TMI Blog2022 (6) TMI 1329X X X X Extracts X X X X X X X X Extracts X X X X ..... ry that Section 119(1)(a) does not visualize issuance of a circular so as to require any income-tax authority to make a particular assessment or to dispose of a particular assessment in a particular manner , and, therefore, such a clarification will not have any bearing on cases other than ABN Amro Bank, or the legally binding force of Section 119. In any event, even going by the observations made by the Hon ble High Court, this communication was issued prior to 24th November 1997 much before the retrospective insertion of Explanation 1 to Section 90 took place. With the amendment in law and with this significant change in the legal position, even if there is an old circular, issued in the context of pre-amendment law, it will not hold good any longer. Nothing, therefore, turns on the said communication either, and, in any event, even this communication has not been sighted before us. We are of the considered view that the plea of the assessee is, therefore, devoid of any sustainable merits. We reject the plea of the assessee, and decline to interfere in the matter. Deductibility of Interest paid by the Appellant to its Head Office - AO/DRP disallowing interest paid by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the entirety of the case, we hold that the disallowance of interest is not sustainable in law. Assessing Officer is directed to delete the same. Whether the said interest paid by the PE to GE (i.e. PE-GE interest) can be taxed in the hands of the assessee company as income of the GE, as has been done by the Assessing Officer? - It may perhaps be too much to contend that the taxability of PE-GE interest receipt is required to be considered on the basis of the domestic law provisions, but even this discussion seems entirely academic in the light of our finding, as above, that an internal charge for the PE profit attribution does not amount to taxable income in the hands of the GE anyway. Be that as it may, having decided this aspect of the matter on the treaty principles so far as taxability of PE-GE interest in the hands of the GE is concerned, we need not examine that aspect any further. In our considered view, for the detailed reasons set out in this order, dehors this theory of tax neutrality for intra-GE transactions also, this PE-GE interest is not taxable in the hands of the assessee. Of course, we have reached the same destination by following a different path but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, in particular with respect to residence, are or may be subjected [the corresponding provision in the present Indo Korean treaty are in Article 24(1)], and as, in terms of Article 3(1)(g) resident includes, amongst others, any legal person, partnership or association deriving its status as such from the laws in force in a Contracting State , [the corresponding provision in the present Indo Korean treaty are in Article 3(1)(j)(ii)] the assessee company is also required to be treated as a national of Korea and levy of tax at the same rate as applicable for the Indian companies. It was also pointed out that in terms of the provisions of Article 25(2) of the then India Korea tax treaty, 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 contracting state than the taxation levied on the enterprise o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the statute, and yet the issue has been decided in favour of the assessee. He left the matter at that and submitted that he has nothing further to add to what has been held by Hon ble Calcutta High Court in the case of Bank of Tokyo Mitsubishi (supra). Learned Departmental Representative, on the other hand, submits that there is no discussion at all in the said decision about the Explanation 1 to Section 90, which is in effect with effect from 1st April 1962, though inserted by the Finance Act 2001, and a decision which has been rendered without dealing with this foundational aspect of the matter, cannot be binding on us. Learned Departmental Representative submits that in any case, it is a non-jurisdictional High Court and there is no dispute about the scope of Explanation to Section 90, and the learned counsel for the assessee has not even advanced any arguments on merits. It is pointed out that the learned counsel has simply cited a judicial precedent and left it at that, and, therefore, we should treat this ground as not pressed in effect. We are thus urged to confirm the stand of the authorities below and decline to interfere in the matter. 6. We have heard the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r more burdensome taxation vis- -vis the domestic companies. Once this principle is implicit in the very scheme of legislation which provides for the treaty provisions overriding the domestic law provisions, it cannot be open to contend that the provisions of law prescribing the higher rate of taxation for the foreign companies will have to be read down by the treaty provisions. The law is clear and unambiguous. To this extent, therefore, the treaty provisions do not override the provisions of the Income Tax Act, 1961. While the amendment was made by the Finance Act 2001, it was retrospective in effect inasmuch as it was specifically inserted with effect from 1st April 1962, i.e. the point of time when the Income Tax Act 1961 itself came into existence. On the first principles, the reason for the classificatory amendment appears to be that while income earned by the domestic companies is first taxed as corporate profits, and then with respect to taxation of dividends in the hands of the shareholder or at the point of time of distribution, the foreign companies normally (i.e. unless they make arrangements for declaration and payment within India, of the dividend payable out of its i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaration of dividends out of income earned in India is charged at a higher rate of tax in India vis- vis domestic company, cannot be treated as discrimination on account of the fact that the enterprise belonged to the other Contracting State, i.e. Korea. That is what the clarificatory and retrospective insertion of Explanation 1 to Section 90 reflects. The plea of the assessee, therefore, must be rejected. In our considered view, given the specific provisions of law- as discussed above, there is no occasion for reading down the rate of tax, as applicable for a foreign company, just because the domestic companies are being taxed at a lower rate of taxation. 8. As we hold so, however, we may add that we are alive to the fact that in Bank of Tokyo Mitsubishi (supra), Hon ble Calcutta High Court has, though without the benefit of discussions on the fact of or scope of this retrospective insertion of Explanation to Section 90, proceeded to decide the matter in favour of the assessee by observing, inter alia, as follows 5. By virtue of Section 90(2) of the Act, since there is a double taxation avoidance agreement between India and Japan, the provisions of the Act shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board for Direct Taxes and a circular issued thereupon. The Tribunal held, in the present case, that since there was no similar circular, the benefit as available to a permanent establishment of ABN Amro Bank in India could not be extended to this assessee. 8. When there is no dispute that there is a double taxation avoidance agreement in place between India and the country of origin of the assessee in the present case and when such agreement contains a lucid clause as apparent from Article 24(2) thereof quoted above and when Section 90 of the Act itself recognises such an agreement and creates a special status for the relevant permanent establishments, there was no room for either the Commissioner to wait for any dictat from the high command of the CBDT or for the Tribunal to demonstrate similar servile conduct in not appropriately interpreting and giving effect to the clear words of the agreement between the two countries. 9. The reference is concluded by answering the first question raised as follows:- The Tribunal was incorrect in holding that the rate of tax applicable to the assessee was 65%. The Tribunal ought to have held that the rate applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or the Tribunals outside its own territorial jurisdiction. It is wellsettled that the decision of a High Court will have the force of binding precedent only in the State or territories on which the court has jurisdiction. In other States or outside the territorial jurisdiction of that High Court it may, at best, have only persuasive effect . Unlike the decisions of Hon'ble jurisdictional High Court, which bind us in letter and in spirit on account of the binding force of law, the decisions of Hon'ble non-jurisdictional High Court are followed by the lower forums, even outside the jurisdiction of Hon ble non-jurisdictional High Court, on account of the persuasive effect of these decisions and on account of the concept of judicial propriety- factors which are inherently subjective in nature. Quite clearly, therefore, the applicability of the nonjurisdictional High Court is never absolute, without exceptions and as a matter of course. That is the principle implicit in Hon'ble Supreme Court's judgment in the case of ACIT v. Saurashtra Kutch Stock Exchange Ltd. [(2008) 173 Taxman 322/305 ITR 227 (SC)] wherein Their Lordships have upheld the plea that non-consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 binding authority. But, if the provision of the Act was noticed and considered before the conclusion arrived at, on the ground that it has erroneously reached the conclusion the judgment cannot be ignored as being per incuriam In Salmond on Jurisprudence, Twelfth edn., at page 151, the rule is stated as follows: The mere fact that (as is contended) the earlier court misconstrued a statute, or ignored a rule of construction, is no ground for impugning the authority of the precedent. A precedent on the construction of a statute is as much binding as any other, and the fact that it was mistaken in its reasoning does not destroy its binding force. 32. In Choudry Bros.' case (supra) as noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is legal position, unless the relevant legal position has not come up for consideration in the process of decisionmaking, even though the said decision will undoubtedly settle the matter between the parties and their privies, it would appear that the decision may not have precedence value. Explaining this position, a three-judge bench of Hon ble Supreme, in the case of Mavaliayi Service Cooperative Bank Ltd Vs CIT [(2021) 12 taxmann.com 161 (SC)], has observed as follows: 25. An illuminating discussion is to be found in the dissenting judgment of Justice A.P. Sen in Dalbir Singh v. State of Punjab [1979] 3 SCR 1059. Since the dissenting judgment refers to a principle of general application, not refuted by the majority, it is worth setting out this part of the judgment as follows: With greatest respect, the majority decision in Rajendra Prasad case does not lay down any legal principle of general applicability. A decision on a question of sentence depending upon the facts and circumstances of a particular case, can never be regarded as a binding precedent, much less law declared within the meaning of Article 141 of the Constitution so as to bind all courts wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce the entire profound discussion on the theory of binding judicial precedents, we may refer to a couple of important observations made by the Hon ble jurisdictional High Court. Their Lordships have, inter alia, observed that An issue raised not addressed or an issue that has altogether gone sub silentio cannot support a precedent . Their Lordships have also observed as follows: It is one thing to say that a precedent should be followed; it is another to say what it means to follow a precedent. And what is a precedent, anyway? Before we answer that question, we need to accept that before a court applies the doctrine of stare decisis to a given case, it must first determine what that previous decision purports to establish. Salmond defines a precedent as a judicial decision, which contains in itself a principle. The underlying principle, which thus forms its authoritative element, is often termed the ratio decidendi. According to him, it is the abstract ratio decidendi which alone has the force of law as regards the world at large. Professor John Chipman Gray, in his The Nature and Sources of the Law (2d ed. 1921) 261stresses that it must be an opinion the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valiayi Service Cooperative Bank Ltd (supra), and Hon ble jurisdictional High Court s full bench judgment in the case of Farhan A Sheikh (supra), we are of the considered view is that Hon ble Calcutta High Court s judgment in the case of Bank of Tokyo Mitsubishi (supra), strictly speaking, does not constitute a legally binding judicial precedent to forums like benches of the Tribunal outside the jurisdiction of Hon ble Calcutta High Court. This judgment, whether for the post-amendment period or the pre-amendment period, is without the benefit of taking note of a critical judicial development, which has not been brought to the notice of the Hon ble Court. Undoubtedly it has the highest persuasive value, but, in the rare circumstances when admittedly the applicable legal provisions have not been brought to the notice of Their Lordships, even this persuasive value cannot be of any help to the assessee. 16. As observed by the Hon ble Supreme Court, in the case of CIT Vs Sun Engineering Works Pvt Ltd [(1992) 198 ITR 297 (SC)], The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legally binding force of Section 119. In any event, even going by the observations made by the Hon ble High Court, this communication was issued prior to 24th November 1997 much before the retrospective insertion of Explanation 1 to Section 90 took place. With the amendment in law and with this significant change in the legal position, even if there is an old circular, issued in the context of pre-amendment law, it will not hold good any longer. Nothing, therefore, turns on the said communication either, and, in any event, even this communication has not been sighted before us. 20. In view of these discussions, and for detailed reasons set out earlier in this order, we are of the considered view that the plea of the assessee is, therefore, devoid of any sustainable merits. We reject the plea of the assessee, and decline to interfere in the matter. 21. In the result, the first ground of appeal is dismissed. 22. In the second, third and fourth grounds of appeal, which we will take up together, the assessee has raised the following grievances: Ground 2- Deductibility of Interest paid by the Appellant to its Head Office The AO/DRP erred in law and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount, nevertheless, was brought to tax in the hands of the GE. As regards the interest income received by the permanent establishment from its head office, (referred to as GE-PE interest, in short], the stand of the assessee was that if the payment by the PE to GE is to be declined on the ground that it is a payment from self to self, which constitutes inadmissible deduction in the computation of profits attributable to the PE, by the same logic the income of the PE from its GE is to be disregarded. The GE PE interest income, on this basis, was claimed to be devoid of tax implications. This claim, however, was also declined by the Assessing Officer. The assessee was not satisfied with this approach. When grievance about the stand so taken by the Assessing Officer was raised before the Dispute Resolution Panel, the DRP noted that, in the income tax return filed by the assessee, the assessee had claimed a deduction, in the computation of income attributable to the PE, for the PE-GE interest payment but offered it to tax, being resultant income of the GE, at the concessional rate of 10% under Article 12 of the then Indo Korean tax treaty. It was thus noted that there is no variation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments within a company, is not taxable in the hands of the assessee. We are thus allowed to hold that while the PE GE interest payment is deductible under the tax treaty provisions, the PE GE interest payments do not result in taxability of that amount in the hands of the GE which has no separate existence anyway. Learned Departmental Representative, however, points out that so far as the five-member bench in the case of Sumitomo Mitsui is concerned, which is what the coordinate bench has followed in the assessee s own case, it dealt with the provisions of the India Japan Double Taxation Avoidance Agreement- particularly its protocol [(1990) 182 ITR (Stat) 380- as amended from time to time; IndoJapan tax treaty, in short], which is materially different from Indo Korea tax treaty that is applicable in the present case. We are then taken through the relevant observations and the difference in the wordings of Indo-Japan vis- -vis Indo-Korean tax treaties. In substance, the learned Departmental Representative s contention is, if we can rephrase it in our words, that if we are to proceed on the basis of tax neutrality of intra GE theory, and the provisions as in protocol attached to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax treaty and the decision is, as it states in so many words- such as in para 88 therein that PE GE interest is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of Article 7(2) 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol, which are more beneficial to the assessee . In the operative portion of the order also there are frequent references to the protocol paragraph 8 and that protocol provision is taken as a critical factor leading to the conclusion of the bench, such as in paragraph 52 where the Special Bench has observed that A combined reading of Article 7(2) and 7(3) of the treaty and paragraph No. 8 of the protocol thus makes it clear that for the purpose of computing the profits attributable to the PE in India, . profit attributable to the PE in India thus is to be computed treating the same as a distinct and separate entity which is dealing wholly independently with the GE of which it is a part and deduction is to be allowed for all the expenses which are incurred for the purpose of PE, whether incurred in India or elsewhere, including the interest paid or payable by a PE to the Head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned, the profits of the Indian PE are to be computed as if the Indian PE is wholly independent of its head office, i.e. Korean GE. Once we treat the PE as independent of the GE, as we are required to treat by the fiction of hypothetical independence in Article 7(2) which provides for the computation of profits attributable to the PE, the very foundation of the impugned disallowance of the interest paid by the PE to the GE ceases to hold good in law. The computations of profits attributable to the PE are to be computed on the basis of this hypothetical independence of the PE from its GE, and, to that extent, the profit neutrality theory of intra-company transactions will not come into play. As a corollary thereto, interest paid by the PE to the GE is to be allowed as a deduction, and the interest received by the PE from GE, under the scheme of the tax treaties, is to be treated as income. As we hold so, we may also note that though the assessee had initially raised a grievance against the taxability of interest received from its head office, when the appeal came up for hearing before us, this plea was abandoned even as there was a five-member bench decision, in support of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the then Indo-Korean DTAA. There is nothing, therefore, to warrant or justify the application of the same principle in the computation of GE profits as well. Clearly, therefore, the fiction of hypothetical independence is for the limited purpose of profit attribution to the permanent establishment. 33. To that extent, this approach departs from the separate accounting principle in the sense that the GE, to which PE belongs, is not seen in isolation with it's PE, and a charge, in respect of PE - GE transactions, on the PE profits is not treated as income in the hands of the GE. 34. As far as the treaty situations, as in the case of the then Indo-Korea tax treaty, are concerned, once an enterprise is found to be carrying on the related business or profession through a permanent establishment or a fixed base in the other contracting state, the scheme of taxability on the gross basis, as implicit in the taxation of dividend, interest, royalties and fees for technical services, and other incomes, under the tax treaties, comes to an end. Article 11(5) specifically provides that the provisions of Article 12(1),(2) and (3) will not come into play if the beneficial owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a smaller amount of PE income to be taxed by the PE state and, correspondingly, a smaller amount of foreign income in respect of which the residence state needs to provide the relief I must admit that my attempts to get these views across have met with varying levels of success- particularly students with an accounting background tend to be on the sceptical side .. . [Emphasis, by underlining, supplied by us] 37. We are in considered agreement with the views so expressed by the eminent international tax scholar. Clearly, the principles for determining the profits of the PE and GE are not the same, and the fiction of hypothetical independence does not extend to the computation of profit of the GE. As regards the GE-PE interest being treated as interest income of the assessee, arising in the source jurisdiction, i.e. India, can only be taxed under Article 12 but then as provided in article 12 (5), the charging provisions of Article 12(1) and (2), which deal with taxability of interest in the source state, will not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on does not amount to taxable income in the hands of the GE anyway. Be that as it may, having decided this aspect of the matter on the treaty principles so far as taxability of PE-GE interest in the hands of the GE is concerned, we need not examine that aspect any further. In our considered view, for the detailed reasons set out in this order, dehors this theory of tax neutrality for intra-GE transactions also, this PE-GE interest is not taxable in the hands of the assessee. Of course, we have reached the same destination by following a different path but then as long as reach the same destination, our traversing through a different path does not really matter at all. 39. In view of the above discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee that the interest of Rs 2,34,51,979 paid by the PE to the GE cannot be brought to tax in the hands of the assessee company, even though it is to be allowed as a deduction in the computation of profits attributable to the permanent establishment. The Assessing Officer is directed to grant the relief accordingly. The assessee has already offered to tax the interest income received from its hea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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