2009 (10) TMI 595 - AT - Income Tax

Double Taxation Avoidance Agreement - Tax Rate - The ld. CIT(A) has erred in directing to tax @ 43% of the total income in terms of Article 24(2) of the Indo-Mauritian DTAA instead of @ 55% charged in the assessment - Since Indian domestic bank and PE of the assessee bank were engaged in banking activities but the activities were not the same; they might only be similar - Co-operative societies are charged with different rates looking to their social involvement and upliftment of poor and the prospects of their betterment though co-operative sector. Clauses (6), (1)and (8) of Model Conventions on article 25(2) provide that it will not be a discrimination if the Contracting State provides special privilege to public bodies or whose activities are performed for public benefit or to its own bodies being Integral part of the State etc - Therefore it was not acceptable to compare co-operative societies with non-resident banking companies upon whom there is no such social burden. Further Explanation to section 90 so introduced with effect from 1-4-1962 is an integral part of section - It clearly lays down that charging of foreign company at a higher rate would not be treated as less favourable - Thus set aside the order of the learned CIT(A) and decide the issue in favour of the revenue. Disallowance - Travelling and entertainment expenses - the restriction has been clearly provided that the expenditure is to be allowed subject to limitation of the Taxation Laws of the Contracting States but no such restriction is incorporation in the DTAA with Mauritius and therefore restriction provided u/s. 37(2) of the Income-tax Act cannot be enforced - Thus allowed the expenditure.

Issues Involved:
1. Tax rate applicable under Article 24(2) of the Indo-Mauritian DTAA.
2. Disallowance of traveling expenses under Rule 6D of I.T. Rules.
3. Disallowance of entertainment expenses under Section 37(2) of the Income-tax Act, 1961.

Issue 1: Tax Rate Applicable under Article 24(2) of the Indo-Mauritian DTAA

The primary issue was the applicable tax rate for the assessee, with the revenue challenging the CIT(A)'s direction to tax at 43% instead of 55%. The assessee claimed a tax rate of 40% based on Article 24 of the Indo-Mauritian DTAA, equating its status to a 'domestic company' as defined in Section 2(22A) of the Income-tax Act, 1961. The Assessing Officer, referencing the Authority for Advance Rulings in the case of Societe Generale, applied a 55% tax rate, arguing that a non-domestic company must adhere to the Finance Act's prescribed rates.

Upon appeal, the CIT(A) held that the DTAA provisions should prevail, allowing a 40% tax rate. However, the Tribunal considered the insertion of Explanation 1 to Section 90 by the Finance Act, 2001, which clarified that charging a foreign company at a higher rate than a domestic company is not discriminatory. The Tribunal referenced the case of Chohung Bank v. Dy. Director of Income-tax (Int. Taxation) [2006] 102 ITD 45 (Mum.), which supported the view that the DTAA does not override the Finance Act regarding tax rates. Consequently, the Tribunal set aside the CIT(A)'s order, deciding in favor of the revenue and affirming the 55% tax rate.

Issue 2: Disallowance of Traveling Expenses under Rule 6D of I.T. Rules

During the assessment, the Assessing Officer disallowed traveling expenses amounting to Rs. 35,083 under Rule 6D of the I.T. Rules. The CIT(A) deleted this disallowance, referencing Article 7(3) of the DTAA with Mauritius, which allows deductions for expenses incurred for business purposes without the restrictions imposed by the Indian Income-tax Act.

The Tribunal upheld the CIT(A)'s decision, noting that similar expenses were allowed in previous years without challenge. Article 7(3) of the DTAA with Mauritius mandates that expenses incurred for the business of the permanent establishment be allowed as deductions, irrespective of domestic restrictions. The Tribunal contrasted this with the DTAA with France, which explicitly incorporates domestic law limitations, highlighting the absence of such restrictions in the Indo-Mauritian DTAA.

Issue 3: Disallowance of Entertainment Expenses under Section 37(2) of the Income-tax Act, 1961

The Assessing Officer also disallowed entertainment expenses amounting to Rs. 1,10,031 under Section 37(2) of the Income-tax Act. The CIT(A) deleted this disallowance based on the same reasoning applied to traveling expenses, citing Article 7(3) of the DTAA with Mauritius.

The Tribunal confirmed the CIT(A)'s decision, reiterating that the DTAA with Mauritius does not incorporate the restrictions of the Indian Income-tax Act. The Tribunal emphasized that if any restriction was intended, it would be explicitly stated in the Treaty, as seen in the DTAA with France. Therefore, the restriction under Section 37(2) could not be enforced, and the entertainment expenses were allowable.

Conclusion

The Tribunal partly allowed the appeal, upholding the revenue's position on the tax rate issue but confirming the CIT(A)'s deletion of disallowances for traveling and entertainment expenses based on the provisions of the Indo-Mauritian DTAA.

← Previous Next →