9911796707
TMI Blog1998 (12) TMI 612X X X X Extracts X X X X X X X X Extracts X X X X ..... raised on the behalf of the Revenue is that the applicant is carrying on banking business in India for the past several years. It is regularly filing its returns as per the Income-tax Act and is being assessed accordingly. Therefore, this applicant is precluded from making this application for advance ruling. The expression "advance ruling" has been defined in section 245N in the following manner. "245N. In this Chapter, unless the context otherwise requires,- (a) 'advance ruling' means the determination, by the Authority, of a question of law or fact specified in the application in relation to a transaction which has been undertaken, or is proposed to be undertaken, by the applicant ;" Section 245(R)(2) lays down thus : "The Authority may, after examining the application and the records called for, by order, either allow or reject the application : Provided that the Authority shall not allow the application except in the case of a resident applicant where the question raised in the application,- (a) is already pending in the applicant's case before any income-tax authority, the Appellate Tribunal or any court ; (b) involves determination of fair market value of any propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany which is not a domestic company. "Indian company" has been defined by section 2(26) of the Income- tax Act to mean a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes- (i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union Territories specified in sub-clause (iii) of this clause ; (ia) a corporation established by or under a Central, State or provincial Act ; (ib) any institution, association or body which is declared by the Board to be a company under clause (17) ; (ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State ; (iii) in the case of any of the Union Territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry, a company formed and registered under any law for the time being in force in that Union Territory : Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India." The rates of tax payable by a domestic company and a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of this paragraph or section 112 shall, in the case of every domestic company having a total income exceeding seventy-five thousand rupees, be increased by a surcharge calculated at the rate of fifteen per cent. of such income-tax." Finance Act, 1996 Paragraph E of Part I of the First Schedule I. In the case of domestic company 40 per cent. of the total income ; II. In the case of a company other than a domestic company, Page No : 0110 (i) on so much of the total income as consists of (a) royalties received from Govern ment or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961, but before the 1st day of April 1, 1976, or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agree ment made by it with the Government or the Indian concern after the 29th day of February, 1964, but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government. 50 per cent. ; (ii) on the balance, if any, of the total income 55 per cent. Surcharge on income-tax The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions as if they had been contracted to a resident of the first-mentioned Contracting State. 5. Enterprises of one of the Contracting States, 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 the first mentioned Contracting State are or may be subjected." Para. 12 in the Protocol to the Agreement provides (see [1994] 209 ITR (St.) 130, 160) : 12. As regards the application of paragraph 1 of Article 26, it is understood that an individual, legal person, partnership or association which is a resident of a Contracting State shall not be deemed to be in the same circumstances as an individual, legal person, partnership or association which is a resident of the other Contracting State. This shall also apply where such individuals, legal persons, partnerships or associations are, in applying paragraph 1(h) of Article 3 (General Definitions) deemed to be nati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Act) as exceeds an amount of twenty-five per cent. thereof : Provided that in the case of a company which has not made the prescribed arrangements for the declaration and payment of dividends within India and whose total income includes any income by way of dividends received by it from an Indian company which is not such a company as is referred to in section 108 and which is mainly engaged in the business of generation or distribution of electricity or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule the amount of income-tax deductible under this section shall be so much of the amount of income-tax calculated at the average rate of income-tax on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of fifteen per cent. thereof : . . ." It will be seen from the above that an Indian company and a company which had made prescribed arrangements for declaration and distribution of dividends in India were treated as one class of taxpayers in this section. Sections 85B and 85C separately dealt with foreign companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a French company and an Indian company in the matter of levy of tax. The distinction drawn by the Finance Act is on the basis of distribution of dividend. If a French concern declares and distributes dividends in India, it has to be treated as a domestic company and taxed as such. The basis of the distinction between a domestic and a non-domestic company is quite clear. The object of a tax Act is to collect tax. The dividends distributed in India lead to fresh accrual of income in the hands of the recipients. That means that there will be further levy of tax on account of distribution of dividend in India. This distinction does not violate article 26 of the DTAA in any way. No attempt has been made in article 26 to do away with this long standing classification of companies in the Income-tax Act. A further contention made on behalf of the Union of India by the learned Additional Solicitor-General is also of substance. The applicant is a bank. It has been contended that an Indian banking company in India is under certain social obligations which have not been thrust upon a foreign bank. A nationalised bank has to look after the needs of the people, big or small and take banking se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and meaningful direction and control over the operations of these banks and also for making these banks an integral part of the national development effort." It was also stated in the objects clause of the Act that the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, was passed to provide for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage and organisation, in order further to control the heights of the economy, to meet progressively, and serve better, the needs of the development of the economy and to promote the welfare of the people, in conformity with the policy of the State towards securing the principles laid down in clauses (b) and (c) of article 39 of the Constitution and for matters connected therewith or incidental thereto. Article 39 of the Constitution of India, to the extent relevant for our purpose, is reproduced as under : Article 39 of the Constitution of India : "39. Certain principles of policy to be followed by the State.-The State shall, in particular, direct its policy towards securing.-. . . (b) that the ownership and control of the material resources of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nking services to the common man at his doorstep. For that purpose, nationalised banks had to open branches at places where banks did not exist. The obvious reason why banking service was not available in urban and semiurban areas before nationalisation was that these sectors were not found profitable by the banks before nationalisation. A nationalised bank which has to function under the Government regulations to achieve certain social objects as stated in the objects clauses of the Bills pursuant to which the aforesaid Acts were enacted, cannot be held to be equally circumstanced as a foreign bank. A nationalised bank is not free even to recruit its employees on its own. The recruitment of employees has to be done under and according to the provisions of the Banking Service Commission Act. A certain percentage of jobs has to be reserved for the under-privileged class. A nationalised bank has to be treated as "State" under article 12 of the Constitution. Fundamental rights are enforceable against a nationalised bank. It follows from the above that a foreign banking company and an Indian banking company are not working under the same circumstances or on same conditions. Reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial and economic objectives of the State and have to function as instruments for mobilisation of resources for the common good. They cannot be said to be in the same circumstances as French banks which have no such constraints and are free to operate their profit-making apparatus to the maximum extent possible. It has also to be borne in mind that a nationalised bank has to be treated as State under article 12 of the Constitution of India. Fundamental rights can be enforced against the nationalised bank. It has also to comply with Government guidelines and laws in the matter of recruitment of its employees. A certain percentage of the posts has to be reserved for the less privileged sector of the society regardless of merit. In other words, their activities have to be in consonance with the Directive Principles of State Policy and cannot violate the fundamental rights of their employees or their customers in any manner. If the activities of a bank before and after nationalisation were the same, there would have been no justification for nationalisation of the large Indian banks. Clause 2 of article 26 prohibits discrimination between an Indian enterprise and a French enterprise ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt out of the ambit of these two Acts and are entirely free to pursue their activities as they like with the sole object of profit-making. We are of the view that the activities which the nationalised banks have to perform and the activities of the foreign banks are not the "same activities" although both were engaged in banking business. We have not specifically dealt with the small Indian private banks which in any event cannot be equated with large foreign banks. The second aspect of the question under article 26(2) of the agreement is whether taxation has been less favourably levied on a foreign bank by the Income-tax Act than a similar enterprise in India. The applicant's case is that a higher rate of tax which has been imposed on a foreign company by the Finance Act, is not permissible under the DTAA between India and France. This argument is misconceived. As we have noted earlier in the judgment, the Finance Acts have consistently drawn a distinction between a domestic and a non-domestic company. A foreign company which distributes dividends in India will be treated as a domestic company and will pay the same rate of tax as an Indian company which declares and distributes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manner in which double taxation has to be avoided. Article 26 seeks to prevent discrimination in taxation between nationals and non-nationals in clause 1. Clause 2 lays down that taxation levied on a foreign enterprise by a Contracting State shall not be less favourable than the taxation on the same activities of the local enterprise. Clause 5 of article 26 also refers to "taxation" and speaks of other or more burdensome taxation. Article 26 has not specifically laid down that the tax payable by an enterprise of one Contracting State must be at the same rate as tax payable by a domestic enterprise of a Contracting State. Nor it has been laid down that the rate of tax payable by a national of one Contracting State must be the same as payable by the national of the other Contracting State. Rate of tax has been specifically mentioned in a number of articles. For example, article 9 deals with profits from shipping and lays down that profits derived by an enterprise of a Contracting State "shall be taxable" only in that Contracting State. Clause 2 of article 9 provides that "tax so charged" shall not exceed 25 per cent. or 50 per cent. as the case may be of "the tax otherwise impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments received by students and apprentices in certain circumstances altogether. The total income of an assessee who is a resident in France will have to be computed in India after giving these benefits. In the background of all these articles, it is not possible to hold that the "non-discrimination" clause was drafted for the purpose of ensuring that the rate of tax on a French company and an Indian company will be the same. Article 26 does not speak of rate of tax at all. What has to be seen under article 26 is that a French company is not subjected to any tax to which an Indian company is not subjected. It has also to be seen that the tax law generally does not place an Indian company at a more advantageous position vis-a-vis a French company. An overall view of the provisions of the Income-tax Act will have to be taken for this purpose. Some arguments were advanced on behalf of the applicant on the significance of the word "levy" in article 26 of the Income-tax Act. The word "levy" has been interpreted by the courts in a number of cases. According to Black's Law Dictionary (sixth edition), "levy" means "to assess ; raise ; execute ; exact ; tax ; collect ; gather ; take up ; s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o which a foreign company is not subjected. For example, sections 115-O, 115B and 115Q are applicable only to domestic companies. It has also to be noted that the surcharge imposed by the annual Finance Act is payable only by a domestic company and not a foreign company. In the background of all these provisions, it is not possible to hold that a French company has been placed at a more disadvantageous position than an Indian company under the Income-tax Act by the levy of a higher rate of tax. There is yet another aspect of this case. How should the non-discrimination clause be construed ? We have noticed earlier in the ruling how rates of tax payable for various types of income have been prescribed. Article 26 speaks generally of taxation. That means Indian tax provisions should not be more burdensome on a French resident nor place a French concern in a more disadvantageous position than a similarly circumstanced Indian concern. This provisions of non-discrimination has nothing to do with rates of tax which have been dealt with specifically by the other articles of the DTAA. The agreement in article 26 has deliberately not used the phraseology "the tax so charged" as against art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. agreement specifically makes it clear that this provision cannot be interpreted to mean that the rate of tax in respect of a permanent establishment of a U.K. company and an Indian company must be the same. How is the French agreement to be construed in the absence of a specific rule of interpretation as provided by the U.K. agreement ? Can article 26(1) and (2) be construed to mean that an enterprise of the French company cannot be taxed in India at a rate higher than the rate at which an Indian company has to pay tax ? The U.K. agreement was signed on January 25, 1993, while the French agreement was signed on September 29, 1992. The contention made on behalf of the applicant, is that in the absence of a specific rule of construction, article 26(2) will have to be construed to mean that a French enterprise in India cannot be taxed at a rate higher than the rate at which a similar enterprise in India is taxed. We are of the view that imposition of a higher rate of tax in respect of income of a permanent establishment of a French company is not prohibited by clause 1 or 2 of article 26 of the French agreement. Substantially, the non-discrimination clause of the French and the U. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is passed which contains provisions contrary to article 26 of the agreement, the scope and effect of the legislation cannot be curtailed by reference to the agreement. The agreement was entered into pursuant to the power conferred upon the Government by section 90 of the Income-tax Act. A subsequent legislation cannot be controlled by the agreement. This point was gone into at length in the case of Woodend (K. V. Ceylon) Rubber and Tea Co. Ltd. v. IRC [1970] 2 All ER 801 (PC). In that case, the Privy Council had to consider the scope of the DTAA entered into by the Government of Ceylon with the U.K. There, the non-discrimination clause contained in article 18 was as under (page 803) : "(1) The residents of one of the territories shall not be subjected in the other territory to any taxation or any requirement connected therewith which is other, higher or more burdensome than the taxation and connected requirements to which the residents of the latter territory are or may be subjected. (2) The enterprises of one of the territories shall not be subjected in the other territory, in respect of profits attributable to their permanent establishments in that other territory, to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the contracting Governments wished to end it, it was to give written notice to the other before 30th June in any calendar year not earlier than the year 1954 (article XXI). That procedure was not followed. The Privy Council noted that a similar problem was considered by the House of Lords in Collco Dealings Ltd. v. IRC [1961] 1 All ER 762 ; [1961] 39 TC 509. In that case, there was a Double Taxation Relief Agreement between the United Kingdom and the Republic of Eire. By a later enactment, Finance (No. 2) Act, 1955, vide section 4(2), repayments of income tax were denied to "a person entitled under any enactment to an exemption from income-tax" where certain defined circumstances existed. A company resident in Eire claimed that notwithstanding the existence of such circumstances in its own case, it was entitled to repayment because the later enactment must be regarded as leaving such entitlement unaffected. The House of Lords, however, rejected this contention. Lord Radcliffe said (page 808) : "The only one of the appellant company's contentions that appeared to me to have any plausibility was that which sought to restrict the apparent range of section 4(2) of the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
