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2005 (11) TMI 372 - AT - Income TaxDouble Taxation Relief - benefit of non-discrimination clause of article 25 - Not accepting the claim of rate of tax applicable to domestic companies and/or co-operative banks also applicable to the Appellant - DTAA between India and Korea - amendment made in section 90(2) - whether article 25 is in conflict with any provisions of the Income tax Act - HELD THAT - The activities of Indian Banks and Korean Bank are similar. Both carry banking operations but the activities of the two are not same or identical. Indian banks were nationalised by the Acts of the Parliament to promote certain social and economical objects of the State and they have to act for the manipulation of the resources for the common good. It cannot be said that Korean Bank is working in the same circumstances as the Indian banks because former has no such constraints and it is free to operate their profit-making apparatus to the maximum extent possible. In our view the provision of non-discrimination has nothing to do with the rate of tax which is dealt with separately by other articles of the DTAA. Article 25 has deliberately not used the words tax was charged as against other articles which provide for rates of tax. Curiously article 25 has used expression levy of taxation . In the context of all these articles levy of taxation in the article 25 cannot mean or cannot be construed in the sense of prescribing rate of tax on the total income of the assessee. So far as conflicting provisions of Income-tax Act 1961 and article 25 are concerned we do not envisage any conflict. Conflict if any must be between two clear and specific provisions of Income-tax Act 1961 and DTAA. The Income-tax Act 1961 does not provide the rate at which income tax will be levied. The rates are provided by the Annual Finance Act and are determined by the fiscal policy of the Government. Section 90(2) so does the agreement do override the provisions of the Finance Act by which the rates of tax are fixed annually. The UK agreement makes it clear that the non-discrimination paragraph cannot be interpreted to mean that rate of tax in respect of PE of a UK and an Indian company must be the same. What is explicit in the UK agreement is implicit in Korean agreement. Whenever required application of rates of taxes on different items of income has been provided in Korean Agreement. For example para 2 of article 11 provides 15/20 per cent of gross dividend as taxes. In case of interest article 12(2) provides 15 per cent rate on gross interest. Article 13(2) provides rates not exceeding 15 per cent of gross amount of royalties or fee for technical services. Article 9(2) provides taxes not more than 50 per cent of tax chargeable in other State. Therefore clause 2 of article 25 of the Korean 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 Indian company. Thus in our considered view the DTAA in general does not prevail over the Finance Act and hence over the tax rates. Section 90 does not provide so. However we may add wherever DTAA has provided the taxation of a particular category of income at certain rates then charging of that income at different rates as per Income-tax Act 1961 may come in conflict with DTAA and hence the taxes over that category of income will be levied at that rates so provided in DTAA. But where no such rates on an income or a category of income on the status of an assessee has been prescribed in DTAA then there cannot be any conflict with the Income-tax Act 1961. Therefore DTAA as such will not prevail over Income-tax Act 1961 and hence rates as applicable to domestic companies cannot be applied to non-domestic companies. In the present case no rates for charging non-domestic companies has been provided in DTAA with Korea. Hence it cannot be said that DTAA is in conflict with Income-tax Act 1961. In fact no such real conflict has been demonstrated. It is discrimination to tax the PE of foreign bank at higher rates when the Indian Bank and the branch of foreign bank acting as P.E. are engaged in same activities. However we find that article 25(1) contains some important words/phrases which testify as to when and under what circumstances this non-discrimination clause would be applicable. One is nationals and the other is in the same circumstances . We are of the view that domestic banking company and non-domestic banking company do not function under same circumstances and hence discrimination clause in article 25 of Indo-Korean DTAA is not applicable. Whether new provision is in conflict with DTAA - In our considered view the Explanation introduced in 2001 by Finance Act 2001 w.r.e.f. 1-4-1962 is no way in conflict with the DTAA with Korea. In fact the DTAA provides for a mechanism for communicating with each other any amendment in law made by one country. It is thus evident that DTAA recognizes the fact that the amendments made in the IT Act are not affected in so far or they are not in conflict with the specific provisions of the DTAA. Therefore we are of the view that the amendment made in section 90(2) by way of insertion of Explanation is applicable insofar as it is not in conflict with the provision of DTAA.
Issues Involved:
1. Applicability of the non-discrimination clause under Article 25 of the India-Korea Double Tax Avoidance Agreement (DTAA). 2. Taxation rate applicable to a non-resident banking company compared to domestic companies. 3. Interpretation and precedence of DTAA provisions over the Income-tax Act, 1961 and the Finance Act. Detailed Analysis: Issue 1: Applicability of the Non-Discrimination Clause under Article 25 of the India-Korea DTAA The primary contention of the assessee was that taxing its income at a higher rate than domestic companies violates the non-discrimination clause of Article 25 of the India-Korea DTAA. The assessee argued that Article 25 mandates that nationals of Korea should not be subjected to more burdensome taxation in India than Indian nationals under similar circumstances. The assessee claimed that the tax rate for Indian companies carrying on similar banking activities should apply to it. The Assessing Officer rejected this claim, arguing that Article 25 only protects against discrimination based on nationality and applies when entities carry out the same activities, not similar ones. The Officer noted that Indian banking companies engage in additional activities, such as advances to agriculture and weaker sections, and distribute dividends in India, which the non-resident banking company does not do. The Officer also referenced the OECD model convention and UN model convention, which distinguish between "same activities" and "similar activities." Issue 2: Taxation Rate Applicable to a Non-Resident Banking Company Compared to Domestic Companies The assessee contended that its income should be taxed at the rate applicable to domestic companies (35%) instead of the higher rate for non-resident companies (48%). The CIT(A) upheld the Assessing Officer's decision, following orders from previous years. The Tribunal considered the rival submissions and case laws. It held that the non-discrimination clause in Article 25 does not apply to the differential tax rates for domestic and non-domestic companies. The Tribunal reasoned that DTAA provisions prevail over the Income-tax Act only regarding the assessability of income, not the rates prescribed by the Finance Act. It emphasized that the Finance Act, which prescribes tax rates, falls within the exclusive domain of Parliament and is not overridden by DTAA. Issue 3: Interpretation and Precedence of DTAA Provisions over the Income-tax Act, 1961 and the Finance Act The Tribunal acknowledged that DTAA provisions prevail over conflicting provisions of the Income-tax Act. However, it clarified that this precedence applies to the assessability and computation of income, not the tax rates prescribed by the Finance Act. The Tribunal cited several case laws, including CIT v. Visakhapatnam Port Trust and CIT v. Davy Ashmore India Ltd., to support this distinction. The Tribunal also examined the Explanation to Section 90, which clarifies that charging a foreign company at a higher rate is not considered less favorable. It held that this Explanation, introduced with retrospective effect from 1-4-1962, is not in conflict with the DTAA. The Tribunal referenced the decision in Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey, which stated that national law prevails in case of conflict with international law. The Tribunal concluded that the non-discrimination clause in Article 25 does not apply to tax rates. It emphasized that the activities of Indian and Korean banks are not the same, and the distinction in tax rates is justified. The Tribunal also noted that the DTAA does not prescribe specific tax rates for non-domestic companies, and there is no conflict between the DTAA and the Income-tax Act regarding tax rates. Conclusion: The Tribunal dismissed the appeal, confirming the CIT(A)'s order. It held that the non-discrimination clause in Article 25 of the India-Korea DTAA does not apply to the differential tax rates for domestic and non-domestic companies. The Tribunal emphasized that the Finance Act, which prescribes tax rates, is not overridden by DTAA, and the Explanation to Section 90 clarifies that charging a foreign company at a higher rate is not considered less favorable.
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