Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members Woodend (K.V. Ceylon) Rubber and Tea Co. Ltd. v. IRC, [1970] 2 All ER 801; Callco Dealings Ltd. v. IRC, [1961] 1 All ER 762, [1961] 59 TC 509; Gramophone Co. of India v. Birendra Bahadur Pandcy, AIR 1984 SC 667 1. The applicant is a non-resident banking company, incorporated in the Republic of France and has been carrying on business from a branch office in India. The applicant has applied for a ruling on the following question : "In the light of Article 26 of the agreement for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital entered into by the Government of the Republic of India and the Government of the French Republic, whether the applicant is chargeable to tax in respect of income earned from business, as computed under Article 7 of the treaty from the assessment year 1996-97, at the rate applicable to a domestic company, in so far as is beneficial to the applicant." 2. The Revenue has raised a preliminary point. Whether this application made, can be entertained at all. The objection raised on the behalf of the Revenue is that the applicant is carrying on banking business in India for the past several years. It is regularly filing its returns as per the Income-tax Act and is being assessed accordingly. Therefore, this applicant is precluded from making this application for advance ruling. The expression "advance ruling" has been defined in Section 245N in the following manner.
(a) 'advance ruling' means the determination, by the Authority, of a question of law or fact specified in the application in relation to a transaction which has been undertaken, or is proposed to be undertaken, by the applicant ;" "The Authority may, after examining the application and the records called for, by order, either allow or reject the application : Provided that the Authority shall not allow the application except in the case of a resident applicant where the question raised in the application,-- (a) is already pending in the applicant's case before any income-tax authority, the Appellate Tribunal or any court ; (c) relates to a transaction which is designed prima facie for the avoidance of income-tax . . ," 4. The determination of a question of law or fact in relation to a transaction which has been undertaken or proposed to be undertaken by the applicant can be referred to this Authority. It is not the case of the Revenue that the question raised in this application has already been decided by Assessing Officer, Computation of tax is part of the assessment process, in which the rate of tax will have to be determined.
5. There is no dispute that the applicant is a non-resident. There is also no dispute that the question arises in relation to a series of transactions which have been undertaken by the applicant. But the only difficulty is that this issue about the rate of tax, even if not specifically raised will have to be decided in the course of the assessment proceedings. It is a question involved in the pending assessment proceedings. The applicant cannot be heard to say that even though the assessment proceedings are pending, determination of the rate of tax which is an integral part of the assessment process is not pending. Therefore, we are of the view, that the preliminary objection raised on behalf of the Revenue is of some substance. We, however, do not propose to dispose of this case on the preliminary point.
6. The second and the main question is whether a higher rate of tax can be imposed on the applicant which is a French banking company in view of the Double Taxation Avoidance Agreement between India and France (DTAA). There is no dispute in this case that a domestic company is required to pay a lower rate of tax than a non-domestic company. The rate of tax is fixed annually by the Finance Act. The grievance of the applicant is that the prescribed rate for payment of tax by a domestic company is lower than the rate of tax applicable to a non-domestic company. This is violative of Article 26 of the DTAA. "Domestic company" has been defined by Section 2(22A) of the Income-tax Act, 1961, to mean "an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income." 7. "Foreign company" has been defined by Section 2(23A) of the Income-tax Act to mean a company which is not a domestic company.
8. "Indian company" has been defined by Section 2(26) of the Income-tax Act to mean a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes- (i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union Territories specified in Sub-clause (iii) of this clause ; (ia) a corporation established by or under a Central, State or provincial Act ; (ib) any institution, association or body which is declared by the Board to be a company under Clause (17) ; (ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State ; (iii) in the case of any of the Union Territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry, a company formed and registered under any law for the time being in force in that Union Territory : Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India." 9. The rates of tax payable by a domestic company and a company which is not a domestic company as laid down in the Finance Acts, 1994, 1995 and 1996 are set out hereunder : (1) where the company is a company in which the public are substantially interested (2) where the company is not a company in which the public are substantially interested.
II. In the case of a company other than a domestic company,-(i) on so much of the total income as consists of- (a) royalties received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961, but before the 1st day of April, 1976, or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 29th day of February, 1964, but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government.
The amount of income-tax computed in accordance with the provisions of this paragraph or Section 112 shall, in the case of every domestic company having a total income exceeding seventy-five thousand rupees, be increased by a surcharge calculated at the rate of fifteen per cent. of such income-tax." (a) royalties received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961, but before the 1st day of April, 1976, or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 29th day of February, 1964, but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government.
The amount of income-tax computed in accordance with the provisions of this paragraph or Section 112 shall, in the case of every domestic company having a total income exceeding seventy-five thousand rupees, be increased by a surcharge calculated at the rate of fifteen per cent. of such income-tax." (a) royalties received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961, but before the 1st day of April 1, 1976, or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 29th day of February, 1964, but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government.
The amount of income-tax computed in accordance with the provisions of this paragraph or Sections 112 and 113 of the Income-tax Act shall, in the case of every domestic company having a total income exceeding seventy-five thousand rupees, be increased by a surcharge calculated at the rate of fifteen per cent. of such income-tax." 10. Article 26 of the Double Taxation Avoidance Agreement (hereinafter referred to as DTAA) between India and the Government of France provides as under (see [1994] 209 ITR (St.) 130, 153) : "1. Nationals of one of the Contracting States 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 the other Contracting State in the same circumstances are or may be subjected. The provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States. 2. Except where the provisions of paragraph 5 of Article 7 apply the taxation on a permanent establishment which an enterprise of one of the Contracting States has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities. 3. The provisions of paragraph 2 shall not be construed as obliging one of the Contracting States to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents. 4.
Except where the provisions of Article 10, paragraph 7 of Article 12 or paragraph 8 of Article 13 apply interest, royalties and other disbursements paid by an enterprise of one of the Contracting States to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first mentioned Contracting State. Similarly, any debts of an enterprise of one of the Contracting States to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned Contracting State. 5. Enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first mentioned Contracting State are or may be subjected." Para. 12 in the Protocol to the Agreement provides (see [1994] 209 ITR (St.) 130, 160) : 12. As regards the application of paragraph 1 of Article 26, it is understood that an individual, legal person, partnership or association which is a resident of a Contracting State shall not be deemed to be in the same circumstances as an individual, legal person, partnership or association which is a resident of the other Contracting State. This shall also apply where such individuals, legal persons, partnerships or associations are, in applying paragraph 1(h) of Article 3 (General Definitions) deemed to be nationals of the Contracting State of which they are residents." 11. The Finance Acts of 1994, 1995 and 1996 have prescribed different rates of tax for a domestic company and a non-domestic company. The non-domestic companies are required to pay a higher rate of tax. A domestic company, on the other hand, has to pay a surcharge on the tax which a non-domestic company does not have to pay. It is contended on behalf of the applicant that even after taking into account the surcharge, a non-domestic company has to pay tax at a higher rate. This fact is not disputed by the respondent. The question, therefore, is whether different rates of tax for domestic and non-domestic companies are violative of the provisions of the DTAA between India and France.
12. The definition of a "domestic company" was inserted by Section 2(22A) in the Income-tax Act by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. When the Double Taxation Avoidance Agreement between India and France was entered into on September 29, 1992, the parties to the agreement were well aware of the fact that a domestic company which declared and distributed its dividends in India had to pay tax at a lower rate than a non-domestic company. This would be evident from the Finance Acts of 1991 and 1992.
A foreign company which does not declare and distribute dividends in India will be a non-domestic company. But, if a foreign company declares and pays dividend in India, it will be treated as a domestic company. This distinction between a "domestic company", "Indian company" and a "foreign company" has been in existence for a long time in the Indian income-tax law. For example, Section 85A as it stood on April 1, 1966 was as under : "85A. Deduction of tax on intercorporate dividends.--"Where the total income of an assessee being a company includes any income by way of dividends received by it from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, the assessee shall be entitled to a deduction from the income-tax with which it is chargeable on its total income for any assessment year or so much of the amount of income-tax calculated at the average rate of income-tax on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of twenty-five per cent. thereof : Provided that in the case of a company which has not made the prescribed arrangements for the declaration and payment of dividends within India and whose total income includes any income by way of dividends received by it from an Indian company which is not such a company as is referred to in Section 108 and which is mainly engaged in the business of generation or distribution of electricity or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule the amount of income-tax deductible under this section shall be so much of the amount of income-tax calculated at the average rate of income-tax on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of fifteen per cent. thereof: . . ." 13. It will be seen from the above that an Indian company and a company which had made prescribed arrangements for declaration and distribution of dividends in India were treated as one class of taxpayers in this section. Sections 85B and 85C separately dealt with foreign companies.
Later on, a company which declared and distributed dividend in India and an Indian company came to be compendiously described as a domestic company.
14. Section 80M which came in place of Section 85A with effect from April 1, 1968, provided as under : "80M. (1) Where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to- (i) in respect of such income by way of dividends received by it from an Indian company which is not such a company as is referred to in section 108 and which is mainly engaged in a priority industry (ii) in respect of such income by way of dividends other than the dividends referred to in sub-clause (i) Explanation--For the purposes of this section, a company shall be deemed to be mainly engaged in a priority industry if the income attributable to any such industry or industries included in its gross total income for the previous year is not less than fifty-one per cent. of such gross total income." 15. The Finance (No. 2) Act, 1971, which substituted the following for Clauses (a) and (b) of Sub-section (1) of Section 80M and deleted the Explanation, with effect from 1st April, 1972, provided thus : "(a) sixty per cent. of such income, where the assessee is a domestic company ; (b) sixty-five per cent. of such income, where the assessee is a foreign company." 16. Section 80MM, however, spoke of Indian companies and 80N dealt with foreign companies. However, what is important to note is that Section 80M prescribed different rates of tax for domestic and foreign companies.
17. With full knowledge of this well known and long standing distinction between an Indian company, domestic company and a foreign company the non-discrimination clause in the DTAA (article 26) was drafted. It did not prohibit the long standing distinction in Indian tax laws between a domestic company and a non-domestic company.
Therefore, it will not be right to contend as has been done before us on behalf of the applicant that discrimination has been made between a French company and an Indian company in the matter of levy of tax. The distinction drawn by the Finance Act is on the basis of distribution of dividend. If a French concern declares and distributes dividends in India, it has to be treated as a domestic company and taxed as such.
The basis of the distinction between a domestic and a non-domestic company is quite clear. The object of a tax Act is to collect tax. The dividends distributed in India lead to fresh accrual of income in the hands of the recipients. That means that there will be further levy of tax on account of distribution of dividend in India. This distinction does not violate Article 26 of the DTAA in any way. No attempt has been made in Article 26 to do away with this long standing classification of companies in the Income-tax Act.
18. A further contention made on behalf of the Union of India by the learned Additional Solicitor-General is also of substance. The applicant is a bank. It has been contended that an Indian banking company in India is under certain social obligations which have not been thrust upon a foreign bank. A nationalised bank has to look after the needs of the people, big or small and take banking service even to remote and non-profitable areas. Therefore, an Indian bank and a foreign bank are not equally circumstanced.
19. The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, was passed to acquire the undertakings of banks having deposits of not less than rupees fifty crores. Foreign banks were specifically exempted from the provisions of this Act. This was followed by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. Foreign companies were once again specially excluded from the definition of a "banking company" as given in Section 2 of this Act.
20. The objects and reasons for passing these two Acts were stated in the following terms (see [1980] 50 Comp Cas (St.) 121) : "To gain control over the commanding heights of the economy for the attainment of the national, social and economic objectives, fourteen major Indian scheduled banks, each with deposit of Rs. 50 crores or more, were nationalised in July, 1969. It was then visualised that public ownership of these banks would help in more effective mobilisation of savings and their channelisation for productive purposes. Since the nationalisation of such banks, bank services have grown rapidly, particularly, in the hitherto under-banked rural and semi-urban areas. There has also been a progressive increase in the deployment of bank resources for the neglected sectors and weaker sections of society.
2. The Government are committed to implement the 20-point programme vigorously. In pursuance of this objective, the public sector banks have undertaken to increase their credit to priority sectors to 40 per cent. of their total advances over a period of five years.
3. In order further to control the heights of the economy, to meet progressively, and serve better, the needs of the development of the economy and to promote the welfare of the people, in conformity with the policy of the State towards securing the principles laid down in Clauses (b) and (c) of Article 31) of the Constitution, six Indian private sector banks, each having deposits of Rs. 200 crores or more on 14th March, 1980, were nationalised by the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1980, promulgated by the President on the 15th April, 1980. The Ordinance was also considered necessary for providing larger credit to priority sectors, for establishing a more effective and meaningful direction and control over the operations of these banks and also for making these banks an integral part of the national development effort." 21. It was also stated in the objects clause of the Act that the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, was passed to provide for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage and organisation, in order further to control the heights of the economy, to meet progressively, and serve better, the needs of the development of the economy and to promote the welfare of the people, in conformity with the policy of the State towards securing the principles laid down in Clauses (b) and (c) of Article 39 of the Constitution and for matters connected therewith or incidental thereto.
Article 39 of the Constitution of India, to the extent relevant for our purpose, is reproduced as under : "39. Certain principles of policy to be followed by the State.-- The State shall, in particular, direct its policy towards securing.--. .
.
(b) that the ownership and control of the material resources of the community are so distributed as best to subserve the common good ; (c) that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment ;" 22. The object of a nationalised bank is not to make maximum possible profit but to "subserve the common good." The professed object is to effectively mobilise savings and employ the money for productive purposes. In order to achieve this object, after nationalisation, the Indian banks have opened branches in a large number of areas to provide banking services specially in "the under-banked rural and semi-urban area". The purpose was not to make profit but to make banking service available to the common man in those areas in accordance with objects and purposes of the two acquisition Acts. A foreign bank does not open a branch except for the purpose of making profit. It does not allow a person of small means to open an account in any of its branches. In fact, a foreign bank usually requires large deposits to be made as a price for opening an account and a substantial amount has to be kept as minimum reserve for operating a savings account. Further, if the deposit falls below a certain minimum, service charges are levied. In other words, the foreign bank confines its business to the more affluent section of the society who can afford to keep a large amount of money deposited with the bank. This practice restricts the number of depositors and enables the bank to have the use of the deposits for gainful purposes. It has no social obligation to open branches in unprofitable areas or to make its services available to the common people of humble means who cannot make a large initial deposit.
23. Moreover, as has been stated in the objects clause of the Act of 1980, after nationalisation, there has been a progressive increase in the deployment of resources of the nationalised banks for the neglected sectors and weaker sections of the society. Forty per cent. of the resources are invested in the priority sector.
24. On behalf of the applicant, this argument was countered by saying that a foreign banking company is not permitted to carry on business in the agricultural sector. That may be so. But a nationalised bank has to open branches in the agricultural and semi-urban sectors even though such branches may not be profitable. The overriding idea is to provide banking services to the common man at his doorstep. For that purpose, nationalised banks had to open branches at places where banks did not exist. The obvious reason why banking service was not available in urban and semi-urban areas before nationalisation was that these sectors were not found profitable by the banks before nationalisation.
25. A nationalised bank which has to function under the Government regulations to achieve certain social objects as stated in the objects clauses of the Bills pursuant to which the aforesaid Acts were enacted, cannot be held to be equally circumstanced as a foreign bank. A nationalised bank is not free even to recruit its employees on its own.
The recruitment of employees has to be done under and according to the provisions of the Banking Service Commission Act. A certain percentage of jobs has to be reserved for the under-privileged class. A nationalised bank has to be treated as "State" under Article 12 of the Constitution. Fundamental rights are enforceable against a nationalised bank. It follows from the above that a foreign banking company and an Indian banking company are not working under the same circumstances or on same conditions.
26. Reference may be made in this connection to Double Taxation Conventions and International Tax Law by Philip Baker (2nd edition), pages 385-386 : "Articles 24(1), (2) and (5): Prohibition of discrimination on grounds of nationality.
The prevention of discriminatory taxation on grounds of nationality in Article 24(1) is of more limited scope than is sometimes thought.
The article prohibits '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 point is that a non-resident alien is not in the same circumstances as a resident national ; the article does not prohibit discrimination against non-residents, only discrimination on grounds of nationality alone.
To give some examples of cases where the taxpayers failed to prove discrimination. A 2 per cent. capital levy imposed in Germany on branches of non-resident enterprises, but not on branches of German enterprises, was held not to infringe the non-discrimination article. . .
Similarly, the Internal Revenue Service have held that there is no breach of the non-discrimination article if special tax rate schedules are available only to resident nationals since a non-resident is not in the same circumstances." 27. In the case before us, distinction has been made on the basis of distribution of dividends in India. We are of the view that the applicant has failed to establish that there has been discrimination under Article 26(1).
28. Moreover, the protocol to the DTAA set out earlier in this ruling clearly recognises that a French company and an Indian company are not deemed to be in the same circumstances.
29. The question is whether the Indian banks have been placed in a more favourable position than French banks by the annual Finance Acts. The case of the applicant is that the French banks have to pay tax at a higher rate than the Indian banks although they are carrying on the same activities.
30. This argument is of little merit. The activities of the Indian and French banks are similar in that both carry on banking operations.
However, the activities of the Indian and French banks are not identical. As we have noted earlier, large Indian banks were nationalised by the two Acts of Parliament to promote certain social and economic objectives of the State and have to function as instruments for mobilisation of resources for the common good. They cannot be said to be in the same circumstances as French banks which have no such constraints and are free to operate their profit-making apparatus to the maximum extent possible. It has also to be borne in mind that a nationalised bank has to be treated as State under Article 12 of the Constitution of India. Fundamental rights can be enforced against the nationalised bank. It has also to comply with Government guidelines and laws in the matter of recruitment of its employees. A certain percentage of the posts has to be reserved for the less privileged sector of the society regardless of merit. In other words, their activities have to be in consonance with the Directive Principles of State Policy and cannot violate the fundamental rights of their employees or their customers in any manner. If the activities of a bank before and after nationalisation were the same, there would have been no justification for nationalisation of the large Indian banks.
31. Clause 2 of Article 26 prohibits discrimination between an Indian enterprise and a French enterprise carrying on the same activities. We are of the view that a French bank and a nationalised Indian bank do not carry on the same activities.
32. As we have seen earlier, the object of bank nationalisation was for the attainment of the national, social and economic objectives. The banks were nationalised to help in more effective mobilisation of savings and their channelisation for productive purposes. It was noted in the objects clause of the Act of 1980 that since nationalisation of such banks, bank services have grown rapidly in "under-banked rural and semi-urban areas". There has also been progressive increase in deployment of bank resources for the neglected sectors and weaker sections of the society. Foreign banks do not have to deploy their resources for economic development of the country. Foreign banks have no obligation to deploy their resources for the neglected sectors and weaker sections of the society. They do not have to play any role to implement the 20-point programme. It has been stated in the objects clause that the public sector banks have undertaken to increase their credit to priority sectors to 40 per cent. of their total advances over a period of five years. The activities of the nationalised banks and the foreign banks are quite different. They are carrying on the same activities in the sense that they are carrying on banking operations but the main purpose and object of carrying on banking operations by the nationalised bank is to help the neglected and weaker sections of the society by deployment of their resources. That was the whole purpose of nationalisation from which the foreign banks were expressly excluded. A nationalised bank has to be an instrument of the Government policy in the implementation of the 20-point programme for economic development of the country. Forty per cent. of the advances have to be reserved for such purposes only. These banks have to act in furtherance towards implementation of Article 39 of the Constitution. It has also to ensure that the material resources of India are so distributed as to subserve the common good. The activities which will have to be carried out by the nationalised bank will be towards achieving the objectives set out in the objects clause of the Nationalisation Acts. In fact, these were the reasons why the large Indian private banks were nationalised. The foreign banks were specifically kept out of the ambit of these two Acts and are entirely free to pursue their activities as they like with the sole object of profit-making. We are of the view that the activities which the nationalised banks have to perform and the activities of the foreign banks are not the "same activities" although both were engaged in banking business.
33. We have not specifically dealt with the small Indian private banks which in any event cannot be equated with large foreign banks.
34. The second aspect of the question under Article 26(2) of the agreement is whether taxation has been less favourably levied on a foreign bank by the Income-tax Act than a similar enterprise in India.
The applicant's case is that a higher rate of tax which has been imposed on a foreign company by the Finance Act, is not permissible under the DTAA between India and France.
35. This argument is misconceived. As we have noted earlier in the judgment, the Finance Acts have consistently drawn a distinction between a domestic and a non-domestic company. A foreign company which distributes dividends in India will be treated as a domestic company and will pay the same rate of tax as an Indian company which declares and distributes dividends in India.
36. Moreover, Article 26(2) lays down that "taxation on a permanent establishment. . . shall not be less fovourably levied . . .". This is not a case where a tax has been imposed upon a French company from which an Indian company is immune. Both Indian and French companies come equally under the tax levied by the Income-tax Act. No special tax is levied on a French company in India. A good example of such a situation has been provided in the case of Woodend (K. V. Ceylon) Rubber and Tea Co. Ltd. v. IRC [1970] 2 All ER 801, where the Privy Council had to deal with a case where under the law of Ceylon, a taxpayer company whose head office was situated in the U.K., had to pay an additional tax in respect of its profit earned in Ceylon. The Privy Council held that the additional tax was "other" taxation and came within the mischief of "the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income Agreement between the United Kingdom and Ceylon". In that case, however, the levy of this additional tax was ultimately upheld by the Privy Council on another ground. We shall refer to this later in the ruling.
37. In the case before us, the French and the Indian companies have to pay income-tax. The grievance of the applicant is that they have to pay tax at a higher rate. Clauses 1 and 2 of Article 26 have used the word "taxation" in preference to "tax" which has been used in most of the other articles of the agreement. The meaning of the expression "taxation" as given by New Webster's Dictionary and Thesaurus [1992] is as under : "The imposition of a tax : the system by which taxes are imposed : the revenue obtained by imposing taxes." The meaning of the expression "taxation" as given in Black's Law Dictionary is "the process of taxing or imposing a tax." 38. "Taxation" does not mean "rate of tax" and has not been used in Article 26 in that sense at all. In the DTAA between India and France, the words "taxation" and "tax" have been used in a number of articles.
Both "taxation" and "tax" have been used in the objects clause of the agreement where the purpose has been stated to be "avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital". "Taxation" has again been used in Articles 25 and 26. Article 25 deals with the elimination of double taxation. It lays down the manner in which double taxation has to be avoided.
Article 26 seeks to prevent discrimination in taxation between nationals and non-nationals in Clause 1. Clause 2 lays down that taxation levied on a foreign enterprise by a Contracting State shall not be less favourable than the taxation on the same activities of the local enterprise. Clause 5 of Article 26 also refers to "taxation" and speaks of other or more burdensome taxation. Article 26 has not specifically laid down that the tax payable by an enterprise of one Contracting State must be at the same rate as tax payable by a domestic enterprise of a Contracting State. Nor it has been laid down that the rate of tax payable by a national of one Contracting State must be the same as payable by the national of the other Contracting State.
39. Rate of tax has been specifically mentioned in a number of articles. For example, Article 9 deals with profits from shipping and lays down that profits derived by an enterprise of a Contracting State "shall be taxable" only in that Contracting State. Clause 2 of Article 9 provides that "tax so charged" shall not exceed 25 per cent. or 50 per cent. as the case may be of "the tax otherwise imposed by the internal law of the Contracting State".
40. Article 11 goes to provide that "this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid".
41. Article 12 provides for a ceiling on the charge of tax in respect of each Contracting State and lays down that "the tax so charged shall not exceed 10 per cent. of the gross amount of the interest in certain cases and 15 per cent. of the gross amount of the interest in all other cases".
42. Article 13 specifically lays down that in certain circumstances, income-tax charged shall not exceed 20 per cent. of the gross amount of such royalties, fees and payments.
43. Under the Income-tax Act as it stands now, the total income of an assessee is to be computed under five heads ; 44. Various reliefs have been given to French nationals or residents or enterprises under various heads of income under the DTAA. There is a specific provision for taxing business profits under Article 7. Profits of an enterprise in France shall be taxable in France unless it carries on business in India through a permanent establishment in India. The income of a permanent establishment in India is taxable in India only to the extent to which it is attributable to that permanent establishment. There are special rules provided in Article 7 for computation of business profits. Special provisions have been made for taxing certain categories of business expenditure. Article 8 deals with air transport. Article 9 deals with shipping. Article 10 deals with associated companies. Various reliefs have been provided as to the rate of tax and also computation of quantum of such business profits.
45. Dividend which falls under the head "Income from other sources" is taxable at a concessional rate. Under certain special circumstances, interest is dealt with by Article 12. The manner of taxation at a special concessional rate of tax is laid down in that article.
Similarly, royalties and fees for technical services are dealt with in Article 13 and the upper limit of rate of tax is provided for taxing the gross amount of such royalties, fees and payments. Article 14 also contains rules of computation of capital gains. Article 21 exempts from tax payments received by students and apprentices in certain circumstances altogether. The total income of an assessee who is a resident in France will have to be computed in India after giving these benefits. In the background of all these articles, it is not possible to hold that the "non-discrimination" clause was drafted for the purpose of ensuring that the rate of tax on a French company and an Indian company will be the same. Article 26 does not speak of rate of tax at all. What has to be seen under Article 26 is that a French company is not subjected to any tax to which an Indian company is not subjected. It has also to be seen that the tax law generally does not place an Indian company at a more advantageous position vis-a-vis a French company. An overall view of the provisions of the Income-tax Act will have to be taken for this purpose.
46. Some arguments were advanced on behalf of the applicant on the significance of the word "levy" in Article 26 of the Income-tax Act.
The word "levy" has been interpreted by the courts in a number of cases. According to Black's Law Dictionary (sixth edition), "levy" means "to assess ; raise ; execute ; exact; tax ; collect; gather ; take up ; seize". Therefore, it will be seen that the word "levy" can have a number of meanings. It can simply mean to assess. It can also mean collection of tax. The word has been used in some statutes to describe the entire process of imposing a charge, assessment of tax as well as collection of tax. The meaning of the word "levy" has to be gathered from the context of the statute in which it has been used.
47. Clause 1 of Article 26 does not use the word "levy" at all. Clause 2 uses the expression "the taxation ... shall not he less favourably levied..." Taxation levied on an enterprise normally means, in the context of the Income-tax Act, levy of income-tax on the income of an enterprise, It merely means the charging section and the computation section of the Income-tax Act should not be so drafted as to place the French company in a less favourable position than the Indian company carrying on the same activities. We have noticed earlier, that there are a number of articles in the DTAA which specifically deal with rate of tax. In these articles, the words, "levy" as well as "taxation" have been scrupulously avoided. Wherever rates of tax have been mentioned in these articles, the language employed has been "the tax so charged" shall not exceed the percentage specified in those articles. Having regard to the context in which the words levy and taxation have been used, we are of the view that Clause 2 of Article 26 does not place an embargo on imposing a higher rate of tax on the French concern than on the Indian concern.
48. In this connection, it should also be noted that Section 4 of the Income-tax Act also, inter alia, uses the words. ". . . income-tax at that rate or those rates shall be charged." 49. It has to be borne in mind in this connection that under the Income-tax Act, a large number of concessions are given to a foreign company which are not available to an Indian company. An Indian company pays tax on its total world income whereas a foreign company is liable to pay tax only in respect of income which accrues or arises in India.
There are various other concessions given to a foreign company. Section 115A contains special provisions for tax on dividends, royalties and technical services fees in the case of a foreign company. Special concessions have been given to non-resident sportsmen. These provisions should be contrasted with certain special provisions to which a foreign company is not subjected. For example, Sections 115-0, 115B and 115Q, are applicable only to domestic companies. It has also to be noted that the surcharge imposed by the annual Finance Act is payable only by a domestic company and not a foreign company. In the background of all these provisions, it is not possible to hold that a French company has been placed at a more disadvantageous position than an Indian company under the Income-tax Act by the levy of a higher rate of tax.
50. There is yet another aspect of this case. How should the non-discrimination clause be construed We have noticed earlier in the ruling how rates of tax payable for various types of income have been prescribed. Article 26 speaks generally of taxation. That means Indian tax provisions should not be more burdensome on a French resident nor place a French concern in a more disadvantageous position than a similarly circumstanced Indian concern. This provisions of non-discrimination has nothing to do with rates of tax which have been dealt with specifically by the other articles of the DTAA. The agreement in Article 26 has deliberately not used the phraseology "the tax so charged" as against Articles, 8, 9, 11, 12 and 13 which deal, inter alia, with rates of tax. On the contrary, Article 26 has used the expression levy of taxation. In the context of all these articles, we are of the view that levy of taxation in Article 26 is not to be in the sense of prescribing the rate of tax on the total income of the assessee.
51. Our attention was also drawn to the contemporaneous agreement which was entered into with the United Kingdom (hereinafter described as the "U.K. agreement". Article 26 of the said agreement is set out hereunder (see [1994] 206 ITR (St.) 255, 260) : 1. The 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 are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention." 52. Clause 1 of Article 26 of the U.K. agreement is practically identical with the corresponding provision of Article 26 of the agreement with France (hereinafter described as the "French agreement").
53. Clause 2 of the U.K. agreement and the French agreement are also identical except that in the U.K. agreement a rule of construction has been provided. The U.K. agreement like the French agreement specifically provides that a taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in the other State than the taxation levied on enterprises of that other Contracting State carrying on the same activities. The U.K. agreement specifically makes it clear that this provision cannot be interpreted to mean that the rate of tax in respect of a permanent establishment of a U.K. company and an Indian company must be the same.
54. How is the French agreement to be construed in the absence of a specific rule of interpretation as provided by the U.K. agreement Can Article 26(1) and (2) be construed to mean that an enterprise of the French company cannot be taxed in India at a rate higher than the rate at which an Indian company has to pay tax The U.K. agreement was signed on January 25, 1993, while the French agreement was signed on September 29, 1992. The contention made on behalf of the applicant, is that in the absence of a specific rule of construction, Article 26(2) will have to be construed to mean that a French enterprise in India cannot be taxed at a rate higher than the rate at which a similar enterprise in India is taxed.
55. We are of the view that imposition of a higher rate of tax in respect of income of a permanent establishment of a French company is not prohibited by Clause 1 or 2 of Article 26 of the French agreement.
Substantially, the non-discrimination clause of the French and the U.K.agreement are similarly worded. The rule of interpretation provided by the U.K. agreement does not have the effect of carving out an exception or introducing a proviso to Article 26 of that agreement. The non-discriminatory clause will remain in full force. It only clarifies that the non-discriminatory clause should not be construed as a bar to imposition of a higher rate of tax on a foreign company.
56. If a permanent establishment of a U.K. company is taxed at a rate higher than the rate of tax payable by an Indian company, then the U.K.agreement does not come in the way. We are of the view that the non-discriminatory clause both in the French agreement and the U.K.agreement are to be construed similarly. Merely because a rule of construction which is specifically provided in the U.K. agreement is absent in the French agreement, does not lead to the conclusion that the same rule of construction will not apply to the French agreement.
57. In our view, the U.K. agreement has made explicit what was implicit in the French agreement. Clause 2 of Article 26 of the French agreement cannot be construed to mean that no tax can be levied on a foreign company at a rate higher than the rate payable by the Indian company.
Article 26 of the French agreement should not be construed as a provision preventing either India or France from charging tax on the profit of a permanent establishment at a rate higher than the rate payable by a domestic company on its total income.
58. Our attention was drawn to Section 90(2) of the Income-tax Act which provides that if there is any conflict between any provision of the agreement and that of the Income-tax Act, then the provision which is more beneficial to the assessee will apply. We do not find any conflict between the provisions of the Income-tax Act and Article 26.
Moreover, the conflict envisage in Section 90(2) must be a conflict between two clear and specific provisions of the Income-tax Act and the DTAA.59. The Income-lax Act, however, does not provide the rate at which income-tax will have to be levied. The rate is provided by the annual Finance Act and is determined by the fiscal policy of the Government.
Sub-section (2) of Section 90 does not say that the agreement will override the provision of the Finance Act by which the rates of tax are fixed annually.
60. Moreover, if after the agreement has come into force, an Act of Parliament is passed which contains provisions contrary to Article 26 of the agreement, the scope and effect of the legislation cannot be curtailed by reference to the agreement. The agreement was entered into pursuant to the power conferred upon the Government by Section 90 of the Income-tax Act. A subsequent legislation cannot be controlled by the agreement. This point was gone into at length in the case of Woodend (K. V. Ceylon) Rubber and Tea Co. Ltd. v. IRC [1970] 2 All ER 801 (PC). In that case, the Privy Council had to consider the scope of the DTAA entered into by the Government of Ceylon with the U.K. There, the non-discrimination clause contained in Article 18 was as under (page 803) : "(1) The residents of one of the territories shall not be subjected in the other territory to any taxation or any requirement connected therewith which is other, higher or more burdensome than the taxation and connected requirements to which the residents of the latter territory are or may be subjected.
(2) The enterprises of one of the territories shall not be subjected in the other territory, in respect of profits attributable to their permanent establishments in that other territory, to any taxation which is other, higher or more burdensome than the taxation to which the enterprises of that other territory, and, in the case of companies, to which enterprises of that other territory incorporated in that other territory, are or may be subjected in respect of the like profits.
(3) In this article the term 'taxation' means taxes of every kind and description levied on behalf of any authority whatsoever. . ." 61. The remainder of the article is not relevant to the issues in the present case.
62. The agreement was entered into during 1950 and was given force of law by an Act called the "Double Taxation (Relief) Act No. 26 of 1950".
In 1959, by an Act of Parliament, an additional tax was imposed in Ceylon on nonresident companies. It was argued by the taxpayer company which was a non-resident that the additional taxation was contrary to the Double Taxation Avoidance Agreement (DTAA) between Ceylon and the U.K. The Privy Council after analysis of the nature of the tax and the scope of article XVIII of the DTAA and Section 53C(1) of the 1959 Act, came to the conclusion that Section 53C of the 1959 Act was pro tanto in conflict with the 1950 Agreement. The Privy Council posed the question "What consequence follows ?" It answered the question by saying that the Act of 1959 must prevail over the 1950 agreement. The Privy Council rejected the contention of the taxpayer company that the agreement of 1950 must prevail. In coming to this conclusion, the Privy Council relied on the well-known rule of construction that if the provision of a later enactment was so inconsistent with or repugnant to the provisions of an earlier one that the two cannot stand together, the earlier is abrogated by the later.
63. The Privy Council observed that this rule of construction was more easy to state than to apply. However, there was no difficulty in application in the case before it because the 1950 agreement prohibited "other" taxation, etc. The 1959 Act imposed such "other" taxation under Section 53C. The inconsistency or repugnance could not be more complete.
64. The Privy Council, thereafter, posed the question "are there, however, other considerations which, when taken into account, tilt the balance in favour of the view that the 1950 Act should nevertheless prevail ?" It was noted that the agreement to which it gave the force of law was to "continue in effect indefinitely". If either of the contracting Governments wished to end it, it was to give written notice to the other before 50th June in any calendar year not earlier than the year 1954 (article XXI). That procedure was not followed.
65. The Privy Council noted that a similar problem was considered by the House of Lords in Callco Dealings Ltd. v. IRC [1961] 1 All ER 762 ; [1961] 59 TC 509. In that case, there was a Double Taxation Relief Agreement between the United Kingdom and the Republic of Eire. By a later enactment, Finance (No. 2) Act, 1955, vide Section 4(2), repayments of income tax were denied to "a person entitled under any enactment to an exemption from income-tax" where certain defined circumstances existed. A company resident in Eire claimed that notwithstanding the existence of such circumstances in its own case, it was entitled to repayment because the later enactment must be regarded as leaving such entitlement unaffected.
66. The House of Lords, however, rejected this contention. Lord Radcliffc said (page 808) : "The only one of the appellant company's contentions that appeared to me to have any plausibility was that which sought to restrict the apparent range of Section 4(2) of the Finance (No. 2) Act, 1955, by the argument that, if applied to persons enjoying exemption as being resident in the Republic of Ireland but not also in the United Kingdom, it would contradict the provisions of the inter-Governmental agreements about double taxation between the two countries. It is, no doubt, true that statutory words apparently unlimited in scope may be given a restricted field of application if there is admissible ground for importing such a restriction ; and the consideration that, if not construed in some limited sense, they would amount to a breach of international law is well recognised as such a ground. But a supposed intention not to depart from observance of the comity of nations is a much vaguer criterion by which to determine the range of a statute ; and when the departure consists in no more than a provision inconsistent with an inter-Governmental agreement about taxation which by its own terms is subordinated to the approval of the respective Legislatures of the countries concerned and persists only so long as its terms are maintained in force as law by those Legislatures, I think that there is no useful aid at all to be obtained from this principle of interpretation. The principle depends wholly on the supposition of a particular intention in the Legislature, and I do not think that in the case before us there is any reason to make the supposition which is suggested." 67. Following the principles laid down by the House of Lords in Collco Dealings Ltd.'s case [1961] 1 All ER 762, the Privy Council in Woodend's case [1970] 2 All ER 801, held that there was no reason to curtail the meaning to be given to Section 53C of the Ceylon Act only because the provisions of Section 53C of the 1959 Act were in conflict with the 1950 Agreement. The provisions of the later Act must prevail.
In Woodend's case [1970] 2 All ER 801, the Privy Council came to its decision after rejecting an argument (at page 809 of the Report) that Articles VI and XVIII of the Agreement did not have the force of law.
68. Consistent with the ruling of the House of Lords in Callco Dealings Ltd.'s case [1961] 1 All ER 762, the Supreme Court of India has also held as under in Gramophone Co. of India v. Birendra Bahadur Pandcy, AIR "National courts cannot say 'yes' if Parliament has said 'no' to a principle of international law. National courts will endorse international law but not if it conflicts with national law, national courts being organs of the National State and not organs of international law must perforce apply national law if international law conflicts with it. But the courts are under an obligation within legitimate limits, to so interpret the municipal statute as to avoid confrontation with the comity of nations or the well established principles of international law. But if conflict is inevitable, the latter must yield." 69. In the instant case, the provisions of the relevant Finance Act are quite clear. A non-domestic company has to pay taxes at the given rate in the Finance Act. Even if the rates are higher than the rates payable by a domestic company, the rate fixed by an Act of Parliament cannot be whittled down by reference to the provisions of an earlier agreement between India and France even if such agreement has the force of law.
70. Therefore, in our view, the rate of tax payable by a non-domestic company cannot be reduced by relying upon Article 26 of the DTAA between India and France.
71. The question raised is answered in the negative and against the applicant.