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TMI Blog2025 (2) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... As in the amended Article 7(3) of the Treaty, specific restriction/condition was imposed providing that the deduction of expenses relating to the PE has to be allowed in accordance with the provisions of and subject to limitations of the tax laws of the particular State where the PE is situated. A reading of the amended Article 7(3) would make it clear that there were no restrictions/conditions imposed with regard to the limit of deduction of expenses earlier to the Protocol. If Revenue's contention that even without the Protocol amending Article 7(3), Article 25(1) provided for computation of deduction under Article 7(3) as per the provisions of domestic law is accepted, then there was no need for amending Article 7(3) by the Protocol. The language used in Article 7(3) of the treaty prior to and post amendment demonstrates that at the time of entering into the DTAA, the treaty partners, initially, never intended to put any restriction of the domestic laws on allowability of expenses in computing the business profits of the PE. Subsequently, the treaty partners having felt that the benefits provided under Article 7(3) needs to be withdrawn or restricted, agreed to amend the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead office expenditure under section 44C and the ratio laid down in the judicial precedents, discussed above, we hold that the expenditure incurred outside India exclusively for the Indian branches does not fall within the ambit of section 44C. Hence, would be allowable in full. This ground is allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... curred on account of following: Swift expenses (charged to Indian operations on actual usage basis) 1,68,349 Globus Accounting Software maintenance Expenses (charged to Indian operations on number of usage basis) 1,90,072 (ii) These expenses are directly connected and necessary for the smooth functioning of the operation of the Indian branches. (iii) These expenses are not in the nature of general administrative expenditure and are not required to be processed under the provisions of Section 44C of the Act. The appellants pray that the AO be directed to allow the expenditure of Rs. 3,58,421 under Section 37 of the Act. 4. In ground no. 1, the assessee has challenged disallowance of deduction claimed of head office expenses of Rs. 1,78,07,340/- allocated to the Indian branches. Whereas, in ground no. 4, assessee has challenged disallowance of deduction claimed of Rs. 3,58,421/-, being expenses specifically incurred outside India for the Indian branches. 5. The material facts relevant for deciding these issues are, the assessee is a non-resident banking company incorporated in United Arab Emirates (UAE) and operates in India through its branches in Mumbai and New Delhi. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowances were confirmed. 7. In course of hearing, Shri Percy Prdiwala, learned Senioor counsel for the assessee advanced detailed submissions, both orally and in writing. Broad propositions put forward by him, insofar as, general and administrative expenses allocated to Indian Branches, can be summarized as under: • Head office expenses are fully deductible as per Article 7(3) of India-UAE DTAA, as, there is no condition or restriction imposed therein that the deduction would be allowable subject to the provisions of taxation laws of India. • Wherever, India wanted to provide for limitations of the domestic law to apply while applying the treaty, the same has been specifically provided in the treaty. • Article 7(3) of the DTAA was amended with effect from 1st April, 2008, wherein, the restriction of applicability of the domestic law while computing the income under the treaty was inserted. However, the protocol amending the provisions of treaty would be applicable from the date when it comes into effect, hence, cannot have retrospective applicability. • Wherever, the amendment is to be applied retrospectively, it has to be mentioned in the protocol and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012), dated 5th October, 2018 8. Drawing our attention to Article 25(1) of the Tax Treaty, learned Departmental Representative submitted, the term 'taxation of income' used in Article 25(1) will also include computation of such income to be taxed, as, computation is an integral part of taxation. He submitted, a reading of Article 25(1) of the treaty would make it clear that the laws of the Contracting States would continue to govern the taxation of income unless there is an express provision in the Treaty restricting application of domestic tax laws. He submitted, since, the income under the Act has to be computed as per the provisions of section 28 to 44, including section 44C, in absence of any express provision restricting the application of domestic law provisions, as per Article 25(1) of the Treaty, income has to be computed by applying the provisions of the Act. Hence, the head office expenses allocated to the Indian branches have to be allowed in terms with section 44C of the Act. He submitted, use of words 'express provision to the contrary' in Article 25(1) would mean, there should be a provision expressly denying the applicability of section 44C. Drawing our attention t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lead to absurdity, inasmuch as, other limitations of sections 28 to 44 would also not apply and expenditure may be allowed irrespective of the fact, whether it is capital or revenue in nature, and whether tax is deductible at source or not etc. In support of such contention, he heavily relied upon the decision of the Tribunal in assessee's own case in assessment year 1996-97. To buttress his argument with regard to the terminology of "express provision" used in Article 25(1), learned Departmental Representative relied upon the decision of Maru Ram & Ors. Vs. Union of India, AIR 1980 SC 2147. He submitted, various decisions relied upon by learned counsel for the assessee have not laid down correct proposition of law with regard to the applicability of Article 7(3). He submitted, in none of these decisions, interpretation of Article 7(3), as provided in UN and OECD Commentaries, as also, the meaning of the word 'express provision to the Contrary' as interpreted by Hon'ble Supreme Court in case of Maru Ram & Ors Vs. Union of India (supra) has been considered while interpreting Article 25(1). Further, he submitted, the decision in case of Abu Dhabi Commercial Bank (supra) has erroneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has held that provisions of section 43B of the Act is not applicable. He submitted, even the reliance on the case of Mitsubishi Heavy Industries Ltd.(61 TTJ 656) is misplaced as the issue of applicability of section 44C in computing the income under DTAA was decided in favour of the assessee. 11. We have carefully considered the rival submissions and perused the materials on record. We have applied our mind to the judicial precedents cited before us, as well. The issue arising for consideration is, whether head office expenses allocated to the PE in India is allowable under Article 7(3) of the treaty without any limit or subject to the restrictions imposed under section 44C of the Act. After carefully examining the various decisions placed before us, we find, there are two viewpoints on the issue. As per the first viewpoint, Article 25(1) of India - UAE Tax Treaty provides for applicability of domestic law for computation of income, unless, there is an express provision in the agreement restricting such applicability. Upon interpreting Article 7(3) of the Treaty it has been held that, since, it does not contain any restrictive covenant regarding applicability of domestic law p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the PE has to be allowed in full in absence of any restriction/condition put in Article 7(3) of the Treaty. Whereas, it is the case of the Revenue that Article 25(1) of the Tax Treaty provides for computation of taxable income as per the applicable law of the Contracting States, unless, there is an express provision to the contrary. It is the case of the Revenue that there is no such express provision in India - UAE DTAA to exclude applicability of section 44C of the Act. In this context, learned Departmental Representative has submitted that there is no such express provision in Article 7(3) of the Treaty restricting applicability of section 44C of the Act. In this context, it is necessary to examine Article 25(1) and Article 7(3) of the Treaty for better understanding. 14. A reading of Paragraph 1 of Article 25 makes it clear that it is in two parts. First part of Article 25(1) says that taxation of income and capital arising in respective Contracting States shall be governed by the domestic laws in force in the respective Contracting Staes. Whereas, the second part of Article 25(1) carves out an exception by providing that where express provisions to the contrary are made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed, the restriction imposed under the domestic law cannot be read into Article 7(3). 16. There is another aspect to the issue. The contextual interpretation of Article 25 of the Treaty. Article 25 of the Treaty starts with the heading 'Elimination of Double Taxation'. Thus, from the heading of the Article, it becomes clear that it provides the mechanism for elimination of double taxation of income in the Contracting States. Further, on a careful reading of Article 25 as a whole and paragraph 1 of Article 25 in particular, it becomes very much clear that it provides for taxation of income from various sources arising in the respective Contracting States in accordance with laws in force governing the taxation of such income or capital in the particular Contracting State, unless, there is an express provision to the contrary made in the Treaty. Thus, what the Article provides is, elimination of double taxation in respect of taxation of various sources of income. In other words, what income is to be taxed or made exempt is to be governed by the domestic law, unless, there is an express provision contrary to the domestic law provided in the agreement. However, how a particular type o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax credit can be given as has been provided in Article 25(2) and 25(3) of India UAE-DTAA. 18. It is also relevant to mention here that DTAAs entered into by the countries are generally on broad contours of the Model Tax Convention on Income and Capital. Articles 6 to 21 are to determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. The purpose of Articles 23 A and 23 B (Article 25 in our case) is to provide that the State of residence must allow relief so as to avoid double taxation. Articles 24 to 30 are for special provisions in the Convention such as the elimination of tax discrimination in various circumstances, the exchange of information between the tax authorities of the Contracting States etc. Thus the Model Convention has clearly defined the purpose of each of the Articles and there is no overlapping or there is no reason for a conjoint reading of the provisions of the various Articles. 19. Therefore, in our view, the purpose of Article 25(1) can not be expanded to mean the manner of taxing the income in each of the contracting s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computing business profits of PE to bring Article 7(3) of the treaty in sync with domestic law provisions and similar provision available in some other treaties entered by India with other countries. Of course, we may hasten to add, the theory of 'reverse discrimination' does not apply to the facts of the present appeal, as, we are concerned with applicability of section 44C of the Act, which arises in case of non-residents alone. 23. Be that as it may, Treaty partners entered into negotiations and the Protocol amending certain provisions in the treaty was signed between the countries, which was made effective from 1st day of April, 2008 by virtue of notification no. SO 2001(E) (NO) 282/2007, dated 28.11.2007. In the said Protocol, the earlier Article 7(3) was substituted by following: "3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for very good reason. To get agreement, politic uncertainty is called for. …..The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery CJ that the words 'are to be given their general meaning, general to lawyer and layman alike... the meaning of the diplomat rather than the lawyer." 121. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including (Mashreq Bank Psc.) one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusively to foreign investors over and above the domestic tax law provisions. In this respect, it does not differ much from other similar tax incentives given by them, such as tax holidays, grants, etc. 123. Developing countries need foreign investments, and the treaty shopping opportunities can be an additional factor to attract them. The use of Cyprus as a treaty haven has helped capital inflows into eastern Europe. Madeira (Portugal) is attractive for investments into the European Union. Singapore is developing itself as a base for investments in South East Asia and China. Mauritius today provides a suitable treaty conduit for South Asia and South Africa. In recent years, India has been the beneficiary of significant foreign funds through the "Mauritius conduit". Although the Indian economic reforms since 1991 permitted such capital transfers, the amount would have been much lower without the India-Mauritius tax treaty. 124. Overall, countries need to take, and do take, a holistic view. The developing countries allow treaty shopping to encourage capital and technology inflows, which developed countries are keen to provide to them. The loss of tax revenues could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y partners permit treaty shopping to encourage capital and technology inflows, unless, the revenue losses are significant compared to other tax and non-tax benefits from the treaty or the treaty shopping leads to other unintended tax abuses. Even, accepting that there is some amount of treaty shopping, which may have taken place when the bilateral agreement was entered into, however, whether it should continue and if so for how long, is a matter which is best left to the discretion of the executive, as, it is dependent upon several economic and political considerations. Therefore, the provision contained in a Tax Treaty has to be understood by strictly looking at the language used in the provisions contained therein. 27. The language of Article 7(3) of the Treaty, as it existed prior to its amendment by way of Protocol, makes it clear that there was nothing in the provision to infer that restrictions/conditions imposed in the domestic law, including section 44C, would be applicable while allowing deduction of expenses attributable to the PE. However, the situation stands substantially altered after amendment of Article 7(3), as, specific restriction has been imposed by providing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the domestic laws, it was specifically provided in the Treaty. Further, wherever the treaty partners intended to amend the provisions of the treaty retrospectively, they specifically provided for it. 30. Thus, the aforesaid factual and legal position make it clear that the conditions imposed in Tax Treaties are specific to each Treaty, as, a Bilateral Treaty is entered between two countries on the basis of negotiations and consideration of both commercial and political factors. Therefore, a provision of the Treaty has to be interpreted strictly in accordance with the language used therein. When the treaty partners wanted to change the provisions of the Treaty, again, it was based on negotiations/agreement and amendment was made with reference to a particular date. Therefore, the amendment would also apply from the effective date and not any other date. Since, the protocol amending Article 7(3) was made effective from 1st April, 2008, it will not have any retrospective effect. Therefore, going by the language used in Article 7(3), as it existed prior to its amendment by protocol dated 28.11.2007, the deduction of expenses attributable to the PE has to be allowed fully without apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,90,072.08. As far as factual aspect of the issue is concerned, there is no dispute that such expenses are incurred outside India exclusively for Indian branches. While, SWIFT expenses are charged to Indian operations on actual usage basis, Globus Accounting Software Maintenance expenses are charged to Indian operations on number of users' basis. The issue arising for consideration is, whether the provisions of section 44C would apply to such expenditure. 33. Looking at the nature of expenditure incurred, there cannot be any doubt that they are exclusively related to the operations of Indian branches. Whereas, section 44C speaks of head office expenditure. The expression 'head office expenditure' has been defined in clause (iv) of Explanation to section 44C as under:- "(iv) "head office expenditure" means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of- (a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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