2006 (9) TMI 349 - AT - Income Tax

Summary

Issues:
Interpretation of the non-discrimination clause of the Indo-Korea Double Taxation Avoidance Agreement (DTAA) and the tax rate applicable to the appellant.

Analysis:
1. The appeals were filed by the assessee against orders of the CIT(A) for the assessment years 1997-98 and 1998-99, challenging the rejection of the appellant's claim for the benefit of the non-discrimination clause of the DTAA and the imposition of a higher tax rate of 48% instead of 35%.

2. The counsel for the assessee argued that recent developments in the interpretation of non-discrimination clauses in DTAAs and legislative amendments indicate that foreign companies are entitled to the benefits of such clauses. The counsel highlighted the decision in the assessee's own case for the assessment year 2002-03, where the ITAT held that the Finance Act prevails over the DTAA provisions.

3. The counsel referred to the Supreme Court decision in Union of India v. Azadi Bachao Andolan, emphasizing that the absence of specific provisions in the DTAA could not deny the benefits under the agreement. This comparison was crucial in understanding the applicability of non-discrimination clauses in different DTAAs.

4. A comparison between the India-UK and India-Korea DTAAs revealed differences in provisions regarding taxation on permanent establishments. While the India-UK DTAA allowed for a higher tax rate on foreign companies, the India-Korea DTAA did not permit such differentiation, impacting the tax treatment of Korean enterprises in India.

5. The counsel relied on Article 25(2) of the DTAA to argue against discrimination in tax treatment compared to Indian enterprises. The interpretation of "enterprise" was crucial, with emphasis on the non-favorable treatment of the appellant compared to Indian co-operative societies engaged in similar activities.

6. The scope of the Explanation to section 90 was highlighted to clarify that a higher tax rate for foreign companies compared to domestic companies was not considered less favorable. However, the absence of specific provisions for co-operative societies raised concerns regarding discrimination against foreign companies.

7. The social obligations and benefits of co-operative societies were discussed, with arguments supporting the equivalence of foreign banks and co-operative banks in terms of activities. The amendment of section 90 indicated a shift in the acceptability of social obligations as a valid argument.

8. The Departmental Representative contended that the decision in the assessee's own case was against the appellant, emphasizing the distinction between the appellant as a bank and a co-operative society. The benefits extended to co-operative societies could not be applied to a foreign bank.

9. The Tribunal, after considering the arguments and previous decisions, upheld the decision against the assessee based on the integral part of the Explanation to section 90, which clarified the treatment of foreign companies compared to domestic companies. The incentives for co-operative societies were not extended to foreign banks, leading to the dismissal of the appeals.

10. Ultimately, both appeals were dismissed based on the precedent set in the assessee's own case for the assessment year 2002-03, reinforcing the interpretation of the non-discrimination clause and the tax treatment applicable to foreign banks under the DTAA.