2024 (5) TMI 1172 - HC - Income Tax

Foreign company must pay higher tax rate as non-domestic company under Section 2(22A) Income Tax Act 1961

The Calcutta HC held that a foreign company incorporated outside India must be taxed at the higher rate applicable to 'company other than a domestic ... Classification/Nature of company for taxation purposes - Classification and Tax Rates for Domestic and Foreign Companies - levy of income tax at the higher rate applicable to a foreign company or rate of tax applicable to a domestic company - DTAA between India Netherlands - Whether appellant is a domestic company? - HELD THAT:- The word ‘domestic company’ has been defined in Section 2 (22A) of the Act, 1961 which has been reproduced above. As per definition, an Indian company or any other company fulfilling specified conditions, is a domestic company. The word “company” has been defined in Section 2 (17) of the Act, 1961 which means (i) an Indian Company, (ii) any body corporate incorporated by or under the laws of a country outside India. - Thus, the Appellant is a company falling under Clause (ii) of Section 2 (17) of the Act, 1961. As per the Act, 1961 there are two class of companies, namely –“Domestic Company” defined u/s 2 (22A) and “Company other than Domestic Company”. It is admitted case of the appellant that it is not a “Domestic Company” rather it is a “foreign company” i.e. “Company other than Domestic Company” as defined in Section 2 (23A) of the Act 1961. Thus, the appellant company is not a domestic company but it is company other than a domestic company. Applicable rate of Income Tax And Classification of Companies for rate of Tax - The first category is “domestic company”. The second category is “Company other than a domestic Company”. Undisputedly the appellant’s company is not a domestic company. Therefore, the appellant’s company falls under the other class i.e. “a company other than a domestic company” as classified in paragraph E of the Finance Act. In ground no. (IV) of the Memorandum of Appeal (afore-quoted) the appellants have admitted themselves to be a foreign company i.e. “company other than a domestic company”. Thus, it is admitted case of the appellant that it is not a domestic company as it is neither an “Indian Company” nor “any other Company” as it has not made prescribed arrangement in respect of its income liable to income tax under the Income Tax Act for declaration and payment within India of the dividends including dividend on preference shares payable out of such income. The classification made in paragraph E of the First Part of the First Schedule to the Finance Act, has not been questioned by the appellants. The classification so made is a valid classification. In Amalgamated Tea Estates Co. Ltd. v. State of Kerala [1974 (4) TMI 32 - SUPREME COURT] Constitution Bench of the Hon’ble Supreme Court considered the challenge to the validity of classification of a domestic company and of a foreign company for rate of tax under the Kerala Agricultural Income Tax Act and held that the classification of a domestic company and foreign company for rate of tax is valid. Interpretation of Taxing Statue and Treaty - It is admitted case of the appellant that it is not a “Domestic Company” but “a Company other than a Domestic Company” Paragraph E of Part I of the First Schedule of the Finance Act, in clear terms, provides for separate rate of tax for company “other than a domestic company” and separate rate of tax for “domestic company,”. Therefore, there being no ambiguity in classification and rates of tax, the appellant is liable to tax at the rates prescribed for a company “other than a domestic company”. It is not the case of the appellant that it fall within the phrase “any other company ” used in Section 2 (22A) of the Act 1961 or in Clause (a) of Sub-section 12 of Section 2 of the Finance Act defining domestic company. Therefore, the appellant is liable to tax at the rate specified for a company other than a domestic company. Whether Explanation to Section 90 of the Act, 1961 is in conflict with Article 24 (2) of the DTAA? - Article 24 (2) of the DTAA prevents from less favourable levy between two enterprises falling under one and the same class and not between one falling under one class and the other falling under another class. The phrase 'shall not be less favourably levied' used in Article 24 (2) of the DTAA simply means that taxation on a company falling under 'any other company' under Section 2 (22A) of the Act, 1961 shall not be less favourably levied than an' Indian company' which both fall under one and the same class i.e. Domestic Company under Section 2 (22A) of the Act, 1961 read with Section 2 (1), Section 2 (12) (a) and Paragraph 'E' of Part I of the First Schedule of the Finance Act, which provisions existed even prior to the DTAA in question and the clarificatory retrospective insertion of the Explanation in Section 90 by the Finance Act, 2001. Thus, there is no conflict between the Explanation to Section 90 of the Act, 1961 and Article 24 (2) of the DTAA. The rate of tax has been provided by the Finance Act which also defines “domestic company”. It classified companies in two categories for rate of tax, namely (I) domestic company and (II) a company other than a domestic company. Thus even without explanation appended to Section 90 of the Act 1961, the appellant company is liable to tax as a “company other than a domestic company” at the rate prescribed in paragraph E of Part I of the First Schedule to the Finance Act. The Explanation has merely clarified the existing position of law. Thus explanation to Section 90 is not in conflict with the provision of DTAA and that there is no conflict between the provision of the DTAA and the Income Tax Act 1961 in regard to non-discrimination. Effect of circular number 333 dated 02.04.1982 issued by CBDT and the letter of the CBDT dated 21.11.1945 - The aforesaid circular of the CBDT deals with the situation where there is a specific provision in the DTAA then that provision will prevail over the general provisions contained in the Income Tax Act, 1961. We find that there is no specific provision in the DTAA providing for rate of tax applicable to a “domestic company” or a “company other than domestic company” as defined under the Act, 1961 and as prescribed in and paragraph E of the First Part of the First Schedule to the Finance Act read with Section 2 (1) and Section 2 (12) (a) of the Finance Act. The aforesaid circular states that the DTAA also provides that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement. We find that the DTAA in question including Article 24 (2) does not contain any provision contrary to the provisions of Section 2 (22A) and Section 4 of the Act 1961 and Section 2 (1), Section 2 (12) (a) of the Finance Act and rate of tax as provided in paragraph E of part one of the first schedule to the Finance Act. Therefore, circular no. 333 dated 02.04.1982 is of no help to the appellant. So far as the letter dated 21.11.1994 issued by Joint Secretary and addressed to Chief Commissioner of Income Tax II Kolkata is concerned, we find that it was written in response to a D.O. letter of the Chief Commissioner. The said letter is a D.O. letter. It is not a circular issued in exercise of power conferred under Section 119 of the Income Tax Act, 1961. That apart the said letter is in conflict with plain and unambiguous provisions of the Act 1961 and the Finance Act which we have discussed above. That apart the opinion expressed in the aforesaid letter was also changed even before the Explanation was inserted. We also find ourselves in agreement with the reasons recorded by the ITAT in paragraph 59 of the impugned order. Accordingly we hold that the said letter cannot override the plain and unambiguous provision of the Act, 1961 and the Finance Act. A taxing statute cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed. Once, Parliament has legislated, the Court must first look at the legislation and construe the language employed in it. If the terms of the legislative enactment do not suffer from any ambiguity or lack of clarity they must be given effect to even if they do not carry out the treaty obligations. But the treaty or the Protocol or the convention becomes important if the meaning of the expressions used by the Parliament is not clear and can be construed in more than one way. Since the expressions used in the aforesaid provisions of the Act 1961 and the Finance Act are clear and capable of only one construction as discussed and there is no ambiguity or lack of clarity, therefore, the provision of the Act 1961 and the provision of the Finance Act, as discussed above, are bound to be given full effect. Accordingly it is held that the appellant is liable to tax at the rate applicable to a company other than a domestic company as provided in the Finance Act. Issues Involved:1. Whether the appellant is liable to income tax at the higher rate applicable to a foreign company or at the rate applicable to a domestic company.2. Interpretation of the provisions of sections 2(22A) and 90 of the Income Tax Act, 1961, read with CBDT circular No. 333 dated April 2, 1982, and Article 24(2) of the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands.Summary:1. Applicable Rate of Income Tax and Classification of Companies for Rate of Tax:The court examined whether the appellant, a foreign company, should be taxed at the rate applicable to a domestic company. The appellant is a branch of a foreign bank and is not a 'domestic company' under Section 2(22A) of the Income Tax Act, 1961. The Finance Act classifies companies into 'domestic company' and 'company other than a domestic company,' with different tax rates for each. The court held that the appellant, being a foreign company, falls under the latter category and is liable to tax at the rate specified for a company other than a domestic company.2. Interpretation of Taxing Statute and Treaty:The court emphasized the principle of interpreting tax statutes strictly and according to their plain meaning. It held that when the words in a statute are clear and unambiguous, the court must give effect to them as they are. The court referred to several judgments, including Commissioner of Customs (Import) Mumbai v. Dilip Kumar & Company & Ors. (2018) 9 SCC 1, to support this principle.3. Whether Explanation to Section 90 of the Act, 1961 is in Conflict with Article 24(2) of the DTAA:The court examined whether the Explanation to Section 90, which clarifies that the charge of tax at a higher rate for foreign companies is not discriminatory, conflicts with Article 24(2) of the DTAA. It held that the Explanation is clarificatory and consistent with the existing provisions of the Income Tax Act and the Finance Act. Therefore, there is no conflict between the Explanation to Section 90 and Article 24(2) of the DTAA.4. Effect of Circular No. 333 dated 02.04.1982 Issued by CBDT and the Letter of the CBDT dated 21.11.1994:The court reviewed the CBDT circular and letter, which suggested that the appellant should be taxed at the rate applicable to a domestic company. However, it held that these administrative instructions cannot override the clear statutory provisions of the Income Tax Act and the Finance Act. The court cited several judgments, including Assistant Commissioner of Income Tax (Exemptions) vs. Ahmedabad Urban Development Authority (2023) 4 SCC 561, to support this view.Conclusion:The court concluded that the appellant is liable to tax at the rate applicable to a company other than a domestic company. The substantial question of law was answered in favor of the revenue and against the assessee. All the appeals and the writ petition were dismissed.