TaxTMI 
TaxTMI 
2011 (3) TMI 3
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....n "resident in India" whereas assessee is admittedly a non-resident. 3. The case of the assessee, on the other hand, was that section 80HHE of the Act has to be read in conjunction with the tax-treaty entered into between India and United States of America ("DTAA" for short). Section 90(2) of the Act provides that where Government of India has entered into a DTAA with the Government of any other country or jurisdiction, provisions of the Act shall apply to the extent they are more beneficial to the assessee. Pressing into service the language employed in article 26 of DTAA, it was contended before the tax authorities that a resident of India is undoubtedly entitled to deduction under section 80HHE of the Act in respect of profits from export of software out of India, subject to other conditions. Therefore, in the same line of activity in India, the profits of PE of the assessee cannot be treated less favourably for taxation when compared to the taxation of profits of an enterprise owned by a resident in India. Thus, assessee should also be extended benefit of deduction under section 80HHE of the Act. The AO as well as the CIT(A) rejected the contention of the assessee. On an appea....
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.... them are not functioning under similar circumstances. On a conjoint reading of paragraphs (1) & (2) of article 26, it was finally held that denial of deduction would be justified. 4.1 Aggrieved by this order, assessee is in appeal before us. The ground taken by him is already reproduced above. 5. Before us, the ld. Counsel referred to the provisions contained in section 80HHE. It is fairly admitted by him that the assessee, being a non-resident person, is not entitled to the deduction on the basis of this provision. However, it is submitted that the assessee is a resident of U.S.A. Therefore, the provision contained in article 26(2) of the DTAA would be applicable to his case. Article 26(2) specifically covers the controversy at hand, meaning thereby that if the assessee is denied deduction under section 80HHE, then it will amount to taxation of the PE of the enterprise of the USA less favourably than an enterprise of resident-assessee situated in the same circumstances. He read out the provision, which states that except where the provision of paragraph (3) of article 7 apply, the taxation on PE which an enterprise of a contracting State carries on in the other contracting Stat....
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....ng the provisions of the DTAA. In this connection reference is made to the decision in the case of Union of India and Anr. v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC), in which references to the OECD model has been made. At page 741 it is mentioned that there is a further reason in support of our view. The expression "liable to taxation" has been adopted from the OECD model convention. Similarly, in the case of CIT v. Vijay Ship Breaking Corporation (2002) 261 ITR 113 (Guj), such references have been made. On the basis of these references, his case is that although the commentary is not binding on Indian Tax Authorities and Courts, references can be usefully made to it in case of any ambiguity in the provision as words are borrowed in the convention from OECD model. 5.2 Reverting to facts of this case, it is submitted that the provisions contained in paragraph (2) of the article 26 of the DTAA are analogous to the provisions contained in paragraph (3) of article 24 of OECD model convention. Klaus Vogel has opined that the question whether the enterprise of the contracting State has been less favourably treated for taxation can be found out by computing tax as if -(i) he is a r....
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....mentary in which it is mentioned that non-resident enterprises are not entitled to tax advantages attached to the activities, exercise of which is strictly reserved, on account of national interest, defence production or national economy etc. to domestic enterprises, since non-resident enterprises are not allowed to engage in such activities. On the basis of this paragraph, it is his case that grant of benefit under section 80HHE to a foreign enterprise does not protect the national economy as the non-resident person can take away the foreign exchange earned by it out of India. Paragraph (2) of article 26 will apply only when the resident and non-resident persons are placed under similar situations. Since the assessee is not similarly placed as resident software exporters, the benefit of this provision will not be available to him. 6.2 It was submitted that the OECD commentary is not binding on Indian authorities and India has also expressed reservation on a number of points made in the commentary. In this connection, he referred to the decision in the case of CIT v. PVAL Kulandagan Chettiar (Decd.), through LRs, (2004) 267 ITR 654 (SC), in which it is mentioned that taxation poli....
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....d, on the ground of national interest, defence protection or the national economy etc. to domestic enterprises, since non-resident enterprises are not allowed to engage in any such activities. Since assessee is allowed to engage in activities of export of software, the assessee is very much entitled to the claim of deduction under section 80HHE of the Act. The ld. counsel also referred to para No. 6 of the Mumbai Tribunal's order in the case of Metchem Canada Inc. (supra) observing that provision of article 24(2) of Indo-Canadian treaty, and the provisions of article of 24(3) of the OECD model convention are in pari-materia. Therefore, the OECD convention commentary plays key role in determining the scope and connotation of article 24(2) of the Indo-Canadian DTAA. Similar interpretation will have to be placed on the DTAA. Thus, article 26(2) is very much applicable in the present case to claim deduction under section 80HHE of the Act. 8. We have considered the facts of the case and the submissions made before us. Facts, in short, are that assessee is a citizen of America and is a non-resident person in India in all the years under consideration. He has carried on the business of e....
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....not more beneficial to the assessee, it is argued that the assessee ought to be assessed under the DTAA. In this connection, article 26(2) provides that except where the provisions of Paragraph (3) of article 7 (business profits) apply, the taxation of a PE of an enterprise of a contracting State in the other contracting State shall not be less favorably levied in that other State contracting than the tax levied on enterprises of that other contracting State carrying on the same activities. The paragraph contains some more provisions regarding deduction on account of civil status etc., which are not relevant to the facts of this case. While interpreting this Paragraph, it is also necessary to examine the contents of Paragraph (3) of article 7. This paragraph deals with deduction of expenses incurred for the purpose of the business of the PE, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purpose of the enterprise as a whole. On consideration, it is seen that these provisions are not material insofar the facts of our case are concerned because there is no dispute abou....
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....Azadi Bachao Andolan, Vijay Ship Breaking Corporation etc. Therefore, reference can usefully be made to the commentary on OECD Model Convention. However, the crux of the matter is as to what will constitute taxation "not being levied less favorably". According to him, the commentary mentions that in such a case calculation can be made by treating the assessee as non-resident and thereafter as resident person. If the tax is calculated at a higher amount by treating him as a non-resident person, it can be concluded that the assessee has been taxed less favorably than the resident person carrying on same activities. It is also his case that there is no question of there not being a reasonable discrimination, as understood in Article 14, for the simple reason that provisions of the Act have to be in conformity with the Constitution of India. It is not his case that section 80HHE of the IT Act is ultra vires the Constitution. His case is that by dint of article 26(2), the assessee has to be treated at par with the resident person carrying on the same activities. 8.3 Having considered the rival submissions, we may now deal with them. Insofar as the status of commentary on OECD Model Con....
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....we consider it unnecessary to examine the commentary or the technical explanation for coming to a conclusion in the matter. 8.4 The learned DR referred to the Board Circular No. 621 dated 19th December, 1991, issued after introduction of section 80HHE in the Income-tax Act. Reference is made to Para No. 34 of the circular which states that with a view to provide fiscal incentives for export of computer software, a new section 80HHE has been inserted in the Act for providing tax concession similar to the earlier section 80HHC of the IT Act. We do not find anything in the circular which could be of aid in interpreting Article 26(2). Further, reference has been made to Circular No. 333 dated 02nd April, 1992, issued in respect of "Treaty Override". The heading of the Circular is "specific provision made in double taxation avoidance agreement - whether it would prevail or general provisions contained in the Income-tax Act". In Para 3, it is mentioned that where double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed irrespective of the provisions in the Income-tax Act, which is the basic law, i.e. the Income-tax Act will....
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.... also a dispute regarding the words "same activities" used in article 26. The case of the ld. Counsel is that the assessee is engaged in the business of export of software in the same manner in which a number of Indian enterprises are exporting software. The fact that the assessee has been allowed to export software shows that the business does not fall in the prohibited category. Accordingly, the assessee's case has to be compared with the case of an Indian enterprise engaged in the business of exporting software. If that is done, the assessee would be entitled to deduction under section 80HHE on the same footing and in the same manner as the deduction is admissible to a resident assessee. On the other hand, the case of the ld. DR is that various deductions under section 80HHE, 10A or 10B are area specific or industry specific. However, he was not able to carry this argument any further. The case of the ld. Counsel is that the provision contained in section 80HHE is industry specific and the assessee is not precluded in any manner from conducting this business in India. We agree with this view as no debate seems to be feasible in this regard. Therefore, we are of the view that the....