9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2007 (4) TMI 394 - AT - Income TaxDTAA between India and UAE - Non resident banking company - expenses attributable to the Permanent Establishment (PE) - whether in India, or outside India - Applicability of the domestic law in the light of the provisions of the article 25(1) of the India-UAE tax treaty - taxability of incomes at a lower rate u/s 115A - carrying on business in India through its PE i.e., branches - Interest chargeable - Business expenditure - HELD THAT - In view of the specific provision being a part of the India UAE tax treaty, it cannot be said that by the virtue of article 7(3) of the treaty which provides that in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere , the provisions of Indian Income-tax Act will not apply with regard to deductibility of expenses. In this view of the matter, and respectfully following the Mitsubishi Heavy Industries Ltd. s case 1998 (2) TMI 158 - ITAT DELHI-A we hold that the provisions of domestic tax laws in India as also in UAE will continue to apply except to the extent specific contrary provisions are set out in the India UAE tax treaty. The assessee thus derives no advantage from the provisions of article 7(3) so far as freedom from artificial disallowances u/s 40A(3), section 40A(12), section 37(2A) and section 43B is concerned. AS there is no specific contrary provisions in the treaty, these and similar other restrictions on deductibility of expenses under the Indian Income-tax Act continue to be applicable, in computation of profits attributable to Indian PEs of UAE tax residents. The plea of the assessee is thus devoid of legally sustainable merits. The comparison of lower tax rates u/s 115A, for the non-resident tax payers, with higher tax rates under the Finance Act, for resident tax payers, is irrelevant. In the case of non-residents, there were restrictions for deduction of expenses incurred for earning dividend, interest and royalty incomes. It is also interesting to note that when the restrictions u/s 44D ceased to be effective from 1st April, 2003, the corresponding income, i.e., income from royalties and fees for technical services, was also taken out of the ambit of lower tax rate under section 115A. Therefore, taxability of incomes at a lower rate u/s 115A cannot be viewed in isolation. The relevant incomes are taxed on net basis in the formal case, while taxability is on the net basis in the latter. When tax base is not the same, the comparison of tax rates is meaningless. As regards learned counsel s contention that once a Contracting State enters into a tax treaty it cannot be open to that Contracting State to shy away from implementing such a tax treaty on the ground that the consequences of its implementation could be contrary to the intentions of the treaty, we quite agree with the learned counsel. However, what is needed to be implemented is a clear and unambiguous provision. At best, if there is an ambiguity in the provisions, it needs to be resolved by way of harmonious construction in accordance with the well settled principles of tax treaties. It cannot be, in any event, open to anyone to embark upon the voyage of discovery in search of hidden meanings or intent of parties, not supported by the specific expressions to articulate the same, and then proceed to give life to these inferences-that too in a manner contrary to the scheme of the tax treaty. We do not find any specific provision in the tax treaty which supports learned counsel s understanding about the scope of Article 7(3); infact, we find, as we have elaborated earlier, specific provision in the treaty which is quite to the contrary. We, therefore, reject this contention as well. Thus, the provisions of article 25(1) of the India-UAE tax treaty, we are of the considered view that the limitations under the domestic tax laws are to be taken into account for the purposes of computing profits of a PE under articles 7(3) of the India-UAE tax treaty. The plea of the assessee is incompatible with overall scheme of the tax treaties, particularly India-UAE tax treaty. Accordingly, the conclusion arrived at by the CIT(A) meets our approval. We confirm the same and decline to interfere in the matter. In the result, first ground of appeal is dismissed. Disallowance on Interest chargeable - HELD THAT - Section 18 of the Interest-tax Act cannot be viewed as a disabling clause; all it provides is that notwithstanding anything contained in the Income-tax Act , deduction in respect of interest tax is payable is to be allowed in computation of income of the credit institution assessable in respect of the same. It does not, therefore, restrict the scope of deduction otherwise allowable to the assessee. Quite to the contrary, section 18 enables the deduction in respect of interest tax even if any restrictions are imposed by the Income-tax Act, in respect of deductions in respect of the same. When interest tax itself is allowed as a deduction, and interest levy u/s 12B is admittedly a compensatory levy for delay in advance payment of interest tax, there cannot be any good reasons to decline deduction to interest levy u/s 12B. Thus, we uphold the grievance of the assessee. Accordingly, we direct the Assessing Officer to delete the disallowance so sustained by the CIT(A). The assessee gets the relief accordingly. Ground No. 4 is thus allowed - In the result, appeal is partly allowed.
Issues Involved:
1. Disallowance of expenses attributable to the Permanent Establishment (PE) under Article 7(3) of the India-UAE tax treaty. 2. Applicability of a higher tax rate on the appellant's business income. 3. Deduction of interest levied under section 12B of the Interest-tax Act, 1974. Issue-wise Detailed Analysis: 1. Disallowance of Expenses Attributable to the PE: The main grievance of the assessee was the CIT(A)'s confirmation of the Assessing Officer's disallowance of various expenses attributable to the PE in India. The assessee contended that under Article 7(3) of the India-UAE tax treaty, all expenses incurred for the PE should be deductible without restrictions imposed by the Indian Income-tax Act. The Tribunal examined previous decisions and found that the domestic tax laws apply unless there are specific contrary provisions in the tax treaty. The Tribunal concluded that the limitations on deductibility of expenses under the Indian Income-tax Act, such as sections 40A(3), 40A(12), 37(2A), and 43B, continue to apply in computing the profits attributable to Indian PEs of UAE tax residents. The Tribunal upheld the CIT(A)'s decision, rejecting the assessee's plea. 2. Applicability of Higher Tax Rate: The assessee argued that the tax rate applicable to its business income should be 46%, the rate for domestic companies, rather than 55%, the rate for foreign companies, citing the non-discrimination clause in Article 26 of the tax treaty. The Tribunal noted that post-2004 amendments to section 90(2) of the Income-tax Act allow differential tax rates between domestic and foreign companies. The Tribunal also emphasized that the comparison for non-discrimination must consider the form of ownership. Since the assessee is a company incorporated in the UAE, its PE can only be compared with a domestic company carrying on the same activities. The Tribunal rejected the assessee's plea, holding that the higher tax rate for foreign companies does not violate the non-discrimination clause. 3. Deduction of Interest Levied Under Section 12B: The assessee sought a deduction for interest levied under section 12B of the Interest-tax Act, 1974. The CIT(A) had denied the deduction, arguing that section 18 of the Interest-tax Act only allows deductions for "interest tax payable," not for interest on deferred payment of interest tax. The Tribunal disagreed, stating that section 18 is not a disabling clause but an enabling one, allowing deductions for interest tax despite restrictions in the Income-tax Act. The Tribunal held that since interest tax itself is deductible, the compensatory interest levy under section 12B should also be deductible. The Tribunal directed the Assessing Officer to allow the deduction, providing relief to the assessee. Conclusion: The Tribunal dismissed the assessee's appeal on the issues of disallowance of expenses and the higher tax rate but allowed the appeal regarding the deduction of interest levied under section 12B of the Interest-tax Act. The appeal was partly allowed.
|
