1. The Tribunal has decided vide order dated 14-2-2007 the cross appeals of the assessee and the revenue for assessment years 1995-96, 1996-97 and 1997-98 and vide the same order, two cross-objections of the assessee were also decided for assessment years 1995-96 and 1996-97. In these years, three issues were involved in all these three years.
2. The first issue was regarding applicability of Section 44C for allowability of head office expenses. This issue was raised in assessee's appeal for assessment years 1995-96 and 1996-97; whereas, the same issue was raised by the revenue in assessment year 1997-98.
This issue has been decided by the Tribunal as per para No. 5 of the impugned Tribunal order as per which, the Tribunal has restored this matter back to the file of the assessing officer with the direction that the assessing officer should decide this issue afresh in all the three years as per amended provisions of Section 44C after considering the Judgment of Hon'ble Bombay High Court relied upon by the learned Counsel of the assessee rendered in the case of Deutsche Bank AG as per order dated 24-7-2003 in Income Tax reference No. 139 of 1997. The assessing officer was also directed to consider the Judgment of Authority for Advance Rulings relied upon by learned Departmental Representative of the revenue rendered in the case of In re ABC (1987) 228 ITR 4871. The assessing officer was also directed to consider the fact as to what happened in the intervening years i.e., assessment years 1993-94 and 1994-95.
Now, this Miscellaneous Application is filed by the assessee and it is contended in the Miscellaneous Application by the assessee that tax treaty between India and UAE is applicable in their case for these assessment years and has in fact been referred to by learned Commissioner (Appeals) in his order in para 2 at pages 1 to 8 of his order for assessment year 1997-98. It is the contention of the assessee in Miscellaneous Application that the Tribunal ought to have taken the decision and decided the issue by reversing the order of learned Commissioner (Appeals) in assessment year 1997-98 and by confirming the order of learned Commissioner (Appeals) on this issue in assessment years 1995-96 arid 1996-97.
3. It is submitted by learned Counsel of the assessee that where, it was felt necessary that the deduction for expenses attributable to a permanent establishment incurred either in the country where the permanent establishment is situated or elsewhere should be restricted in accordance with taxation laws of such country, specific provisions have been made in Article 7(3) of Double Taxation Avoidance Agreement wherein it has been provided that deduction for expenses attributable to a permanent establishment would be allowable only to the extent such expenses are allowable under the provisions of domestic law of the contracting state in which the permanent establishment is situated as mentioned in the Double Taxation Avoidance Agreement with Nepal, Norway and Oman. It is also submitted that in Double Taxation Avoidance Agreement entered into by India with Japan, Mauritius and Malaysia, wherein the provisions of Article 7(3) relating to assessment of profits of a permanent establishment are similar as in the Double Taxation Avoidance Agreement between India and UAE. Reliance have been placed on the Tribunal Judgment rendered in the case of ITO v.Degremont International (1985) 11 ITD 564 (Jp-Trib) and also in the case of Banque Indo-suez (IT Appeal No. 2089 to 2091 (Bom) 1991 ). It has been submitted by him that provisions of Article 7(3) between of Double Taxation Avoidance Agreement between India and UAE should be interpreted in the same manner as done by the Income Tax Appellate Tribunal in these Judgments relied upon by him and no restriction should be made under Section 44C of the provisions in the matter of allowance of head office expenses of the assessee bank.
4. As against this, it is submitted 'by learned Departmental Representative of the revenue that there is no mistake in the Tribunal order on this issue; and hence, Miscellaneous Application of the assessee on this point should be rejected.
5. We have considered the rival submissions and we find that all these arguments were raised before learned Commissioner (Appeals) also and these Judgments of the Tribunal were also cited before him; and he has noted the same in para No. 2.1 of his order for assessment year 1997-98. It has been noted by learned Commissioner (Appeals) in para No. 2.2 of his order that since, Article 7(3) of the Double Taxation Avoidance Agreement between India and UAE does not contain an express provision to lay down that the Indian taxation law would not be applicable for computation of profits of the permanent establishment, the provisions of Article 25(1) relating to elimination of double taxation would prevail and the laws in force in India should continue to govern the taxation of income of the permanent establishment situated in India. Learned Commissioner (Appeals) has reproduced one para from treaties on double taxation conventions by Klaus Vogel (3rd Edition), wherein while interpreting the provisions of Article 7(3) of the Double Taxation Avoidance Agreement between India and Germany; certain observations were made. From these observations, it is noted by learned Commissioner (Appeals) that, wherever it was decided by the contracting states that the provision of domestic tax laws would not apply in computation of profits of the permanent establishment situated in that state, it was specifically provided so in the Double Taxation Avoidance Agreement entered into by Germany with Kuwait and UAE and express provision in this regard has been introduced in the Article 7(3) to lay down that irrespective of limitations provided by internal law, expenses may be deducted (attributable to the permanent establishment) provided that the deductions are in accordance with the international practices. On this basis, learned Commissioner (Appeals) came to the conclusion that provision of Article 25(1) of Double Taxation Avoidance Agreement between India and UAE specifically clarify the international principles of double taxation which is implicit in provision of Article 7(3) in the matter of computation of income of a permanent establishment that the taxation of the income of a permanent establishment in a contracting state must always be in accordance with the domestic tax laws of the said contracting state. On this basis, it was held by him in para No. 2.3 of his order that on the combined reading of provisions of Article 7(3) and Article 25(1) of the Double Taxation Avoidance Agreement between India and UAE, the profits of the Indian branch or permanent establishment of the assessee-bank would have to be determined in accordance with the domestic laws of India and all restrictions on allowance of various business expenses as contained in the Indian Income Tax Act would be applicable on the profits of the permanent establishment.
Regarding reliance placed by learned Counsel of the assessee on various Tribunal Judgments, we find that in the case of Degremont International (supra), the Tribunal has considered only Article 111 (3), which is similar to Article 7(3) of Double Taxation Avoidance Agreement between India and UAE; but there is no reference to any article in that Judgment similar to Article 25(1) between India and UAE, which is followed by learned Commissioner (Appeals) in the present case. Copies of other Tribunal Judgments are not provided to us and these Judgments are not reported; and hence, these Judgments cannot be considered by us. It is noted by learned Commissioner (Appeals) on page No. 3 of his order that learned Authorized Representative of the assessee accepted in fairness that in this regard one would have to also consider the provisions of Article 25(1) of the Double Taxation Avoidance Agreement with UAE, wherein it is provided that the laws in force in either of the contracting states shall continue to govern the taxation of income and the capital in the respective contracting states except where express provision to the contrary is made in this convention. The contention of the assessee before learned Commissioner (Appeals) was that express provision to the contrary in the matter of allowance of expenses attributable to the permanent establishment has been made in Article 7(3). It is also noted by learned Commissioner (Appeals) that it was specifically provided in the Double Taxation Avoidance Agreement entered into by Germany with Kuwait and UAE and express provision in this regard has been introduced in the Article 7(3) to lay down that irrespective of the limitations provided by internal law, expenses may be deducted (attributable to the permanent establishment) provided that the deductions are in accordance with the international practices. In the present case, Article 7(3) of India with UAE reads as under: In determining the profits of a permanent establishment, there shall beallowed as deduction expenses, which are incurred for the purposes ofthe business of the permanent establishment, including executive andgeneral administrative expenses so incurred whether in the state inwhich the permanent establishment is situated or elsewhere.
From the above Article 7(3) of the Double Taxation Avoidance Agreement between India and UAE, it is clear that this article does not contain an express provision to lay down that the Indian Taxation Law would not be applicable for computation of profits of the permanent establishment; hence, we are in agreement that the provision of Article 25(1) relating to elimination of double taxation would prevail and the laws in force in India should continue to govern the taxation of income of the permanent establishment situated in India. We dealt with the objection of learned Counsel of the assessee that in the impugned Tribunal order, applicability of Article 7(3) of Double Taxation Avoidance Agreement between India and UAE to head office expenses was not considered and we find that even after considering applicability of Article 7(3) between India and UAE, conclusion remains the same that in view of Article 25(1) of Double Taxation Avoidance Agreement between India and UAE, head office expenses in the present case has to be allowed as per provisions of Section 44C of Income Tax Act. This contention of the assessee in Miscellaneous Application is rejected that head office expenses is to be allowed without subjecting the same to the restriction contained in Section 44C of the Income Tax Act.
6. Second issue involved in all these three years was regarding allowability of Indian Operations Liaison Office (IOLO) expenses.
7. On this issue also, matter was decided by learned Commissioner (Appeals) in favour of the assessee in assessment years 1995-96 and 1996-97 and against the assessee in assessment year 1997-98. In the Miscellaneous Application, it is the contention of the assessee that the expenditure of IOLO office was exclusively in connection with the Indian Operations and it had nothing to do with the expenditure on account of head office expenses; and hence, the same should be allowed as per the ratio of the decision of the Hon'ble Bombay High Court in assessee's own case in CIT v. Emirates Commercial bank Ltd. . It is the contention of the assessee that if for any reason, these are considered as head office expenses, based on the provisions of the treaty between India and UAE, the entire expenditure ought to have been allowed.
8. We have considered the Miscellaneous Application of the assessee on this account and we find no mistake in the Tribunal order on this issue. This issue has been dealt with by the Tribunal as per para No.10 of the impugned Tribunal order and the matter was restored by the Tribunal to the file of the assessing officer for a fresh decision for the reason that judgment of Hon'ble Bombay High Court in assessee's own case in Emirates Commercial bank Ltd.'s case (supra) was in respect of the assessment years 1983-84 and 1984-85; whereas, assessment years involved in the present appeals before us are assessment years 1995-96, 1996-97 and 1997-98. It is also noted by the Tribunal that there is amendment in the provisions of Section 44C with effect form 1-4-1993 i.e., with effect from assessment year 1993-94 and because of this reason, the issue was restored by the Tribunal to the file of the assessing officer for a fresh decision after considering amended provisions of Section 44C. Regarding the contention that these expenses i.e., expenses on IOLO are exclusively pertaining to branch at Bombay, it has been noted by the Tribunal on page No. 7 of the impugned Tribunal order that the language of the Auditors certificate suggests that the expenditure were allocated to Indian Branch and the auditors have checked the mathematical accuracy of the allocation made. It is also observed by the Tribunal that the mathematical accuracy of allocation will be required to be checked if the expenses are not pertaining to Indian Branch alone and some amount is allocated to Indian Branch as per some mathematical formulae on the basis of some agreed criteria. Under these facts and circumstances, the Tribunal came to the conclusion that this matter should also go back to the file of the assessing officer for deciding this issue afresh after examining the fact as to whether these expenses incurred at head office were for the Indian branches alone. Regarding the contention that even if these expenses are considered as Head Office expenses, the same should be allowed in full as per treaty, we find that this issue was decided against the assessee because it is held by us above that Head Office expenses are to be governed by Section 44C even after considering Article 7.3 of the treaty. Under these facts and circumstances, we find no mistake in the impugned Tribunal order regarding this issue also; and hence, this contention of the assessee in all these Miscellaneous Applications is also rejected.
9. The third issue involved in all these three years was regarding tax rate applicable to the business income of the assessee. As per the assessee, it should be 43 per cent [40 per cent tax and 7.5 per cent surcharge] and not55 per cent being the rate applicable to foreign companies for assessment year 1997-98. As per the assessee in assessment years 1995-96 and 1996-97, tax rate applicable to its business income should be 46 per cent [40 per cent tax and 15 per cent surcharge] and not 55 per cent being the rate applicable to the foreign companies for these years.
10. Regarding this issue, it is submitted by the assessee in its three Miscellaneous Applications that the assessee is seeking to invoke provisions of Article 26(2) of India-UAE tax treaty. It is submitted in the Miscellaneous Application that as per Article 26(2) of Indo-U AE tax treaty, tax rates to be charged to the assessee company has to be compared with tax rates being charged to other entities in India engaged in the same activities and since co-operative banks are also engaged in the banking activities in India, rate of tax to be charged to the assessee has to be compared with the rate of tax being charged to co-operative banks in India and since rate of tax being charged to co-operative banks in India is less, the assessee bank cannot be charged with higher rate of tax as per this Article 26(2) of India-UAE tax treaty.
11. It is also submitted that explanation to Section 90 is also not applicable to the assessee's case because this explanation seeks to allow rate discrimination between domestic company and foreign company, and because co-operative bank is not a domestic company, Explanation would not apply.
12. It is submitted in the Miscellaneous Application that even amended Explanation does not alter the legal position as the definition of 'domestic company' in Section 2(22A) itself includes the condition that in order to constitute a domestic company, foreign company must have "made the prescribed arrangement for declaration and payment within India of the dividends [including dividends on preference shares] payable out of its income in India". It is submitted that this condition is the same as the one that existed in the explanation to Section 90 prior to its deletion by the Finance Act, 2004; and, therefore, the ratio of the rulings in the case of Decca Survey Overseas Ltd., IT Appeal No. 3604/B/94 dated 27-2-2004 and bank International Indonesia must continue to apply.
It is also submitted by the assessee in Miscellaneous Application that as per Article 26(1) & (2) and as per the definition of the term "National" in Article 3(h), term 'National' includes any legal person and a company would certainly be a legal person; and therefore reading article (3) with Article 26, non-discrimination provisions are required to be taken into account for the purpose of determining the tax rate applicable to a UAE resident bank carrying on business in India.
13. It is also submitted by the assessee in the Miscellaneous Application that list of 26 treaties of India with various countries had been handed over at the time of hearing of the appeal to show that wherever it was noted that PE may be subjected to a higher tax rate, express provision to that effect has been made in the relevant treaties; whereas, no such provisions exists in treaty between India and UAE. It is submitted that in the impugned Tribunal order, there is no reference to these treaties of India with 26 countries. It is also submitted that it was also pointed out in course of hearing of the appeal that the treaty between India and New Zealand was introduced in 1987; and the same was amended in 2000 and as per this amendment made in 2000, certain words were added in Article 24(2), which reads as under: This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which a company 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 company of the first-mentioned contracting state.
14. It is submitted that since, in the tax treaty between India and UAE, there is no specific provision that the rate differential between a domestic company and a foreign company is not to be construed as resulting indiscrimination, higher rate of tax cannot be charged on the assessee-company.
15. It is also submitted by the assessee in the Miscellaneous Application that the revenue has relied upon the decision of Mumbai Income Tax Appellate Tribunal in the case of Chohung Bank v. Dy.
Director of IT ; but it is submitted in the Miscellaneous Application that this decision should not be followed because this decision contains several inconsistencies, inaccuracies and contradictions.
16. It is submitted in the Miscellaneous Application by the assessee that the Tribunal has decided this issue without dealing any of these arguments advanced by the assessee on the basis of Double Taxation Avoidance Agreement, which formed the fundamental contention of the assessee on the footing that even if the explanation is applied, the non-discrimination clauses of the Double Taxation Avoidance Agreement would result in the lower rate of tax to be applied. It is submitted that this is apparent mistake in the impugned order and therefore this issue should be decided after considering these contentions and various statements made by learned Counsel of the assessee.
17. As against this, learned Department of Representative of the revenue submitted that the Tribunal has decided this issue on merit and there is no mistake in the Tribunal order and therefore Miscellaneous Application of the assessee on this issue should be rejected.
18. We have considered the rival submissions and we find that this issue has been decided by the Tribunal on the basis that only comparables can be compared. It is also noted by the Tribunal in the impugned order that till date, the higher rate of tax is charged in India from foreign companies only and not to any other foreign entity; and for these two reasons, this explanation to Section 90 is talking rate of tax only to foreign company and domestic company. The contention of the assessee in Miscellaneous Application is that various arguments advanced by the learned Counsel of the assessee in course of hearing of the appeal are not considered by the Tribunal. We want to make it clear that this is not so and issue has been decided by the Tribunal after duly considering all arguments of the assessee; although, the same are not incorporated in the body of the order for the sake of brevity; but, now, in the following paragraphs, we deal with these contentions of learned Counsel of the assessee; although result will remain the same.
19. The first contention raised in the Miscellaneous Application is that in view of the provisions of Article 26(2) of India-UAE tax treaty, ratechargeable to the assessee-company should be compared with the ratechargeable to co-operative bank in India because co-operative bank in India is also carrying on the same activities as being carried on by the assessee. We find no merit in this contention of the assessee because in our considered opinion, Article 26(2) of the tax treaty between India and UAE does not provide that rate of tax to be charged to a company has to be compared with any other entities carrying on the same activity. If that be so, then in case of a company of UAE carrying on the business of retail trade, it can be claimed that rate of tax to be charged to it should be compared with an individual in India because individual in India is also carrying on the same activity of retail trade and is charged with low rate of tax along with initial exemption of certain amount in each year. Article 26(2) of Indo-UAE treaty reads as under: The taxation on a permanent establishment which enterprise of acontracting state has in the other contracting state shall not be less favourably levied in that other contracting state than the taxation leviedon enterprise of that contracting state carrying on the same activities inthe same circumstances or under the same conditions.
20. From the above provisions of Article 26(2), it can be seen that for comparing the tax rate of foreign entity, and an Indian entity not only carrying on the same activity is required to be compared but also the circumstances and conditions should be the same. In our humble opinion, circumstances and conditions to be compared includes the constitution of entity and hence, foreign company has to be compared with the domestic company and we, therefore, find no force in this contention of the assessee and that in the present case, rate of tax to be charged to the present assessee should be compared with rate of tax being charged to cooperative bank in India.
21. Now, we deal with second contention of the assessee that explanation to Section 90 would not be applicable to the assessee's case; as it only seeks to allow discrimination between a domestic company and a foreign company; and since, co-operative bank is not a domestic company, the Explanation would not apply. It is also contended by learned Counsel that the assessee-company is also 'national' as per Article 3(h) and hence as per Article 26(1) of the Double Taxation Avoidance Agreement, higher rate of tax cannot be charged. We find no force in these arguments of learned Counsel of the assessee also because, we have already held above that only comparable can be compared and rate of tax to be charged to foreign company has to be compared with the rate of tax being charged to domestic company and the same cannot be compared with the co-operative bank, hi view of explanation to Section 90, the second argument regarding charging of higher rate of tax to foreign national also has no substance. These arguments of learned Counsel of the assessee also fail.
22. Now, we deal with the contention that the definition of 'domestic company' in Section 2(22A) itself includes the similar contention as was there in explanation to Section 90 prior to its deletion by the Finance Act,2004. We find no merit in this contention of the assessee because we find that this argument has already been dealt with by us in para No. 33 of the impugned Tribunal order; and it has been held by us in that para that for the purpose to satisfy Explanation to Section 2(22 A), arrangements prescribed in rule 29 with regard to Section 194H are applicable and hence, it cannot be said that no arrangement is prescribed for the purpose of 'domestic company' as per the definition of that term in Section 2(22A). Since, this argument was already specifically dealt with by us in paraNo. 33 of the impugned Tribunal order, there is no need to deal it again.
23. Now, we deal with the contention of learned Counsel of the assessee that as per the list given of tax treaty of India with 26 countries, where, it was intended that a differential tax rate does not amount to discrimination, a specific provision has been inserted in the respective treaties. It is also contended by the assessee in Miscellaneous Application that the tax treaty between India and New Zealand, which was introduced in 1987, there was amendment made in 2000 in this regard. This is the contention of the assessee that since no such amendment has been made in the tax treaty between India and UAE to the effect that the differential tax rate does not amount to discrimination; it has to be held that it amounts to discrimination and hence, in the present case, tax rate cannot be charged to the assessee in excess of tax rate being charged to an Indian company. In this connection, we find that anExplanation has been inserted in Section 90 by the Finance Act, 2001 with retrospective effect from 1-4-1962. The explanation reads as under: Explanation. For the removal of doubts, it is hereby declared thatthe charge of tax in respect of a foreign company at a rate higher thanthe rate at which a domestic company is chargeable, shall not beregarded as less favourable charge or levy of tax in respect of such foreign company.
24. From the above, it can be seen that this explanation was inserted for removal of doubts; and the same is inserted by the Finance Act, 2001. We also find that out of list of 26 treaties of India with various countries, all treaties are dated prior to the date of Finance Act, 2001, except, the treaty of India with Ukraine, which is dated 11-1-2002; with Uganda, which is dated 12-10-2004; with Sudan, which is dated 1-11-2004 and with Malaysia, which is dated 12-10-2004. The amendment in tax treaty between India with New Zealand was also in the year 2000, which is also prior to the date of Finance Act, 2001.
25. From the above, it can be seen that prior to insertion of this explanation to Section 90, Government of India took precaution to provide specifically in these tax treaties with various countries that charging of higher rate of tax will not amount to discrimination. In the absence of this explanation to Section 90, this can be argued that in such cases, where there is no such specific provision in the treaty, charging of higher rate of tax will amount to discrimination; but in the light of this explanation to Section 90, no such argument can be raised. It is also to be noted that tax treaties are entered into by the Central Government of India with Government of outside India as per authorities given by the same Section 90 of Income Tax Act, 1961; and hence, insertion of explanation in Section 90 or amendment in Section 90 cannot be overlooked or ignored. With regard to tax treaties with 4-countries, which are subsequent to insertion of this explanation to Section 90 by the Finance Act, 2001, we are of the considered opinion that in spite of insertion of this explanation in Section 90, insertion of such clause in tax treaties with the outside countries is always advisable to avoid any confusion; but that does not mean that if there is no such specific provision in the tax treaty with any country, this explanation to Section 90 will not apply and hence, this contention of the counsel of the assessee also fails that because of the reason that the treaty of India with UAEI does not contain specific provision to the effect that charging of higher rate of tax will not amount to discrimination, no such higher rate of tax can be charged to the assessee-company. We are of the considered opinion that in the light of this Explanation to Section 90, charging of higher rate of tax to any foreign company shall not be regarded as less favourable charge or discrimination whether the treaty contains any specific provision in this regard or not. This contention of the assessee also fails.
26. Now, we deal with the last contention of the assessee in the Miscellaneous Application that the Tribunal decision in the case of Chohung Bank (supra) is not applicable in the present case. In this regard, it is sufficient to mention that in the impugned Tribunal order. Tribunal decision in the case of Chohung Bank (supra) has not been followed; and, therefore, this contention of the assessee is not relevant.
27. We have dealt with all the arguments of learned Counsel of the assessee; but the result remains the same.
28. In the result, all these Miscellaneous Applications of the assessee stands disposed of as above.