1. We find it convenient to dispose of these three appeals of the assessee, for the assessment years 1992-93 to 1994-95, involving common issue, by this consolidated order.
2. The common issue involved in these appeals is relating to the rate of tax chargeable on the income of the company for the respective assessment years. The relevant facts in this case are that the appellant, viz., Bank of America is a resident of the United States. It had filed the returns of income for assessment years 1992-93 to 1994-95 in India. Assessments under Section 143(3) had been completed for the said assessment years. In the case of domestic companies, the rate of tax provided under the respective Finance Acts is 45 per cent. Besides, surcharge at the rate of 15 per cent is chargeable. In the case of companies other than domestic companies the rate of tax provided under the respective Finance Act is 65 per cent. However, no surcharge is payable by a company other than a domestic company. The appellant company is admittedly a company other than a domestic company and therefore under the provisions of the Income-tax Act read with the Finance Acts of the respective assessment years, the rate of tax chargeable on the income of the appellant-company would be 65 per cent.
The appellant company however claimed that the rate of tax in their case cannot exceed 15 per cent of the rate of tax applicable in the case of domestic companies by virtue of tax avoidance agreement between the Government of India and the United States. It was claimed that the said convention between the two countries was signed on September 12, 1989. Under Clause 2 of Article 14 of the convention between the Government of the Republic of India and the Government of United States of America it is provided that a company which is resident of United States may be subject to tax in India at a rate higher than that applicable to the domestic companies. It however provides that the difference in the tax rate shall not exceed the difference of 15 percentage points. The appellant company had succeeded before the Assessing Officer in convincing him that the rate of 65 per cent provided under the Income-tax Act read with the Finance Act is to be restricted to 60 per cent as difference in the rate of tax of the domestic companies and the rate of tax applicable to other companies exceeds the difference of 15 percentage points.
3. However, the Commissioner of Income-tax, Bombay City-III, on being satisfied that the action of the Assessing Officer in charging tax at the rate of 60 per cent only in respect of the income of the appellant bank was erroneous insofar as it was prejudicial to the interests of the revenue, invoked his jurisdiction under Section 263 of the Income-tax Act, 1961. After giving an opportunity of being heard and considering the objections on behalf of the appellants the Commissioner held as follows:- That for assessment years 1992-93 to 1994-95 the rate of tax applicable in the case of domestic companies was 45 per cent. That since the surcharge at the rate of 15 per cent was payable by the domestic companies the effective rate of tax payable by the domestic companies was 51.75. As per Clause 2 of Article 14 of the convention between the Government of Republic of India and the Government of United States of America the difference in the tax rates should not exceed 15 per cent. In this case the effective rate of tax in the case of domestic companies being 51.75 per cent the levy of tax in the case of companies other than domestic companies would go up to 66.75 per cent. However, since the Finance Act imposes tax at the rate of 65 per cent only, therefore the difference of tax between the domestic companies and other than domestic companies has been maintained at less than 15 per cent. That therefore, the Assessing Officer was not justified in restricting the rate of tax in the case of the appellant bank to 60 per cent only The CIT(A) has accordingly directed the Assessing Officer to levy tax at the rate of 65 per cent for the respective assessment years.
4. Being aggrieved the assessee is in appeal against the decision of the CIT for the respective assessment years. It has been contended that Section 90 of the Income-tax Act, 1961 provides for entering into an agreement with a Government of any country outside India by the Central Government for the granting of reliefin respect of income etc. Our attention has been drawn to the convention between the two countries.
Reference has also been made to the Circular No. 333 of the Central Board of Direct Taxes (F. No. 506/42/81 -FTD), dated 2nd of April, 1982 wherein it has been clarified that in the event of any specific provision in the double taxation avoidance agreement that provision will prevail over the general provisions contained in the Income-tax Act. The learned counsel for the assessee contended that Section 90 of the Income-tax Act also provides that the laws in force in either country will continue to govern the assessment and taxation of income in the respective countries except where provisions to the contrary have been made in the agreement. In this case the Act provides for the levy of tax at the rate of 65 per cent. However, there is a restriction on the levy of tax in the case of foreign companies in so far as the difference between the rate of tax in the case of domestic companies and the companies of residents of United States of America should not exceed 15 per cent. It has been contended that under Article 2 of the convention between the two countries the convention shall apply in India in respect of the income-tax including any surcharge thereon. It is not disputed that surcharge is part of income-tax and chargeable in certain cases under the Income-tax Act, 1961. The learned counsel contended that the restriction placed under Clause 2 of Article 14 of the convention is in regard to the rate of tax and not in respect of on the income-tax and surcharge. The learned counsel pointed out that the rate of tax in the case of domestic companies at the time of signing of the convention was 50 per cent on which a surcharge of 5 per cent was also chargeable. For assessment year 1990-91 the rate of tax on the domestic companies was 50 per cent and the surcharge was payable at the rate of 8 per cent. The rate of tax in the case of companies other than domestic companies was 65 per cent. The convention takes note of the difference in the tax rates of the domestic companies and the foreign companies at 15 per cent. It is clear that the rate of tax mentioned in the convention is the rate at which income-tax is chargeable under the Finance Act without surcharge. The learned counsel pointed out that if the surcharge is included in the rate of tax payable by the domestic companies, then the difference between the rate of tax payable by the domestic companies and the rate of tax payable by other companies in assessment year 1989-90 or 1990-91 is not 15 per cent but less than 15 per cent. It is therefore claimed that the restriction placed under the convention is on the difference in the rate of tax without taking into account the surcharge. The surcharge, according to the learned counsel, is charged on the income-tax in respect of certain assessees as provided under the Finance Act. In the case of foreign companies there is no surcharge on income-tax. In the case of domestic companies a surcharge of 15 per cent is charged. The Central Government could levy a surcharge in respect of the foreign companies as in the case of domestic companies it was contended. However, the mere fact that the Central Government have not levied surcharge on the income-tax payable by the foreign companies, it cannot be said that the difference in the rates of tax payable by the foreign companies does not exceed 15 per cent of the rate of tax payable by the domestic companies, it was contended.
5. It has further been contended that the decision of the authority of the advance ruling reported in the case of Application No. P-16 of 1998, In re [1999] 236 ITR 103 and relied upon by the CIT is distinguishable on facts. Similarly, the decision of the Supreme Court in the case of CIT v. K. Srinivasan [1972] 83 ITR 346, relied upon by the CIT is claimed to be misplaced. It is not disputed that surcharge is payable on the income-tax and is part of the income-tax chargeable under the statute. Nevertheless a distinction has been maintained in respect of the rate of tax at which income-tax is chargeable and at which surcharge is payable by some of the assessees. It was accordingly contended that the orders passed by the CIT under Section 263 may be cancelled and those of the Assessing Officer restored.
6. The learned Departmental Representative on the other hand contended that the appeals filed by the assessee are misconceived insofar as the CIT has sent the matter back to the Assessing Officer for fresh consideration without recording any definite finding relating to the rate of tax chargeable in the case of appellant company. It was further contended that the rate of tax chargeable in the case of the appellant company is 65 per cent as against 60 per cent charged by the Assessing Officer. It was further contended that the difference in the rate of tax between the domestic company and the foreign company at the rate of 15 per cent as provided under Article 14(2) has been maintained. The learned DR pointed out that the domestic companies are liable to pay tax at the rate of 45 per cent, besides surcharge at the rate of 15 per cent on income-tax. Thus the domestic companies are liable to income-tax at the rate of 51.75 per cent. As against that rate of tax in the case of foreign companies has been provided at 65 per cent. The difference between the rate of tax in the case of domestic companies and the foreign companies is thus less than 15 per cent and therefore, the Assessing Officer was not justified in restricting the rate of tax to 60 per cent in the case of the appellant company. Our attention was invited to the decision of the Authority of Advance Ruling reported in the case of Application No. P-16 of 1998 (supra) where a reference has been made to the decision of the Supreme Court and on that basis held that in case of conflict between laws of two nations the, same is to be decided in favour of national law. The CIT, according to, the learned DR, was thus justified in invoking his jurisdiction under Section 263 and setting aside the orders of the Assessing Officer.
7. In counter reply the learned counsel for the assessee pointed out that the CIT (Admn.) has given a definite finding about the rate of tax chargeable in the case of the assessee and therefore, the contention on behalf of the revenue to the contrary is misconceived. Even otherwise an order under Section 263 without recording a definite finding would be invalid in view of the decision of the Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108. The learned counsel for the assessee further invited our attention to Section 2(37A), which defines the rate or rates in force. It was, accordingly, contended that the contentions advanced on behalf of the revenue are without any merit and therefore, appeals of the assessee may be accepted.
8. We have given our careful consideration to the rival contentions.
The dispute involved in these appeals revolves on the interpretation of Clause 2 of Article 14 of the convention between the Government of Republic of India and the Government of United States of America. The convention between the two countries has statutory recognition under Section 90 of the Income-tax Act, 1961. The Assessing Officer is empowered to make an assessment of any assessee in accordance with the provisions of the Act. Section 4 of the Income-tax Act, 1961 is the charging section. It provides that where a Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provision for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person. The Finance Act, 1992, Finance Act, 1993 and the Finance Act, 1994 provide for levy of tax in the case of companies other than domestic companies at the rate of 65 per cent. Therefore, if one were to go strictly in accordance with the provisions of the Act, the Assessing Officer would be bound to levy tax in the case of the appellant company at the rate of 65 per cent. However, under Section 90 of the Income-tax Act, 1961 the Central Government is empowered to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country or for avoidance of the double taxation income under this Act and under the corresponding law in force in that country. The effect of the agreement between the two countries as explained by the Andhra Pradesh High Court in the case of CIT v.Visakhapatnam Port Trust[1983] 144 ITR 146 : 15 Taxman 72 is as under:- (a) If no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act.
(b) If tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it.
(c) In case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the Court.
9. Thus, if as per the agreement between the two countries there is a restriction in the rate of tax chargeable in the case of foreign countries, the effect shall have to be given to the provisions of the agreement in preference to the provisions of the Act. We, therefore, have to concentrate on Clause 2 of Article 14 of the agreement. It will be useful to reproduce the said clause as under:- A company which is a resident of the United States may be subject to tax in India at a rate higher than that applicable to the domestic companies. The difference in the tax rate shall not, however, exceed the existing difference of 15 percentage points.
10. It is observed from Clause 2 of Article 14 reproduced above that a company which is resident of United States of America is permitted to be subjected to tax in India at a rate higher than applicable to the domestic companies provided the difference between the rate of tax applicable to the companies which are resident of United States of America is not more than 15 percentage points of the rate of tax applicable to the domestic companies. In the case of K. Srinivasan (supra) their Lordships of the Supreme Court have held that income-tax includes surcharge. If one were to work out the difference between the tax paid by the domestic companies and other than domestic companies including surcharge, then it cannot be said that the rate of 65 per cent applicable to the companies other than domestic companies exceeds the limits prescribed under Clause 2 of Article 14 of the agreement.
However, it is well established principle of law in regard to interpretation of the agreements that the same should be construed as to effectuate the intention of the parties and not to defeat it. The Court is bound to construe the terms and conditions in the context in which these have been incorporated. In Clause 2 of Article 14 the parties have consciously used the words "the difference in the rate shall not however exceed the existing difference of 15 percentage points". The use of words "existing difference" has made it necessary for us to find out what was the existing difference in the rate of tax in respect of the domestic companies and other companies at the time of signing of the agreement between the two countries.
11. The agreement between the Government of Republic of India and the Government of United States of America was signed on September 12, 1989. At that time the Finance Act, 1989 provided for 50 per cent rate of tax in the case of domestic companies and 65 per cent in the case of companies other than domestic companies. There was thus a difference of 15 per cent in the rate of tax payable by the domestic companies and the foreign companies. As already pointed out the tax in respect of the domestic companies was payable at the rate of 50 per cent, besides a surcharge of 5 per cent was also payable. The effective rate works out to 52.5 per cent. Since the domestic companies were liable to tax at the rate of 65 per cent, the difference between the rate of tax in respect of the domestic companies and the foreign companies does not work out to be15 per cent. It is, therefore, evident that the two countries intended to impose a restriction of 15 per cent difference in the rate of tax excluding surcharge.
12. Before we record our conclusion in respect of the interpretation of Clause 2 of Article 14 of the convention between the two countries, it is necessary in our view to consider the contention on behalf of the revenue that the surcharge is nothing but income-tax as held by the Supreme Court in the case of K. Srinivasan (supra). We have no doubt in our mind that surcharge is part of income-tax. Nevertheless the rate of income-tax and the surcharge are two different connotations recognised not only under the Income-tax Act, 1961 but also under the Constitution of India.
Though surcharge has been held to be part of income-tax, yet it is recognised as a separate category and the collection is treated differently than the tax levied at the specified rates. The income-tax is a broader concept. It includes additional tax, surcharge etc.
Different connotations may however be used for describing each part of the income-tax. As in the case of income, agricultural income though part of income, is treated differently under the Income-tax Act, 1961.
Similarly the mere fact that the surcharge is part of income-tax does not necessarily mean that it can have no separate identity or description. It may be useful to refer to Articles 270 and 271 of the Constitution of India. Article 270 provides that tax on income other than agricultural income shall be levied and collected by the Government of India and distributed between Union and the States in the manner provided in Clause 2. Article 271 provides as under:- Notwithstanding anything in Articles 269 and 270 Parliament may at any time increase any of the dues or taxes referred to in those Articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the consolidated fund of India.
13. It is therefore abundantly clear that even under the Constitution the income-tax and the surcharge have been treated differently.
Therefore, no wonder that the two countries viz-, Government of Republic of India and the Government of United States of America treated the 'rate of tax' chargeable in the case of the companies as it is treated under the Act and the Constitution of India. The rate of tax referred to in the agreement is the rate of tax chargeable under Article 270 of the Constitution of India. The surcharge is the additional tax, which was not intended to be taken into account for the purpose of placing a limit in the levy of tax in the case of foreign companies. In the case of domestic companies the Parliament have exercised the option of imposing additional levy under Article 271 of the Constitution of India but in its wisdom have excluded the foreign companies from the additional levy. Since the surcharge has been treated to be different than the rate of tax by the two countries in the agreement, we hold that the restriction placed on the rate of tax under Article 14(2) of the convention between the Government of Republic of India and the Government of United States of America is in regard to the rate of tax excluding surcharge. In this view of the matter the Assessing Officer was justified in restricting the rate of tax in the case of the appellant company to 60 per cent and therefore CIT was wrong in holding that the orders passed by the Assessing Officer for the respective assessment years in regard to rate of tax were erroneous insofar as prejudicial to the interests of the revenue.
We, accordingly, set aside the orders of the CIT under Section 263 for assessment years 1992-93, 1993-94 and 1994-95.