TaxTMI 
TaxTMI 
2007 (4) TMI 394
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....income in respect of expenses attributable to its permanent establishment in India". 3. Briefly stated, the material facts, so far as relevant to this grievance of the assessee, are like this. The assessee is a non resident banking company incorporated in the United Arab Emirates. The assessee is carrying on business in India through its permanent establishment, i.e., branches (PE, in short); and is admittedly assessable to tax in India in respect of the profits attributable to the PE. In the course of scrutiny assessment proceedings in respect of its such income taxable in India, the Assessing Officer disallowed Rs. 2,22,309 out of travelling expenses, under section 37(3) r.w. rule 6D, Rs. 2,88,494 out of entertainment expenses, under section 37(2A) of the Act, Rs. 72,746 out of employer's contribution to provident fund, under section 43B of the Act, added Rs. 72,746 on account of employees contribution to the provident fund account under section 36(1)(va) r.w.s. 2(24)( x) of the Act, and Rs. 6,809 out of payments disallowable under section 40A(3) of the Act. These disallowances were made apparently on the basis of information furnished by the assessee himself, and there is no ....
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....sequently followed in other orders cited at the bar, the co-ordinate bench was dealing with the question whether restriction on deduction of head office expenses under section 44C is to be viewed as contrary to the provisions of the India France tax treaty. A note was taken of Article III(3) of the treaty which provided that, as summarised in the said order, "whatever is reasonably allocable out of the expenditure incurred in both the countries, should be allocated and allowed as deduction". In the immediately following sentences and in the same breath, the co-ordinate bench concluded that "We consider it a very specific provision in computing the income of a non-resident having activities in India and France. Therefore, the provisions of section 44C will not be applicable". In the present case, we are not concerned with section 44C. In any event, having carefully gone through this decision, we find that the attention of the Tribunal was apparently not invited to the provisions of Article XIX(1) of the same treaty which specifically provided that "the laws in force in either of the contracting state will continue to govern the taxation of income in the respective contracting state ....
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.... case of Degremont International (supra) was not applied in subsequent decisions in the context of the tax treaties where specific provisions are made to the effect that the laws in force in either of the contracting state will continue to govern the taxation of income in respective contracting state except where express provisions to the contrary are made in the such agreement. The decision in Mitsubishi Heavy Industries Ltd.'s case (supra) is a later decision, is arrived at after taking into account all the relevant provisions and not only article III(3) in isolation, and is specifically in the context of artificial disallowances under section 40A(3), section 40A(12), section 37(2A) and section 43B etc. We have to accept the fact, as clearly discernible from unequivocal stand taken by another co-ordinate bench in Mitsubishi's Heavy Industries Ltd.'s case (supra), the Degremont International's case (supra) was rendered by oversight and oblivious of the provisions of article XIX(1) of old India France Tax treaty. In any event, it does not have precedence value in the context of India UAE tax treaty, particularly as we take note of the provisions of article 25(1) of the tax treaty r....
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....the assessee's contention that the provisions dealing with deduction of tax at source under section 195 presupposes the existence of two distinct and separate entities which is absent in the present case. On both the grounds therefore section 40(a)( i) does not come into play. Disallowance of interest on this by invoking the provisions of this section would not be justified." 8. As regards the question of impermissiblity of artificial disallowances by the virtue of the provisions of article 7(3), there is no specific finding by the Special Bench. We reproduce below the entire paragraph, on which learned counsel has placed the reliance, for ready reference : 50. On a close reading of these provisions, we find that clauses 1, 2, 5, 6 and 7 and article 7 of the Japanese DTAA are similarly worded as clauses 1, 2, 4, 5 and 6 of the Netherlands DTAA. Clause 3 of the Japanese DTAA merely incorporates the first part of clause 3(a) of Netherlands DTAA and the proviso placing a restriction by the law of the State in which PE is situate are not incorporated. Again, clause 3(b) of Netherlands DTAA which prohibits allowance of certain expenditure is also missing in Japanese DTAA. There is....
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....f whether or not provisions of section 40(a)( i) laying down disallowance of expenditure in respect of which tax withholding liability is not discharged by the assessee, apply to the assessee, there was no tax withholding requirement on payments from branch office to head office, or vice versa. The question about applicability of section 40(a)( i), therefore, was entirely academic in this context. Merely because the Special Bench has noted an argument, even though it has not adjudicated upon the same, it cannot be inferred that the Special Bench has approved the said argument. We reject the plea of the learned counsel. The next line of defence by the learned counsel is his reliance on the Tribunal's decision in the case of Siemans Aktiengesellshaft v. ITO [1987] 22 ITD 87 (Bom.)(SB). It is submitted that in this decision, the Tribunal has held that definition of 'royalty' under the Income-tax Act will not have any bearing in deciding the scope of expression 'royalty' for the purposes of the tax treaty. We are in respectful agreement with the views so stated by the Tribunal, but we are unable to comprehend as to how this proposition can enable us to ignore the specific provisions of....
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....re better off than residents. Even without the aid of a provisions similar to one which exists in article 25(1) of the India UAE tax treaty, the Court answered this question in negative and decided the issue against the tax payer. In the case of Utah Mines v. The Queen 92 DTC 6194, and while dealing with the issue whether in view of the provisions of article 7(3) of Canadian-US Tax Treaty, royalties and by PE of US company to the provincial Government, which were not tax deductible under the Candian domestic tax law, could be allowed as deduction, the Court observed : The interpretation proposed by the appellant, on the other hand, would have the effect of giving a US taxpayer with a permanent establishment in Canada a more favourable tax treatment than its Canadian competitor engaged in the same business in this country. Such a result would not be in accordance with the policy expressed in the preamble to the Convention and indeed would be contrary to it. It would take much clearer language than a simple reference to 'all expenses' to bring it about. 11. In a situation, therefore in which a specific provisions like the one in article 25(1) in India-UAE tax treaty exists, the....
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....nd that an exemption for aliens essentially seeks to restrict host country's jurisdiction to tax, and it is well settled that, as has also been observed by Prof Kees Van Raad, "while nationality is virtually unconditionally employed as a ground of non-discrimination...., it is not related to the use of nationality as jurisdictional basis for income taxes..." (Non discrimination in Income Tax Law - Prof Kees Van Raad, at page 15). Therefore, non taxability of any of an aliens income sourced in the host country cannot be viewed as discrimination in his favour. It is, therefore, too far fetched to suggest that availability of certain tax exemptions to aliens shows that reverse discrimination is generally permissible under the scheme of Indian Income-tax Act. We reject this proposition. As far as learned counsel's reference to section 115A is concerned, this is also fallacious inasmuch as it does not take into the fact that the related incomes are taxed on gross basis in the hands of the non residents taxpayers and net basis in the hands of the resident tax payers. Dealing with this aspect of the matter, a co-ordinate bench of this Tribunal, in the case of Dy. CIT v. Boston Consulting ....
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....duction will be allowed in computing the income from the aforesaid sources, regardless of whether the agreement has been..... 36.1 ...income by way of royalty or fees for technical services received by them from Indian concerns in pursuance of approved agreements made on or after the 1st April, 1976, will now be charged to tax at flat rates applicable on the gross amount of such income. The rates of income-tax to be applied in respect of such income have been specified in new section 115A of the Income-tax Act and are as follows : ** ** ** (iii) Income by way of fees for technical services received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after the 1st April 1976, will be charged to tax at the rate of 40 per cent on the gross amount of such fees." The periodic changes in section 44D have been accompanied by the corresponding changes in section 115A. It is thus clear that non deduction of expenses under section 44D, which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under section115A...' 13. In this view of the matter, the comparison of lower ....
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....lear that one of the basic principles governing the interpretation of tax treaties is that a tax treaty must be interpreted in good faith. Article 31(1) of the Vienna Convention governing the interpretation of tax treaties also lays down that, "a treaty shall be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its objects and purpose". It is therefore important that undue emphasis should not, in any event, be given to a legalistic and literal approach in interpreting a tax treaty; the effort should always be made to harmonise the interpretation of the words of the treaty with its object and purpose. Viewed in this perspective, in our considered view, it is not possible to proceed on the basis that a discrimination in favour of the non resident tax payer by the host country, without any specific provision of that effect, can be inferred. It is only elementary that a tax treaty is required to be read as a whole and, when the India UAE tax treaty is read as a whole, the scheme of non discrimination is clearly discernible from the scheme of things. It would, therefore, be quite inappropriate t....
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.... negotiations, deviation in language of the tax treaties entered into by a country, does not necessarily indicate a deviation in objectives and purpose that these tax treaties seek to achieve. It is also not common that some of the Contracting States are too conservative in their approach and insist on certain provisions as a measure of abundant caution (ex abudanti coutela). As regards learned counsel's contention that once a Contracting State enters into a tax treaty it cannot be open to that Contracting State to shy away from implementing such a tax treaty on the ground that the consequences of its implementation could be contrary to the intentions of the treaty, we quite agree with the learned counsel. However, what is needed to be implemented is a clear and unambiguous provision. At best, if there is an ambiguity in the provisions, it needs to be resolved by way of harmonious construction in accordance with the well settled principles of tax treaties. It cannot be, in any event, open to anyone to embark upon the voyage of discovery in search of hidden meanings or intent of parties, not supported by the specific expressions to articulate the same, and then proceed to give life ....
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....would have to be determined under the domestic law of the State of permanent establishment even if this were not expressly stipulated. . . ." 20. In this view of the matter, unless there is a specific provision to the effect that restrictions under domestic tax laws on deduction of expenses are to be ignored, the same will have application in computation of PE profits. The specific provisions in some of the treaties (such as India-Australia tax treaty for example) to the effect that profits are to be computed according to the domestic law of the Contracting State in which a PE is situated, is, according to the learned scholar, no more than clarificatory in nature. A school of thought thus exists that specific mention of the applicability of domestic law limitations in computation of profits of the permanent establishment is justified as a measure of abundant caution and is made ex abudanti coutela. It is, however, not necessary to go into that aspect of the matter any further at this stage. 21. In view of the above discussions, and particularly bearing in mind the provisions of article 25(1) of the India-UAE tax treaty, we are of the considered view that the limitations under....
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....ating in the other Contracting State vis-a-vis enterprises of that other Contracting State carrying on the same activities in the same circumstances or under the same conditions. It is thus submitted that the non-discrimination clause is activity based and not form of ownership based. In other words, according to the learned counsel, as long as PE and the enterprise of the other Contracting State are carrying on the same activities in the same circumstances or under the same conditions, there cannot be any discrimination between the two. Our attention is then invited to the provisions of section 2(19) and section 2(22A) which define the expression 'co-operative society' and 'domestic company' respectively. It is pointed out that the definition of the expression 'co-operative society' covers only such co-operative societies as are registered in India, the definition of expression 'company' also includes a company incorporated abroad. Learned counsel submits that a co-operative society incorporated in UAE, or for that purpose, anywhere abroad, cannot be assessed as such in India. Learned counsel again emphasizes that non discrimination sought to be prevented by article 24(2) is not d....
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....a Permanent Establishment, in one State, of a non-resident enterprise must not be taxed any less favourably that the enterprise of that State. To that extent, we agree with the learned counsel. However, we do not thinks that for the purpose of this comparison, it is possible to ignore the form of ownership. A comparison can only be made with comparables. Under article 3(1)(g), the expression 'enterprise of a Contracting State' has been defined 'as an enterprise carried on by the resident of that Contracting State'. And, on the basis of definition of 'resident' under article 4(1) and of 'person' under article 3(1)(e), the expression 'resident' refers to "any individual, a company, and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States, who, under the laws of that State, is liable to tax therein by the reason of his domicile, residence, place of management, place of incorporation or any other criterion of similar nature". The form of ownership, therefore, becomes relevant. An enterprise cannot be considered in isolation with the person (i.e. individual, company or co operative society etc.) which carries it on. It....
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....erprise to be taxed, this criterion should be taken into account additionally when determining the enterprise with which to compare the permanent establishment. Since the latter is only a part of the enterprise that has its head office in another State and no independent legal status, the comparison should attach to the legal set up of that enterprise. . . ." 32. We agree with the distinguished scholar. It would thus follow that comparison of a PE of one state carrying on business in the other Contracting State, with enterprise in the other Contracting State is not activity specific alone, it must bear in mind the form of ownership as well. The question of comparing tax rates applicable on PE with that of the domestic co-operative societies carrying on the same business can only arise when the enterprise of which it is a PE also the same form of ownership i.e. co-operative society. 33. We would also like to refer to another interesting observation made by Prof. Vogel, which is relevant in the context of issue in appeal before us. On the same page i.e. 1315, Prof. Vogel has also observed as follows: Protection against discrimination does not include special tax privileges g....