9911796707
TMI Blog2011 (3) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to deductions and exemptions, if any, available to it. The AO as well as the CIT(A) were of the opinion that deduction available to an Indian company or Indian resident, under section 80HHE of the Act, in respect of export of software out of India, is not available to a non-resident in the light of the express language employed in section 80HHE which speaks of an Indian company or a person resident in India whereas assessee is admittedly a non-resident. 3. The case of the assessee, on the other hand, was that section 80HHE of the Act has to be read in conjunction with the tax-treaty entered into between India and United States of America ( DTAA for short). Section 90(2) of the Act provides that where Government of India has entered into a DTAA with the Government of any other country or jurisdiction, provisions of the Act shall apply to the extent they are more beneficial to the assessee. Pressing into service the language employed in article 26 of DTAA, it was contended before the tax authorities that a resident of India is undoubtedly entitled to deduction under section 80HHE of the Act in respect of profits from export of software out of India, subject to other cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the AO. The CIT(A) considered the provisions of the Act, the DTAA and the activities of the assessee and came to the conclusion that the discrimination on the basis of residence cannot be said to be discrimination on the ground of nationality. Further, it was held that an Indian Company or the resident assessee exporting computer software out of India cannot be equated with the assessee as both of them are not functioning under similar circumstances. On a conjoint reading of paragraphs (1) (2) of article 26, it was finally held that denial of deduction would be justified. 4.1 Aggrieved by this order, assessee is in appeal before us. The ground taken by him is already reproduced above. 5. Before us, the ld. Counsel referred to the provisions contained in section 80HHE. It is fairly admitted by him that the assessee, being a non-resident person, is not entitled to the deduction on the basis of this provision. However, it is submitted that the assessee is a resident of U.S.A. Therefore, the provision contained in article 26(2) of the DTAA would be applicable to his case. Article 26(2) specifically covers the controversy at hand, meaning thereby that if the assessee is denied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are entitled to claim tax advantage in the State-concerned, they must fulfil same conditions and requirements as the resident enterprise. They may, therefore, be denied such advantages if their PEs fail to fulfil all conditions and requirements attached to the grant. It is argued that various decisions rendered by Indian Courts have held that the commentary may be referred to usefully for understanding the provisions of the DTAA. In this connection reference is made to the decision in the case of Union of India and Anr. v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC), in which references to the OECD model has been made. At page 741 it is mentioned that there is a further reason in support of our view. The expression liable to taxation has been adopted from the OECD model convention. Similarly, in the case of CIT v. Vijay Ship Breaking Corporation (2002) 261 ITR 113 (Guj), such references have been made. On the basis of these references, his case is that although the commentary is not binding on Indian Tax Authorities and Courts, references can be usefully made to it in case of any ambiguity in the provision as words are borrowed in the convention from OECD model. 5.2 Reverti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific one. The benefit of section 80HHE is granted to all resident assessees and Indian companies with the intention of earning foreign exchange. This object is not fulfilled in the case of an enterprise of a non-resident who is entitled to take away the profit from India without any restriction, thus not augmenting the foreign exchange reserves of India. He also referred to paragraph 46 of the OECD commentary in which it is mentioned that non-resident enterprises are not entitled to tax advantages attached to the activities, exercise of which is strictly reserved, on account of national interest, defence production or national economy etc. to domestic enterprises, since non-resident enterprises are not allowed to engage in such activities. On the basis of this paragraph, it is his case that grant of benefit under section 80HHE to a foreign enterprise does not protect the national economy as the non-resident person can take away the foreign exchange earned by it out of India. Paragraph (2) of article 26 will apply only when the resident and non-resident persons are placed under similar situations. Since the assessee is not similarly placed as resident software exporters, the ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no concept of discrimination or reasonable discrimination, but there is concept of less favourable treatment . The ld. counsel submitted that para No. 46 of the commentary on article 24 concerning non-discrimination actually favours the assessee because it goes without saying that non-resident enterprises are not entitled to tax advantages attaching the activities, the exercise of which is strictly reserved, on the ground of national interest, defence protection or the national economy etc. to domestic enterprises, since non-resident enterprises are not allowed to engage in any such activities. Since assessee is allowed to engage in activities of export of software, the assessee is very much entitled to the claim of deduction under section 80HHE of the Act. The ld. counsel also referred to para No. 6 of the Mumbai Tribunal s order in the case of Metchem Canada Inc. (supra) observing that provision of article 24(2) of Indo-Canadian treaty, and the provisions of article of 24(3) of the OECD model convention are in pari-materia. Therefore, the OECD convention commentary plays key role in determining the scope and connotation of article 24(2) of the Indo-Canadian DTAA. Similar interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon parlance this principle is known as Treaty Override . What it means is that the assessment of such person shall be made in accordance with the provision contained in the DTAA. However, if any provisions of the Act are found to be more beneficial, then the assessment shall be made in accordance with the provisions contained in the Act. Since according to the learned Counsel, the provisions of the Act are not more beneficial to the assessee, it is argued that the assessee ought to be assessed under the DTAA. In this connection, article 26(2) provides that except where the provisions of Paragraph (3) of article 7 (business profits) apply, the taxation of a PE of an enterprise of a contracting State in the other contracting State shall not be less favorably levied in that other State contracting than the tax levied on enterprises of that other contracting State carrying on the same activities. The paragraph contains some more provisions regarding deduction on account of civil status etc., which are not relevant to the facts of this case. While interpreting this Paragraph, it is also necessary to examine the contents of Paragraph (3) of article 7. This paragraph deals with deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differential tax treatment of the US enterprises will not amount to discrimination. In other words Article 26(2) of the DTAA will not come to the aid of the assessee for grant of the deduction. In the course of hearing of the appeal, a number of arguments were made by both the sides. The case of the learned Counsel is that Model Conventions have been referred to in a number of judgments by Indian Courts, being Azadi Bachao Andolan, Vijay Ship Breaking Corporation etc. Therefore, reference can usefully be made to the commentary on OECD Model Convention. However, the crux of the matter is as to what will constitute taxation not being levied less favorably . According to him, the commentary mentions that in such a case calculation can be made by treating the assessee as non-resident and thereafter as resident person. If the tax is calculated at a higher amount by treating him as a non-resident person, it can be concluded that the assessee has been taxed less favorably than the resident person carrying on same activities. It is also his case that there is no question of there not being a reasonable discrimination, as understood in Article 14, for the simple reason that provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention. Therefore, in our considered view it will be unnecessary for us to refer to the commentary on OECD Model Convention, decision of any foreign jurisdiction or other jurisdiction if the provisions contained in the DTAA are capable of clear and unambiguous interpretation. Accordingly, we consider it unnecessary to examine the commentary or the technical explanation for coming to a conclusion in the matter. 8.4 The learned DR referred to the Board Circular No. 621 dated 19th December, 1991, issued after introduction of section 80HHE in the Income-tax Act. Reference is made to Para No. 34 of the circular which states that with a view to provide fiscal incentives for export of computer software, a new section 80HHE has been inserted in the Act for providing tax concession similar to the earlier section 80HHC of the IT Act. We do not find anything in the circular which could be of aid in interpreting Article 26(2). Further, reference has been made to Circular No. 333 dated 02nd April, 1992, issued in respect of Treaty Override . The heading of the Circul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 44C and, therefore, it is distinguishable. To our mind, the decision harmonises provisions of the treaty and the provisions contained in section 44C of the Act. Similar exercise is involved in this case as the provisions of the Act and the treaty are required to be interpreted in a harmonious manner. Therefore, the ratio of this decision is applicable to the facts of the case before us. 8.6 There is also a dispute regarding the words same activities used in article 26. The case of the ld. Counsel is that the assessee is engaged in the business of export of software in the same manner in which a number of Indian enterprises are exporting software. The fact that the assessee has been allowed to export software shows that the business does not fall in the prohibited category. Accordingly, the assessee s case has to be compared with the case of an Indian enterprise engaged in the business of exporting software. If that is done, the assessee would be entitled to deduction under section 80HHE on the same footing and in the same manner as the deduction is admissible to a resident assessee. On the other hand, the case of the ld. DR is that various deductions under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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