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TMI Blog2005 (9) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has erred in holding that the provisions of section 44C of the Act will not be applicable and the quantum of expenditure will be allowed without the restriction imposed by section 44C. The assessee has raised the grievance by way of following grounds of appeal: "The Commissioner of Income-tax erred in upholding the Assessing Officer's view that deduction for expenses incurred at the head office was allowable in accordance with the provisions of section 44C of the Income-tax Act. The appellant submits that it is governed by the provisions of the Double Taxation Avoidance Agreement (DTAA) entered into by the Government of India with the Government of Canada, and the provisions of section 44C of the Income-tax Act (which restrict the head office expenses allowable in the case of non-resident) are inapplicable. The CIT(A) erred in holding that the provisions of Articles XXIV (1) and (2) of DTAA are subject to Article VII(4) of the DTAA and as such the view taken by the Assessing Officer in applying the provisions of section 44C are not only within the express provisions of Income-tax and relevant Finance Act, but also well within the various provisions contained in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les XXIV(1) and (2) [i.e. of non-discrimination clause] are to be read subject to the other provisions of the Convention, including Articles VII(4) and XXIV(4) [i.e., computation of business profits and exclusion of applicability of different tax rates between domestic companies and enterprise of the other State by the non-discrimination clause]". The CIT(A) further added that the provisions of section 44C "only provide for a mode of computation of income". It was noted that the head office expenses incurred by the non-resident companies cannot be allocated with accuracy and the question, therefore, remains one of estimate on one basis or the other, and that "the provisions of section 44C embody a fair method of estimation". The CIT(A) thus confirmed the action of the Assessing Officer for the assessment year 1993-94. In the two subsequent years, however, the CIT(A) decided the same issue in favour of the assessee by holding that "the special provisions of Article XXIV will override the general provisions of Article VII(4)". Reliance was also placed on the decision of the Tribunal in the case of Standard Chartered Bank v. IAC [1991] 39 ITD 57 (Bom.). The CIT(A) thus upheld the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtainment thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis provided that the result shall be in accordance with the principles laid down in this article. 3. In the determination of the profits of a permanent establishment, there shall be allowed those deductible expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses, whether incurred in the State in which the permanent establishment is situated or elsewhere as are in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than as a reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 44C only provide for a fair method of estimation of D deductible head office expenses and are enabling provisions in nature. 6. Article 24(2) of the Indo-Canadian DTAA is worded on the lines on Article 24(3) of the OECD Model Convention. In fact, it is verbatim extract from the Model Convention. While elaborating upon the scope of the said clause, the OECD Model Convention commentary, inter alia, states as follows: "24. Effect of tax bases - With regard to the basis of assessment of tax, the principle of equal treatment normally has the following implications: (a) Permanent establishment must be accorded the same right as resident enterprises to deduct the trading expenses that are, in general, authorized by the taxation law to be deducted from taxable profits in addition to the right to attribute to the permanent establishment a proportion of overheads of the head office of the enterprise. Such deductions should be allowed without any restriction other than those imposed on the resident enterprise." (b) ... 7. It is thus clear that according to the scope of this clause, as explained by the OECD commentary, includes the deduction on account of head office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DTAA, it is only axiomatic that the clause or the expression will have the same meaning as normally assigned in the tax literature by the OECD. Therefore, when an expression or a clause from the OECD Model Convention is used even in a bilateral tax treaty involving a non-OECD country, one has to proceed on the basis that it is used in the same meaning and with the same connotations as assigned to it by the OECD Model Convention Commentary. As per the OECD Commentary, placing a restriction on the deduction on account of overheads of the head office, except when the same restriction is also placed on the resident enterprises, does constitute discrimination under Article 24. The taxation on a permanent establishment of a Canadian company, by the reason of placing a restriction on deduction of head office expenditure which is not applicable in the case of resident companies, does, therefore, constitute less favourable tax treatment in India than the taxation levied on Indian enterprise carrying on the same activities in India. Viewed in this perspective, it is clear that the limitation on deduction of head office expenditure, as stipulated by section 44C of the Act, will be hit by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are, therefore, required to be read as subject of the provisions of Article 24. Revenue's argument that since the business profits are to be computed "in accordance with the provisions of and subject to the limitations of the taxation laws of that State" under Article 7(3) and, therefore, limitation placed under section 44C of the Indian Income-tax Act cannot be ignored, cannot, therefore, be accepted. What Article 24(2) seeks to remove is the discrimination to the permanent residents of Indian and Canadian residents in the other States vis-a-vis the domestic business entities of that other State. When domestic tax laws permit such discrimination, such legal provisions have to be treated as overridden by the provisions of the Indo-Canadian DTAA. There is no dispute about the fact that when the provisions of the Income-tax Act and the DTAA are in conflict, the provisions of the Act will be applicable only to the extent the same are more beneficial to the assessee. In other words, the provisions of the treaty prevail over the provisions of the Act. Therefore, the restriction placed on the allowability of the head office expenditure by section 44C of the Act is to be ignored in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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