9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2008 (9) TMI 439 - AT - Income TaxDouble Taxation Relief - denial of deduction u/s. 80HHE - claim for incentive - PE in India by way of a branch office - whether or not the assessee being denied deduction u/s. 80HHE in respect of export of software by its Indian branch office indeed amounts to discrimination against the assessee company in terms of the provisions of the Indo-US tax treaty - Article 26-Non-discrimination - test of reasonableness - Role of OECD Commentary in interpretating the provisions of the Indo-US tax treaty. Whether or not the assessee being denied deduction under Section 80HHE in respect of export of software by its Indian branch office indeed amounts to discrimination against the assesses company in terms of the provisions of the Indo US tax treaty? HELD THAT - In our considered view, the OECD Model Convention Commentary has a role to play in construing the scope of provisions of the Indo-US tax treaty, only to the extent (i) the relevant provision, though based on OECD Model Convention, is not explained in the Technical Explanation to the US Model Convention, and (ii) specific reference is made to the OECD Model Convention Commentary, and the interpretation so given by the OECD Model Convention Commentary is not in conflict with the Technical Explanation to the US Model Convention. The case before us does not fit into any of these categories because while the relevant clause of the non-discrimination article is the same as art. 24(2) of the OECD Model Convention, the scope of non-discrimination is, as we will see a little later, well defined in the Technical Explanation and also because the scheme of non-discrimination in the OECD Model Convention and US Model Convention is materially different. It is only elementary that a sound interpretation of a sub-article of non-discrimination article cannot be based on reading of that clause in isolation, but it would require that the non-discrimination clause as a whole, or even a treaty as a whole, is to be carefully analyzed. Scope of non-discrimination clauses in the tax treaties - The expressions 'discrimination' and 'non-discrimination' are not defined in the tax treaties, but, as noted by Brian J. Arnold and Michael J. McIntyre, in their oft referred book 'International Tax Primer' (Second Edition @ p. 128), in general, discrimination means distinguishing between persons adversely on the grounds that are unreasonable, irrelevant, or arbitrary . It is thus clear that in order to establish discrimination, not only that a taxpayer has to demonstrate that he has been subjected to different treatment vis-a-vis other taxpayers, but also that the ground for this differentiation in treatment is unreasonable, arbitrary or irrelevant. This principle on reasonableness of the differential treatment is also evident from the Technical Explanation issued by the treaty partner State, i.e. US, to art. 26(2) its Model Convention which, barring the opening words except where the provisions of para 3 of art. 7 (business profits) apply is exactly the same as art. 26(2) of Indo-US tax treaty. It is also interesting to note that art. 26(5) of the Indo-US tax treaty, inter alia, states that nothing in the non-discrimination article, shall be construed as preventing either Contracting State from imposing the taxes described in art. 14 (permanent establishment tax) . A permanent establishment tax, which is levied in the US, obviously puts an additional tax burden on the PEs of Indian enterprise vis-a-vis US enterprise, and yet it is not construed as an act of discrimination against the PEs of Indian enterprise. This strengthens our interpretation that to make out a case for discrimination, demonstrating differential treatment, by itself, cannot suffice. In our considered view, to establish a case discrimination, it is to be established that the basis of differentiation lacks any coherent relationship with the object ought to be achieved by the legal provision which is alleged to be discriminatory. In the light of the discussions, we are of the considered view that a differential treatment to the PE of the US tax resident, by itself, cannot be treated as covered by the scope of rule prohibiting non-discrimination. The true test for deciding whether or not there is a non-discrimination is whether or not the resident enterprise and the PE of the other Contracting State, who are similarly situated, get the same tax treatment or not. There could indeed be different tax treatments to the PE of the other Contracting State and the enterprise of the source State, but, as long as such tax differentiation could be justified on the grounds of dissimilarities in their situation, the prohibition against discrimination cannot be invoked. Conclusions on the discrimination issue - In view of the discussions, we are of the considered opinion that, on the facts and in the circumstances of this case and in the light of the provisions of the Indo-US tax treaty, restricting entitlement to deduction u/s. 80HHE only to the resident taxpayers did not constitute discrimination against the non-resident taxpayers. We, therefore, uphold the CIT(A)'s action of rejecting the taxpayer's claim of deduction u/s. 80HHE. As we do so, we also make it clear that while our reasoning is different, our conclusion is the same as arrived by the ld CIT(A). We confirm the conclusion arrived at by the CIT(A) on this issue and decline to interfere in the matter to that extent - the ground of appeal against denial of deduction u/s. 80HHE to the assessee, is thus rejected. Eligibility for deduction u/s. 10A - set off of losses incurred by new unit - Respectfully following the cases of Mindtree Consulting (P) Ltd. vs. Asstt. CIT 2005 (11) TMI 176 - ITAT BANGALORE-B and Honeywell International (India) (P) Ltd. vs. Dy. CIT 2007 (2) TMI 248 - ITAT DELHI-F , in favour of the assessee, we hold that so far as the present assessment year is concerned, the assessee was indeed entitled to claim set off of s. 10A unit loss against business profits of the taxpayer company. We direct the AO to grant relief accordingly. Disallowance of head office expenditure - deduction u/s 44C - Assessee has not been able to give any details of head office expenses which are attributable to the Indian branch office. He has furnished a certificate from CFO of the assessee company which confirms that such expenditure definitely exceeds US 15,000 . In our considered view, this is a vague certificate and. in the absence of details of head office expenditure attributable to Indian operations, we are unable to compute admissible deduction under s. 44C. We hold that the assessee is not entitled to deduction u/s. 44C even on merits. We, therefore, confirm the conclusion arrived at by the CIT(A) and decline to interfere in the matter. In the result, the appeal is partly allowed in the terms indicated above.
Issues Involved:
1. Discrimination under Article 26(2) of the Indo-US Tax Treaty regarding denial of deduction under Section 80HHE. 2. Set-off of losses incurred by a new unit eligible for deduction under Section 10A against other business profits. 3. Deduction of head office expenses under Section 44C. Issue-Wise Detailed Analysis: 1. Discrimination under Article 26(2) of the Indo-US Tax Treaty regarding denial of deduction under Section 80HHE: The taxpayer, a US-based company with a branch in India, claimed that the denial of deduction under Section 80HHE for its Indian branch constitutes discrimination under Article 26(2) of the Indo-US tax treaty. The core issue was whether the non-availability of this deduction to the taxpayer amounts to discrimination against its Indian branch. The Tribunal examined Section 80HHE, which provides an incentive deduction for profits from the export of computer software, applicable only to Indian companies and resident non-corporate taxpayers. The taxpayer argued that this exclusion discriminates against its Indian branch, contrary to the non-discrimination clause in the tax treaty. The Tribunal considered the nature of the non-discrimination clause, which seeks parity between the taxation of a permanent establishment (PE) of a foreign enterprise and a domestic enterprise engaged in similar activities. The Tribunal noted that the non-discrimination clause does not extend to limitations on deductions under Article 7(3) of the treaty and personal allowances based on civil status or family responsibilities. The Tribunal found that the differentiation based on the residential status of the taxpayer is reasonable and has a rational relationship with the objective of the legislation, which is to promote exports by resident taxpayers. Therefore, the denial of deduction under Section 80HHE to non-resident taxpayers does not constitute discrimination. The Tribunal also addressed the taxpayer's argument that other fiscal incentives are available to non-resident taxpayers, stating that there is no estoppel against the statute, and each incentive must be examined on its own merits. The Tribunal upheld the Commissioner (Appeals)'s decision to deny the deduction under Section 80HHE, concluding that the differentiation based on residential status is not discriminatory. 2. Set-off of losses incurred by a new unit eligible for deduction under Section 10A against other business profits: The taxpayer argued that the losses incurred by its new unit, eligible for deduction under Section 10A, should be set off against its other business profits. The Tribunal noted that the issue is covered by several decisions of coordinate benches, including Mindtree Consulting Pvt. Ltd. v. ACIT and Honeywell International India Pvt. Ltd. v. DCIT, which support the taxpayer's claim. The Tribunal saw no reason to deviate from these precedents and directed the Assessing Officer to grant the relief accordingly. Thus, the taxpayer's claim for set-off of losses under Section 10A was allowed. 3. Deduction of head office expenses under Section 44C: The taxpayer claimed a deduction for head office expenses under Section 44C for the first time during the appellate proceedings. The Commissioner (Appeals) declined to entertain the claim, stating that it required verification of facts and additional evidence, which was not provided at the assessment stage. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that the taxpayer failed to provide details of head office expenses attributable to the Indian branch office. The certificate provided by the taxpayer was deemed vague and insufficient to compute the admissible deduction under Section 44C. The Tribunal concluded that the taxpayer is not entitled to the deduction under Section 44C, even on merits, and confirmed the Commissioner (Appeals)'s decision. Outcome of the Appeal: The appeal was partly allowed. The taxpayer's claim for set-off of losses under Section 10A was accepted, while the claims for deduction under Section 80HHE and Section 44C were rejected.
|
