TaxTMI 
TaxTMI 
2025 (2) TMI 332
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....cation seeking recall of the order on the ground that while deciding the issue the Tribunal had not taken note of its decision in assessee's case in assessment years 1998-99 and 2001-02, though, cited by the assessee. Allowing the miscellaneous application filed by the assessee, the Tribunal recalled the earlier appellate order for the limited purpose of deciding ground nos. 1 and 4. After the appeal order was recalled, as aforesaid, the Revenue requested for constitution of a Special Bench for resolving the issues. Keeping in view the conflicting decisions of the Tribunal in assessee's own case, the Hon'ble President accepted the request of Revenue and constituted a Special Bench for deciding ground nos. 1 and 4 arising in the present appeal. This is how the appeal came up for hearing before this Bench. 3. Ground nos. 1 and 4 are as under: 1. The Commissioner of Income-tax(Appeals)-XXI, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Deputy Director of Income-tax (IT)-3(2), Mumbai (hereinafter referred to as the AO) in disallowing the appellants claim for deduction of head office expenses of Rs. 1,78,07,340 allocated to the Indian branches. ....
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....king business and had undertaken foreign exchange business only to the extent of covering operations for its existing clients. 6. For the assessment year under dispute, the assessee had initially filed a return of income on 31.10.2002 declaring book profit under section 115JB of Rs. 3,19,76,508/-. Whereas, It offered nil business income after set off of brought forward losses. Subsequently, assessee filed a revised return of income on 01.12.2003 declaring total loss of Rs. 17,78,01,164/-. In course of assessment proceeding, the Assessing Officer, while verifying note no. 4, annexed to the return of income, noticed that the assessee had stated that it has not claimed any deduction on account of head office expenses, since, it has returned loss, but, reserves its right to claim deduction at 5% as per section 44C of the Act. Without prejudice, the assessee submitted that as per Article 7(3) of India-UAE Double Taxation Avoidance Agreement (DTAA), all expenses incurred for the purpose of business of the Permanent Establishment (PE), including, the executive and administrative expenses, are allowable without applying the restriction imposed under section 44C of the Act. The Assessing O....
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.... not imply that the deduction of head office expenses is allowable as per domestic tax law, even, before the amendment of Article 7(3) of the DTAA for years prior to 1st April, 2008. It is submitted, if the limitation existing in terms of section 44C was applicable in view of Article 25(1) of the Treaty even for period prior to 01.04.2008, the amendment to Article 7(3) of the Treaty was not required. * The decision of the Tribunal in assessee's own case in assessment year 1996-97 is no longer good law in view of the Protocol dated 3rd October, 2007 of India-UAE DTAA and the decision of the Special Bench in case of Sumitomo Mitsui Banking Corporation [2012]19 taxmann.com 364 (SB). * The Treaty between two sovereign countries has to be interpreted in good faith in accordance with ordinary meaning to be given to the terms of the Treaty in their context and in the light of its objects and purpose. Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of the provision has to be taken into account while applying the provisions of the treaty. In this context, learned counsel for the assessee referred to Article 31 of Vienna Conventi....
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....tted, even prior to the Protocol amending Article 7(3) w.e.f. 01.04.2008, a harmonious construction of Article 25(1) and Article 7(3) would leave no room for doubt that section 44C would be applicable, even, while allowing deduction of head office expenses under Article 7(3) of the Treaty. He submitted, the Protocol amending Article 7(3) only clarifies the position existing earlier, as, even without considering the amendment, the deduction as per Aritcle 7(3) [(whether without considering Aritcle 25(1) or after considering Article 25(1)] was always subject to section 44C of the Act. Referring to UN Commentary on Model Tax Convention of 2011, he submitted, even without considering the provisions of Article 25(1), Article 7(3) is not intended to be interpreted in a manner so as to disregard any specific legislative provision placing a monetary or other ceiling on the deduction of business expenditure. Referring to OECD-MTC, 2008 commentary of Model Tax Convention, vis-à-vis, Article 7(3), learned Departmental Representative submitted that Article 7(3) only determines which expenses should be attributed to the PE for the purpose of determining the profit attributable to the PE ....
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....o deduction of head office expenses and the decision was rendered in the context of deduction of interest expenditure, being interest paid to head office and its taxability at the hands of head office. Thus, he submitted, the departmental authorities were correct in computing the deduction of head office expenditure in terms with section 44C of the Act. 10. In rejoinder, learned Senior Counsel for the assessee submitted, reliance on the decision of Maru Ram & Ors Vs. Union of India (supra) is totally misplaced as Hon'ble Supreme Court has held that section 433A of Criminal Procedure Code, being a specific provision states that in case of a person imposed with life imprisonment or death sentence commuted under section 433 to life imprisonment, then such person shall not be released from prison unless he has served at least fourteen years of imprisonment. He submitted, Hon'ble Supreme Court has held that section 433A being a specific provision will prevail over section 5 of Procedure Code as it expressly states that specific provisions, if any, to the contrary will prevail over any special or local law. On the contrary, he submitted, in case of Sumitomo Mitsui Banking Corporation, t....
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.... the DTAA, as referred to in Article 25(1) of the treaty, it will override the provisions of domestic law, including section 44C. While doing so, the subsequent amendment made to Article 7(3) by Protocol dated 28.11.2007 was also taken note of and it was held that only after the amendment to Article 7(3) w.e.f. 01.04.2008, the deduction allowable would be subject to the domestic law provisions. The aforesaid proposition has been laid down in the following decisions: 1. DDIT(IT)-2(1) vs. Toyo Engineering Corp. [2012] 136 ITD 268 2. ITO vs. Degremont International [1985] 11 ITD 564 3. Credit Llyonnais vs. DCIT [2004] ITA nos.6539 & 6701/Bom/95) 4. DDIT vs. Unocol Bharat Ltd. (ITA No. 1388/Del/2012) vide order dated 05.10.2018 5. Decision of Mumbai Tribunal in the case of Abu Dhabi Commercial Bank Limited for AY: 1995-96 to 2000-01 [2012] 23 Taxmann.com 359 6. Decision of Mumbai Tribunal in case of State Bank of Mauritius (2013) 25 taxmann.com 555 12. Whereas, there is a second viewpoint on the issue, which says that Article 25(1) clearly provides for computation of income as per respective laws of the Contracting States in absence of any express provision. It has been he....
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....ic laws in force in the respective Contracting States. In other words, if there is an express provision in the Treaty conferring benefit to the assessee, which is contrary to the domestic law, then the provision of the Treaty will override the domestic law and would be applicable. This line of interpretation is also in consonance with section 90(2) of the Act. In our view, Article 25(1) has to be read as a whole and not on piecemeal basis to get the true meaning. It is relevant to observe, there is no change in Article 25(1) of the Treaty prior to or post amendment of Article 7(3). In case of Sumitomo Mitsui Banking Corporation (supra), the Special Bench of the Tribunal, while interpreting Article 23 of India-Japan treaty, akin to Article 25(1) of India-UAE Treaty, observed that only interpretation, which can be assigned to the said Article so as to bring the provision in consonance with section 90(2) of the Act is that if there is an express provision in the treaty giving benefit to the assessee, which is contrary to the domestic law, the treaty provision shall override the provision of domestic law, to the extent, it is more beneficial to the assessee. 15. Whereas, Article 7 of ....
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....ned in them for taxability of various items of income, such as, business profits, interest, dividend, royalty, fee for technical services, salary, capital gain, independent personal services etc. Even, many treaties have omnibus provision, akin to Article 22 of India-UAE Treaty, providing for taxation of any income which is not covered under any other Articles of the convention. 17. For the purpose of understanding the role of Articled 25(1) with regard to the manner of computing tax on income arising in each of the contracting state, it is important to look at the principles of "Elimination of Double Taxation" as per OECD (2019), Model Tax Convention on Income and on Capital 2017. As per the said Convention there are two leading principles i.e. the principle of exemption and the principle of credit and either of these principles, as agreed between the two contracting states, would be followed for elimination of double taxation. Under the principle of exemption, the State of residence does not tax the income which according to the Convention may be taxed in State of Source or State where PE is located. Under the principle of credit, the State of residence calculates its tax on the....
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....contained in the convention. This, when read with Section 90(2) of the Act, would mean that the assessee has option to choose whichever is beneficial to it. Accordingly, Article 25(1) cannot be interpreted to impose restrictions on the manner of computing the tax which is beyond its scope of eliminating double taxation. 20. Article 7 of India-UAE treaty deals with taxability of business profits. Paragraph 3 of Article 7 provides the mode of computation of profit of PE. In that context, it says that while determining the profits of the PE, all expenses incurred for the business of the PE, including executive and general administrative expenses, whether incurred in the State where PE is located or elsewhere, has to be allowed as deduction. Therefore, Article 25(1) cannot be interpreted in a manner to say that it will influence the computation of business profits under Article 7(3) or thrust the restriction imposed under the domestic law for computing the business profits. Article 25(1) and Article 7(3) operate in different situations. While Article 25(1) deals with elimination of double taxation, Article 7 deals with taxability of business profits and paragraph 3 of Article 7 lays d....
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....duction of expenses relating to the PE has to be allowed in accordance with the provisions of and subject to limitations of the tax laws of the particular State where the PE is situated. A reading of the amended Article 7(3) would make it clear that there were no restrictions/conditions imposed with regard to the limit of deduction of expenses earlier to the Protocol. If Revenue's contention that even without the Protocol amending Article 7(3), Article 25(1) provided for computation of deduction under Article 7(3) as per the provisions of domestic law is accepted, then there was no need for amending Article 7(3) by the Protocol. The amendment of Article 7(3) clearly establishes that the countries to the agreement, prior to the date of Protocol, had intended to allow deduction of all expenses relating to the PE without applying any restrictions/conditions imposed in the domestic laws of the respective Contracting States. 25. One more argument advanced by the Revenue is, restrictions/limitations for deduction of expenses under Article 7(3) was always there in view of Article 25(1) and the Protocol amending Article 7(3) is only for clarifying the position existing earlier. In our vie....
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....in between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide para 1.06): "The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides." And, finally, in paragraph 1.08: "Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achie....
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.... or the treaty shopping leads to other tax abuses. 125. There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development. Deficit financing, for example, is one; treaty shopping, in our view, is another. Despite the sound and fury of the respondents over the so called 'abuse' of 'treaty shopping', perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy." 26. As observed by the Hon'ble Apex Court, while interpreting the provisions of bilateral treaties between two sovereign nations, it has to be borne in mind that Treaties are negotiated and entered at political level and have severa....
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....e of entering into the DTAA, the treaty partners, initially, never intended to put any restriction of the domestic laws on allowability of expenses in computing the business profits of the PE. Subsequently, the treaty partners having felt that the benefits provided under Article 7(3) needs to be withdrawn or restricted, agreed to amend the provision. Thus, in our view, prior to amendment of Article 7(3), the understanding between treaty partners is to allow all expenses attributable to the PE, without applying the limitation/restriction imposed under the domestic laws. 28. Having held so, the next issue which arises for consideration is, whether the amendment brought to Article 7(3) by way of protocol will apply retrospectively. As stated earlier, the protocol amending Article 7(3) was specifically made effective from 01.04.2008. Therefore, it is very much clear, treaty partners intended to apply the amendment prospectively. Had the Treaty partners wanted the amendment to apply retrospectively, they would have specifically provided such retrospective operation. Hence, in absence of any such retrospective effect being given, such intendment cannot be inferred. In this context, it i....
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....ndia - Japan Treaty in contrast to similar provision in India - Netherland Treaty, observed that India - Japan Treaty does not provide for restriction in limit of expenditure as per domestic law provision. Thus, keeping in view the discussions, hereinabove, we hold that Article 7(3) of the Treaty, being an express provision contrary to the domestic law will, override the domestic law. As per the language of pre-amended Article 7(3) of the Treaty, the disallowance of expenditure attributable to the PE has to be allowed in full without applying the restriction imposed under section 44C of the Act. Thus, we agree with the view expressed by the Coordinate Benches in case of Dalma Energy LLC (supra), Abu Dhabi Commercial Bank (supra), State Bank of Mauritius Ltd (surpa) and the other decisions expressing similar view. At this stage, we must observe, learned counsel of the Revenue had strongly relied upon a decision of the Canadian court in case of Utah Mines Vs The Queen [92 DTC 6194]. Having gone through the decision we are of the view that it was decided upon different set of facts, hence, not applicable. Firstly, in the case before us, there is no allegation by the Departmental Autho....