TaxTMI 
TaxTMI 
2015 (1) TMI 1255
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....rticle 7(3) of the convention between the Government of India and the Government of UAE", and that "in computing the taxable income in India, the tax treaty allows a deduction for all the expenses wherever incurred and reasonably allocated to the permanent establishment, including its share of executive and general administrative expenses". 3. This issue requiring our adjudication is set out in a rather narrow, but somewhat peculiar, set of facts. The assessee before us is a banking company incorporated in, and tax resident of, the United Arab Emirates which is also carrying on business in India through its branches in New Delhi and Mumbai. During the course of the assessment proceedings, the Assessing Officer noted that while the assessee has not claimed deduction under section 44C, which is restricted to 5% of its profits, as there was no profit in the current year, it was noted that the assessee has contended, in a note appended to the income tax return, "the claim is made without prejudice to their claim that as per Article 7 of the Double Taxation Avoidance Agreement between the Governments of India and UAE, all expenses incurred for the purpose of the business of the, incl....
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....ion before a coordinate bench of this Tribunal, in assessee's own case for the assessment year 1996-97, and, vide order dated 13th April 2007, the issue was decided against the assessee. This decision is a reported decision and the relevant citations is Mashreq Bank Vs JDIT [(2007) 14 SOT 1 (Mum)]. In this decision, the coordinate bench had observed, inter alia, as follows: 6. ......... .......we take note of the provisions of Article 25(1) of the tax treaty read with observations made by another co-ordinate bench in Mitsubishi's case (supra). The provisions in India UAE tax treaty are specific and admit no ambiguity on question of applicability of domestic tax laws in the absence of specific provisions to the contrary under the tax treaty. 7. When this was pointed out to the learned counsel, our attention was drawn to the decision of Kolkata Special Bench in the case of ABN Amro Bank Vs ADIT (97 ITD SB 89) wherein, on materially identical provision, the Special Bench has held that provisions of Section 40(a)(i) are not applicable in the case of interest paid by the banks. In our considered view, however, the ABN Amro Special Bench decision (supra) is certainl....
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.... 6 and 7 of Article 7 of the Japanese DTAA are similarly worded as clauses 1, 2, 4, 5 and 6 of 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 no other material difference between the two treaties. As pointed out by the learned counsel of the assessee, there are no restrictive covenants in Article 7 for allowance of expenses incurred for the purposes of PE either by the prefix of the words "in accordance with the provisions of the law of that State" or by the suffix words "and subject to limitations of taxation laws of that State". This may be one of the other alternate reasons for not invoking the provisions of section 40(a)(i) of the Income-tax Act for disallowing the payment of interest in computing the income of the assessee through the PE. However, here also, the deeming fiction of treating the PE as a different and separate entity dealing wholly independently with the enter....
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....the case of Siemens AG Vs ITO (22 ITD SB 87). 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 the India UAE tax treaty. Article 25(1) of the applicable India UAE tax treaty [(1994) 205 ITR (St) 49] specifically provides 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 present agreement". We are, therefore, not persuaded by the submissions of the learned counsel to the effect that provisions of the Income Tax Act have no application in the matter. In view of this specific provision being a part of the India UAE tax treaty, it cannot be said that by the virtue of Article 7(3) of the treaty which provides that "in determining the profits of a permanent establishment, ....
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.... 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 provision like the one in Article 25(1) in India UAE tax treaty exists, there cannot be any occasion to ignore the limitations on deduction of expenses under the domestic tax legislation. That would be a case of, what can be termed as, reverse discrimination. Just as much a discrimination against a non resident assessee is undesirable, a discrimination against the resident assessee is also not desirable. As is the underlying philosophy of the tax treaties, there should be a level paying ground for everyone, which must include domestic enterprises as well. When we put this to the learned counsel, it was submitted that it is not clear as to what was the language in the relevant DTAA and whether the Government of Canada has used different terminology in different tax treaties.....
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....scrimination is generally permissible under the scheme of Indian Income Tax Act. We reject this proposition. As far as learned counsel's reference to Section 115 A 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 DCIT Vs Boston Consulting Group Pte Ltd (94 ITD 31) has observed as follows: 19. Section 44D was brought on the statute, w.e.f. 1st April 1976, by the Finance Act, 1976. By the same Finance Act, section 115A was also introduced. Section 44D, as we have already seen, provides for taxation of royalties and fees for technical services on gross basis and without allowing any deduction for expenses incurred in earning the said income. Section 115A, on the other hand, provides for a special rate of tax on certain incomes including the income from royalties and fees for technical services. The provisions of these two sections are required to be read together inasmuch as while one section lays down ....
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.... 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." [Emphasis supplied] 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 section 115A...." 13. In this view of the matter, the comparison of lower tax rates under section 115A, for the non resident tax payers, with higher tax rates under the Finance Act, for resident tax payers, is irrelevant. In the case of non residents, there were restrictions for deduction of expenses incurred for earning dividend, interest and royalty incomes. It is also interesting to note that when the restrictions under section 44D ceased to be effective from 1st April 2003, the corresponding income, i.e. income from royalties and fees for technical services, was also taken out of the ambit of lower tax rate under section 115A. Therefore, taxability of incomes at a lower rat....
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....g 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 to 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 discernable from the scheme of things. It would, therefore, be quite inappropriate to read the provisions of the treaty in such a manner so as to result in discrimination against residents of one of the Contracting States; there can not be any justification for exception to this underlying object of the treaty by reading the provisions of tax treaty in such a manner as to permit discrimination against residents of PE host country. When a treaty explicitly seeks to ensure that there is no discrimination by the host country against a non resident, who is resident of the other Contracting State, it is really incongruous to interpret the treaty....
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....ng 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 to these inferences- that too in a manner contrary to the scheme of the tax treaty. We donot find any specific provision in the tax treaty which supports learned counsel's understanding about the scope of Article 7(3) ; infact, we find, as we have elaborated earlier, specific provision in the treaty which is quite to the contrary. We, therefore, reject this contention as well. 17. In United Kingdom, Revenue's International Tax Handbook (IH 859) uses exactly the same argument, as was taken by the Federal Court of Canada in ....
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....s 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 the domestic tax laws are to be taken into account for the purposes of computing profits of a PE under Article 7(3) of the India UAE tax treaty. The plea of the assessee is incompatible with overall scheme of the tax treaties, particularly India UAE tax treaty. Accordingly, the conclusion arrived at by the CIT(A) meets our approval. We confirm the same and decline to interfere in the matter. 7. Around the same time when this decision was delivered, a protocol, amending the Indo UAE ....
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.... reported and unreported decisions. As for the facets of the protocol amendment on this aspect which were left untouched by the Tribunal decisions and on which there were no binding precedents, obviously these aspects were held to be applicable from the date on which protocol came into force. 8. In effect thus, the protocol made the legal provision, with respect to tax liability in UAE not being sine qua non to avail the treaty benefits in India, unambiguous and without any doubt. What was implicit in the treaty earlier, was made explicit by the protocol later. That is the view the coordinate benches and has been consistently taken all along. Hon'ble Bombay High Court has also approved the decision so taken, for the pre 1st April 2008 period, in judgment reported as DIT Vs ICICI Bank Limited [(2015) 370 ITR 17 (Bom)]. 9. On the question of limitations under the domestic law being implicit in the application of article 7 read with article 25(1) also, the coordinate bench, in assessee's own case for the assessment year, had decided the issue. It was held that these limitations are implicit in article 25(1). However, when this issue came up before Ahmedabad A bench of this Tribu....
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....States have kept in mind the provisions of the tax laws of the contracting States and to avoid any conflict in the provisions of the tax laws vis-à-vis the provisions of Treaty, as also to streamline the applicable provisions of law, it was decided to incorporate that, for the purposes of determining the profits of a permanent establishment, there shall be allowed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore by this amendment in the Article the applicability of provisions of section 44C has been enforced, nevertheless with effect from 1st day of April- 2008. 10. While so rendering the decision, the bench had no occasion to take note of earlier direct decision on this issue in the case of Mashreq Bank (supra) or the provisions of Article 25(1) of India UAE tax treaty. As to what could be the impact of such an omission, we find guidance from a full bench decision of Hon'ble Andhra Pradesh High Court in the case of CIT Vs B R Constructions [(1993) 202 ITR 222 (AP FC)] as ....
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....light what is perceived by them as an erroneous decision in the earlier case. In such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger Bench." 6. In the case of Venus Jewels (supra), the co-ordinate Bench held the issue in favour of the Revenue on the basis of Hon'ble Bombay High Court's judgment in the case of Indian Rayon Corpn. Ltd. (supra) and on the basis of the Hon'ble Rajasthan High Court's judgment in the case of Vijay Industries vs. CIT (2004) 190 CTR (Raj) 90 : (2004) 270 ITR 175 (Raj). What is held in Vijay Industries' case (supra) is the same thing as held in Indian Rayon Corpn. Ltd.'s case (supra) but then Plastiblends India Ltd.'s case (supra) having considered the school of thought emerging from these materially similar decisions, has come to the conclusion that where the assessee has not claimed the depreciation in its books of account, the same cannot be thrust upon the assessee for the purpose of computing the deduction under s. 80- IA. Following the Hon'ble Supreme Court's judgment in Paras Laminates (P) Ltd.'s case (supra) it was not open to the Bench to take any other view of the matter than t....
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.... Judge to alter or vary from, according to his private sentiment. . . .' The ratio decidendi of a judgment is a binding precedent. The hierarchy of authority with regard to binding precedent is summed up in para 28 at p. 158 of 'Salmond on Jurisprudence', Twelfth Edition, as follows : 'The general rule is that a Court is bound by the decision of all Courts higher than itself. A High Court Judge cannot question a decision of the Court of Appeal, nor can the Court of Appeal refuse to follow judgments of the House of Lords. A corollary of the rule is that the Courts are bound only by decisions of higher Courts and not by those of lower or equal rank. A High Court Judge is not bound by a previous High Court decision, though he will normally follow it on the principle of judicial comity, in order to avoid conflict of authority and to secure certainty and uniformity in the administration of justice. If he refuses to follow it, he cannot overrule it; both decisions stand and the resulting antimony must wait for a higher Court to settle.' The principles applicable to Courts in India were laid down by Subba Rao, J. (as he then was) in Dr. K.C. Nambiar vs. ....
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..... It may be noticed that precedent ceases to be a binding precedent : (i) if it is reversed or overruled by a higher Court, (ii) when it is affirmed or reversed on a different ground, (iii) when it is inconsistent with the earlier decisions of the same rank, (iv) when it is sub silentio, and (v) when it is rendered per incuriam. In para 578 at p. 297 of Halsbury's Laws of England, Fourth Edition, the rule of per incuriam is stated as follows : 'A decision is given per incuriam when the Court has acted in ignorance of a previous decision of its own or of a Court of co-ordinate jurisdiction which covered the case before it, in which case it must be decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.' In Punjab Land Development & Reclamation Corpn. Ltd. vs. Presiding Officer, Labour Court (1990) 3 SCC 682 : (1990) 77 FJR 17 (SC), the Supreme Court explained the expression 'per incuriam' thus : 'The Latin expre....
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....ed : 'It is not open to the Court of Appeal to give gratuitous advice to Judges of first instance to ignore decisions of the House of Lords in this way'. It is recognised that the rule of per incuriam is of limited application and will be applicable only in the rarest of rare cases. Therefore, when a learned single Judge or a Division Bench doubts the correctness of an otherwise binding precedent, the appropriate course would be to refer the case to a Division Bench or Full Bench, as the case may be, for an authoritative pronouncement on the question involved as indicated above. The abovesaid two questions are answered as indicated above." 9. It is thus beyond dispute that a decision which is per incuriam is not a binding judicial precedent. It is also well-settled that when it is not open to a High Court Bench to differ from the decision of a Bench of equal strength, it cannot also be open to a Bench of this Tribunal to differ from the view taken by a co-ordinate Bench of equal strength. The only option in case one doubts the correctness of such a decision is to refer the matter for constitution of a larger Bench. A decision ignoring this rule of pre....
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....n alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein". Quite clearly, therefore, a judicial precedent holds good in law as long as it is not specifically reversed or disapproved a higher judicial forum, as long as a higher judicial forum has not held anything directly and clearly contrary to the ratio decidendi of the said judicial precedent, and unless, of course, such a judicial precedent itself is held to be per incurium on the basis of the well settled legal principles. In view of this discussion, our humble understanding is that a binding judicial precedent does not cease to be good law merely because some observations have been made by a higher forum which may, by a long drawn process of reasoning and inference, be construed as contrary to the reasoning adopted by such a judicial precedent. That precisely, however, is at best the case before us. 13. The observations made in Abhu Dhabi decision (supra), which, according to the learned counsel, overrule the Mashreq Bank decision (supra), are as follows: "60. First we shall deal with the arguments of Shri G....
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....said article so as to make the provisions thereof in consonance with section 90(2) of the domestic law is that if there is an express provision made in the convention giving benefit to the assessee which is contrary to the domestic law, then the provisions of treaty can be relied upon which shall override and prevail over the provisions of the domestic law to give any benefit expressly given to the assessee under the treaty. The decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) fully supports this view." 14. We have carefully gone through the above observations. What we could make out from these observations is this. The argument of the learned DR was that since there is a specific provision regarding taxation of interest income in article 7 read with article 11 of the Indo Japanese tax treaty, to that extent the provisions of the Income Tax Act, 1961 are not applicable. Interestingly, if the provisions of the Act were to be applied in this case, as were eventually applied, interest income received from self to self would not have been taxable. It was in this context that the five member bench held that such a contention is contrary to the scheme of t....
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....member bench had no occasion to even remotely deal with the question which was adjudicated by the division bench in Mashreq Bank's case nor that decision was even cited before the five member bench. 16. In our considered view, the observations made by the five member bench cannot be considered to be reversing, disapproving or even dealing with the ratio decidendi of Mashreq Bank decision. 17. That apart, the very concept of a binding precedent being "implied overruled" is a myth. A binding precedent is either overruled by another precedent from the higher forum, or it is not overruled. The concept of a binding precedent being "impliedly overruled", in our humble understanding, would amount to rejecting a binding precedent on the basis of what logically follows from another binding precedent of a higher forum, but then this such a process of rejecting the judicial precedents is contrary to the principles laid down by Hon'ble jurisdictional High Court in the case of Sudhir Jayantilal Mulji (supra). 18. What follows from the entire discussion is this. Reverse discrimination, which would have resulted by not restricting the deductions in the light of the provisions of the Act ....
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....se there is a more specific and more unambiguous provisions post the protocol amendment, one cannot come to the conclusion that the judicial precedent, rendered by a coordinate bench, even without these specific and unambiguous expressions, cases to hold good. That will be stretching the things too far and will also be contrary to approach adopted by a very large number of judicial precedents set out earlier in this order. As to the impact of different wordings in the pre and post amendment treaty provisions, we can do no better than to quote once again from the decision of Mashreq Bank as follows: The next thing that needs our consideration is learned counsel's suggestion that different phraseology employed in the Indian tax treaties warrant an interpretation in such a manner that a uniform meaning is not given to all these different expressions because differentiation in expression will then be rendered meaningless. Unlike a piece of tax legislation, which is creature of a sovereign state, a tax treaty is a result of bilateral negotiations. Therefore, the wordings of a tax treaty are essentially dependent on the priorities of, and acceptability by, the Contracting St....
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....the coordinate bench decision in the case of Abu Dhabi Commercial Bank (supra). Normally, we should have referred this matter to a special bench of this Tribunal but we did not do so because Abu Dhabi Commercial Bank decision itself follows a decision in the case of Dalma Energy LLC (supra) which, though inadvertently as it was never brought to the notice of the bench, ignored the earlier binding precedent, and was thus per incurium, and adopted an approach which was contrary to the law laid down by Hon'ble jurisdictional High Court in the case of Sudhir Jayantilal Mulji (supra). With greatest respect to the coordinate bench decision in Abu Dhabi Commercial Bank's case (supra), the approach adopted by this coordinate bench is appears to be in conflict with the law laid down by Hon'ble jurisdictional High Court and also by a full bench of Hon'ble Andhra Pradesh High Court, as elaborated above. It is also important to bear in mind the fact that just because something else has been decided on a comparable set of facts, normally the earlier decision, in assessee's own case, can not be ignored. If at all the subsequent bench had doubts on correctness of these views, the matter could hav....
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....e assessee submits that, in view of the fact that the assessee has already been allowed deduction for entire payment for VRS, he assessee does not wish to pursue this ground of appeal. 28. Ground no. 3 is thus dismissed as not pressed. 29. In ground no. 4, the assessee is aggrieved of the Assessing Officer disallowing the deduction of Rs. 3,58,421 under section 37 of the act, being specifically incurred outside India for the Indian branches and thereby processing the same under section 44C of the Act. 30. In respect of this ground of appeal as well, learned counsel for the assesse fairly accepts that whatever is decided on ground no.1 will apply mutatis mutandis on this ground of appeal as well, since the disallowance is admittedly on the basis of specific disabling provisions under the domestic law i.e. the Income Tax Act. Vide our adjudication above, we have rejected the first ground of appeal, and the same fate must, therefore, follow for this ground of appeal as well. 31. Ground no. 4 is also thus dismissed. 32. So far as ground no. 5 is concerned, learned counsel for the assessee submits that the basic issue that is required to be adjudicated, as specifically ra....