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TMI Blog2007 (8) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a theory has the acceptance of the Hon'ble Supreme Court. Just because anticipated profits are not assessed to tax, it would not follow, as a corollary thereto, that anticipated losses cannot be allowed as deduction in computation of business income. Thus, we are of the considered view that the very basis of the action of the Assessing Officer was vitiated in law and on facts. We, therefore, deem it fit and proper to direct the Assessing Officer to delete the impugned disallowance. The assessee gets the relief accordingly. Disallowance by way of capital expenditure out of the pre-operative expenses - HELD THAT:- In the case of CIT v. Bush Boake Allen (India) Ltd.[ 1981 (10) TMI 32 - MADRAS HIGH COURT] , held that expenses incurred cannot always be viewed as derivative expenses taking colour from the particular transaction to which they relate. Their Lordships were dealing with legal expenses. Their Lordships held that as the expenses are of revenue nature in their own right, the same have to be allowed as revenue deduction irrespective of its linkage with a capital expense. In our considered view, the same holds good true for travelling expenses as well. The trav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided that, as summarised in the said order, whatever is reasonably allocable out of the expenditure incurred in both the countries, should be allocated and allowed as deduction . In the immediately following sentences and in the same breath, the co-ordinate Bench concluded that We consider it a very specific provision in computing the income of a non-resident having activities in India and France. Therefore, the provisions of section 44C will not be applicable . In the present case, we are not concerned with section 44C. In any event, having carefully gone through this decision, we find that the attention of the Tribunal was apparently not invited to the provisions of Article XIX(1) of the same treaty which specifically provided that the laws in force in either of the Contracting State will continue to govern the taxation of income in the respective Contracting State except where specific provisions to the contrary is made in the present agreement . The provisions of Article III(3) of India-France treaty obviously cannot be read in isolation with other relevant provisions of the treaty. However, since attention of the Tribunal was never invited to Article XIX(1), nor did the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t where express provisions to the contrary are made in the such agreement. The decision in Mitsubishi's case ( supra ) is a later decision, is arrived at after taking into account all the relevant provisions and not only Article III(3) in isolation, and is specifically in the context of artificial disallowances under section 40A(3), section 40A(12), section 37(2A) and section 43B etc. We have to accept the fact, as clearly discernible from unequivocal stand taken by another co-ordinate Bench in Mitsubishi's case ( supra ), that Degremont International ( supra ) was rendered by oversight and oblivious of the provisions of Article XIX(1) of old India-France tax treaty. In any event, it does not have precedence value in the context of India-UAE tax treaty, particularly as we take note of the provisions of Article 25(1) of the tax treaty read with observations made by another co-ordinate Bench in Mitsubishi's case ( supra ). The provisions in India-UAE tax treaty are specific and admit no ambiguity on question of applicability of domestic tax laws in the absence of specific provisions to the contrary under the tax treaty. 7. When this was pointed out to the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this section would not be justified.' 8. As regards the question of impermissibility of artificial disallowances by the virtue of the provisions of Article 7(3), there is no specific finding by the Special Bench. We reproduce below the entire paragraph, on which learned counsel has placed the reliance, for ready reference : '50. On a close reading of these provisions, we find that clauses 1, 2, 5, 6 and 7 of Article 7 of the Japanese DTAA are similarly worded as clauses 1, 2, 4, 5 and 6 of Netherlands DTAA. Clause 3 of the Japanese DTAA merely incorporates the first part of clause 3( a ) of Netherlands DTAA and the proviso placing a restriction by the law of the State in which PE is situate are not incorporated. Again, clause 3( b ) of Netherlands DTAA which prohibits allowance of certain expenditure is also missing in Japanese DTAA. There is no other material difference between the two treaties. As pointed out by the learned counsel of the assessee; there are no restrictive covenants in Article 7 for allowance of expenses incurred for the purposes of PE either by the prefix of the words in accordance with the provisions of the law of that State or by the suffix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about applicability of section 40( a )( i ), therefore, was entirely academic in this context. Merely because the Special Bench has noted an argument, even though it has not adjudicated upon the same, it cannot be inferred that the Special Bench has approved the said argument. We reject the plea of the learned counsel. The next line of defence by the learned counsel is his reliance on the Tribunal's decision in the case of Siemens AG v. ITO [22 ITD SB 87]. It is submitted that in this decision, the Tribunal has held that definition of 'royalty' under the Income-tax Act will not have any bearing in deciding the scope of expression 'royalty' for the purposes of the tax treaty. We are in respectful agreement with the views so stated by the Tribunal, but we are unable to comprehend as to how this proposition can enable us to ignore the specific provisions of the India-UAE tax treaty. Article 25(1) of the applicable India-UAE tax treaty [(1994) 205 ITR (St.) 49] specifically provides that the laws in force in either of the Contracting State will continue to govern the taxation of income in respective Contracting State except where express provisions to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dealing with the issue whether in view of the provisions of Article 7(3) of Canadian-US tax treaty, royalties paid by PE of US company to the provincial Government, which were not tax deductible under the Canadian domestic tax law, could be allowed as deduction, the Court observed : 'The interpretation proposed by the appellant, on the other hand, would have the effect of giving a US taxpayer with a permanent establishment in Canada a more favourable tax treatment than its Canadian competitor engaged in the same business in this country. Such a result would not be in accordance with the policy expressed in the preamble to the Convention and indeed would be contrary to it. It would take much clearer language than a simple reference to 'all expenses' to bring it about.' 11. In a situation, therefore, in which a specific provision like the one in Article 25(1) in India-UAE tax treaty exists, there cannot be any occasion to ignore the limitations on deduction of expenses under the domestic tax legislation. That would be a case of, what can be termed as, reverse discrimination. Just as much a discrimination against a non-resident assessee is undesirable, a discri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-discrimination,. . . ., it is not related to the use of nationality as jurisdictional basis for Income-taxes...' (Non-discrimination in Income-tax Law - Prof. Kees Van Raad, at page 15). Therefore, non-taxability of any of an aliens income source in the host country cannot be viewed as discrimination in his favour. It is, therefore, too far-fetched to suggest that availability of certain tax exemptions to aliens shows that reverse discrimination is generally permissible under the scheme of Indian Income-tax Act. We reject this proposition. As far as learned counsel's reference to section 115A is concerned, this is also fallacious inasmuch as it does not take into the fact that the related incomes are taxed on gross basis in the hands of the non-residents taxpayers and net basis in the hands of the resident taxpayers. Dealing with this aspect of the matter, a co-ordinate Bench of this Tribunal, in the case of DCIT v. Boston Consulting Group (P.) Ltd. [ 94 ITD 31] has observed as follows : '19. Section 44D was brought on the statute, with effect from 1-4-1976, by the Finance Act, 1976. By the same Finance Act, section 115A was also introduced. Section 44D, as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or after 1-4-1976, will now be charged to tax at flat rates applicable on the gross amount of such income. The rates of income-tax to be applied in respect of such income have been specified in new section 115A of the Income-tax Act and are as follows : ****** ( iii )Income by way of fees for technical services received by a foreign company from an Indian concern in pursuance of an approved agreement made on or after 1-4-1976, will be charged to tax at the rate of 40 per cent on the gross amount of such fees. [Emphasis supplied] The periodic changes in section 44D have been accompanied by the corresponding changes in section 115A. It is thus clear that non-deduction of expenses under section 44D, which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under section 115A....' 13. In this view of the matter, the comparison of lower tax rates under section 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 ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a treaty shall be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its objects and purpose . It is therefore important that undue emphasis should not, in any event, be given to a legalistic and literal approach in interpreting a tax treaty; the effort should always be made to harmonise the interpretation of the words of the treaty with its object and purpose. Viewed in this perspective, in our considered view, it is not possible to proceed on the basis that a discrimination in favour of the non-resident tax payer by the host country, without any specific provision to that effect, can be inferred. It is only elementary that a tax treaty is required to be read as a whole and, when the India-UAE tax treaty is read as a whole, the scheme of non-discrimination is clearly discernible from the scheme of things. It would, therefore, be quite inappropriate to read the provisions of the treaty in such a manner so as to result in discrimination against residents of one of the Contracting States; there cannot be any justification for exception to this underlying object of the treaty by reading the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracting States are too conservative in their approach and insist on certain provisions as a measure of abundant caution ( ex abudanti coutela). 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); in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is a specific provision to the effect that restrictions under domestic tax laws on deduction of expenses are to be ignored, the same will have application in computation of PE profits. The specific provisions in some of the treaties (such as India-Australia tax treaty for example) to the effect that profits are to be computed according to the domestic law of the Contracting State in which a PE is situated, is, according to the learned scholar, no more than clarificatory in nature. A school of thought thus exists that specific mention of the applicability of domestic law limitations in computation of profits of the permanent establishment is justified as a measure of abundant caution and is made ex abudanti coutela. It is, however, not necessary to go into that aspect of the matter any further at this stage. 21. In view of the above discussions, and particularly bearing in mind 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 Article 7(3) of the India-UAE tax treaty. The plea of the assessee is incompatible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty have to be construed in the light of this limitation. Article 26(2) of the India-UAE tax treaty provides that, the taxation of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably be levied in that other State than the taxation levied on enterprise of that other carrying on the same activities in same circumstances or under similar conditions . In our view, the basic mandate of article 26(2) of India-UAE tax treaty is that a permanent establishment, in one State, of a non-resident enterprise must not be taxed any less favourably that the enterprise of that State. To that extent, we agree with the learned counsel. However, we do not think that for the purpose of this comparison, it is possible to ignore the form of ownership. A comparison can only be made with comparables. Under article 3(1)( g ), the expression enterprise of a Contracting State has been defined as an enterprise carried on by the resident of that Contracting State . And, on the basis of definition of 'resident' under article 4(1) and of 'person' under article 3(1)( e ), the expression 'resident' refers to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same activities . The observations will, therefore, apply with equal force in the context of Article 24(2) of India-UAE tax treaty. We are in considered agreement with the views so expressed by this eminent international tax scholar. 31. Prof. Vogel, another distinguished international tax scholar, also makes some interesting observations in this regard. In his book ' Vogel on Double Taxation Conventions ' and in the context of Article 24(3) of the OECD Model Convention, he observes, at page 1315, as follows : '. . . Since tax burdens often depend on the legal form of the enterprise to be taxed, this criterion should be taken into account additionally when determining the enterprise with which to compare the permanent establishment. Since the latter is only a part of the enterprise that has its head office in another State and no independent legal status, the comparison should attach to the legal set up of that enterprise....' 32. We agree with the distinguished scholar. It would thus follow that comparison of a PE of one State carrying on business in the other Contracting State, with enterprise in the other Contracting State is not activity specific al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of the ACIT of disallowing Rs. 10,14,045 being the loss on Forward Foreign Exchange Contracts which were unmatured on the last day of the previous year. The appellants submit that Forward Exchange Contracts are mainly entered into to cover the risk arising due to fluctuation in the exchange rate of currencies. Such contracts are entered into on an ongoing basis depending upon the currency position in the books of the bank. The forward exchange contracts are in the nature of stock-in-trade and the same are valued at the forward exchange rate notified by the Foreign Exchange Dealers Association of India as required by RBI. The forward contracts are normally for a short period. In view of the above submission any loss on revaluation would be properly allowable as a deduction in arriving at the business income. Moreover, such contracts are entered into the ordinary course of business on a day-to-day basis and the revaluation profit/loss represents the banks business income/loss. The bank has been consistently following this method in the past which does not result in the distortion of income/loss booked during the accounting period, and is also in accordance with the genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggrieved, assessee carried the matter in appeal before the CIT(A), but without any success. The assessee is not satisfied and is in appeal before us. 14. We have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. 15. We have taken note of the fact that the Assessing Officer has primarily contended that when anticipated profits on unmatured contracts are held, to be non-taxable, as in the case of Indian Overseas Bank ( supra ), there is no good reason as to why anticipated losses on unmatured contracts can be taken into account while computing business income. There is, however, an inherent fallacy in this approach inasmuch as anticipated losses and anticipated profits are not treated in the same manner in the computation of business profits. The accountancy principle of conservatism, which has been duly recognized by the Courts, mandates that anticipated losses are to be provided for in the computation of income but it does not permit anticipated profits to be taken into account till the profits actually arise. That is the underlying reason that in the case of unsold stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee did some interior decoration work and a sum of Rs. 26,17,500 was spent for that purpose. This expense was treated as capital expenditure by the assessee himself. The Assessing Officer noticed that the assessee has also spent a sum of Rs. 1,43,200 on account of travelling expenses of the interior decoration team. As the travelling expenses was in connection with the capital work of interior decoration, the Assessing Officer disallowed this travelling expenditure as well. Aggrieved, assessee carried the matter in appeal, inter alia, on the issue that the travelling expenses cannot be held to be capital expenses in nature, but without any success on this aspect of the matter. The assessee is not satisfied and is in further appeal before us. 19. Having heard the rival contentions and having perused the material on record, we are inclined to uphold the plea of the assessee. In the case of CIT v. Bush Boake Allen (India) Ltd. [1982] 135 ITR 306, Hon'ble Madras High Court has held that expenses incurred cannot always be viewed as derivative expenses taking colour from the particular transaction to which they relate. Their Lordships were dealing with legal expenses. A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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