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TMI Blog2005 (11) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax rate for non-domestic companies as against claim of assessee to tax it at a rate of 35 per cent being the rate applicable to domestic companies. 3. The assessee is a banking company based at Korea. It has a branch in India. It is involved in normal Banking activities including financing of foreign trade and foreign exchange transactions. The assessee-company claimed that the tax rate as applicable to Indian companies carrying on similar business should be applied in its case instead of the tax rate applicable to non-resident companies. To press for its arguments the assessee-company relied upon article 25 of the Double Tax Avoidance Agreement (DTAA) between India and Korea. The Assessing Officer considered the provisions of article 25 of the DTAA with Korea and rejected the claim. While rejecting the claim he gave his reasonings in para 3 of his order. 4. In brief arguments of the learned Assessing Officer are : 1. Article 25 of DTAA provides protection against discrimination on the basis of nationality. 2.1 Non-discrimination clause can be invoked only when the foreign entity and Indian entity are carrying on the same activities and not when they are carrying simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khapatnam Port Trust [1983] 144 ITR 146 (AP) 3. 137 ITR (St.) 1. 4. Explanation to section 90 does not apply in the case of a person who is national of a country with which India has entered with DTAA. It only applies in cases where- (i) The country of which the assessee is a national has not entered into a treaty for DTAA with India. (ii) The DTAA treaty is silent about discrimination clause. (iii) The assessment year involved is after 2004, when last amendment in the Explanation was carried out. (iv) The treaty itself provides for differential rate treatment like in the case of DTAA with U.S. The treaty itself provides for differential rate treatment of 15 per cent. 6. On the other hand learned DR supported the orders of authorities below. He further relied on the decision of ITAT Bench, Mumbai in Credit Llyonnais v. Dy. CIT [IT Appeal No. 6540 (Mum.) of 1995 assessment year 1991-92]; [2005] 94 ITD 401, Mumbai and in the case of ABN Amro Bank NV v. Jt. CIT ITAT Kolkata 'E' Third Member Bench in ITA 4961/M/1999, 58 & 106/Cal./2001 and 693/Kol./2002 for assessment years 1992-93 to 1995-96 for the propositions that Explanation to section 90(2) inserted with retrospectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Malaysia, income from sources mentioned in these articles are not assessable in India even though IT Act provided otherwise. (v) In Arabian Express Line Ltd. of UK v. Union of India [1995] 212 ITR 31 (Guj.), it was held, by virtue of article 9 of the DTAA with U.K., that entire shipping income of the petitioner, was exempt from tax in India. (vi) In CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 6542 (SC) it was held that by virtue of articles II(1)(b), IV, V, VI, VII(1), XXII(2), where assessee does not have any P.E. in India, he is not assessable in India. From all these decisions, which have been brought to our notice, we find that the main issue in the dispute has been the taxability of an item under IT Act. Thus, the issue has centered around assessability of an assessee in India or about computation of income as to whether certain item is to be included in the total income or not, which is apparently so includible but the provisions of DTAA provided otherwise and the Courts have held that they are not assessable or includible in the total income. In none of these decisions the question of applicability of rates after finally computing the total income was invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The following sub-section (3) is inserted after sub-section (2) of section 90 by the Finance Act, 2003, w.e.f. 1-4-2004 : (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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. Let us compare DTAA of India with Korea with DTAA of India with UK. Article 23(2) of agreement with UK reads as under : "2. The taxation on a permanent establishment which an enterprise of a Contracting State has in other Contracting State shall not be less favourably levied in that other State than the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies has been provided in DTAA with Korea. Hence, it cannot be said that DTAA is in conflict with Income-tax Act, 1961. In fact, no such real conflict has been demonstrated. 3. Let us examine article 25 of the DTAA with Korea so as to find out whether it is in conflict with any provisions of the Act : "Article : 25 1. The nationals of a Contacting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other, or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 2. The 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 that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be constituted as obliging a Contracting State 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 residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination, hit by non-discrimination clause in article 21 of Indo-French DTAA, the language of which is pari materia with that of article 25(1) of Indo-Korean DTAA. Para 6 of that order reads as under : "6. The applicable India France Double Taxation Avoidance Agreement is India-France DTAA dated 26th March, 1969 (reported in 76 ITR Statute 1). In this tax treaty, article XXI provided as follows: Article XXI The nationals of one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirements connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other Contracting State in the same circumstances are or may be subjected. In particular, the citizens of one Contracting State who are subjected to tax in the other Contracting State shall be entitled to the same extent as the citizens of that other Contacting State, to any exemption, deduction, credit or other allowance accorded in consideration of the family circumstances. A plain reading of the above tax treaty provision makes it clear that it deals with discrimination on the ground of nationality alone. To p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation etc. of one of which is more burdensome than the other, must be 'in the same circumstances'. Elaborating upon the scope of expression 'in the same circumstances', OECD commentary, inter alia, observes as follows: 'The expression "in the same circumstances" refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of ordinary taxation laws and regulations, in substantially similar circumstances both in law and on fact.... The expression "in the same circumstances" would be sufficient by itself to establish that a taxpayer who is resident of a Contracting State and one who is not a resident of a Contracting State are not in the same circumstances. In fact, whilst the expression 'in particular with respect to residence' did not appear in the 1963 Draft Convention or in 1977 Model Convention, the Member countries consistently held that, in applying and interpreting the expression "in the same circumstances", that the residence of the taxpayer must be taken into account. However, in revising the Model Convention, the Committee on Fiscal Affairs felt that a specific reference to the residence of taxpayer would be useful clarifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and any legal person, partnership, association or other entity deriving its status as such from the laws in force in the Contracting State." 8.3 From this it appears to us that corporate bodies are not covered in the definition of nationals. Since 'legal person' come side by side with individual in the above definition, than from the principal of 'Nocitur-a-soccii' the 'legal person' would not be a corporate body. Further, 'other entity' as used in article 3(7) would also not include 'corporate bodies' unless they are declared 'nationals' under the law of that State. Similar views were expressed by professor Dr. Klaus Vogel, University of Munich, in his treatise on 'Double taxation convention' third edition (being a commentary to the OCED UN - US Model Convention for the DTAA on income and capital) on page 1291. (c) Rule : Article 24(1) MC provides that * nationals of a Contracting State * whether or not residents of one of the Contracting States * must not be subjected in the other Contracting State to any taxation or any requirement connected therewith * which is other or more burdensome than the taxation or connected requirements * to which nations of that other St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the ordinary taxation laws and regulations, in substantially similar circumstances both in law and in fact. The expression 'in particular with respect to residence' makes clear that the residence of the taxpayers is one of the factors that are relevant in determining whether taxpayers are placed in similar circumstances. The expression 'in the same circumstances' would be sufficient by itself to establish that a taxpayer who is a resident of a Contracting State and one who is not a resident of that State are not in the same circumstances. In fact, whilst the expression 'in particular with respect to residence' did not appear in the 1963 Draft Convention or in the 1977 Model Convention, the Member Countries have consistently held, in applying and interpreting the expression 'in the same circumstances' that the residence of the tax payer must be taken into account. However, in revising the Model Convention, the Committee on Fiscal Affairs felt that a specific reference to the residence of the taxpayers would be a useful clarification as it would avoid any possible doubt as to the interpretation to be given to the expression 'in the same circumstances' in this respect." 9.1 In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as a less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India. 54.2 This amendment takes effect retrospectively from 1st April, 1962 and, accordingly, applies in relation to the assessment year 1962-63 and subsequent assessment years. [Section 48]" 11.1 In our view this Explanation is an umbilical cord to the main section. Main section 90(2) provides that provisions of this Act shall apply to the extent they are beneficial to the assessee. As a consequence, if the provisions of DTAA are beneficial as compared to the provisions of the Act, then the provisions of DTAA will apply. In other words, wherever DTAA is in force, the beneficial provisions either in DTAA or in the Act, will apply to an assessee. He can ask the Court or Tribunal to invoke provisions beneficial to him in the Act or in the DTAA. Thus section 90(2) provides an exception to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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. In the context of amendment made in the section 90 w.r.e.f. 1-4-1962 it is useful to quote para 49 in ABN Amro Bank NV's case (supra) wherein Hon'ble ITAT has quoted from the decision of Hon'ble SC in Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey AIR 1984 SC 667 : "49. Before considering the claim of the assessee in the light of the amendment of section 90 with retrospective effect from 1st April, 1962, we consider it useful to keep in mind the applicability of the Indian tax laws vis-a-vis DTAA with the foreign country. In this connection, reference to the decision of the Hon'ble Supreme Court in the case of Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey AIR 1984 SC 667 is relevant. In this case, Their Lordships of the Hon'ble Supreme Court held that in the event of conflict between international law, the Court must follow municipal law. The rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the learned counsel is that, at least sub-paragraph 2 of Article 25, will hold the field. According to the assessee, as existence of a P.E. of assessee-company is not disputed, Indian Enterprises such as domestic companies and co-operative societies are charged with lesser rates as compared to non-resident companies. This situation is less favourable for assessee-company. Therefore, according to learned counsel, it hits Article 25(2). In our view this stand is misconceived. The words 'less favourable' have not been defined either in the DTAA or in IT Act. Therefore, it cannot be construed to mean that levy of higher rate on the income on non-domestic company would be 'less favourable'. This paragraph [Article 25(2)], as per model convention is designed to curb the discrimination in the treatment of P.E. as compared with resident enterprises belonging to the same sector of activities. Even though, broadly Indian domestic Bank and P.E. of assessee-bank are engaged in banking activities but as highlighted earlier, the activities are not the same, they may only be, similar. Secondly, co-operative societies are charged with different rates looking to their social involvement and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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