TaxTMI 
TaxTMI 
2008 (9) TMI 439
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....ner (Appeals) has erred in rejecting taxpayer's claim for deduction under Section 44C in respect of head office expenses; and, third, that the Commissioner (Appeals) has erred in rejecting taxpayer's claim for incentive deduction under Section 80HHE in respect of profits of business of software exports. In last grievance, the taxpayer has alleged that denying him deduction under Section 80HHE constitutes discrimination against the taxpayer - something which is expressly forbidden by Article 26(2) of Convention for the Avoidance Of Double Taxation dated 12th September 1989 entered into between India and the United States (hereinafter referred to as 'Indo US tax treaty') We will take up this issue, which is the main issue in this appeal, first: Grievance of the assessee regarding discrimination 3. Grievance of the assessee is that non granting of deduction under Section 80HHE to the assessee amounts to 'discrimination' against the Indian branch of the assessee company, which is not permissible in terms of Article 26 of the Indo US tax treaty. The assessee also contends that the Commissioner (Appeals) has erred in not granting this deduction on merits, as al....
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....39; interchangeably with 'any other taxable unit'. 8. A plain look at these provisions make it clear that as far as a company is concerned, only an Indian company is entitled to deduction under Section 80HHE. The expression 'Indian company' is also neatly defined under the Act. Under Section 2(26) of the Act, it means 'a company formed and registered under the Companies Act' and includes certain other categories of other entities formed or incorporated in India. 9. There is no dispute that the deduction under Section 80HHE is in the nature of an incentive deduction and is Computed with reference to the profits of the eligible business, though the deduction is made in computation of gross total income and from the aggregate of incomes under various heads of income. In the public circular # 621, issued by the Central Board of Direct Taxes at the time of introducing this section it was stated that "with a view to providing fiscal incentive for promoting export of computer software, a new Section 80HHE has been inserted in the income Tax Act for providing tax concession...". In the aforesaid circular it was further stated that "under the new provisions, Indian....
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....rticle 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or paragraph 8 of article 12 (Royalties and Fees for Included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected. 5. Nothing in this article shall be construed as preventing either Contracting State from imposing the taxes described in Article 14 (Permanent Establishment Tax) or the limitations described in paragraph 3 of Article 7 (Business profits). 11. The assesses ....
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....amily responsibilities which it grants to its own residents. 13. The scope of non discrimination clause thus does not extend to the limitation on deductions under Article 7(3) as also to the reliefs and reductions on account of civil status and family responsibilities, which essentially are personal allowances in nature. Barring these two exceptions, prima facie, the non discrimination clause seeks parity in all other areas of taxability of the foreign enterprise in respect of the profits of the profits attributable to the PE vis-a-vis taxability of Indian enterprise engaged in the same business. Basic case of the assessee: 14. The case of the assessee is that while an Indian company is allowed deduction under Section 80HHE, any foreign company, including, of course, a US resident company, is not entitled to the deduction under Section 80HHE, and that this non availability of deduction to the assessee company, which is a US resident, amounts to discrimination against the taxability on PE of the US resident company operating in India. It is contended that deduction under Section 80HHE is a tax incentive to promote export of computer software out of India, and that non availabilit....
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....gn company. In view of this line of reasoning, and having noted that the assessee has withdrawn the claim on the advice of the Price Waterhouse Coopers, the Assessing Officer declined the deduction to the assessee. 17. When the assessee came up in appeal before the Commissioner (Appeals), and despite this flip flop, the assessee raised the grievance against deduction under Section 80HHE being declined. The main plank of assessee's grievance, for the first time, was that in view of Article 26(2) of the Indo US tax treaty, the assessee company being declined the aforesaid deduction will amount to discrimination vis-a-vis an Indian enterprise engaged in the same business. 18. Learned Commissioner (Appeals) turned down the plea of the assessee for more reasons than one. 19. The Commissioner (Appeals) was of the view that once the assessee has himself withdrawn the claim of deduction, by way of a conscious decision and on the basis of a legal advice taken from a reputed expert, it cannot be open to revive the same claim. He referred to the judgment of Hon'ble Bombay High Court in the case of Ramesh Chandra & Co. v. CIT 168 ITR 375 wherein it is held that "where an assessee ha....
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.... US resident company operating in India, which is forbidden under Article 26(2) of the Indo US tax treaty. In response to our pointing out that the taxability in India is of the US company, though in respect of profits attributable to its permanent establishment in India, and not of the PE per se, learned Counsel fairly accepts that to that extent, the authorities below, as also the assessee, have proceeded on an erroneous assumption that the taxable unit is the Indian branch office of the US company, but adds that this aspect of the matter, however, does not make a difference inasmuch as the taxability of the US company in India is only in respect of the profits attributable to the PE, and the resultant tax liability is to be viewed as "taxation on a permanent establishment". It is pointed out that the expression 'Indian company' is a defined expression under Section 2(26) which require a company, in order to be treated as an 'Indian company', to be formed and registered under the Indian Companies Act. That condition can never be fulfilled by the PE of a US company, and, therefore, the law is discriminatory for PE of a US company vis-a-vis an Indian company. It is ....
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....rvations made by Klaus Vogel to the effect that the expression 'civil status' is only relevant for individuals, and, on that basis, it is contended that the reasoning adopted by the Commissioner (Appeals), in holding that provisions of Article 26(2) will not apply to the facts of this case, is fallacious, As regards learned Commissioner (Appeals)'s reasoning that once the legislature itself restricts the allowance of deduction from export profits only to an Indian company or to a person resident in India, this restriction on deduction cannot be removed on the basis non discrimination provisions set out in a tax treaty, it was submitted that this proposition has been impliedly rejected by the Tribunal on several occasions by holding that the provisions of the Income Tax Act which are contrary to the discrimination provisions in a tax treaty are to be read down accordingly. We are meticulously taken through decisions of the coordinate benches of this Tribunal in the cases of Credit Lyonnais v. DCIT 94 ITO 401, Metchem Canada v. DCIT 100 ITD 259, Mashreque Bank v. DCIT 108 TTJ 554 and Herbalife International India Pvt. Ltd. v. ACIT 101 ITD 4500 dealing with the different f....
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....m the Assessing Officer, and the same having been duly furnished by the Assessing Officer; it cannot be open to now seek another opportunity for examining the facts. Such contentions, according to the learned Counsel, are only delaying tactics and no useful purpose will be served by accepting these contentions. Learned Counsel submits that the issue in appeal is a purely legal question and it can be decided on the basis of admitted facts on record. In the tight of the above submissions and very elaborate supporting arguments, we are urged to hold that the assessee, being protected against discrimination vis-a-vis Indian enterprises, is entitled to deduction under Section 80HHE of the Act. 24. Mr. Srinivasan, on the other hand, relied upon the orders of the authorities below and primarily harped upon his contention that the assessee having accepted to withdraw the claim for deduction under Section 80HHE, he cannot be allowed to revive the claim at this stage, and that the appeal filed by the assessee should be treated as non est. In support of this argument, learned Departmental Representative invited our attention to the Hon'ble Bombay High Court's judgment in the case of ....
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....e, learned Departmental Representative replied in negative. 25. In rejoinder, learned Counsel for the assessee submitted that a tax treaty, in terms of the provisions of Section 90 of the Income Tax Act. overrides the provisions of the Income Tax Act. It is, therefore, futile to argue that because there is a specific provision in the Income Tax Act, disentitling a foreign company from deduction under Section 80HHE, such a disentitlement cannot be read down because of the provisions of the tax treaty. An incentive deduction, according to the learned Counsel, is no exception. A tax treaty provides that there cannot be a tax discrimination between a PE and enterprise of the source state, but the Indian Income Tax Act provides that a enterprise of a source state is entitled to certain incentive deduction which the is not available to the PE of the treaty partner. Obviously, to that extent, there is a conflict in the domestic law and tax treaty provisions, and once there is a conflict, as is the settled law, the provisions of the tax treaty prevail. As regards the binding nature of the OECD commentary, learned Counsel submits that the co ordinate benches are consistently following the ....
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....tax treaties and the principles on the basis of which such provisions need to be construed. Role of OECD Commentary in interpretating the provisions of the Indo US tax treaty 28. In the course of his arguments, learned Counsel has very heavily relied upon the OECD Commentary, and has urged us to interpret the scope of Article 26(2) of Indo US tax treaty in the light of the observations made in the OECD Commentary. Reliance is placed on several decisions by co ordinate benches of this Tribunal, including in the cases of Graphite India Ltd. v. DCIT 86 ITD 384, Metchem Canada Inc (supra), Herbalife International (supra), Balaji Shipping (UK) Ltd. v. DDIT etc, wherein it is held that OECD commentary constitutes contemporanea expositio, that the OECD Commentary has a key role in interpretating various expressions which find place in the OECD Model Convention, and wherein the scope of expressions appearing in the various tax treaties were construed in the light of the OECD Model Convention commentary. 29. Learned Counsel's attention was invited to the Technical Explanation on the US Model Convention issued by the tax administration of the treaty partner country, i.e. USA, and it w....
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.... that may be updated from time to time to reflect further consideration of various provisions in light of experience, subsequent treaty negotiations, economic, judicial, legislative or regulatory developments in the United States, and changes in the nature or significance of transactions between U.S. and foreign persons. The Technical Explanation is also intended to be ambulatory, and may be expanded to deal with new issues that may arise in the future. The Model will be more useful if it is understood which developments have given rise to alterations in the Model, rather than leaving such judgments to be inferred from actual treaties concluded after the release of the Model. The manner and timing of such updates will be subsequently determined. The Model does not present alternative provisions that might be included in a particular treaty under a particular sot of circumstances. For example, a treaty with a country that has a remittance basis or an integrated system of corporate taxation might have to depart significantly in several respects from the Model. For this reason and others, the Model is not intended to represent an ideal United States income tax treaty. Rather, a prin....
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....racts with the treaty and the provisions of U.S. tax law, precedents in the partner's other treaties, the relative economic positions of the two treaty partners, the considerations that gave rise to the negotiations, and the numerous other considerations that give rise to any agreement between two sovereign nations. 30. A plain reading of this preamble would show that the US Model Convention is drawn from a variety of sources, including U.S. Treasury Department's draft Model Income Tax Convention, OECD Model Convention prior U.S. income tax treaties, U.S. negotiating experience, U.S. tax laws etc OECD Model Convention is only one of the several inputs which have produced this US Model Convention. It is, therefore, futile to proceed on the basis that US Model Convention, or its underlying approach, is always in harmony with the approach of the OECD. It is also specifically mentioned that "References are made in the Technical Explanation to the OECD commentaries, where appropriate, to note similarities and differences" which shows that Technical Explanation is to be considered on standalone basis - unless, of course, when a reference is made to the OECD Model to highlight si....
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.... the OECD Model Convention Commentary has to give way to the Technical Explanation to the US Model Convention. 32. In view of the above discussions, in our considered view, the OECD Model Convention Commentary has a role to play in construing the scope of provisions of the Indo US tax treaty, only to the extent (i) the relevant provision, though based on OECD Model Convention, is not explained in the Technical Explanation to the US Model Convention, and (ii) specific reference is made to the OECD Model Convention commentary, and the interpretation so given by the OECD Model Convention commentary is not in conflict with the Technical Explanation to the US Model Convention. The case before us does not fit into any of these categories because while the relevant clause of the nondiscrimination article is the same as Article 24(2) of the OECD Model Convention, the scope of nondiscrimination is, as we will see a little later, well defined in the Technical Explanation and also because the scheme of non discrimination in the OECD Model Convention and US Model Convention is materially different. It is only elementary that a sound interpretation of a sub article of nondiscrimination article....
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....re unreasonable, arbitrary or irrelevant Whether a distinction is unreasonable, arbitrary or irrelevant is a matter of judgment.... 35. It is thus clear that in order to establish discrimination, not only that a taxpayer has to demonstrate that he has been subjected to different treatment vis-a-vis other taxpayers, but also that the ground for this differentiation in treatment is unreasonable, arbitrary or irrelevant. 36. This principle on reasonableness; of the differential treatment is also evident from the Technical Explanation issued by the treaty partner State, i.e. United States, to Article 26(2) its Model Convention which, barring the opening words "Except where the provisions of paragraph 3 of article 7 (Business Profits) apply" is exactly the same as Article 26(2) of Indo US tax treaty. This Explanation, inter alia, observes as follows: ...There are cases, however; where the two enterprises would not be similarly situated and differences in treatment may be warranted. For instance, it would not be a violation of the nondiscrimination protection of paragraph 2 to require the foreign enterprise to provide information in a reasonable manner that may be different from the ....
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.... 14 (Permanent Establishment Tax)". A Permanent Establishment Tax, which is levied in the United States, obviously puts an additional tax burden on the PEs of Indian enterprise vis-à-vis US enterprise, and yet it is not construed as an act of discrimination against the PEs of Indian enterprise. This strengthens our interpretation that to make out a case for discrimination, demonstrating differential treatment, by itself, cannot suffice. In our considered view, to establish a case discrimination, it is to be established that the basis of differentiation lacks any coherent relationship with the object ought to be achieved by the legal provision which is alleged to be discriminatory. 39. The Technical Explanation on the US Model Convention having recognized that "there are cases, however, where the two enterprises would not be similarly situated and differences in treatment may be warranted", what becomes very important and crucial is to take note of the dissimilarities in the position of a PE of the US company vis-à-vis an Indian enterprise, and to test reasonableness on the limitations on; incentive deduction under Section 80HHE in the light of these dissimilarities. ....
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....n a tax treaty constitute a set of special rules providing protection against discrimination against nationals or residents of another contracting State. Learned authors, however, hasten to add as follows: ...However, not all differences in tax treatment, either between nationals of the two States or between residents of the two States, are violations of the prohibition against non discrimination. Rather, the non discrimination provisions...would apply only if the nationals or residents of two States are similarly situated. Thus...(it) does not cover indirect indiscrimination and does not introduce an all encompassing non discrimination rule.... 42. In the light of the above discussions, we are of the considered view that a differential treatment to the PE of the US tax resident, by itself, cannot be treated as covered by the scope of rule prohibiting non discrimination. The true test for deciding whether or not there is a non discrimination is whether or not the resident enterprise and the PE of the other contracting State, who are similarly situated, get the same tax treatment or not. There could indeed be different tax treatments to the PE of the other contracting State and t....
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....entities formed or incorporated in India.'. So far as the companies, i.e. corporate taxpayers, are concerned, this Section provides that only Indian companies are eligible for deduction. By implication, it would appear that, while Indian companies are eligible for this deduction irrespective of their residential status, the foreign companies are not eligible for this deduction. That inference, however, would be clearly fallacious and misleading for the reason that in terms of Section 6(3)(i) of the Act, however, residential company of an Indian company will always be 'resident' It is thus clearly discernable from the scheme of the eligibility for deduction under Section 80HHE that all taxpayers who are eligible for deduction are 'residents' under the Indian Income Tax Act, and that all taxpayers who are not eligible for deduction under Section 80HHE are also not 'residents' under the Indian Income Tax Act. The residential status is thus the actual basis (sic) differentiation, so far as eligibility for deduction under Section 80HHE (sic) concerned. 47. When it was put to the learned Counsel that the true basis of differentiation is 'residential statu....
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.... the basis of differentiation has a reasonable relationship with the object sought to be achieved by this incentive deduction. In this view of the matter, while there is indeed a differentiation in treatment, such a differentiation cannot be said to be discriminatory. 49. One of the arguments of the learned Counsel is that when other incentive deductions such as under Section 10A, 10B, 80HH and 80I are available to the non resident taxpayers, it cannot be open to the revenue authorities to take a stand that other incentive deductions should be confined to resident taxpayers alone. The proposition which emerges from this argument is that by granting certain other fiscal export incentives to non resident taxpayers, there is some kind of an estoppel against these incentives being declined to the non residents. It is only elementary that there cannot be any estoppel against the statute, and, in any event, it is not relevant to examine that aspect of the matter because all that is necessary to be examined, for our purposes, is whether or not there is discrimination against the PEs of US companies when deduction under Section 80HHE is declined to non resident taxpayers in India. That is....
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....ns on it because in this case the Tribunal came to the conclusion that there was no discrimination at all and the question of reasonableness would not have been relevant anyway. Does a difference in wording of a treaty provision, as used in two different treaties signed by a contracting State, necessarily imply difference in intent and scope of the treaty provision? 54. One of the points argued before us was that whenever India entered into a tax treaty which did not want to prohibit grant of certain deductions only to the residents, it was so specifically provided in the treaty itself. Our attention was invited to tax treaty that India has entered into with Republic of Belarus which specifically provides as follows: Article 25: Non Discrimination ... 3. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs, reductions and deductions for taxation purposes which are by law available only to persons who are so resident. 55. It is contended that since India US tax treaty does not contain any such specific clause, the existence of such a clause cannot be inferred. 56....
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....in mind the fact that treaties are products of bilateral negotiations and that the wordings of a treaty essentially depend on comfort level of the treaty partners with the words so employed, we are of the considered opinion that merely because different expressions are used in two different tax treaties entered into by a country, it is not necessary that these different expressions must lead to distinct results. There can be more than one path to reach the same destination, and merely because someone has chosen a different path, it is not necessary that he much reach a different destination as well. Not too much needs to be read into deviations in wordings employed in tax treaties, particularly when the meaning of the words so employed is clear and unambiguous. The proposition advanced by the learned Counsel has also been specifically rejected by a coordinate bench of this Tribunal in the case of Mashreque Bank (supra). We have no reasons to take any other view of the matter than the view so taken by the co ordinate bench, and we, accordingly, reject this contention as well. It does not meet our approval. Observations made by eminent international tax law experts on the scope of n....
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....ty are so radically different than the OECD Model Convention that Vogel has gone to the extent of calling one of these provisions as incompatible with the scheme of Article 24(3). In Indo US treaty it is mentioned that Nothing in this non discrimination article "shall be construed as preventing either Contracting State from imposing the taxes described in Article 14 (Permanent Establishment Tax)..." but Vogel finds this scheme of permanent establishment tax as compatible with Article 24(3) of the OECD Model Convention and observes as follows: In contrast, the imposition of special taxes on the profits of foreign enterprises' permanent establishment is incompatible with Article 24(3) to the extent such taxes are not imposed on the profits of permanent establishments of the domestic enterprises. Such branch profits may be equivalent to the withholding tax levied on distributions made by the subsidiaries on foreign enterprises; however, this does not change the fact that the branch profit tax is more burdensome on permanent establishments than comparable domestic enterprises 63. Let us not forget that we are dealing with a tax treaty which entitles United States to levy a perma....
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....rest paid by the permanent establishment of such a company in India to the head office may be subject in India to a tax in addition to the tax imposable under the other provisions of this Convention at a rate which shall not exceed the rate specified in paragraph 2(a) of Article 11 (Interest). 64. Unlike the thrust of OECD Model Convention, as argued before us, the differentiation between resident taxpayers and non resident taxpayers is thus institutionalized in the Indo US tax treaty. Therefore, at best what matters is the reasonableness of such differentiation which is time and again referred to at various places in the Technical Explanation. Therefore, it is not even necessary to examine the matter from the OECD's point of view. The assessee, therefore, derives no advantage from the observations made by Phillip Baker and Klaus Vogel in their respective books. Reasoning adopted by the Commissioner (Appeals): 65. As we proceed to conclude our judgment on this issue of discrimination, we wish to make some observations on the reasoning adopted by the Commissioner (Appeals) in holding that the assessee was not entitled to deduction under Section 80HHE. 66. The first reason ad....
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....in India and, therefore, on account of such "civil status", any allowance to the Indian company would not be considered to be discriminatory in nature when denying such allowance to an American company. The expression 'civil status' appears along with the expression 'family responsibilities' in the Indo US tax treaty's non discrimination clause, as this clause states that "This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents". It is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. Broom's Legal Maxims (10th Edn.) observes that "It is a rule laid down by Lord Bacon, that copulat....
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....ed by the learned Commissioner (Appeals). We confirm the conclusion arrived at by the Commissioner (Appeals) on this issue and decline to interfere in the matter to that extent. 71. Ground No. 3, i.e. the ground of appeal against denial of deduction under Section 80HHE to the assessee, is thus rejected. Grievance against set off being declined 72. The next issue that requires our consideration is whether or not the CIT(A) was justified in declining set off of losses incurred by new unit, which is eligible for deduction under Section 10A, against taxable business profits of the taxpayer. 73. Learned representatives fairly agree that the issue is appeal is covered by several decisions of the co ordinate benches, including in the cases of Mindtree Consulting Pvt. Ltd. v. ACIT 102 TTJ 691 and Honeywell International India Pvt. Ltd. v. DCIT 108 TTJ 924, in favour of the assessee. Learned Departmental Representative however vehemently relied upon the orders of the authorities below and justified the same. 74. We, however, see no reasons to take any other view of the matter than the view so taken by the co ordinate bench. Respectfully following the same we hold that so far as the pre....