TMI Blog2007 (4) TMI 394X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is situated or elsewhere , the provisions of Indian Income-tax Act will not apply with regard to deductibility of expenses. In this view of the matter, and respectfully following the Mitsubishi Heavy Industries Ltd. s case [ 1998 (2) TMI 158 - ITAT DELHI-A] we hold that the provisions of domestic tax laws in India as also in UAE will continue to apply except to the extent specific contrary provisions are set out in the India UAE tax treaty. The assessee thus derives no advantage from the provisions of article 7(3) so far as freedom from artificial disallowances u/s 40A(3), section 40A(12), section 37(2A) and section 43B is concerned. AS there is no specific contrary provisions in the treaty, these and similar other restrictions on deductibility of expenses under the Indian Income-tax Act continue to be applicable, in computation of profits attributable to Indian PEs of UAE tax residents. The plea of the assessee is thus devoid of legally sustainable merits. The comparison of lower tax rates u/s 115A, for the non-resident tax payers, with higher tax rates under the Finance Act, for resident tax payers, is irrelevant. In the case of non-residents, there were restriction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal is dismissed. Disallowance on Interest chargeable - HELD THAT:- Section 18 of the Interest-tax Act cannot be viewed as a disabling clause; all it provides is that notwithstanding anything contained in the Income-tax Act , deduction in respect of interest tax is payable is to be allowed in computation of income of the credit institution assessable in respect of the same. It does not, therefore, restrict the scope of deduction otherwise allowable to the assessee. Quite to the contrary, section 18 enables the deduction in respect of interest tax even if any restrictions are imposed by the Income-tax Act, in respect of deductions in respect of the same. When interest tax itself is allowed as a deduction, and interest levy u/s 12B is admittedly a compensatory levy for delay in advance payment of interest tax, there cannot be any good reasons to decline deduction to interest levy u/s 12B. Thus, we uphold the grievance of the assessee. Accordingly, we direct the Assessing Officer to delete the disallowance so sustained by the CIT(A). The assessee gets the relief accordingly. Ground No. 4 is thus allowed - In the result, appeal is partly allowed. - PRAMOD KUMAR AND S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, attributable to business carried on in India by the assessee, are allowable as deduction, without restricting the allowance of such expenses under various provisions of the Income-tax Act". The details of the expenses disallowed were also set out in the statement of facts. The assessee made elaborate submissions in respect of this plea before the CIT(A) and also filed copies of orders passed by the co-ordinate benches of this Tribunal in the cases of ITO v. Degremont International [1985] 11 ITD 564 (Jp.), Banque Indosuez [IT Appeal Nos. 2089 to 2091 (Bom.) of 1991] and Banque National de Paris [IT Appeal No. 1341 (Bom.) of 1987 and 1380 (Bom.) of 1989] wherein it was held that various restrictions prescribed under the Income-tax Act would not be applicable while computing the profits of permanent establishment, and that computation of profits of the PE is to take into account all the expenses attributable to the PE - whether in India, or outside India. The CIT(A) was, however, not impressed with the stand of the assessee. He was of the view that the profits attributable to the PE, in terms of Article 7(3) of the India UAE tax treaty, will have to be determined in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal have any occasion to deal with the same, the conclusion arrived at by the Tribunal did not take into account provisions of the treaty as a whole. In a later decision by another co-ordinate bench of this Tribunal, i.e., in the case of Dy. CIT v. Mitsubishi Heavy Industries Ltd. [1999] 102 Taxman 301 (Delhi) (Mag.), took note of similar provision in Indo Japan tax treaty, and, in view thereof, rejected the contentions of the assessee by observing as follows : "Ground No. 5 relates to the findings given by the CIT(A) holding that in view of article III(3) of DTA with Japan, no disallowance can be made under rule 6D, section 40A(3), section 40A(12), section 37(2A) and section 43B of the Income-tax Act, 1961. Article III(3) in the relevant DTA relating to the year under consideration only provides that in determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deduction all expenses, wherever incurred, reasonably allocable to such permanent establishment. It does not expressly provide that the provisions of domestic income tax law governing the allowability of various expenses will be subject to limitations and cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the tax treaty. 7. When this was pointed out to the learned counsel, our attention was drawn to the decision of Kolkata Special Bench in the case of ABN Amro Bank NV v. Asstt. Director of Income-tax [2005] 97 ITD 89 wherein, on materially identical provisions, the Special Bench has held that provisions of section 40( a )( i ) are not applicable in the case of interest paid by the banks. In our considered view, however, the ABN Amro Special Bench decision ( supra ) is certainly not an authority for the propositions that disallowance under section 40( a )( i ) are impermissible under the provisions of India Japan tax treaty. As a matter of fact, in the said decision, the Special Bench held that the provisions of section 195 do not come into the play in the case of Branch Head office transactions because these are transactions from self to self. The Special Bench, inter alia , observed as follows : "30. The assessee in this case is the corporate body and its branches are paying interest to its Head office and other offshore Branches i.e., the payment is by one wing of the assessee to its other wing or so to say by one hand to another. The tax is to be deductible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with the provisions of the law of that State" or by the suffix words "and subject to limitations of taxation laws of that State". This may be one of the other alternative reasons for not invoking the provisions of section 40( a )( i ) of the Income- tax Act for disallowing the payment of interest in computing the income of the assessee through the PE . However, here also, the deeming fiction of treating the PE as a different and separate entity dealing wholly independently with the enterprises in clause 2 of the Article 7 of Japanese DTAA or for the specific purpose of computing the income attributable to the PE and not for any other purposes. Therefore, for the reasons stated above while dealing with the Netherlands DTAA, we hold that no tax was required to be deducted under section 195 of the Act from the payment of interest by the PE to its head office or other offshore branches of the assessee-enterprise, Bank of Tokyo . We, therefore, uphold the order of the CIT(A) in vacating the order under section 201 of the Act by holding that the assessee was not in default in deducting the tax at source. [Emphasis supplied] 9. A plain reading of the above paragraph indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect contracting state except where express provisions to the contrary are made in the present agreement". We are, therefore, not persuaded by the submissions of the learned counsel to the effect that provisions of the Income-tax Act have no application in the matter. In view of this specific provision being a part of the India UAE tax treaty, it cannot be said that by the virtue of article 7(3) of the treaty which provides that "in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere", the provisions of Indian Income-tax Act will not apply with regard to deductibility of expenses. In this view of the matter, and respectfully following the Mitsubishi Heavy Industries Ltd. s case ( supra ) we hold that the provisions of domestic tax laws in India as also in UAE will continue to apply except to the extent specific contrary provisions are set out in the India UAE tax treaty. The assessee thus derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-resident assessee is undesirable, a discrimination against the resident assessee is also not desirable. As is the underlying philosophy of the tax treaties, there should be level paying ground for everyone, which must include domestic enterprises as well. When we put this to the learned counsel, it was submitted that it is not clear as to what was the language in the relevant DTAA and whether the Government of Canada has used different terminology in different tax treaties. Learned counsel also submitted that this reverse discrimination , as we term it, is not only permissible under the tax treaties, it is also permissible under the Income-tax Act. Our attention was then invited to the provisions of section 10( 15 ) which provides for certain exemptions only to non-residents, as also the provisions of section 115A which provides for lower rates of taxes for certain category of incomes of the non-residents. Learned counsel has also invited our attention to different phraseology employed in different treaties, and contended that a uniform meaning given to all these different expressions will make differentiation in expression meaningless. It is also contended that once a tax t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Section 44D, as we have already seen, provides for taxation of royalties and fees for technical services on gross basis and without allowing any deduction for expenses incurred in earning the said income. Section 115A, on the other hand, provides for a special rate of tax on certain incomes including the income from royalties and fees for technical services. The provisions of these two sections are required to be read together inasmuch as while on section lays down that no deductions are permissible in computation of income from, inter alia , royalties and fees for technical services, the other section provides for a lower rate of tax from the said income. These are complementary provisions in that sense. These two sections are to be read in conjunction and not in isolation. Explaining the scope and nature of these sections, Board Circular No. 202, dated 5th July, 1976 (105 ITR Statute 17) stated that : "Special provisions for computing income by way of royalties and technical service fees in the case of foreign companies - New section 44D. 26.1 Hitherto, income by way of royalties received under agreements made after the 31st March, 1961, and approved by the Central Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restrictions for deduction of expenses incurred for earning dividend, interest and royalty incomes. It is also interesting to note that when the restrictions under section 44D ceased to be effective from 1st April, 2003, the corresponding income, i.e., income from royalties and fees for technical services, was also taken out of the ambit of lower tax rate under section 115A. Therefore, taxability of incomes at a lower rate under section 115A cannot be viewed in isolation. The relevant incomes are taxed on net basis in the formal case, while taxability is on the net basis in the latter. When tax base is not the same, the comparison of tax rates is meaningless. 14. Let us also not forget the fact that principles governing a tax treaty are quite different vis-a-vis principles governing a tax legislation. Hon ble Supreme Court, in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 had an occasion to deal with the principles governing the interpretation of tax treaties. In this regard, Hon ble Supreme Court held that the principles adopted in the interpretation of treaties are not the same as those adopted in the interpretation of statutory legislation. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exception to this underlying object of the treaty by reading the provisions of tax treaty in such a manner as to permit discrimination against residents of PE host country. When a treaty explicitly seeks to ensure that there is no discrimination by the host country against a non resident, who is resident of the other Contracting State, it is really incongruous to interpret the treaty in such a manner that host country has to discriminate against its own residents vis-a-vis the residents of the other Contracting State. Such an interpretation will not only be contrary to the provisions of the Vienna Convention but also contrary to the law laid down by the Hon ble Supreme Court of India, which, in turn, has concurred with Canadian Federal Court on the principles governing tax treaties. For this reason also, the proposition advanced by learned counsel does not meet our approval. 16. The next thing that needs our consideration is learned counsel s suggestion that different phraseology employed in the Indian tax treaties warrant an interpretation in such a manner that a uniform meaning is not given to all these different expressions because differentiation in expression will then b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... understanding about the scope of Article 7(3); infact, we find, as we have elaborated earlier, specific provision in the treaty which is quite to the contrary. We, therefore, reject this contention as well. 17. In United Kingdom, Revenue s International Tax Handbook (IH 859) uses exactly the same argument, as was taken by the Federal Court of Canada in the case of Utah Mines ( supra ), and states that: "We take the view that neither the Business Profit Article in general nor the specific provision concerning the expenses in particular requires us to allow expenses which are not admissible in United Kingdom domestic law. For example, we could not allow capital expenses or entertaining expenses. We say that each Contracting State is entitled to apply its own general principles and rules in computing the profits it has right to tax. It would be inequitable to permit a non-resident trading in a territory though a permanent establishment to deduct items that a resident competition would not be permitted to deduct." 18. Once again, here also the applicability of domestic law restrictions on deduction of expenses is on an independent reading of article 7(3) and without recours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is incompatible with overall scheme of the tax treaties, particularly India-UAE tax treaty. Accordingly, the conclusion arrived at by the CIT(A) meets our approval. We confirm the same and decline to interfere in the matter. 22. In the result, first ground of appeal is dismissed. 23. As regards ground of appeal No. 2, as also ground of appeal No. 5, learned counsel submits that he does not wish to press these grounds of appeal. 24. Ground Nos. 2 and 5 are thus dismissed as withdrawn. 25. In ground No. 3, the assessee has raised the following grievance: The CIT(A) erred in upholding the ACIT s action of not allowing the appellant s claim that the tax rate applicable to its business income is 46% and not 55% being the rate applicable to foreign companies for the year under appeal. The appellant submits that in view of article 26 of the tax treaty, i.e. non-discrimination clause, read with section 90(2) of the Income-tax Act, the business income is chargeable to tax @46% as is applicable to domestic companies. 26. At the outset, learned counsel fairly accepts that, post-2004 amendments in Explanation to section 90(2) of the Income-tax Act, there ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State in which PE is situated. We are thus urged to hold that, notwithstanding in amendment in Explanation to section 90(2) of the Act, non-discrimination clause under article 24(2) of India-UAE treaty will apply on the facts of this case as the assessee-company is paying higher tax rate than what is payable by Indian co-operative societies carrying out the same activity. Learned CIT(DR), however, vehemently relies upon the orders of the authorities below and justified the same. We were taken through the orders passed by the Assessing Officer as also by the CIT(A). Reliance was also placed on Tribunal s decision in the case of Chohung Bank v. Dy. Director of Income-tax [2006] 102 ITD 45 / 6 SOT 144 (Mum.). On the strength of these arguments, we are urged to confirm the stand of the authorities below and decline to interfere in the matter. 27. We have conscientiously heard the rival contentions, carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 28. It is also important to bear in mind that provisions of a tax treaty override domestic law in India, by the virtue of specific provision to that ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the same as that of the enterprise of which it is a PE. Therefore, in a case PE belongs to a banking company formed in UAE, and taxable units of that banking company is company , such PE can only be compared with a domestic enterprise in India which is assessed as company and carries on the same business. In the present case, the assessee before us is admittedly a company incorporated in the UAE, and, therefore, for the purposes of articles 26(2), PE of the assessee can only be compared with a domestic company carrying on the same activities in the same circumstances or similar conditions. The plea of the assessee, therefore, does not meet our approval. 29. Prof. Kees Van Raad, a very well-known international tax scholar, in his book "Non-discrimination in International Tax Law", published by Kluwer Law International (ISBN 90 6544 2669), has, at page 135, has observed that : ". . . a foreign entrepreneur who resides in State B as individual, his tax position in State A in respect of permanent establishment income must be compared with that of a resident individual of State A who operates a similar enterprise in State A . And if the foreign enterprise is operated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purposes of public benefit exclusively specific to that State. In those cases, a comparison with activities of a Permanent Establishment aiming to make profits for its own account is impossible. This restriction, which MC Commentary expressly refers to in connection with non-discrimination of nationals applies mutatis mutandis to the rule of non-discrimination for permanent establishment. 34. The views so expressed by Prof. Vogel are quite appropriate; we share his perception. It will indeed be unreasonable to expect parity in taxation of profit making organizations with non-profit making organizations, and taxation of local public welfare bodies in a State with taxation of bodies which are transnational in their operations. 35. In view of the above discussions, and for the detailed reasons set out above, we hold that just because Indian PEs of foreign banking companies are taxed at a rate higher than the rate at which Indian co-operative societies carrying out the same business activity are taxed, the provisions of article 24(2), dealing with non-discrimination in taxation of PE, cannot be invoked. We, therefore, reject the grievance of the assessee as unsustainable in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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