TaxTMI 
TaxTMI 
2005 (11) TMI 372
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....sing Officer in taxing it at the rate of 48 per cent being the tax rate for non-domestic companies as against claim of assessee to tax it at a rate of 35 per cent being the rate applicable to domestic companies. 3. The assessee is a banking company based at Korea. It has a branch in India. It is involved in normal Banking activities including financing of foreign trade and foreign exchange transactions. The assessee-company claimed that the tax rate as applicable to Indian companies carrying on similar business should be applied in its case instead of the tax rate applicable to non-resident companies. To press for its arguments the assessee-company relied upon article 25 of the Double Tax Avoidance Agreement (DTAA) between India and Korea. The Assessing Officer considered the provisions of article 25 of the DTAA with Korea and rejected the claim. While rejecting the claim he gave his reasonings in para 3 of his order. 4. In brief arguments of the learned Assessing Officer are : 1. Article 25 of DTAA provides protection against discrimination on the basis of nationality. 2.1 Non-discrimination clause can be invoked only when the foreign entity and Indian enti....
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....For this proposition the learned counsel relied on following judgments: 1. CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.) 2. CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP) 3. 137 ITR (St.) 1. 4. Explanation to section 90 does not apply in the case of a person who is national of a country with which India has entered with DTAA. It only applies in cases where- (i) The country of which the assessee is a national has not entered into a treaty for DTAA with India. (ii) The DTAA treaty is silent about discrimination clause. (iii) The assessment year involved is after 2004, when last amendment in the Explanation was carried out. (iv) The treaty itself provides for differential rate treatment like in the case of DTAA with U.S. The treaty itself provides for differential rate treatment of 15 per cent. 6. On the other hand learned DR supported the orders of authorities below. He further relied on the decision of ITAT Bench, Mumbai in Credit Llyonnais v. Dy. CIT [IT Appeal No. 6540 (Mum.) of 1995 assessment year 1991-92]; [2005] 94 ITD 401, Mumbai and in the case of ABN Amro Bank NV v. Jt. CIT ITAT K....
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....irtue of DTAA with Malaysia the capital gains arising on sale of property in Malaysia is not assessable in India. (iv) In CIT v. R.M. Muthaiah [1993] 202 ITR 508 (Kar.), it was held that by virtue of articles 6, 7, 8 and 9 of DTAA with Malaysia, income from sources mentioned in these articles are not assessable in India even though IT Act provided otherwise. (v) In Arabian Express Line Ltd. of UK v. Union of India [1995] 212 ITR 31 (Guj.), it was held, by virtue of article 9 of the DTAA with U.K., that entire shipping income of the petitioner, was exempt from tax in India. (vi) In CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654^2 (SC) it was held that by virtue of articles II(1)(b), IV, V, VI, VII(1), XXII(2), where assessee does not have any P.E. in India, he is not assessable in India. From all these decisions, which have been brought to our notice, we find that the main issue in the dispute has been the taxability of an item under IT Act. Thus, the issue has centered around assessability of an assessee in India or about computation of income as to whether certain item is to be included in the total income or not, which is apparent....
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....h evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The following sub-section (3) is inserted after sub-section (2) of section 90 by the Finance Act, 2003, w.e.f. 1-4-2004 : (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation.-For the removal of doubts, it is hereby....
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....is working in the same circumstances as the Indian banks because former has no such constraints and it is free to operate their profit-making apparatus to the maximum extent possible. In our view, the provision of non-discrimination has nothing to do with the rate of tax, which is dealt with separately by other articles of the DTAA. Article 25 has deliberately not used the words 'tax was charged' as against other articles, which provide for rates of tax. Curiously article 25 has used expression 'levy of taxation'. In the context of all these articles levy of taxation in the article 25 cannot mean or cannot be construed in the sense of prescribing rate of tax on the total income of the assessee. So far as conflicting provisions of Income-tax Act, 1961 and article 25 are concerned, we do not envisage any conflict. Conflict, if any, must be between two clear and specific provisions of Income-tax Act, 1961 and DTAA. The Income-tax Act, 1961 does not provide the rate at which income tax will be levied. The rates are provided by the Annual Finance Act and are determined by the fiscal policy of the Government. Section 90(2) so does the agreement do override the provisions of the Finance A....
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....income or a category of income on the status of an assessee has been prescribed in DTAA then, there cannot be any conflict with the Income-tax Act, 1961. Therefore, DTAA as such will not prevail over Income-tax Act, 1961 and hence rates as applicable to domestic companies cannot be applied to non-domestic companies. In the present case, no rates for charging non-domestic companies has been provided in DTAA with Korea. Hence, it cannot be said that DTAA is in conflict with Income-tax Act, 1961. In fact, no such real conflict has been demonstrated. 3. Let us examine article 25 of the DTAA with Korea so as to find out whether it is in conflict with any provisions of the Act : "Article : 25 1. The nationals of a Contacting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other, or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levi....
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....cable. One is 'nationals' and the other is 'in the same circumstances'. 8.1 The concept of 'national' has been considered in the decision of ITAT 'J' Bench, Mumbai in Credit Llyonnais v. Dy. CIT [2005] 94 TTJ (Mum.) 1074; 94 ITD 401 (Mum.). The question involved therein was whether deduction under section 80M is available to foreign companies like it is available to Indian domestic companies, and if not, whether it is a discrimination, hit by non-discrimination clause in article 21 of Indo-French DTAA, the language of which is pari materia with that of article 25(1) of Indo-Korean DTAA. Para 6 of that order reads as under : "6. The applicable India France Double Taxation Avoidance Agreement is India-France DTAA dated 26th March, 1969 (reported in 76 ITR Statute 1). In this tax treaty, article XXI provided as follows: Article XXI The nationals of one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirements connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other Contracting State in the same circumstances are or may be su....
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....n appears to discriminate on the ground of nationality. It is interesting to note that while sections 80R and 80RRA deal with the citizenship also, many similar sections such as section 80QQB, section 80RR, section 80RRB, there is no reference to citizenship, and the requirements are only with respect of residence. It is also very important to appreciate that such Indian and French nationals, as are compared for the purpose of finding out whether or not taxation etc. of one of which is more burdensome than the other, must be 'in the same circumstances'. Elaborating upon the scope of expression 'in the same circumstances', OECD commentary, inter alia, observes as follows: 'The expression "in the same circumstances" refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of ordinary taxation laws and regulations, in substantially similar circumstances both in law and on fact.... The expression "in the same circumstances" would be sufficient by itself to establish that a taxpayer who is resident of a Contracting State and one who is not a resident of a Contracting State are not in the same circumstances. In fact, whilst t....
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....f UN Model convention and so the article 25(1) of Indo Korean DTAA provided that the term 'national' in article 3(g) of Indo Korean DTAA showed that those who may be entitled to invoke article 25 of Indo Korean DTAA are individuals (possessing the nationality of a Contracting State), legal persons, partnerships and associations. Article 3(g) of Indo Korean DTAA reads as under: "3(g) the term 'national' means any individual possessing the nationality of a Contracting State and any legal person, partnership, association or other entity deriving its status as such from the laws in force in the Contracting State." 8.3 From this it appears to us that corporate bodies are not covered in the definition of nationals. Since 'legal person' come side by side with individual in the above definition, than from the principal of 'Nocitur-a-soccii' the 'legal person' would not be a corporate body. Further, 'other entity' as used in article 3(7) would also not include 'corporate bodies' unless they are declared 'nationals' under the law of that State. Similar views were expressed by professor Dr. Klaus Vogel, University of Munich, in his treatise on 'Double taxation convention' third ed....
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....ons of society. The percentage of advances to priority sector is more in case of domestic banking company as compared to non-domestic banking company. Hence it cannot be said that domestic banking company and non-domestic company are working under the same circumstances. Klaus Vogel's commentary on Page 1288 refers to this aspect as under : 17.3. [same circumstances] : "The expression 'in the same circumstances' refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of the applications of the ordinary taxation laws and regulations, in substantially similar circumstances both in law and in fact. The expression 'in particular with respect to residence' makes clear that the residence of the taxpayers is one of the factors that are relevant in determining whether taxpayers are placed in similar circumstances. The expression 'in the same circumstances' would be sufficient by itself to establish that a taxpayer who is a resident of a Contracting State and one who is not a resident of that State are not in the same circumstances. In fact, whilst the expression 'in particular with respect to residence' did not appear in the 1....
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....ove, elsewhere in this order, Explanation to it was introduced with effect from 1-4-1962 with retrospective effect. It clearly provided that charging of a foreign company at a higher rate will not be regarded as less favourable as compared to domestic company. The Departmental Circular No. 14 of 2001 explains the effect of Explanation as under : "54. Amendment in section 90 relating to agreement with foreign countries 54.1 Through Finance Act, 2001, an Explanation has been inserted in section 90 of the Income-tax Act to clarify that the charge of the tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as a less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India. 54.2 This amendment takes effect retrospectively from 1st April, 1962 and, accordingly, applies in relation to the assessment year 1962-63 and subsequent assessment years. [Section 48]" 11.1 In our....
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....act the DTAA provides for a mechanism for communicating with each other any amendment in law made by one country. Article 2 para 4 of DTAA is relevant. It is extracted below : "4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any substantial changes, which have been made in their respective taxation laws." 11.2 It is, thus, evident that DTAA recognizes the fact that the amendments made in the IT Act are not affected in so far or they are not in conflict with the specific provisions of the DTAA. Therefore, we are of the view that the amendment made in section 90(2) by way of insertion of Explanation is applicable insofar as it is not in conflict with the provision of DTAA. In the context of amendment made in the section 90 w.r.e.f. 1-4-1962 it is useful to quote para 49 in ABN Amro Bank NV's case (supra) wherein Hon'ble ITAT has quoted from the decision of Hon'ble SC in Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey AIR 1984 SC 667 : ....
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.... : (i) The area of operation of Explanation and of Art. 25(1) are in different field. (ii) Explanation clarifies the position as it always stood. (iii) DTAA did not prescribe any separate or specific rate or any particular criteria to be applied on income of Korean companies assessed in India. (iv) Explanation does not deal with assessability of any item of income. Secondly, even if any conflict is envisaged, still then the provision of DTAA will yield to law passed independently by Parliament in view of decision of Hon'ble Supreme Court in Gramophone Co. of India Ltd.'s case (supra). 12. The last argument of the learned counsel is that, at least sub-paragraph 2 of Article 25, will hold the field. According to the assessee, as existence of a P.E. of assessee-company is not disputed, Indian Enterprises such as domestic companies and co-operative societies are charged with lesser rates as compared to non-resident companies. This situation is less favourable for assessee-company. Therefore, according to learned counsel, it hits Article 25(2). In our view this stand is misconceived. The words 'less favourable' have not been defined either in the D....