2011 (3) TMI 3 - AT - Income Tax

Deduction under section 80HHE - export of software- refusal to grant deduction - whether provisions contained in paragraph (2) of article 26 will override the distinction made between the resident persons on one hand and the nationals of the U.S.A. and a non-resident on the other - distinction could not have been made - assessee entitled to deduction under section 80HHE on the same footing as it is available to a resident person in India

Issues Involved:
1. Allowability of deduction under section 80HHE of the Income Tax Act, 1961 for a non-resident assessee exporting software from India.
2. Interpretation of Article 26(2) of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
3. Relevance of OECD Commentary and other international guidelines in interpreting the DTAA.

Detailed Analysis:

1. Allowability of Deduction under Section 80HHE:
The primary issue revolves around whether a non-resident assessee can claim deduction under section 80HHE of the Income Tax Act, 1961, which is specifically available to Indian companies or residents in India. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied the deduction, stating that the language of section 80HHE explicitly limits the benefit to Indian companies or residents in India. The assessee, being a non-resident, was not entitled to this deduction under the Act.

2. Interpretation of Article 26(2) of the DTAA:
The assessee argued that Article 26(2) of the DTAA between India and the USA, which addresses non-discrimination, should be read in conjunction with section 80HHE. According to the assessee, this article ensures that the permanent establishment (PE) of a US enterprise in India should not be taxed less favorably than an Indian enterprise carrying on the same activities. The assessee contended that denying the deduction under section 80HHE would result in less favorable treatment, contrary to the DTAA provisions.

The Tribunal examined the language of Article 26(2), which states that the taxation of a PE of an enterprise of a contracting state (USA) in the other contracting state (India) shall not be less favorably levied than the taxation levied on enterprises of that other state (India) carrying on the same activities. The Tribunal concluded that this provision mandates equal treatment for the PE of a US enterprise and an Indian enterprise engaged in the same activities, thereby entitling the assessee to the deduction under section 80HHE.

3. Relevance of OECD Commentary and Other International Guidelines:
The Tribunal considered the relevance of the OECD Commentary and other international guidelines in interpreting the DTAA. The assessee referred to the OECD Commentary and various Indian court decisions to support the argument that the DTAA should be interpreted in a manner that avoids discrimination. The Tribunal acknowledged that while the OECD Commentary is not binding, it can be used as a reference to understand the provisions of the DTAA.

The Tribunal also examined the decisions of Indian courts, such as the Supreme Court's ruling in Union of India and Anr. v. Azadi Bachao Andolan, which recognized the utility of the OECD Commentary in interpreting tax treaties. However, the Tribunal emphasized that the DTAA provisions should be interpreted based on their clear and unambiguous language, without over-relying on external commentaries or technical explanations.

Conclusion:
The Tribunal concluded that the assessee, being a non-resident engaged in the export of software from India, is entitled to the deduction under section 80HHE of the Income Tax Act, 1961, by virtue of Article 26(2) of the DTAA between India and the USA. The Tribunal held that denying the deduction would result in less favorable treatment of the PE of the US enterprise compared to an Indian enterprise engaged in the same activities, which is contrary to the non-discrimination principle enshrined in the DTAA. Consequently, the appeals for assessment years 2002-03 and 2003-04 were allowed, and the appeal for assessment year 2004-05 was partly allowed.

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