2007 (7) TMI 426 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 44C for allowability of head office expenses.
2. Allowability of Indian Operations Liaison Office (IOLO) expenses.
3. Tax rate applicable to the business income of the assessee.

Detailed Analysis:

1. Applicability of Section 44C for Allowability of Head Office Expenses:

The Tribunal addressed the issue of the applicability of Section 44C for the allowability of head office expenses in the appeals for the assessment years 1995-96, 1996-97, and 1997-98. The Tribunal restored the matter to the file of the Assessing Officer (AO) with instructions to decide the issue afresh based on the amended provisions of Section 44C, considering the judgment of the Hon'ble Bombay High Court in the case of Deutsche Bank AG and the Authority for Advance Rulings in the case of ABC In re. The AO was also directed to consider the facts of the intervening years 1993-94 and 1994-95.

The assessee filed a Miscellaneous Application contending that the tax treaty between India and UAE should be applicable. The assessee argued that Article 7(3) of the DTAA should allow expenses attributable to a permanent establishment without the restrictions of Section 44C. However, the Tribunal found no mistake in its original order, noting that the CIT(A) had already considered these arguments and concluded that the provisions of Article 25(1) of the DTAA between India and UAE, which relate to the elimination of double taxation, would prevail. Therefore, the laws in force in India should continue to govern the taxation of income of the permanent establishment situated in India. The Tribunal upheld that head office expenses must be allowed as per Section 44C of the Income-tax Act.

2. Allowability of Indian Operations Liaison Office (IOLO) Expenses:

The issue of IOLO expenses was decided by the CIT(A) in favor of the assessee for the assessment years 1995-96 and 1996-97, and against the assessee for the assessment year 1997-98. The Tribunal restored the matter to the AO for a fresh decision, considering the amended provisions of Section 44C effective from 1-4-1993. The Tribunal noted that the auditors' certificate suggested that the expenses were allocated to the Indian Branch, and the mathematical accuracy of the allocation needed verification.

The assessee contended that IOLO expenses should be allowed based on the Hon'ble Bombay High Court's decision in their own case and that these expenses were exclusively related to the Indian Operations. The Tribunal found no mistake in its order, stating that the issue was rightly restored to the AO for a fresh decision. The Tribunal also rejected the contention that even if these expenses were considered head office expenses, they should be allowed in full as per the treaty, reiterating that head office expenses are governed by Section 44C.

3. Tax Rate Applicable to the Business Income of the Assessee:

The assessee argued that the tax rate applicable should be 43% for the assessment year 1997-98 and 46% for the assessment years 1995-96 and 1996-97, invoking Article 26(2) of the India-UAE tax treaty. The assessee contended that the tax rate should be compared with the rate charged to co-operative banks in India, which are engaged in similar activities.

The Tribunal rejected this contention, stating that Article 26(2) does not provide for comparing the tax rate of a company with other entities carrying on the same activity. The Tribunal emphasized that only comparable entities can be compared, and the tax rate for a foreign company should be compared with that of a domestic company. The Tribunal also addressed the argument regarding the Explanation to Section 90, which allows rate discrimination between domestic and foreign companies, and found no merit in the assessee's contentions.

The Tribunal further dealt with the argument that the definition of 'domestic company' in Section 2(22A) includes conditions similar to those in the Explanation to Section 90. The Tribunal reiterated its earlier decision that arrangements prescribed in Rule 29 with regard to Section 194H are applicable, and thus, the argument was already addressed.

Regarding the list of treaties provided by the assessee, the Tribunal noted that the Explanation to Section 90, inserted by the Finance Act, 2001, clarifies that charging a higher rate of tax to a foreign company does not amount to discrimination. The Tribunal concluded that this Explanation applies regardless of whether the tax treaty contains a specific provision to that effect.

The Tribunal dismissed the assessee's contention that the decision in the case of Chohung Bank should not be followed, noting that it was not relied upon in the impugned order.

Conclusion:

The Tribunal found no mistakes in its original order and upheld its decisions on all three issues. The Miscellaneous Applications filed by the assessee were disposed of accordingly.