TMI Blog2013 (11) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... er allowance of deduction as contested by assessee would result in a reverse discrimination of the Indian company vis-à-vis tax rate of foreign company, in our view does not come under the definition of non discrimination. We are not convinced with the contention of assessee with reference to the reduction rate under section 80M - no reason to constitute a Special Bench on this issue when there is no other contradictory order analyzing the Indo-French DTAA particularly invoking non- discrimination clause while taxing dividends under section 115A at a reduced rate - Decided against assessee. - IT Appeal Nos. 8693 (Mum.) of 1995 & 507 (Mum.) of 2000 - - - Dated:- 28-2-2013 - B. RAMAKOTAIAH AND VIJAY PAL RAO , JJ. For the Appellant : Farrokh V. Irani. For the Respondent : Mahesh Kumar. ORDER:- PER : B. Ramakotaiah These two appeals are against the orders of the CIT(A) XIII Mumbai, dated 28.8.1995 and the CIT (A) XLVI Mumbai, dated 22.10.1999 respectively, for the assessment years 1991-92 and 1994-95. Since common issues are involved, the cases were heard together and decided by this common order. 2. As seen from the record, the appeals were being posted number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of the said sum of Rs 6,39,000 in computing your appellant's total income. 4. In concluding that the evidence produced in support of call money and securities transactions, based on which the DC gave the remand report, were inadequate and in not accepting the remand report of the Assessing Officer. We submit that at the time of completing the assessment the assessing officer relied on documents and evidences to make the additions on account of call money and securities transactions. However, during the appeal proceedings, the learned CIT(A) directed the Assessing Officer to verify the call money and securities transactions and when the Assessing Officer relied on documents and evidences similar to the one produced at the time of assessment in support of the transactions, the learned CIT(A) considered them as inadequate. 5. In restoring the issue relating to additions on account of securities and call money transactions to the Assessing Officer, inspite of offering explanation to the satisfaction of the assessing officer according to Chapter VI of the Income tax Act, 1961. The A.O had pursuant to the remand order of CIT(A) verified these transactions and had rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted deduction under section 80M of the Act. 4. The Assessee had raised this contention at the assessment and the first appellate stages; however, at both these stages, the contention of the Assessee was rejected. The Assessee therefore raised the following ground of appeal in respect of AYs 1991-92 : "Based on the facts and circumstances of the case, the Assessee respectfully submits that the learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of deduction of Rs 10,929,533 under section 80M of the Income-tax Act, 1961 made by the Assessing Officer." 5. AO as well as the CIT (A) rejected assessee's claim on the reason that the provisions of section 80M are applicable to the 'domestic company' and assessee being a 'foreign company' cannot claim the deduction specifically provided to the domestic companies. Request for reference to Special Bench: 6. Assessee's contentions particularly with reference to the referring to the Special Bench on a question of law are as under: Assessee is a 'national' of France and Indian Scheduled Banks are 'nationals' of India. In respect of AYs 1991-92 and 1994-95 deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. of India (supra), which was referred to by the ITAT Mumbai in the case of Standard Chartered Bank (supra), it was the contention that foreign company is to be considered as national of other contracting state as per Article XXI. It was the submission that the deduction under section 80M was available only to the nationals of India that too domestic companies. It was the contention that no company incorporated outside India should have ever qualify as a 'domestic company' and there is discrimination between the 'nationals' of India and 'nationals' of other contracting state as far as this deduction is concerned. Continuing further, it was submitted that even though the Act defines the 'domestic company', 'foreign company' and 'Indian company', the rules never prescribed any arrangements for the declaration of payment of dividend within India as applicable to foreign company. For all practical purposes, the domestic company means an Indian company. Therefore, even though reference to section 80M is with reference to the domestic company to the extent it relates to the 'company other than an Indian company' has not been activated by the Legislature as neither Rule 27 referred to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in Standard Chartered Bank was in the context of DTAA between India and UK, wherein the provisions of non-discrimination are similar. The comparative chart placed is as under: India UK Tax Treaty Article 23 India-Netherlands Article 24 India France Article XXI 1. The nationals of a Contracting 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 in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first mentioned State at a rate of tax which is higher than that im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first mentioned State are or may be subjected. 5. In this Article, the term "taxation" 4. Except where the provisions of paragraph 1 of Article 9, paragraph 9 of Article 11, or paragraph 9 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of one of the States to a resident of the other State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first mentioned State. Similarly, any debts of an enterprise of one of the States to a resident of the other State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first mentioned State. 5. Enterprises of one of the States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other State, shall not be subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and so the deduction was not allowed to a foreign company, but only to the domestic company. 13. With reference to the contention that the Indian Company is to be considered as 'domestic company' and there is discrimination between an Indian Company and the Foreign company, the learned DR referred to section 2(17) the definition of the 'companies' and section 2(33)A of the 'foreign company', Section 2(22) A of 'domestic company' and section 2(26) of 'Indian Company' and more particularly for declaration of any foreign company to be an Indian Company by the CBDT under section 2(17). It was submitted that because of this express provision, domestic company does not mean only Indian Company. A foreign company can also be declared as Indian company so the discrimination sought on nationality is not correct. 14. The learned DR then referred to the principles on invoking the discrimination clause and referred to the observations of third Member in the case of ABN Amro NV (supra) to submit that the decision in Decca Survey is no longer applicable. He then referred to the order of the ITAT on the miscellaneous application in the case of Abu-Dhabi Commercial Bank Ltd. v. Jt. CIT [200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to,- (i) in the case of a scheduled bank or a public financial institution or a State financial corporation or a State industrial investment corporation or a company registered under section 25 of the Companies Act, 1956 (1 of 1956), sixty per cent of the income by way of dividends from another domestic company; (ii) in the case of any other domestic company, so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first-mentioned domestic company on or before the due date. (2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under clause (ii) of sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year. (3) Where the dividend distributed is in respect of any period comprised in the previous year ending on the 31st day of March, 1990, no deduction shall be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he withdrawal of benefit under section 80M, no deduction was allowed to foreign companies from the dividend income under 80M and under section 115A the gross amount of such dividend is being charged @ flat rate of 25%. As submitted by assessee, the tax rate applicable for these years is at 25% only on gross basis. Assessee's illustration depicting the tax rates applicable to the Assessee vis- -vis Indian scheduled Banks in respect of dividend income of Rs.100 is as under: Particulars Indian Scheduled Banks Assessee Dividend 100 100 Less: Deduction under section 80M of the Act 60 - Taxable dividends (subject to the tax at the following rates - Indian scheduled Banks @ 57.5%. - The Assessee @ 25% 40 100 Effective tax rate 23 25 18. Assessee's contention is that the effective tax rates on dividend is higher in the case of Assessee vis- -vis Indian Scheduled Bank by 2% and therefore, assessee a 'national' of French is being subjected to a more burdensome taxation than the Indian Scheduled Banks (Nationals of India). On the fact of this above Table, it looks apparent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of India, any income from sources within France is subjected to tax both in India and in France, India shall allow against the Indian tax payable in respect of such income and within the limit of such Indian tax, a credit of French tax payable in respect of such income; so however, that where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance, against the income tax payable by the company, in India and, as to the balance, if any, against the surtax payable by it in India. Subject to the provisions of Article VI and paragraph (1) above, in respect of income subject to tax in both the Contracting States, tax shall be determined in the case of a resident as follows: (a) On royalties mentioned in Article VII derived from sources within India and which have been subjected to tax in India, France shall allow, against the French tax payable in respect of such royalties and within the limit of such French Tax, a credit of Indian tax payable in respect of such royalties. (b) On interest mentioned in Article VIII derived from sources within India: (i) In cases where such interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y her so far with other West European countries. It provides, in substance, that the country in which the income from a particular source arises will be primarily entitled to tax that income and if such income is also taxable in the home country under the operation of its laws, double taxation will be relieved by the home country. For this purpose, either the income is exempted from tax in the home country of the recipient of the income or the tax charged on that income in the source country is given credit for against the home country's tax. In relieving double taxation by the latter method, the home country gives credit not only for the tax actually charged on such income in the source country but also the tax spared in that country under the special concessional provisions in taxation laws for encouraging investment and promoting industrial development. In the French Agreement, both these methods have been used. As regards industrial and commercial profits derived by an enterprise of one country in another country, the same are taxable in the source country if and to the extent that they derived from a "permanent establishment" of the enterprise in the country of sources. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of such French tax, a credit of an amount equal to 30% of the gross amount of such dividends. In computing the French tax on such dividends in cases where the Indian tax thereon has been reduced or exempted by the operation of section 80J, 80K and 80M of the Income Tax Act it shall be deemed that the amount by which the Indian tax has been reduced or exempted has been actually paid in India. In view of these provisions of Article XIX (3)(c) of the Double Taxation Avoidance Agreement (hereinafter referred to as DTAA) it is argued by the learned counsel that deduction u/s. 80M was intended by the DTAA. 2.5. This argument of the learned counsel is not correct. If by operation of section 80J, 80K and 80M Indian tax on dividend has been reduced, then it shall be deemed that the amount by which the Indian tax has been reduced or exempted has been actually paid in India. This provision of Article XIX(3)(c) does not provide for deduction u/s. 80M but it only provides for considering certain amount actually paid in India if by operation of section 80M, 80J and 80K tax in India has been reduced or exempted in respect of dividend income. Article XIX(3)(c) does not indicate applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n shares of a company which are not part of business of the Cooperative Bank, such a cooperative Bank will not be entitled to deduction u/s. 80M of the I.T. Act because cooperative Bank is not a domestic company though it is a scheduled bank. Therefore the appellant cannot claim parity with those scheduled banks which are domestic company because there is no such provision in the DTAA between India and France. 2.7. It may also be mentioned that provisions contained in Article XXI of DTAA between India and France are general in character whereas provisions of section 80M are specific and applicable only in the case of domestic co. It is well established that such general provision in Treaty do not derogate from special provision of law. There is no dispute between specific provision of section 80M of I.T. Act and Article XXI of DTAA between India and France but even in case of disputes between general and specific provisions, special provisions have to be applied. This principle is contained in the maxim "generalia specialibus non derogant" which means that general words or things do not derogate from special. This expression was explained to mean that when there is conflict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y' and 'citizenship' and stated that nationality has reference to the jural relationship which may arise, for consideration under international law. The assessee herein being incorporated in U.K. is a national of one of the Contracting States, namely, the U.K. Since our country has a DTA agreement with the U.K. any national of that State cannot be subjected to a higher burden of tax than a national of the Indian State." In this respect, reliance is also placed on the following observations of the Mumbai ITAT, in the case of ITO v. Decca Survey Overseas Ltd. (ITA.No.3604/Bom/94). The Decca Survey Ruling was issued in the context of Explanation to section 90 of the Act, which, as it stood then, made reference to foreign companies making the prescribed arrangements for declaration and payment of dividend. In Decca Survey Ruling, the Mumbai ITAT observed : "Rule 27 of the Income Tax Rules, to which our attention was drawn by the department lays down as to what would be the prescribed arrangement for declaration and payment of dividends within India, but that is only for the purpose of sections 194 and 236 of the Act. This rules does not refer to section 90. The department was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction available under section 36(1)(vii)a with reference to computation of business income r.w. Article 23. The special rates applicable under section 115A are not applicable for the business income. Therefore, the principle laid down while computing the business income being taxed at higher rate invoking the non discrimination clause cannot be applied when the tax on dividend in the case of a foreign company is specially charged under section 115A at a tax rate, lesser than tax on Indian companies. We are not convinced that the above decisions will apply to the case of income from Dividends which are governed by special provisions both under domestic law and also under DTAA. 22. Explanation 1 to section 90 is as under: Explanation 1 to section 90 "Explanation 1. - 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. 23. This explanation is available under section 90 w.e.f. 01-04-1962 (inserted by Finance Act 2001 and modified by Finance Act 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said Explanation to section 90 is un-implementable because of inappropriate language, does not appeal. The Explanation provides for two eventualities. One is the charge of tax in respect of a foreign company vis- -vis an Indian company (i.e. a domestic company). The second category as per Explanation is the foreign company vis- -vis the domestic company other than Indian company. Even under the Finance Act, the domestic company is recognized as Indian company and any other company having made arrangement for declaration of dividends payable on such income. Therefore, the language of the Explanation to section 90 is not in appropriate. Moreover in so far as there is no doubt about the category of the foreign company vis- -vis the Indian company having been specified in the Explanation, one need not ascertain as to whether in any case the second category of the companies would at all exist". (B) Similar opinion was also expressed in the case of Abu-Dhabi Commercial Bank Ltd (supra): "Double taxation relief-Agreement between India and UAE-Taxation under art. 26(2) of DTAA-For comparing the tax rate of a foreign entity and an Indian entity for purposes of art. 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pared includes the constitution of entity and hence, foreign company has to be compared with the domestic company and therefore, there is no force in this contention of the assessee and that in the present case, rate of tax to be charged to the present assessee should be compared with rate of tax being charged to co-operative bank in India. Now, the second contention of the assessee that Explanation to :;. 90 would not be applicable to the assessee's case; as it only seeks to allow discrimination between a domestic company and a foreign company; and since, co-operative bank is not a domestic company, the Explanation would not apply. It is also contended that the assessee company is also 'national' as per art. 3(h) and hence as per art. 26(1) of the DTAA, higher rate of tax cannot be charged. There is no force in these arguments of the assessee also because, only comparable can be compared and rate of tax to be charged to foreign company has to be compared with the rate of tax being charged to domestic company and the same cannot be compared with the co-operative bank. In view of Explanation to s. 90, the second argument regarding charging of higher rate of tax to foreign national a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Korea-Clause (2) of art. 25 could not be construed to mean that no tax could be levied on a foreign company at a rate higher than the rate payable by Indian company-Where no rates on an income or a category of income on the status of an assessee have been prescribed in DTAA,. then there cannot be any conflict with the IT Act-The DTAA in general does not prevail over the Finance Act and hence over the tax rates- Further, domestic banking company and non-domestic banking company do not function under 'same circumstances' and, hence, discrimination clause in art. 25 is not applicable- Explanation to s. 90(2) introduced-by the Finance Act, 2001 retrospectively w.e.f. 1st April, 1962, provides that charging of a foreign company at a 'higher rate will not be regarded as less favourable as compared to domestic company-This clarifies the position and is no way in conflict with the DTAA with Korea". The charging of PE of the assessee-company at higher rates applicable to non- domestic companies is not hit by non-discrimination clause of art. 25 of the DTM with Korea. It is one thing to say that provisions of agreement will prevail over the provisions of IT Act insofar as assessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 'in the same Circumstances'. Corporate bodies are not covered in the definition of nationals. Since 'legal person' come side by side with individual in the above definition, then from the principle of noscitur a sociis, the legal person' would not be a corporate body. Further, 'other entity' as used in Art. 3(g) would a so not include 'corporate bodies' unless they are declared nationals under the law of that State. For the sake of argument presuming that the assessee-company is a national of the Contracting State (i.e. Korea), it still cannot be said that it is functioning in India under the same circumstances like a domestic company. The place of residence has been considered to be an essential criterion in determining whether two taxpayers are functioning 'in the same circumstances'. Another distinction between domestic company and non-domestic company is the declaration of dividend or making arrangement therefore. Thirdly, the domestic banking company has to abide by the additional conditions imposed by RBI about advances to agriculture or to weaker sections of society, Domestic banking company and non-domestic banking company do not function under 'same circumstances' and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mean that levy of higher. rate on the income of non-domestic company would be 'less favourable'. Art. 25 (2), as per Model Convention is designed to curb the discrimination in the treatment of PE as compared with resident enterprises belonging to the same sector of activities. Even though, broadly Indian domestic bank and PE of the assessee-bank are engaged in banking activities but the activities are not the same, they may only be similar. Conclusion: Charging of assessee foreign banking company at higher rate applicable to non domestic companies was not hit by non discrimination clause of art.25 of the DTAA with Korea. (D) In the case of MashreqBank PSC (supra), it was held : "Double taxation relief-Agreement between India and UAE-Rate of tax for a foreign company vis-a-vis non-discriminatory clause-Basic mandate of art. 26(2) of the DTAA is that a PE, in one State, of a non-resident enterprise must not be taxed any loss favourably than the enterprise of that State-However, for the purpose of this comparison, form of ownership cannot be ignored-Ownership characteristics of a PE have to be the same as that of the enterprise of which it is a PE-In the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of art. 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. 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 art. 24(2), dealing with non-discrimination in taxation of PE, cannot be invoked". Even though the above decisions were given while interpreting various DTAAs, but the context is with reference to Section 90 post amendment retrospectively. Foreign bank and Indian bank; are they operating under similar circumstances: 24. As rightly pointed by the learned DR, foreign bank and the Indian Scheduled Banks is not operating under similar circumstances. This issue was discussed by the Coordinate Bench in the case of Credit Llyonnais (supra) wherein similar issue was elaborately discussed and considered as under: "5. We have heard the rival contentions and perused the material on record. We have also duly considered the legal position in the light of the provisions of the applicable India France Double Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian nationals only. In such an eventuality, in view of the provisions of Article XXI, the benefits of that provision would have been available to the French nationals as well. Another situation in which the provisions of Article XXI may affect the provisions of the Income-tax Act is perhaps the entitlement for deduction under section 80R which is available only to an Indian citizen. Since one of the necessary conditions for entitlement of deduction under section 80R, in respect of remuneration from certain foreign incomes in the case of professors and teachers etc., is an Indian citizenship, this section appears to discriminate on the ground of nationality. It is interesting to note that while section 80R and 80RRA deal with the citizenship also, many similar sections such as section 80QQB, section 80RR, section 80RRB, there is no reference to citizenship, and the requirements are only with respect of residence. It is also very important to appreciate that such Indian and French nationals, as are compared for the purpose of finding out whether or not taxation etc. of one of which is more burdensome than the other, must be 'in the same circumstances'. Elaborating upon the scope of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. CIT[2003] 86 ITD 384 (Kol.) and Dy. CIT v. ITC Ltd. [2003] 85 ITD 162 (Kol.). In any event, on a plain reading of the provision also it is unambiguous that it deals with discrimination on account of nationality alone. It is so stated in clear words of the DTAA. 7. The question then is as to on what basis is a company classified as a domestic company and a foreign company under the Income-tax Act. Is it based on the nationality simplicitor or is it on the basis of some other criterion? Does this classification depend on requirements connected with residence, or is it the nationality of a company which decide such company being classified as a 'domestic company' or a 'foreign company'? This question is very important because the contention of the assessee is that a foreign company, it is not entitled to deduction under section 80M, and that the said deduction is available only to the domestic companies. The availability, or non-availability, of deduction under section 80M is entirely dependent on in which of these mutually exclusive categories an assessee company falls. It is therefore important to ascertain whether that this classification is dependent on the nationality o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause in the applicable India French DTAA, cannot be considered as a discrimination on the ground of nationality. 9. During the course of hearing before us, we shared our, then prima facie, impression with the learned representatives that the discrimination so far as non-availability of section 80M to the foreign companies is concerned, if at all that can be termed as a discrimination, is not on the ground of nationality but is on the ground as to whether or not the company in question has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of income liable to tax in India have not been made. Learned counsel's reply was that since the appellant company does not have any shareholders in India, there is no question of making any prescribed arrangements for the declaration and payment, within India, of the dividends. It thus implies that conditions under section 2(22A) of the Act, for being classified as a domestic company, are satisfied. 10. This argument, however, does not impress us. We are not at present dealing with the question as to whether the assessee is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lves to the merits of assessee's grievance about discrimination against foreign companies, even if such a discrimination actually exists. 11. The assessee's grievance against CIT(A)'s declining the deduction of Rs. 2,70,91,836 under section 80M, and assessee's reliance on Article XXI of the applicable India France DTAA, in support of such a grievance, is not sustainable in law. We, therefore, reject the same". Many of the arguments raised before us were considered and discussed in the above decision, so we are not repeating the same. Suffice to say that, we also agree with the above decision in all respects. DTAAs : 25. Many of the decisions relied upon by the learned Counsel are given in the context of various DTAAs and assessee submits that all these agreements are similar in nature. However, according to assessee's own chart furnished, there are variations in non discrimination clause itself. India UK Tax Treaty Article 23 India-Netherlands Article 24 India France Article XXI 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to tax in the other Contracting State shall be entitled to the same extent as the citizens of that other Contracting State, to any exemption, deduction, credit or other allowance accorded in consideration of the family circumstances. 3. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to individuals not resident in that State any personal allowances, reliefs and reductions for taxation purposes which are by law available only to individuals who are so resident. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first mentioned State are or may be subjected. 5. In this Article, the term "taxation" 4. Except where the provisions of paragraph 1 of Article 9, paragraph 9 of Article 11, or paragraph 9 of Article 12, apply, interest, royalties and other di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of Article I, also apply to persons who are not residents of one or both of the Contracting States. 2. Except where the provisions of paragraph 3 of Article 7 apply the taxation on a permanent establishment which an enterprise of one of the Contracting States has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities. 3. The provision of paragraph 2 shall not be construed as obliging one of the Contracting States 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 residents. 4. Except where the provisions of Article 10, paragraph 7 of Article 12 or paragraph 8 of Article 13, apply, interest, royalties and other disbursements paid by an enterprise of one of the Contracting States to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly does not fulfill the conditions prescribed under section 80M and therefore, cannot claim deduction under section 80M. 29. Since there is only one direct decision given by a Coordinate Bench interpreting the non discrimination clause in the case of foreign Bank in the case of Credit Llyonnais (supra) and as there is no other contradictory decision under the same DTAA, we are of the view that the Coordinate Bench decision has to be followed. The decision relied upon by both the parties in other cases are not applicable to the DTAA between India and France, even though some principles laid down therein are taken support of by both the parties to support and object to the contentions. Even when there is a diversion of views by the different Benches on same issue, then the decision which laid down the principles more elaborately and logically after considering the latest statutory provisions as applicable has to be followed as held by the full Bench of Hon'ble Andhra Pradesh High Court in the case of Ushodaya Enterprises Ltd v. CIT [1998] 111 STC 711. 30. The learned Counsel relied on the decision of the ITAT E Bench of the Kolkata in the case of ABN Amro NV in assessment year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not allow the reduction. It was argued before the learned CIT (A) that the basis of accounting for these revenues/expenses are in keeping in tune with the RBI Circular No. DBOD/BP.BC.133/C469(W) 89, dated 25.5.89 which states that interests earned on bad and doubtful debts are not to be taken into income account on accrual basis and may be accounted on cash basis. The learned CIT (A) discussing the provisions of section 36(1)(viia) and 36(1)(vii) confirmed the amount as he was of the opinion that since assessee charged the amounts, the income accrues to assessee. The learned Counsel at the outset fairly submitted that this issue is to be restored to the file of AO consequent to the orders of the ITAT in earlier years, more so on the order for assessment year 1989-90, Para No.8 which is as under: "8. We are of the view that the matter has to be restored back to the file of the learned CIT (A) with a direction to re-decide the issue after considering the factual aspect of the matter as stated above and also in the light of the decision of the Hon'ble Bombay High Court in assessee's own case for A.Y 1975-76 cited supra. The second ground is allowed for statistical purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to Rs. 6,39,000 which is not admissible. The balance amount of Rs. 4,99,182 (Rs. 11,38,182 - Rs. 6,39,000) is admissible to the appellant on account of actual expenses incurred on flat. AO is therefore, directed to allow Rs. 4,99,182. The appellant gets a relief of Rs. 4,99,182. This ground of appeal is partly allowed". 34.1 It was the contention that the bills pertaining to the above expenditure has come in the later year, however the liability to pay has arisen in this year. Therefore, following the principles of Hon'ble Bombay High Court in the case of CIT v. United Motors (India) Ltd,[1990] 181 ITR 347 (Bom.), the expenditure is allowable in the year of liability. We are unable to examine the issue on facts as no bills were placed on record with reference to the expenditure and there is also no finding that the said expenditure was not claimed in the later years or claimed as previous year expenditure in later year. Since complete facts are not available on record, it is very difficult to establish whether liability to pay has occurred in this year or not. Therefore, in the interest of justice, we restore this issue to the file of AO with a direction to assessee to furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial or commercial profits of a permanent establishment, there shall be allowed as deductions all expenses, wherever incurred reasonably allocable to such permanent establishment, including executive and general administrative expenses so allocable". Vide new agreement with French Republic notified on 07.09.1994, Article-III has been revised as under: "Article 7: business profits 1 and 2** ** ** 3(a) In determining the profits of a permanent establishment, there shall be allowed as deductions expense which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation law of that Contracting State. Provided that where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention, Agreement or Protocol sig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stic law, can be said to have come into force, w.e.f. 1st day of April, 2008 or can be held to be clarificatory in the nature, hence, to have retrospective effect. 10.1. The department's case has been, wherever, there has been no specific provision in Article 7(3) for computing the profit of PE as per domestic laws, the same should be interpreted in view of the provisions of Article 25(1) of the DTAA which provides that the laws in force in either of the contracting States shall continue to govern the taxation of income in the respective contracting State except for expressly provided in the agreement. The ld. CIT(A) has observed that most of the Treaties entered into by India with various countries, it has been specifically provided that computation of profit of PE in Article 7(3) would be as per domestic laws of that State in which PE is situated and wherever there is no such specific provision, Article 25(1) enables the applicability of the domestic law. He has referred to commentary by 'Klaus Vogel', wherein he mentions that "while explaining the provision of Article 7(1) of the OECD/UN Model Convention that the meaning of term profit of a permanent establishment and how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st April, 2008. The Article 2 of the Protocol, has amended the Article 7(3),which reads as under : "3. 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, in accordance with the provisions of and subject to the limitations of the tax laws of that State." 11.1 Now, with the insertion of phrase, "in accordance with the provisions of and subject to the limitations of the tax laws of that State", the mandate of applicability of the domestic law has been provided, in allowing the deduction of expenses of the PE and determination of profit under the Income Tax Act. Consequently section 44C becomes applicable. The issue before us is, whether such a limitation clause can be said to have retrospective effect. It is a cardinal principle, when two sovereign nations enter into an agreement and have come to an understanding regarding the terms, views expressed in the agreement, such terms cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Various countries in their agreements based on different models have adopted different method of credit of taxes or deductions or exemptions to eliminate the incidents of double taxation in their domestic laws. Article 25 per se does not provide any rules on the mechanism for computing relief. Hence for this purpose, the domestic laws may have to be referred. Interpretation of Article 25 that it extends to Article 7 for applicability of domestic law will not be correct. If a computation of profit has been provided in a certain manner in Article7, restrictions cannot imported therein by virtue of Article25. 13. The case of Mashreqbank psc (supra), which has been relied upon heavily by the department, first of all, was rendered prior to the amendment brought by the Protocol. However in this case it has been interpreted that Article 25(1) of Indo-UAE Treaty should be read in Article7(3) for applicability of domestic law. After detail analysis and discussion, the relevant observations given in the said decision are as under :- "21. In view of the above discussions, and particularly bearing in mind the provisions of Article 25(1) of the India UAE tax treaty, we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act shall apply to the extent they are more beneficial to him. It, therefore, follows that if the provisions of the domestic law are more beneficial to the assessee than the provisions of the relevant tax treaty, the provisions of the domestic law shall override and prevail over the provisions of the treaty. Article 23 of the Indo-Japanese treaty therefore cannot be interpreted in a way as sought by Shri Girish Dave because if such interpretation is assigned to article 23 and the interest income which is otherwise not taxable in India as per the domestic law is held to be taxable relying on the provisions of the treaty, the same will run contrary to the provisions of section 90(2). Such interpretation, therefore, cannot be assigned to article 23 and the only interpretation which, in our opinion, can be assigned to the said article so as to make the provisions thereof in consonance with section 90(2) of the domestic law is that if there is an express provision made in the convention giving benefit to assessee which is contrary to the domestic law, then the provisions of treaty can be relied upon which shall override and prevail over the provisions of the domestic law to give a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, now the admitted legal position is that the admissibility of expenditure is to be governed by Article 7(3) of the Treaty upto the date from which the new amended provisions of the Treaty shall be applicable i.e. w.e.f. 1.4.2008. It can, inter alia, be summed-up that the contracting States and to avoid any conflict in the provisions of the tax laws vis- -vis the provisions of Treaty, as also to streamline the applicable provisions of law, it was decided to incorporate that, for the purposes of determining the profits of a permanent establishment, there shall be allowed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore, by this amendment in the Article the applicability of provision of section 44C has been enforced, nevertheless with effect from 1st day of April, 2008." 14. Thus, in view of our above finding, we hold that, firstly, in the assessment year involved, limitation clause of applicability of income-tax Act will not apply in Article 7(3) and consequently provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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