. These provisions sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention. Clause 1 of article 26 of the U.K. agreement is practically identical with the corresponding provision of article 26 of the agreement with France (hereinafter described as the French agreement ). Clause 2 of the U.K. agreement and the French agreement are also identical except that in the U.K. agreement a rule of construction has been provided. The U.K. agreement like the French agreement specifically provides that a 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 the other State than the taxation levied on enterprises of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax can be levied on a foreign company at a rate higher than the rate payable by the Indian company. Article 26 of the French agreement should not be construed as a provision preventing either India or France from charging tax on the profit of a permanent establishment at a rate higher than the rate payable by a domestic company on its total income. Our attention was drawn to section 90(2) of the Income-tax Act which provides that if there is any conflict between any provision of the agreement and that of the Income-tax Act, then the provision which is more beneficial to the assessee will apply. We do not find any conflict between the provisions of the Income-tax Act and article 26. Moreover, the conflict envisage in section 90(2) must be a conflict between two clear and specific provisions of the Income-tax Act and the DTAA. The Income-tax Act, however, does not provide the rate at which income- tax will have to be levied. The rate is provided by the annual Finance Act and is determined by the fiscal policy of the Government. Sub-section (2) of section 90 does not say that the agreement will override the provision of the Finance Act by which the rates of tax are fixed annua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59 Act was pro tantoin conflict with the 1950 Agreement. The Privy Council posed the question What consequence follows ? It answered the question by saying that the Act of 1959 must prevail over the 1950 agreement. The Privy Council rejected the contention of the taxpayer company that the agreement of 1950 must prevail. In coming to this conclusion, the Privy Council relied on the well-known rule of construction that if the provision of a later enactment was so inconsistent with or repugnant to the provisions of an earlier one that the two cannot stand together, the earlier is abrogated by the later. The Privy Council observed that this rule of construction was more easy to state than to apply. However, there was no difficulty in application in the case before it because the 1950 agreement prohibited other taxation, etc. The 1959 Act imposed such other taxation under section 53C. The inconsistency or repugnance could not be more complete. The Privy Council, thereafter, posed the question are there, however, other considerations which, when taken into account, tilt the balance in favour of the view that the 1950 Act should nevertheless prevail ? It was noted that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atures, I think that there is no useful aid at all to be obtained from this principle of interpretation. The principle depends wholly on the supposition of a particular intention in the Legislature, and I do not think that in the case before us there is any reason to make the supposition which is suggested. Following the principles laid down by the House of Lords in Collco Dealings Ltd. s case [1961] 1 All ER 762, the Privy Council in Woodend s case [1970] 2 All ER 801, held that there was no reason to curtail the meaning to be given to section 53C of the Ceylon Act only because the provisions of section 53C of the 1959 Act were in conflict with the 1950 Agreement. The provisions of the later Act must prevail. In Woodend s case [1970] 2 All ER 801, the Privy Council came to its decision after rejecting an argument (at page 809 of the Report) that articles VI and XVIII of the Agreement did not have the force of law. Consistent with the ruling of the House of Lords in Collco Dealings Ltd. s case [1961] 1 All ER 762, the Supreme Court of India has also held as under in Gramophone Co. of India v. Birendra Bahadur Pandey, AIR 1984 SC 667, at 671 : National courts cannot say ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
