DTAA tax rate and expense deduction rules: foreign company rate upheld, but treaty-based business expense disallowance was rejected.

A foreign company covered by the Indo-Mauritian DTAA was held taxable at the higher rate applicable to foreign companies rather than the domestic-company rate, because the retrospective Explanation 1 to section 90 of the Income-tax Act states that such differential rate treatment is not discriminatory and treaty provisions do not override the Finance Act rate where no specific treaty rate applies. By contrast, travelling and entertainment expense disallowance was not sustained under the Mauritius DTAA, because Article 7(3) allowed deductions for expenditure incurred for the permanent establishment and the treaty standard, not domestic restrictions under rule 6D and section 37(2), governed the computation of business profits.

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Issues: (i) Whether the assessee, a foreign company covered by the Indo-Mauritian DTAA, was taxable at the rate applicable to domestic companies or at the higher rate applicable to foreign companies. (ii) Whether disallowance of travelling and entertainment expenses under the Income-tax Act could be sustained when the Mauritius DTAA governed the computation of business profits.

Issue (i): Whether the assessee, a foreign company covered by the Indo-Mauritian DTAA, was taxable at the rate applicable to domestic companies or at the higher rate applicable to foreign companies.

Analysis: The relevant non-discrimination argument was rejected in light of the retrospective insertion of Explanation 1 to section 90 of the Income-tax Act, 1961, which declares that charging a foreign company at a rate higher than that applicable to a domestic company is not to be regarded as less favourable treatment. The Court also followed the view that DTAA provisions regulate assessability of income but do not by themselves control the tax rates fixed by the Finance Act where the treaty does not prescribe a different rate for the relevant class of assessee.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether disallowance of travelling and entertainment expenses under the Income-tax Act could be sustained when the Mauritius DTAA governed the computation of business profits.

Analysis: Article 7(3) of the Mauritius DTAA provided that expenses incurred for the purposes of the permanent establishment are to be allowed as deductions. Since the treaty text did not incorporate the domestic-law restriction that would otherwise limit such deductions, the Court held that the disallowance under rule 6D and section 37(2) could not be enforced in the present treaty context. The expenses were to be tested by the treaty standard of business purpose rather than by the domestic restriction.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The appeal succeeded on the rate-of-tax issue but failed on the disallowance issue, resulting in a mixed outcome with only partial relief to the Revenue.

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