Treaty non-discrimination does not guarantee identical tax rates where domestic law classifies taxpayers differently.

Article 26 of the India-France tax treaty was held not to bar a higher tax rate on a French banking company than on a domestic company. The Authority found that non-discrimination protects against taxation that is more burdensome in substance in comparable circumstances, but it does not require identical tax rates where municipal law makes a bona fide classification between differently situated taxpayers. It further held that a French bank was not similarly placed to a nationalised Indian bank because their functions, obligations, and objectives differed. The treaty also did not override the annual Finance Act rate structure, and the applicant was not entitled to the domestic company rate.

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Issues: Whether the non-discrimination provision in article 26 of the India-France Double Taxation Avoidance Agreement barred levy of a higher rate of tax on a French banking company than on a domestic company.

Analysis: The Authority held that article 26 prohibited taxation that was more burdensome in substance against a resident of one Contracting State in the same circumstances, but it did not require identical rates of tax in all cases. The distinction between domestic and non-domestic companies under the Income-tax Act and the annual Finance Acts was a long-standing classification based on the dividend-distribution arrangement and other fiscal differences, and was not shown to be discrimination on nationality. It further held that a French bank and a nationalised Indian bank were not carrying on the same activities in the relevant sense, because nationalised banks functioned under public obligations and State-directed objectives, unlike foreign banks operating as profit-making enterprises. The Authority also held that article 26 did not override the rate structure fixed annually by Parliament in the Finance Act, and that a later fiscal enactment could not be controlled by the earlier treaty so as to reduce the statutory rate of tax.

Conclusion: The higher rate of tax on the applicant was not hit by article 26, and the question was answered against the applicant.

Final Conclusion: The treaty non-discrimination clause did not prevent India from applying the Finance Act rate applicable to a non-domestic company, and the applicant was not entitled to the domestic company rate.

Ratio Decidendi: A non-discrimination clause in a tax treaty does not, by itself, require parity of tax rates where the municipal law creates a bona fide distinction between differently situated classes of taxpayers, and a later statutory rate fixed by Parliament is not curtailed by the treaty absent a direct and specific inconsistency.

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