2015 (1) TMI 1255 - AT - Income Tax

Disallowance of deduction of head office expenses allocated to Indian branches - whether entire amount should be allowed as per the provisions of Article 7(3) of the convention between the Government of India and the Government of UAE? - whether or not the disallowances set out under section 44C or for that purpose- any artificial disallowances under the provisions of the Income Tax Act as applicable to a resident assessee will come into play in computation of taxable income of the assessee under Article 7 also? - Held that - Reverse discrimination which would have resulted by not restricting the deductions in the light of the provisions of the Act for nonresidents assessees was not permissible under the Indo UAE treaty prior to the protocol amendment in question and such a reverse discrimination is permissible even now as specifically provided for in the said protocol amendment in the Indo UAE tax treaty itself. That is what is clearly discernable from the Indian tax treaty approach and is completely in harmony with the judicial precedents and the best practices in well developed international tax jurisdictions. The issue is squarely covered by the decision of this Tribunal in assessee s own case for the assessment year 1996-97. This stand has now been specifically accepted in the protocol to the India UAE tax treaty. Just because there is a more specific and more unambiguous provisions post the protocol amendment one cannot come to the conclusion that the judicial precedent rendered by a coordinate bench even without these specific and unambiguous expressions cases to hold good. That will be stretching the things too far and will also be contrary to approach adopted by a very large number of judicial precedents set out earlier in this order. Thus we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. The claim made by the assessee by way of note to the income tax return is rejected. As the assessee has incurred loss in this year no part of head office expenses is allowable under section 44C. As the assessee has not anyway claimed any deduction in the income tax return in this respect no disallowance is warranted. - Decided in favour of assessee MAT applicability - whether the provisions of Section 115 JB will apply to the assessee? - Held that - In the case of Krung Thai Bank (2010 (9) TMI 18 - ITAT MUMBAI ) a coordinate bench of this Tribunal has inter alia held that the provisions of Section 115JB come into play only when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Act but then since banking companies under Section 211(2) of the Act are not covered by this requirement the provisions of Section115JB cannot be applied in the case of the banking companies. Of course there is an amendment in Section 115JB which extends applicability of this section to the cases in which the accounts are not prepared in accordance with the Schedule VI requirements as well but then this amendment is effective from 1st April 2013. The assessment year before us is 2002-03 and it remains unaffected by this legislative amendment. In view of these discussions as also bearing in mind entirety of the case we uphold the grievance of the assessee. We accordingly direct the Assessing Officer to delete the impugned levy of MAT under section 115 JB. - Decided in favour of assessee

Summary

The judgment from the ITAT Mumbai involves an appeal by an assessee banking company incorporated and tax resident in the United Arab Emirates, challenging the correctness of an order by the CIT(A) regarding the assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2002-03. The appeal primarily revolves around the disallowance of head office expenses and other related tax issues under the Indo-UAE Double Taxation Avoidance Agreement (DTAA) and the Income Tax Act.

Issues Presented and Considered:

The core issues considered in this appeal include:

• Whether the disallowance of head office expenses under section 44C of the Income Tax Act is applicable to the assessee in light of Article 7(3) of the Indo-UAE DTAA.
• The applicability of domestic law limitations on deductions in computing the profits of a Permanent Establishment (PE) under Article 7(3) of the Indo-UAE DTAA.
• The impact of subsequent protocol amendments to the Indo-UAE DTAA on the applicability of domestic law limitations.
• The applicability of Section 115JB (Minimum Alternate Tax) to the assessee.

Issue-wise Detailed Analysis:

1. Disallowance of Head Office Expenses:

• The relevant legal framework includes Section 44C of the Income Tax Act, which limits the deduction of head office expenses to 5% of the adjusted total income, and Article 7(3) of the Indo-UAE DTAA, which allows deductions for expenses incurred for the business of the PE.
• The Court noted that the issue had been previously adjudicated in the assessee's own case for the assessment year 1996-97, where it was held that the provisions of the Income Tax Act apply unless specifically overridden by the DTAA.
• The Court rejected the assessee's argument that Article 7(3) of the DTAA allows for deductions beyond the limitations of domestic tax laws, citing the absence of specific contrary provisions in the treaty.
• The Court emphasized the principle of non-discrimination, stating that allowing deductions not permitted by domestic law would result in reverse discrimination against resident taxpayers.
• The Court upheld the CIT(A)'s decision, confirming the disallowance of head office expenses as per Section 44C.

2. Impact of Protocol Amendments:

• The protocol amending the Indo-UAE DTAA, effective from 1st April 2008, explicitly incorporated the limitations of domestic tax laws into the computation of PE profits under Article 7(3).
• The Court noted that even before the protocol, the limitations were implicit by virtue of Article 25(1) of the DTAA, which states that domestic laws govern taxation unless expressly overridden by the treaty.
• The Court rejected the argument that the protocol amendment changed the legal position, affirming that the limitations of domestic law were always applicable.

3. Applicability of Section 115JB:

• The Court addressed the applicability of Section 115JB (MAT) to the assessee, noting that the provisions apply only when the profit and loss account is prepared in accordance with Schedule VI of the Companies Act.
• Since banking companies are not required to prepare accounts as per Schedule VI, Section 115JB was held inapplicable to the assessee for the assessment year 2002-03.
• The Court directed the Assessing Officer to delete the levy of MAT under Section 115JB.

Significant Holdings:

• The Court upheld the disallowance of head office expenses under Section 44C, confirming that the limitations of domestic tax laws apply unless expressly overridden by the DTAA.
• The Court affirmed that the protocol amendment to the Indo-UAE DTAA did not alter the pre-existing legal position regarding the applicability of domestic law limitations.
• The Court held that Section 115JB does not apply to the assessee for the relevant assessment year, as banking companies are not required to prepare accounts as per Schedule VI.
• The appeal was partly allowed, with relief granted on the issue of MAT under Section 115JB.