1. These appeals filed by the assessee against separate orders both dated 30-8-2002 of Commissioner (Appeals) for the assessment years 1997-98 and 1998-99. Ground raised common to both the appeals is as under The Commissioner (Appeals) erred in law and on facts in upholding the action of the JCIT thereby rejecting the appellant's claim for the benefit of the nondiscrimination clause of the Indo-Korea Double Taxation Avoidance Agreement (hereinafter referred to as "the DTAA") and taxing the appellant's income at the rate of 48 per cent instead of 35 per cent.
2. At the time of hearing, the learned Counsel for the assessee fairly conceded that the only issue in both the appeals is covered against the assessee by the decision dated 25-11-2005 of the ITAT 'D' Bench in ITA No. 4948/ Mum./05 for the assessment year 2002-03 in assessee's own case. However, he submitted that there have been several developments on the interpretation of the non-discrimination article of the Double Tax Avoidance Agreements (DTAAs) signed by India and to override the favourable rulings given by the judiciary the Legislature has amended the provisions of the Act twice in the recent past. The counsel submitted that in the aforesaid decision in assessee's own case for the assessment year 2002-03 (supra) the reasons given for non-granting of benefit of articles 25(l) and 25(2) are as under: 1. The assessee bank and the Indian banks cannot be said to be functioning under the same circumstances.
2. The area of operation of Explanation and article 25(l) are in different field 3. The provisions of the Finance Act prevail over the provisions of the DTAA. 4. The Indian banks are required to promote certain social and economical objectives.
5. Non-discrimination article of the India-UK DTAA specifically permits discrimination.
1. Levy of tax at a higher rate cannot be construed as "less favourable".
2. The activities of the appellant and the Indian banks are not same.
3. Co-operative societies are engaged in social engagement etc. and should be considered as a privileged public body.
The counsel further submitted that he does not wish to rely on the provisions of article 25(l). However, it is submitted that the order of the Hon'ble Mumbai Tribunal (ITA No. 4948/Mum./05) does not take into consideration the order of the Hon'ble Calcutta Tribunal (ITA No. 692 /Cal./ 2000). This is because the Calcutta Tribunal has specifically held that the provisions of the DTAA override the provisions of the Finance Act. Further, even the argument of 'social obligations' is not accepted by the Calcutta Tribunal. Subsequently the provisions of Section 90 are amended by virtue of an Explanation. The insertion of this Explanation indicates that the Legislature has accepted the fact that without such Explanation foreign companies are entitled to the benefit of the non-discrimination article of the respective DTAA. Even the CBDT had clarified the same position in the form of a letter in the case of ABN AMRO Bank. Thus, he submitted that the following arguments do not hold good after amendment of Section 90: (a) Higher rate of tax on foreign companies does not result in discrimination.
(b) The non-discrimination article ('taxation') does not apply to 'rate of tax'.
(d) Indian banks have social obligations and hence the foreign banks and the Indian banks cannot be said to be engaged in the 'same activities'.ABN Amro Bank N.V.v. Jt. CIT (2005) 4 SOT 643 (TM) the Kolkata Tribunal has specifically observed that the Explanation to Section 90 has been inserted with the intention of overriding the provisions of the non-discrimination of the DTAAs. If based on the aforesaid arguments read with the provisions of Section 90. Finance Act and the DTAA if it was possible to levy tax at a higher rate on the foreign companies then there was no need to amend Section 90.
3. As regards comparison with the provisions of other DTAAs are concerned, he invited our attention to the decision of the Supreme Court in the case of UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC). In this case the availability of the provisions of the DTAA between India - Mauritius was disputed. The Supreme Court compared the provisions of the DTAA between India-USA and India-Mauritius. The India-USA DTAA contained a specific provision (Limitation of Benefit) which provided that the benefit on the India-USA DTAA would not be available under certain circumstances. However- such provisions do not appear in the India Mauritius DTAA. The Supreme court held that in absence of provisions similar to those contained in India-USA DTAA, the benefit of India Mauritius DTAA cannot be denied.
4. It was further submitted that in the context of discrimination on account of rate of tax, it is submitted that the DTAA signed by India with certain countries such as UK, Germany, Bulgaria, Canada etc.
specifically permit taxation of the Permanent Establishment at a rate higher than the rate applicable to domestic companies. However, the DATA between India and Korea does not contain such specific provision.
He relied on the provisions of relevant para of the articles are as under India-UK 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.
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.
This provision shall not be constituted as obliging a Contracting State 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..
It is submitted that the DTAA containing the difference between the aforesaid provisions is obvious and both cannot have the same interpretation. Thus article 26(2) of the India-UK DTAA specifically permits India to levy tax at a higher rate on the Indian Permanent Establishment of an UK company as compared to tax rates applicable to an Indian enterprise. However, article 25(2) of the India-Korea DTAA does not permit India to levy tax at a higher rate on the Indian Permanent Establishment of a Korean company as compared to tax rates applicable to an Indian enterprise.
5. With regard to reliance on article 25(2), the counsel placed reliance on the provisions of article 25(2) of the DTAA. In terms of article 25(2) the taxation of the Indian Permanent Establishment of the Korean enterprise "shall not be less favourably levied in that other State (India) than the taxation levied on enterprises of that other State (India) carrying on the same activities". The aforesaid provision restricts discrimination as compared to an 'enterprise' of India. An 'enterprise' in simple terms is a business unit. Thus an enterprise could be an Indian company or an Indian co-operative society'. The counsel submitted that it is discriminated as compared to an Indian co-operative society carrying on banking activities. The appellant further submits that the Hon'ble Supreme Court has in the case of Madhya Pradesh Co-op Bank v. Addl. CIT held that even the co-operative banks are engaged in the 'banking business' like any other banking company. The Calcutta Tribunal has in the case of ABN Amro Bank (ITA No. 692 (Cal.) 2000) upheld this interpretation.
6. He further relied on the Scope of Explanation to Section 90 as under: Explanation:-For the removal of doubts it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.
The aforesaid Explanation provides that if a foreign company is required to pay tax at a rate higher than the rate applicable to a'domestic company' then the same is not to be considered as a 'less favourable charge'.
The Explanation uses the term 'domestic company' and accordingly it is obvious that the scope of the Explanation is restricted to comparison with a 'domestic company'. The term 'domestic company' is defined under Section 2(22A) of the Act. A 'co-operative society' cannot be said to be a 'domestic company'.
It was submitted that in terms of the provisions of article 25(2) of the DTAA between India and Korea, India cannot levy tax on the Indian Permanent Establishment of a Korean enterprise at a rate higher than the rate applicable to: Further, Explanation to Section 90 provides that if the foreign company (permanent establishment) is charged tax at a rate higher than a domestic company then the same is not to be considered as less favourable charge for the foreign company. However, the Explanation does not provide that if the foreign company (permanent establishment) is charged tax at a rate higher than the rate applicable to a co-operative society then the same is not to be considered as less favourable charge for the foreign company.
In absence of any specific provision in Explanation in this regard, if an Indian permanent establishment of foreign company is made liable to pay tax at a rate higher than the rate applicable to a co-operative society engaged in the same activities, then the same amounts to less favourable charge for the foreign company. In such circumstances the provisions of the DTAA override the provisions of the domestic law and the foreign company is entitled to claim the benefit, of the non discrimination article.
7. He further narrated the social obligations of a co-operative society and benefits as a privileged public body. Based on the decision of the Supreme Court in the case of Madhya Pradesh Co-operative Bank (supra) read with the decision of the Calcutta Tribunal in the case of ABN Amro Bank (IT Appeal No. 692 (Cal.) of 2000) it is submitted that a foreign bank and a cooperative bank can be said to be engaged in the same activity i.e., banking. Further, subsequent to the amendment of Section 90 it may not be correct to take the same 'social obligations' argument as the amendment of Section 90 indicates that it was not an acceptable argument.
As regards special benefits available to a co-operative society as a 'privileged public body' engaged in fulfilment of social obligations, the appellant submits that it does not wish to claim the same benefits.
A co-operative society was subject to tax at a maximum rate of 35 per cent for assessment year 1997-98. Further, in terms of provisions of Section 80P the income earned by a co-operative society from banking business is deductible from taxable income and not chargeable to tax.
The appellant submits that the tax benefit available to a co-operative society in terms of the provisions of Section 80P should be considered as a special benefit for fulfilling the social obligations etc. The appellant.does not wish to claim the benefit of Section 80P. The appellant merely claims the tax rate applicable to a co-operative society on its income without any specific tax exemptions i.e., the rate of 35 per cent.
8. On the other hand, the learned D.R. contended that the only issue involved in both the appeals is squarely covered against the assessee in assessee's own case (supra). Therefore, following the said decision of the Co-ordinate Bench, the appeals filed by the assessee be dismissed. The learned D.R. further submitted that the assessee is not a Co-operative Society, therefore, reliance placed by the assessee is misplaced. The benefit available to Co-operative Society cannot be extended to a bank based in Korea.
9. We have heard both the sides and carefully gone through the orders of the authorities below. The facts of the assessee's case are identical with that in the assessment year 2002-03, wherein, the Tribunal vide order dated 25-11-2005 in ITA No. 4948/M/05 (supra) held that Explanation to Section 90(2) introduced by the Finance Act, 2001 with retrospective effect from 1-4-1962 is an integral part of the Section, which clearly laid down that the charging of a foreign company at a higher rate will not be regarded as less favourable as compared to domestic company. In view of this, in our opinion, no comparison of tax rate/treatment given to co-operative society in India can be given to a foreign company. The incentive given to the Co-operative Bank/ Society cannot be extended to the foreign bank. We therefore, following the decision of the Co-ordinate Bench in assessee's own case for the assessment year 2002-03 (supra), we dismiss the appeals of the assessee.