TaxTMI 
TaxTMI 
2022 (6) TMI 1329
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....ndia-Korea Double Taxation Avoidance Agreement ('DTAA') and taxing the Appellant's income @ 40% (plus surcharge and education cess) instead of rate applicable to a resident taxpayer. The Appellant, therefore, prays that the benefit of Article 25 of the DTAA be granted and that its income be taxed @30% instead of 40% (plus surcharge and education cess). 4. The assessee before us is a banking company incorporated in, and fiscally domiciled in, Korea. It is carrying on business, through its permanent establishment, in India as well. In the income tax return filed by the assessee, it was pointed out that in view of Article 25(1) of the India Korea Double Taxation Avoidance Agreement [(1987) 165 ITR Stat 191; the then Indo Korea tax treaty, in short], which provides that "nationals of a Contracting 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, in particular with respect to residence, are or may be subjected" [the corresponding provision in the present Indo Korean ....
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.... levy the tax at the rate prescribed for a foreign company, i.e. a company which is not a domestic company. The assessee is not satisfied and is in appeal before us. 5. Learned counsel for the assessee invites our attention to the judgment dated 7th August 2019 passed by Hon'ble Calcutta High Court, in the case of Bank of Tokyo Mitsubishi Ltd Vs CIT [(2019) 108 taxmann.com 242 (Cal)] and submits that the issue is covered, in favour of the assessee, by the aforesaid decision of Hon'ble Calcutta High Court. However, when learned counsel's attention was invited to Explanation 1 to Section 90 and he was asked to address us on the implications of this amendment, he simply pointed out that the aforesaid judgment was delivered on 7th August 2019- i.e. after the retrospective amendment was bought to the statute, and yet the issue has been decided in favour of the assessee. He left the matter at that and submitted that he has nothing further to add to what has been held by Hon'ble Calcutta High Court in the case of Bank of Tokyo Mitsubishi (supra). Learned Departmental Representative, on the other hand, submits that there is no discussion at all in the said decision about the Explanation....
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....override the provisions of the Income Tax Act, 1961. As a corollary to this legal framework, it is only elementary that once a rider to this override is placed in the statute itself, to that extent the provisions of the Income Tax Act, 1961 will hold the field notwithstanding the more beneficial provisions in the tax treaties. In this light, when we look at the expression "less favourably levied" or "more burdensome...taxation and connected requirement", appearing in Articles 25(2) and 25(1) respectively, in the then applicable tax treaty, we find that unless such a foreign company makes prescribed arrangements for declaration and payment within India, of the dividend payable out of its income in India, the levy of tax at a higher rate cannot be considered a less favourable levy of tax or more burdensome taxation vis-à-vis the domestic companies. Once this principle is implicit in the very scheme of legislation which provides for the treaty provisions overriding the domestic law provisions, it cannot be open to contend that the provisions of law prescribing the higher rate of taxation for the foreign companies will have to be read down by the treaty provisions. The law is cl....
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....t company will be subjected to the same rate of tax which is levied on the Indian companies. The taxation of the foreign companies at a higher rate therefore at a higher rate vis-à-vis the domestic companies is thus not considered to be discriminatory vis-à-vis the foreign companies. The sharp contrast in the definition of a foreign company under section 2(23A) vis-à-vis the definition of a non-resident company under section 6(3) makes it clear that so far as the charge of tax is concerned, the critical factor is the situs of the control and management of a company, but so far as the rate of tax is concerned, the critical factor is the arrangements for the declaration of dividends out of income earned in India. Clearly, thus, the mere fact that a company which has not made "arrangements for the declaration of dividends out of income earned in India" is charged at a higher rate of tax in India vis-àvis domestic company, cannot be treated as discrimination on account of the fact that the enterprise belonged to the other Contracting State, i.e. Korea. That is what the clarificatory and retrospective insertion of Explanation 1 to Section 90 reflects. The ple....
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....e to pay tax at the same rate as Indian companies carrying on the same activities were liable to for the relevant assessment year. The effect of the legal fiction envisaged in Article 24(2) of the agreement was that for the purpose of applying the appropriate rate, the permanent establishment of the Japanese entity had to be regarded as a domestic company. That is the effect of the expression 'taxation...not be less favourably levied...than the taxation levied on enterprises of that other Contracting State carrying on the same activities,' in Article 24(2) of the bilateral agreement between India and Japan. 7. The stand taken in the Tribunal's order cannot be appreciated or accepted since a similar clause in the double taxation avoidance agreement between India and the Netherlands was interpreted by the Central Board for Direct Taxes and a circular issued thereupon. The Tribunal held, in the present case, that since there was no similar circular, the benefit as available to a permanent establishment of ABN Amro Bank in India could not be extended to this assessee. 8. When there is no dispute that there is a double taxation avoidance agreement in place ....
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....heir Lordships was a pre-amendment period. Such an approach, given the amendment being admittedly retrospective in effect w.e.f. 1st April 1962, will be superfluous. Therefore, the fact that reference before Their Lordships, which was disposed of vide the judgment dated 7th August 2019 in the case of Bank of Tokyo Mitsubishi (supra), was for the assessment year 1991-92 and in respect of a coordinate bench's order dated 24th November 1997, would not really make a difference. While dealing with judicial precedents from non-jurisdictional High Courts, however, we may also usefully take of the observations of Hon'ble jurisdictional High Court in the case of CIT v. Thane Electricity Co. Ltd. [1994] 206 ITR 727 (Bom.)], to the effect "The decision of one High Court is neither binding precedent for another High Court nor for the courts or the Tribunals outside its own territorial jurisdiction. It is wellsettled that the decision of a High Court will have the force of binding precedent only in the State or territories on which the court has jurisdiction. In other States or outside the territorial jurisdiction of that High Court it may, at best, have only persuasive effect". Unlike the ....
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....b silentio, and (v) when it is rendered per incuriam, 30. In paragraph 578 at page 297 of Halsbury's Laws of England, Fourth edn., 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 decide 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." 31. In Punjab Land Development & Reclamation Corpn. Ltd. v. Presiding Officer, Labour Court [1990] 3 SCC 682, the Supreme Court explained the expression 'per incuriam' thus : "The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has acted in ignorance of a previous decision of its own or when a High Court has acted in ignorance of a decision of the Supreme Court." As has been noticed above, a judgment can be said to be....
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....e is no dispute that Hon'ble Calcutta High Court's decision in the case of Bank of Tokyo Mitsubishi (supra) deals with the legal position prevailing prior to the retrospective insertion of Explanation 1 to Section 90, and that the applicable statutory provisions not having been brought to the notice of Their Lordships. 11. The fact that the Bank of Tokyo Mitsubishi decision (supra) is a judgment by the Hon'ble non-jurisdictional High Court and the fact that this decision does not take into account a provision of law which was on the statute at the material point of time apart, even otherwise what really matters for the doctrine of precedents is the ratio decidendi and that must essentially take into account "statements of the principles of law applicable to the legal problems disclosed by the facts". As a corollary to this legal position, unless the relevant legal position has not come up for consideration in the process of decisionmaking, even though the said decision will undoubtedly settle the matter between the parties and their privies, it would appear that the decision may not have precedence value. Explaining this position, a three-judge bench of Hon'ble Supreme, in th....
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....cision is based. The other two elements in the decision are not precedents. The judgment is not binding (except directly on the parties themselves), nor are the findings of facts. This means that even where the direct facts of an earlier case appear to be identical to those of the case before the court, the judge is not bound to draw the same inference as drawn in the earlier case." [Emphasis, by underlining, supplied by us] 12. In the case of Farhan A Shaikh Vs DCIT [(2021) 125 taxmann.com 253 (Bom FB)], a full bench of Hon'ble jurisdictional High has thoroughly examined, in an extended and profound discussion on the subject, the theory of binding judicial precedents, and felicitously explained the mechanism of its implementation. While it is not possible, given our limited context and purpose, to reproduce the entire profound discussion on the theory of binding judicial precedents, we may refer to a couple of important observations made by the Hon'ble jurisdictional High Court. Their Lordships have, inter alia, observed that "An issue raised not addressed or an issue that has altogether gone sub silentio cannot support a precedent". Their Lordships have also observed as fol....
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....he Hon'ble Calcutta High Court, the Bank of Tokyo Mitsubishi judgement (supra) cannot be an authority for the proposition that dehors the insertion of Explanation (now Explanation 1) to Section 90, the levy of the income tax on the assessee company at a rate higher than the domestic companies can be regarded as less favourable charge. 15. In this backdrop, and having noted that this decision is from a non-jurisdictional High Court and without the benefit of analysis of the impact of retrospective insertion of Explanation to Section 90, in the light of specific guidance by Hon'ble jurisdictional High Court in the case of Thane Electricity (supra), of Hon'ble Andhra Pradesh High Court's Full Bench guidance in the case of B R Constructions (supra), Hon'ble Supreme guidance in the case of Mavaliayi Service Cooperative Bank Ltd (supra), and Hon'ble jurisdictional High Court's full bench judgment in the case of Farhan A Sheikh (supra), we are of the considered view is that Hon'ble Calcutta High Court's judgment in the case of Bank of Tokyo Mitsubishi (supra), strictly speaking, does not constitute a legally binding judicial precedent to forums like benches of the Tribunal outside the ....
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....assessee company cannot be read down in the light of the provisions of a double taxation avoidance agreement, as is the specific mandate of Explanation 1 to Section 90 or even on the first principles without the benefit of this Explanation. 19. We may also add that as for the mention, in paragraph 7 of the Bank of Tokyo Mitsubishi decision (supra), of some clarification issued by the CBDT with respect to ABN Amro Bank, even if that be so, it is only elementary that Section 119(1)(a) does not visualize issuance of a circular "so as to require any income-tax authority to make a particular assessment or to dispose of a particular assessment in a particular manner", and, therefore, such a clarification will not have any bearing on cases other than ABN Amro Bank, or the legally binding force of Section 119. In any event, even going by the observations made by the Hon'ble High Court, this communication was issued prior to 24th November 1997 - much before the retrospective insertion of Explanation 1 to Section 90 took place. With the amendment in law and with this significant change in the legal position, even if there is an old circular, issued in the context of pre-amendment law, it ....
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....d office constitute the same legal entity and one cannot earn income from oneself". The matter, however, did not end here. The Assessing Officer relied upon the CBDT circular 740 which, inter alia, stated that "Interest paid/ payable by such branch to its head office or any branch located outside India will be liable to tax in India and would be governed by the provisions of Section 115 of the Act. If the double taxation avoidance agreement with the country, where the parent company is assessed to tax provides for a lower rate of taxation, the same would be applicable". In effect thus, the Assessing Officer's draft assessment order indicated that while no deduction of PE-GE interest payment was allowed in the computation of income attributable to the PE, the same amount, nevertheless, was brought to tax in the hands of the GE. As regards the interest income received by the permanent establishment from its head office, (referred to as GE-PE interest, in short], the stand of the assessee was that if the payment by the PE to GE is to be declined on the ground that it is a payment from self to self, which constitutes inadmissible deduction in the computation of profits attributable to ....
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.... 25. As regards the remaining two issues, learned counsel for the assessee submits that both of these issues are covered, in favour of the assessee, by a five-member bench decision of this Tribunal, in the case of Sumitomo Mitsui Banking Corp (supra) and by the subsequent division bench decisions in the assessee's own cases for the assessment years 2004-05, 2005-06 and 2006-07 vide coordinate bench decision dated 27th June 2012. He submits that as the legal position now is by virtue of treaty provisions, and as per the scheme of treaty law elaborated upon by the Tribunal, deductions in respect of payments to head office are allowed as deductions in the computation of the profits attributable to the PE, the resultant income, on account of tax neutrality of payments within a company, is not taxable in the hands of the assessee. We are thus allowed to hold that while the PE GE interest payment is deductible under the tax treaty provisions, the PE GE interest payments do not result in taxability of that amount in the hands of the GE which has no separate existence anyway. Learned Departmental Representative, however, points out that so far as the five-member bench in the case of Sum....
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....e case of Sumitomo Mitsui Banking Corp (supra) recognizes this position and specifically states that "the position under the domestic law, as emanating from the above judicial precedents is that one cannot make profit out of himself", and in the lights of the corollaries to this position, declined the applicability of this theory in the treaty situation. There is no other reason assigned in this case in support of the disallowance of interest paid by the PE to the head office or the GE. For this short reason alone, therefore, the impugned interest disallowance must be deleted. 28. As the learned Departmental Representative rightly points out, the Special Bench decision in the case of Bank of Tokyo & Mitsubishi is specifically in the context of the Indo-Japan tax treaty and the decision is, as it states in so many words- such as in para 88 therein that PE GE interest is "deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of Article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol, which are more beneficial to the assessee". In the operative portion of the order also there are frequent referen....
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....hereto, no carve-outs either, for the intra GE transactions, from such restrictions on deductions, the outcome will be any different. 29. We find that Article 7(2), to the extent relevant for the present purposes, provides that where an enterprise of a Contracting State (i.e. Korea) carries on business in the other Contracting State (i.e. India), through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or the similar activities under the same or similar conditions and dealing wholly independent of each other. In plain words, so far as a Korean enterprise and its Indian PE are concerned, the profits of the Indian PE are to be computed as if the Indian PE is wholly independent of its head office, i.e. Korean GE. Once we treat the PE as independent of the GE, as we are required to treat by the fiction of hypothetical independence in Article 7(2) which provides for the computation of profits attributable to the PE, the very foundation of the impugned disallowance of the interest paid by the PE ....
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....rea tax treaty specifically provides that when an enterprise of a treaty partner country carries out business through a permanent establishment, " there shall be in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment" This fiction of hypothetical independence comes into play for the limited purposes of computing profits attributable to permanent establishment only and is set out under the specific provision, dealing with the computation of such profits, in the tax treaties, including in the then Indo-Korean DTAA. There is nothing, therefore, to warrant or justify the application of the same principle in the computation of GE profits as well. Clearly, therefore, the fiction of hypothetical independence is for the limited purpose of profit attribution to the permanent establishment. 33. To that extent, this approach departs from the separate accounting principle in the sense that the GE, to which PE bel....
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....emporary international tax scholar, in his preface to "The Attribution of Profits to Permanent Establishments - The taxation of intra-company dealings [ISBN 90-76078-84-X; published by IBFD, Amsterdam]", made the following observations: "Since my early days of teaching international tax law, I have tried to explain to students the relationship between a PE and the general enterprise of which the PE is a part, as that of an egg and the yolk it contains. I have further explained that, with regard to income attribution to PEs, the OECD Model does not require that a general enterprise is divided into two separate parts - a head office and a PE - and that, therefore, an internal charge borne by a PE will not yield income for anyone, but only produces a smaller amount of PE income to be taxed by the PE state and, correspondingly, a smaller amount of foreign income in respect of which the residence state needs to provide the relief I must admit that my attempts to get these views across have met with varying levels of success- particularly students with an accounting background tend to be on the sceptical side..............". [Emphasis, by underlining, supplied by us] 37. W....
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....rality theory for payments within the entity is, even if partially, abandoned. With the benefit of the Sumitomo decision (supra), one can understand the provisions of the tax treaty being invoked for examining the tax treatment of the interest payments by the PE, and the provisions of the domestic law being invoked for the interest receipts by the PE, but then even vis-à-vis the taxability of GE-PE interest by the PE having been accepted on the treaty principles, it may perhaps be too much to contend that the taxability of PE-GE interest receipt is required to be considered on the basis of the domestic law provisions, but even this discussion seems entirely academic in the light of our finding, as above, that an internal charge for the PE profit attribution does not amount to taxable income in the hands of the GE anyway. Be that as it may, having decided this aspect of the matter on the treaty principles so far as taxability of PE-GE interest in the hands of the GE is concerned, we need not examine that aspect any further. In our considered view, for the detailed reasons set out in this order, dehors this theory of tax neutrality for intra-GE transactions also, this PE-GE in....