2005 (9) TMI 227 - AT - Income Tax

Tribunal Rules Section 44C Inapplicable to Non-Resident Companies Under India-Canada DTAA, Allows Deductions.

The Tribunal dismissed the revenue's appeals and allowed the assessee's appeal, determining that section 44C's limitation on head office expenditure ... Expenses incurred at the head office - Non-resident - Whether or not the limitation on deduction of head office expenditure, as set out in section 44C of the Indian Income-tax Act, will apply in the case of non-resident companies governed by the India-Canada DTAA, particularly in the light of non-discrimination clause in the said DTAA - HELD THAT:- We are of the considered view that a restriction on admissibility of head office overheads of permanent establishment of a Canadian company constitutes discrimination against such a PE vis-a-vis a domestic Indian entity because no such restriction is applicable for deduction of head office or controlling office overheads of an Indian entity. It puts PE of a Canadian company to an unfair disadvantage inasmuch as even legitimate business expenses attributable to the PE and deductible u/s 37(1) cannot be allowed as a deduction in the light of restriction placed u/s 44C of the Act, whereas all the legitimate business expenses of the Indian entity operating in India will be allowed as a deduction. The scope of deduction u/s 37(1) thus stands curtailed for PE of a Canadian company. When domestic tax laws permit such discrimination, such legal provisions have to be treated as overridden by the provisions of the Indo-Canadian DTAA. There is no dispute about the fact that when the provisions of the Income-tax Act and the DTAA are in conflict, the provisions of the Act will be applicable only to the extent the same are more beneficial to the assessee. In other words, the provisions of the treaty prevail over the provisions of the Act. Therefore, the restriction placed on the allowability of the head office expenditure by section 44C of the Act is to be ignored in the light of the provision of Article 24(2) of the Indo-Canadian DTAA. We have noted that the CIT(A) has, in the assessment years 1994-95 and 1996-97, has restored the matter to the file of the Assessing Officer for examining the claim of expenditure as attributable to the permanent establishment in India, and the assessee is not in appeal against these directions. Therefore, beyond dispute, only such expenses are to be allowed as a deduction on account of head office expenses as can be fairly allocated to the permanent establishment. The only impact of the applicability of non-discrimination clause will be that the scope of deduction u/s 37(1) will not stand curtailed by the restriction placed u/s 44C of the Act. In our considered view, this direction of the CIT(A) is justified and calls for no interference. As far as assessment year 1993-94 is concerned, the CIT(A) has held that the provisions of section 44C will apply, but then, for the reasons set out above, we are of the considered view that section 44C has no application in the matter and that the assessee is to be allowed deduction of such head office expenses as can be fairly allocated to the permanent establishment. Accordingly, as for the assessment year 1993-94, the matter is to be restored to the file of the Assessing Officer for adjudication de novo in the light of the above observations. In the result, the appeals filed by the revenue are dismissed and the appeal filed by the assessee is allowed for statistical purposes. Issues Involved:1. Applicability of section 44C of the Indian Income-tax Act on non-resident companies governed by the India-Canada Double Taxation Avoidance Agreement (DTAA).2. Interpretation of the non-discrimination clause in the DTAA.3. Comparison of the provisions of Article 7 and Article 24 of the DTAA.4. Determination of whether section 44C constitutes a restriction or a fair method of estimation.5. The jurisdiction of the CIT(A) in remanding the matter to the Assessing Officer.Issue-wise Detailed Analysis:1. Applicability of Section 44C of the Indian Income-tax Act:The primary legal issue in these appeals was whether the limitation on the deduction of head office expenditure under section 44C of the Indian Income-tax Act applies to non-resident companies governed by the India-Canada DTAA, particularly in light of the non-discrimination clause in the DTAA. The Assessing Officer (AO) argued that Article 7(4) of the DTAA mandates that profits of the permanent establishment (PE) be computed in accordance with the domestic taxation laws, thus justifying the application of section 44C. However, the CIT(A) had differing views in different years, sometimes upholding the AO's decision and at other times siding with the assessee.2. Interpretation of the Non-discrimination Clause in the DTAA:Article 24(2) of the DTAA, which is modeled after Article 24(3) of the OECD Model Convention, was central to the case. It states that the taxation on a PE of a foreign enterprise should not be less favorable than that on domestic enterprises carrying on the same activities. The Tribunal referred to the OECD Commentary, which clarifies that deductions for head office expenses should be allowed without any restrictions other than those imposed on resident enterprises. Thus, the Tribunal concluded that section 44C's limitation on head office expenditure deduction constitutes discrimination against non-resident companies, violating Article 24(2).3. Comparison of Provisions of Article 7 and Article 24 of the DTAA:The Tribunal analyzed whether the general provisions of Article 7 concerning the computation of business profits should be read subject to the specific provisions of Article 24, or vice versa. Citing legal maxims and precedents, the Tribunal held that specific provisions (Article 24) override general provisions (Article 7). Therefore, the non-discrimination clause in Article 24(2) prevails, meaning that the limitation under section 44C cannot be applied to the PE of a Canadian company.4. Determination of Whether Section 44C Constitutes a Restriction or a Fair Method of Estimation:The revenue argued that section 44C is not a restriction but a fair method of allocating head office overheads. The Tribunal dismissed this argument, referencing the Bombay High Court's decision in CIT v. Deutsche Bank AG, which held that section 44C places a ceiling on the deduction of head office expenditure and is thus a restrictive provision. The Tribunal concluded that section 44C's limitation is discriminatory and not merely a fair method of estimation.5. Jurisdiction of the CIT(A) in Remanding the Matter to the Assessing Officer:For the assessment years 1994-95 and 1996-97, the CIT(A) remitted the matter back to the AO to re-examine the quantum of allowable expenditure. The Tribunal found this direction justified, emphasizing that only expenses fairly allocable to the PE should be allowed, without the section 44C limitation. For the assessment year 1993-94, the Tribunal restored the matter to the AO for fresh adjudication, aligning with the decision for the other years.Conclusion:The Tribunal dismissed the revenue's appeals and allowed the assessee's appeal for statistical purposes. It held that the limitation on the deduction of head office expenditure under section 44C does not apply to non-resident companies under the India-Canada DTAA due to the non-discrimination clause in Article 24(2). The Tribunal directed the AO to allow deductions for head office expenses fairly allocable to the PE without applying the section 44C limitation.