Treaty non-discrimination and permanent-establishment profit attribution: domestic tax rate claim rejected, internal interest deduction upheld.

Explanation 1 to section 90 was applied to reject a foreign company's claim to domestic-company taxation under the India-Korea treaty non-discrimination clause, because the retrospective statutory override makes a higher rate for a foreign company not less favourable merely by reason of the domestic rate. By contrast, internal interest between a permanent establishment and its head office was treated as deductible in computing attributable profits on a distinct-and-separate-enterprise basis, but the same notional charge was not taxable again in the head office's hands. An additional ground on section 44C was admitted as a pure question of law and remanded for fresh adjudication.

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Issues: (i) Whether, in view of Explanation 1 to section 90 of the Income-tax Act, 1961, the assessee foreign company could claim taxation at the rate applicable to domestic companies on the basis of the non-discrimination clause in the India-Korea tax treaty; (ii) Whether interest paid by the permanent establishment to the head office was deductible and whether the same amount could be taxed in the hands of the head office; (iii) Whether the additional ground relating to section 44C required adjudication on merits.

Issue (i): Whether, in view of Explanation 1 to section 90 of the Income-tax Act, 1961, the assessee foreign company could claim taxation at the rate applicable to domestic companies on the basis of the non-discrimination clause in the India-Korea tax treaty.

Analysis: The treaty provisions were examined along with section 90(2) and Explanation 1 to section 90. The retrospective explanation clarified that a higher rate of tax on a foreign company is not to be regarded as less favourable merely because the domestic company is taxed at a lower rate. The rate structure under the Act was held to depend on whether the company is domestic or foreign, and the treaty could not override the specific statutory rider created by the Explanation. The reliance on a non-jurisdictional High Court decision was held not to assist the assessee in the absence of consideration of the retrospective amendment.

Conclusion: The claim for taxation at the domestic-company rate was rejected and the issue was decided against the assessee.

Issue (ii): Whether interest paid by the permanent establishment to the head office was deductible and whether the same amount could be taxed in the hands of the head office.

Analysis: For computation of profits attributable to a permanent establishment, Article 7(2) requires attribution on the basis of a distinct and separate enterprise. On that footing, the internal interest charge between the permanent establishment and the head office was held allowable as a deduction in computing the permanent establishment's profits. However, the same notional internal charge did not create separate taxable income in the hands of the head office, because the fiction of hypothetical independence is confined to profit attribution of the permanent establishment and does not extend to taxing the head office separately under Article 12. The internal adjustment was held not to result in income in the hands of the head office.

Conclusion: The deduction was allowed and the corresponding addition in the hands of the head office was deleted, in favour of the assessee.

Issue (iii): Whether the additional ground relating to section 44C required adjudication on merits.

Analysis: The additional ground raised a pure question of law but had not been examined by the authorities below. It was therefore admitted, but the matter was restored to the Assessing Officer for fresh adjudication on merits.

Conclusion: The additional ground was admitted and remanded for consideration, with no final adjudication on merits.

Final Conclusion: The appeal succeeded only in part: the assessee failed on the rate-of-tax issue, succeeded on the head-office interest issue, and the additional ground was sent back for fresh consideration; the cross-objections were dismissed as infructuous.

Ratio Decidendi: A retrospective statutory override in section 90 can neutralize treaty-based non-discrimination claims, and the profit-attribution fiction for a permanent establishment is confined to that computation alone and does not create separate taxable income in the hands of the head office.

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