1998 (12) TMI 612 - AAR - Income Tax

Whether in the light of article 26 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 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? Whether the rate of tax payable by a non-domestic company cannot be reduced by relying upon article 26 of the DTAA between India and France?

Summary

Issues Involved
1. Preliminary objection on the maintainability of the application for advance ruling.
2. Applicability of Article 26 of the Double Taxation Avoidance Agreement (DTAA) between India and France to the tax rate imposed on the applicant, a non-resident banking company.

Detailed Analysis

1. Preliminary Objection on Maintainability
The Revenue raised a preliminary objection regarding the maintainability of the application, arguing that since the applicant has been carrying on banking business in India for several years and has been regularly filing its returns as per the Income-tax Act, it is precluded from making this application for advance ruling. The definition of "advance ruling" under section 245N and the conditions under section 245(R)(2) were examined. The Authority noted that the determination of the rate of tax is an integral part of the assessment process, which is pending. Therefore, the preliminary objection raised by the Revenue was considered to have some substance. However, the Authority decided not to dispose of the case on this preliminary point.

2. Applicability of Article 26 of the DTAA
The main issue was whether a higher rate of tax imposed on the applicant, a French banking company, violates Article 26 of the DTAA between India and France. The applicant argued that the prescribed rate for domestic companies is lower than that for non-domestic companies, which is discriminatory under Article 26.

Definition and Rates of Tax:
- "Domestic company" is defined under section 2(22A) of the Income-tax Act, 1961.
- "Foreign company" is defined under section 2(23A).
- The Finance Acts of 1994, 1995, and 1996 prescribed different rates for domestic and non-domestic companies, with non-domestic companies required to pay a higher rate of tax.

Article 26 of the DTAA:
- Article 26(1) prohibits discrimination against nationals of one Contracting State in the other Contracting State.
- Article 26(2) ensures that taxation on a permanent establishment of an enterprise is not less favorably levied than on enterprises of the other Contracting State carrying on the same activities.

Analysis and Conclusion:
- The distinction between domestic and non-domestic companies is based on the distribution of dividends in India. If a foreign company declares and distributes dividends in India, it is treated as a domestic company.
- The object of the tax distinction is to collect tax on dividends distributed in India, leading to further accrual of income and tax.
- The Authority concluded that this distinction does not violate Article 26 of the DTAA. The differentiation is not based on nationality but on the distribution of dividends.
- Additionally, the Authority noted that Indian nationalized banks have social obligations and constraints that foreign banks do not share, making them not similarly circumstanced.

Non-Discrimination Clause:
- The Authority referred to international tax law principles, noting that non-resident aliens are not in the same circumstances as resident nationals.
- The non-discrimination clause in the DTAA does not prohibit different tax rates for domestic and non-domestic companies.

Comparison with UK Agreement:
- The Authority compared the DTAA with France to a similar agreement with the UK, noting that the UK agreement explicitly allows for different tax rates for permanent establishments of foreign companies.
- The absence of a specific rule of interpretation in the French agreement does not imply that a higher tax rate for foreign companies is prohibited.

Final Ruling:
- The rate of tax payable by a non-domestic company cannot be reduced by relying on Article 26 of the DTAA between India and France.
- The question raised by the applicant was answered in the negative, and the ruling was against the applicant.