TMI Blog2015 (1) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... d the best practices in well developed international tax jurisdictions. The issue is squarely covered by the decision of this Tribunal, in assessee’s own case for the assessment year 1996-97. This stand has now been specifically accepted in the protocol to the India UAE tax treaty. Just because there is a more specific and more unambiguous provisions post the protocol amendment, one cannot come to the conclusion that the judicial precedent, rendered by a coordinate bench, even without these specific and unambiguous expressions, cases to hold good. That will be stretching the things too far and will also be contrary to approach adopted by a very large number of judicial precedents set out earlier in this order. Thus we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. The claim made by the assessee, by way of note to the income tax return, is rejected. As the assessee has incurred loss in this year, no part of head office expenses is allowable under section 44C. As the assessee has not anyway claimed any deduction in the income tax return in this respect, no disallowance is warranted. - Decided in favour of assessee MAT applicability - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r all the expenses wherever incurred and reasonably allocated to the permanent establishment, including its share of executive and general administrative expenses . 3. This issue requiring our adjudication is set out in a rather narrow, but somewhat peculiar, set of facts. The assessee before us is a banking company incorporated in, and tax resident of, the United Arab Emirates which is also carrying on business in India through its branches in New Delhi and Mumbai. During the course of the assessment proceedings, the Assessing Officer noted that while the assessee has not claimed deduction under section 44C, which is restricted to 5% of its profits, as there was no profit in the current year, it was noted that the assessee has contended, in a note appended to the income tax return, the claim is made without prejudice to their claim that as per Article 7 of the Double Taxation Avoidance Agreement between the Governments of India and UAE, all expenses incurred for the purpose of the business of the, including the executive and administration expenses, are allowable without applying the limit of 5% prescribed in section 44C of the Income Tax Act . It was noted that, according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. This decision is a reported decision and the relevant citations is Mashreq Bank Vs JDIT [(2007) 14 SOT 1 (Mum)]. In this decision, the coordinate bench had observed, inter alia, as follows: 6. .we take note of the provisions of Article 25(1) of the tax treaty read with observations made by another co-ordinate bench in Mitsubishi's case (supra). The provisions in India UAE tax treaty are specific and admit no ambiguity on question of applicability of domestic tax laws in the absence of specific provisions to the contrary 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 Vs ADIT (97 ITD SB 89) wherein, on materially identical provision, 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 proposition 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 Spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s DTAA and the proviso placing a restriction by the law of the State in which PE is situate are not incorporated. Again, clause 3(b) of Netherlands DTAA which prohibits allowance of certain expenditure is also missing in Japanese DTAA. There is no other material difference between the two treaties. As pointed out by the learned counsel of the assessee, there are no restrictive covenants in Article 7 for allowance of expenses incurred for the purposes of PE either by the prefix of the words in accordance 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 alternate 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 enterprise 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scope of expression 'royalty' for the purposes of the tax treaty. We are in respectful agreement with the views so stated by the Tribunal, but we are unable to comprehend as to how this proposition can enable us to ignore the specific provisions of the India UAE tax treaty. Article 25(1) of the applicable India UAE tax treaty [(1994) 205 ITR (St) 49] specifically provides that the laws in force in either of the contracting state will continue to govern the taxation of income in respective 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and indeed would be contrary to it. It would take much clearer language than a simple reference to 'all expenses' to bring it about. 11. In a situation, therefore, in which a specific provision like the one in Article 25(1) in India UAE tax treaty exists, there cannot be any occasion to ignore the limitations on deduction of expenses under the domestic tax legislation. That would be a case of, what can be termed as, reverse discrimination. Just as much a discrimination against 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 a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not take into the fact that the related incomes are taxed on gross basis in the hands of the non residents taxpayers and net basis in the hands of the resident tax payers. Dealing with this aspect of the matter, a co ordinate bench of this Tribunal, in the case of DCIT Vs Boston Consulting Group Pte Ltd (94 ITD 31) has observed as follows: 19. Section 44D was brought on the statute, w.e.f. 1st April 1976, by the Finance Act, 1976. By the same Finance Act, section 115A was also introduced. 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 one 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en accompanied by the corresponding changes in section 115A. It is thus clear that non deduction of expenses under section 44D, which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under section 115A.... 13. In this view of the matter, the comparison of lower tax rates under section 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 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 115 A 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non resident tax payer by the host country, without any specific provision to that effect, can be inferred. It is only elementary that a tax treaty is required to be read as a whole and, when the India UAE tax treaty is read as a whole, the scheme of non discrimination is clearly discernable from the scheme of things. It would, therefore, be quite inappropriate to read the provisions of the treaty in such a manner so as to result in discrimination against residents of one of the Contracting States; there can not be any justification for 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an ambiguity in the provisions, it needs to be resolved by way of harmonious construction in accordance with the well settled principles of tax treaties. It cannot be, in any event, open to anyone to embark upon the voyage of discovery in search of hidden meanings or intent of parties, not supported by the specific expressions to articulate the same, and then proceed to give life to these inferences- that too in a manner contrary to the scheme of the tax treaty. We donot find any specific provision in the tax treaty which supports learned counsel's 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation of profits of the permanent establishment is justified as a measure of abundant caution and is made ex abudanti coutela. It is, however, not necessary to go into that aspect of the matter any further at this stage. 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 considered view that the limitations under the domestic tax laws are to be taken into account for the purposes of computing profits of a PE under Article 7(3) of the India UAE tax treaty. The plea of the 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. 7. Around the same time when this decision was delivered, a protocol, amending the Indo UAE tax treaty, has been entered into. This protocol has since been notified by the Government of India vide Notification No. 282 of 2007, dated 28th November 2007 (213 CTR Statues 64). This protocol had two major changes first, with respect to definition of a resident of contracting stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orce. 8. In effect thus, the protocol made the legal provision, with respect to tax liability in UAE not being sine qua non to avail the treaty benefits in India, unambiguous and without any doubt. What was implicit in the treaty earlier, was made explicit by the protocol later. That is the view the coordinate benches and has been consistently taken all along. Hon ble Bombay High Court has also approved the decision so taken, for the pre 1st April 2008 period, in judgment reported as DIT Vs ICICI Bank Limited [(2015) 370 ITR 17 (Bom)]. 9. On the question of limitations under the domestic law being implicit in the application of article 7 read with article 25(1) also, the coordinate bench, in assessee s own case for the assessment year, had decided the issue. It was held that these limitations are implicit in article 25(1). However, when this issue came up before Ahmedabad A bench of this Tribunal in the case of ADIT Vs Dalmas Energy LLC [(2012) 150 TTJ 70 (Ahd)], the Mashreq Bank decision (supra) was not brought to the notice of the coordinate bench. The bench did not have the benefit of knowing that even without the assistance of the protocol amendment, the Tribunal had come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 provisions of section 44C has been enforced, nevertheless with effect from 1st day of April- 2008. 10. While so rendering the decision, the bench had no occasion to take note of earlier direct decision on this issue in the case of Mashreq Bank (supra) or the provisions of Article 25(1) of India UAE tax treaty. As to what could be the impact of such an omission, we find guidance from a full bench decision of Hon ble Andhra Pradesh High Court in the case of CIT Vs B R Constructions [(1993) 202 ITR 222 (AP FC)] as was summarized by a coordinate bench decision in the case of JKT Fabrics Vs DCIT [(2005) 4 SOT 84 (Mum)] as follows: 5. As far as Tribunal s decision in the case of Prince SWR Systems (P) Ltd. (supra) is concerned, we have noted that the Tribunal has not followed the co-ordinate Bench decision in Plastible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Hon ble Bombay High Court s judgment in the case of Indian Rayon Corpn. Ltd. (supra) and on the basis of the Hon ble Rajasthan High Court s judgment in the case of Vijay Industries vs. CIT (2004) 190 CTR (Raj) 90 : (2004) 270 ITR 175 (Raj). What is held in Vijay Industries case (supra) is the same thing as held in Indian Rayon Corpn. Ltd. s case (supra) but then Plastiblends India Ltd. s case (supra) having considered the school of thought emerging from these materially similar decisions, has come to the conclusion that where the assessee has not claimed the depreciation in its books of account, the same cannot be thrust upon the assessee for the purpose of computing the deduction under s. 80- IA. Following the Hon ble Supreme Court s judgment in Paras Laminates (P) Ltd. s case (supra) it was not open to the Bench to take any other view of the matter than the view taken by the co-ordinate Bench. The decision in Venus Jewels case (supra) also appears to be per incurium. 7. No doubt that when a co-ordinate Bench doubts the correctness of decision of another co-ordinate Bench, a reference can be made to the Hon ble President for constitution of a larger Bench. However, as far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her than itself. A High Court Judge cannot question a decision of the Court of Appeal, nor can the Court of Appeal refuse to follow judgments of the House of Lords. A corollary of the rule is that the Courts are bound only by decisions of higher Courts and not by those of lower or equal rank. A High Court Judge is not bound by a previous High Court decision, though he will normally follow it on the principle of judicial comity, in order to avoid conflict of authority and to secure certainty and uniformity in the administration of justice. If he refuses to follow it, he cannot overrule it; both decisions stand and the resulting antimony must wait for a higher Court to settle. The principles applicable to Courts in India were laid down by Subba Rao, J. (as he then was) in Dr. K.C. Nambiar vs. State of Madras AIR 1953 Mad 351, which were approved by a Full Bench of our High Court in Subbarayudu vs. State AIR 1955 AP 87 (FB) : (1955) 11 ALT (Cri.) 53. They are as follows : 'A single Judge is bound by a decision of a Division Bench exercising appellate jurisdiction. If there is a conflict of Bench decisions, he should refer the case to a Bench of two Judges who may refer it t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourth Edition, the rule of per incuriam is stated as follows : 'A decision is given per incuriam when the Court has acted in ignorance of a previous decision of its own or of a Court of co-ordinate jurisdiction which covered the case before it, in which case it must be decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force. In Punjab Land Development Reclamation Corpn. Ltd. vs. Presiding Officer, Labour Court (1990) 3 SCC 682 : (1990) 77 FJR 17 (SC), the Supreme Court explained the expression 'per incuriam thus : 'The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a previous decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court. As has been noticed above, a judgment can be said to be per incuriam if it is rendered in ignorance or forgetfulness of the provisions of a statute or a rule having statutory force or a bindi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Full Bench, as the case may be, for an authoritative pronouncement on the question involved as indicated above. The abovesaid two questions are answered as indicated above. 9. It is thus beyond dispute that a decision which is per incuriam is not a binding judicial precedent. It is also well-settled that when it is not open to a High Court Bench to differ from the decision of a Bench of equal strength, it cannot also be open to a Bench of this Tribunal to differ from the view taken by a co-ordinate Bench of equal strength. The only option in case one doubts the correctness of such a decision is to refer the matter for constitution of a larger Bench. A decision ignoring this rule of precedent, which is duly approved by the Hon ble Courts from time to time, cannot but be viewed as per incuriam. Therefore, following the Hon ble Andhra Pradesh High Court Full Bench decision in the case of B.R. Constructions (supra), such a decision of the co-ordinate Bench has no precedence value. [Emphasis supplied] 11. In the light of the settled legal position as above by full bench decision of Hon ble Andhra Pradesh High Court and as elaborated above, the decision of Dalma Energy LLC ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself is held to be per incurium on the basis of the well settled legal principles. In view of this discussion, our humble understanding is that a binding judicial precedent does not cease to be good law merely because some observations have been made by a higher forum which may, by a long drawn process of reasoning and inference, be construed as contrary to the reasoning adopted by such a judicial precedent. That precisely, however, is at best the case before us. 13. The observations made in Abhu Dhabi decision (supra), which, according to the learned counsel, overrule the Mashreq Bank decision (supra), are as follows: 60. First we shall deal with the arguments of Shri Girish Dave based on the relevant provisions of the Indo-Japanese treaty. He has, inter alia, relied on article 23 of Indo- Japanese treaty which provides that the laws in force in either of the contracting State shall continue to govern the taxation of income in respective contracting state except where express provisions to the contrary are made in the convention. According to him, article 11 read with article 7 of the treaty contains such express provision and make the interest payable by the PE in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly supports this view. 14. We have carefully gone through the above observations. What we could make out from these observations is this. The argument of the learned DR was that since there is a specific provision regarding taxation of interest income in article 7 read with article 11 of the Indo Japanese tax treaty, to that extent the provisions of the Income Tax Act, 1961 are not applicable. Interestingly, if the provisions of the Act were to be applied in this case, as were eventually applied, interest income received from self to self would not have been taxable. It was in this context that the five member bench held that such a contention is contrary to the scheme of the law inasmuch as what is not taxable under the domestic tax law cannot be held to be taxable under a tax treaty because section 90(2) provides that the tax treaties will apply only to the extent, the provisions of the treaties are beneficial to the assessee. The benefit given under the domestic law, as held by the five member bench, cannot be declined because the treaty has a harsher provision. These observations were made in the context of taxation of an income. Under the domestic income tax law in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erruled by another precedent from the higher forum, or it is not overruled. The concept of a binding precedent being impliedly overruled , in our humble understanding, would amount to rejecting a binding precedent on the basis of what logically follows from another binding precedent of a higher forum, but then this such a process of rejecting the judicial precedents is contrary to the principles laid down by Hon ble jurisdictional High Court in the case of Sudhir Jayantilal Mulji (supra). 18. What follows from the entire discussion is this. Reverse discrimination, which would have resulted by not restricting the deductions in the light of the provisions of the Act for nonresidents assessees, was not permissible under the Indo UAE treaty prior to the protocol amendment in question, as was held by the Mashreq Bank decision (supra), and such a reverse discrimination is permissible even now as specifically provided for in the said protocol amendment in the Indo UAE tax treaty itself. That is what is clearly discernable from the Indian tax treaty approach and is completely in harmony with the judicial precedents and the best practices in well developed international tax jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o no better than to quote once again from the decision of Mashreq Bank as follows: 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 be rendered meaningless. Unlike a piece of tax legislation, which is creature of a sovereign state, a tax treaty is a result of bilateral negotiations. Therefore, the wordings of a tax treaty are essentially dependent on the priorities of, and acceptability by, the Contracting States parties to such a tax treaty. It is only elementary that these factors vary from one of set of Contracting States to another set of Contracting States. The same purpose, therefore, can indeed be intended even by radically different phraseology employed in tax treaties to which a particular country is one of the parties. In the case of tax legislation, however, things are quite different, because, as we have emphasized earlier, tax legislations are unilateral acts of the law making bodies, and when a law making body ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l High Court in the case of Sudhir Jayantilal Mulji (supra). With greatest respect to the coordinate bench decision in Abu Dhabi Commercial Bank s case (supra), the approach adopted by this coordinate bench is appears to be in conflict with the law laid down by Hon ble jurisdictional High Court and also by a full bench of Hon ble Andhra Pradesh High Court, as elaborated above. It is also important to bear in mind the fact that just because something else has been decided on a comparable set of facts, normally the earlier decision, in assessee s own case, can not be ignored. If at all the subsequent bench had doubts on correctness of these views, the matter could have been referred to a special bench but, for the reasons which are not discernable from our reading of the order, that course was not adopted. However, because of this deviation and particularly as we have no doubts about correctness of our approach which is also adopted in a large number of judicial precedents as set out in earlier in this order and which now has the approval of Hon ble jurisdictional High Court, we see no reasons to refer this issue to a special bench; none of the parties before us had prayed for recomm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In respect of this ground of appeal as well, learned counsel for the assesse fairly accepts that whatever is decided on ground no.1 will apply mutatis mutandis on this ground of appeal as well, since the disallowance is admittedly on the basis of specific disabling provisions under the domestic law i.e. the Income Tax Act. Vide our adjudication above, we have rejected the first ground of appeal, and the same fate must, therefore, follow for this ground of appeal as well. 31. Ground no. 4 is also thus dismissed. 32. So far as ground no. 5 is concerned, learned counsel for the assessee submits that the basic issue that is required to be adjudicated, as specifically raised by an additional ground of appeal, is whether the provisions of Section 115 JB will apply to the assessee. It is submitted that this issue is covered, in favour of the assessee, in principle, by a number of decisions in the cases beginning with Krung Thai Bank PCL Vs JDiT [(2012) 49 SOT 70 (Mum)]. Learned Departmental Representative does not have anything specific to say on this aspect and he graciously leaves the matter to us. 33. We find that, in the case of Krung Thai Bank (supra), a coordinate bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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