ORDER
D.C. Agrawal, Accountant Member
This is an appeal filed by the assessee raising following ground :
The CIT(A) erred in law and in facts, in upholding the action of Dy. Director of Income-tax (International taxation) -1(2), Mumbai thereby rejecting the appellant’s claim for the benefit of the non-discrimination clause of the India-Korea DTAA and taxing the appellant’s income at the rate of 48 per cent instead of at the rate applicable to a domestic company i.e., 35 per cent.
The appellant therefore, prays that the benefit of the article 26 of the DTAA be granted and that its income be taxed at the rate of 35 per cent instead of 48 per cent.
2. Thus the assessee is aggrieved against the action of the Assessing Officer in taxing it at the rate of 48 per cent being the tax rate for non-domestic companies as against claim of assessee to tax it at a rate of 35 per cent being the rate applicable to domestic companies.
3. The assessee is a banking company based at Korea. It has a branch in India. It is involved in normal Banking activities including financing of foreign trade and foreign exchange transactions. The assessee-company claimed that the tax rate as applicable to Indian companies carrying on similar business should be applied in its case instead of the tax rate applicable to non-resident companies. To press for its arguments the assessee-company relied upon article 25 of the Double Tax Avoidance Agreement (DTAA) between India and Korea. The Assessing Officer considered the provisions of article 25 of the DTAA with Korea and rejected the claim. While rejecting the claim he gave his reasonings in para 3 of his order.
4. In brief arguments of the learned Assessing Officer are :
1. Article 25 of DTAA provides protection against discrimination on the basis of nationality.
2.1 Non-discrimination clause can be invoked only when the foreign entity and Indian entity are carrying on the same activities and not when they are carrying similar activities.
2.2 Indian banking company carry many other activities such as advances to agriculture, and to weaker Sections : which are not done by non-resident Banking company.
2.3 Indian Banking companies distribute Dividend in India. Dividend is not payable by non-resident Banking Co. in India.
2.4 OECD model convention also distinguishes the words ‘same activities’ and ‘similar activities’.
3. Article 24 of UN model convention also provide that where P.E. does not distribute dividend, the extension of reduced rates to P.E. will also not serve any purpose.
4. In Bank of Tokyo Mitsubhusi Ltd. case, ITAT Calcutta has held that non-discrimination clause is not applicable to differential rate treatment.
5. CBDT Circular No. 333, dated 2-4-1982 also affirm the proposition that differential rate treatment to foreign companies or to their P.E. is not hit by non-discrimination clause.
6. Amendment made in Section 90 by way of introduction of Explanation provides to tax non-resident companies at higher rates.
The CIT(A) confirmed the order of Assessing Officer by following his orders in earlier years.
5. Before us the learned Counsel for the assessee raised following arguments in support of his contention that there is a discrimination against a foreign company and its P.E. by taxing it at a higher rate as compared to taxing the domestic companies (at a lower rates) and such discrimination is hit by article 25 of the DTAA with Korea. His arguments are :
1. Article 25 of DTAA with Korea provides a non-discrimination clause according to which National of Korea shall not be subjected in India to any taxation which is more burdensome than the taxation to which National of India are subjected to.
2. Taxation of P.E. (of Korean Bank) shall not be less favourable than the taxation on an Enterprise of India.
3. The provisions of DTAA would prevail over this provision of the Income-tax Act, 1961. Even though, Income-tax Act, 1961 provides by virtue of Explanation to Section 90(2) that charging a foreign company or its P.E. at higher rates will not be treated as less favourable, still the non-discrimination clause in article 25, will prevail over all the \ revisions of IT Act including this Explanation, For this proposition the learned Counsel relied on following judgments:
1. CIT v. Davy Ashmore India Ltd.
2. CIT v. Visakhapatnam Port Trust
3. 137 ITR (St.) 1.
4. Explanation to Section 90 does not apply in the case of a person who is national of a country with which India has entered with DTAA. It only applies in cases where
(i) The country of which the assessee is a national has not entered into a treaty for DTAA with India.
(ii) The DTAA treaty is silent about discrimination clause.
(iii) The assessment year involved is after 2004, when last amendment in the Explanation was carried out.
(iv) The treaty itself provides for differential rate treatment like in the case of DTAA with U.S. The treaty itself provides for differential rate treatment of 15 per cent.
6. On the other hand learned DR supported the orders of authorities below. He further relied on the decision of ITAT Bench, Mumbai in Credit Llyonnais v. Dy. CIT [IT Appeal No. 6540 (Mum.) of 1995 assessment year 1991-92]; [2005] 94 ITD 401, Mumbai and in the case of ABN Amro Bank NV v. Jt. CIT [2005] 4 SOT 643 ITAT Kolkata ‘E’ Third Member Bench in ITA 4961/M/1999, 58 & 106/ Cal./2001 and 693/Kol./2002 for assessment years 1992-93 to 1995-96 for the propositions that Explanation to Section 90(2) inserted with retrospective effect from 1-4-1962 is not in conflict with the provisions of DTAA and that charging of domestic companies and non-domestic companies at different rates has nothing to do with the nationality which is the base of non-discrimination clause in article 25 of DTAA. The learned DR further submitted that an explicit provision is provided in article 23(2) of DTAA of India with UK, wherein it is made clear that charging at higher rate will not tantamount to discrimination. In Korean agreement, though, there is no such specific provision, it is made implicit by providing specific rates on different types of income, meaning thereby, according to learned DR, charging non-domestic companies at higher rates by virtue of Finance Act will not tantamount to discrimination.
7. We have considered the rival submissions, material on record and case laws cited by the parties. In our considered view, the charging of P.E. of the assessee companies at higher rates applicable to non-domestic companies is not hit by non-discrimination clause of article 25 of the DTAA with Korea. The reasons for coming to this conclusion are as under:
1. There is no dispute with the proposition that wherever the provisions of IT Act are in conflict with the provisions of DTAA, the provisions of the DTAA will prevail. It has been held in number of cases decided by Hon’ble High Courts :
(i) In CIT v. Visakhapatnam Port Trust where the German company carrying on supervision work of installation of ‘bucket wheel reclaimer’ was held to have no P.E. in India. The assessee-Visakhapatnam Port Trust was not required to effect TDS on such payment to German Co. as per DTAA. It was further held that the provisions of DTAA will prevail over the provisions of IT Act.
(ii) In CIT v. Davy Ashmore India Ltd. payment made for import of drawings and designs with approval of RBI was not regarded as Royalty as per terms of the DTAA with U.K. and hence amount so paid was held as not assessable even though so provided in Section 9 of the IT Act.
(iii) In CIT v. VR. S.R.M. Firm , it was held that by virtue of DTAA with Malaysia the capital gains arising on sale of property in Malaysia is not assessable in India.
(iv) In CIT v. R.M. Muthaiah , it was held that by virtue of articles 6, 7, 8 and 9 of DTAA with Malaysia, income from sources mentioned in these articles are not assessable in India even though IT Act provided otherwise.
(v) In Arabian Express Line Ltd. of UK v. Union of India , it was held, by virtue of article 9 of the DTAA with U.K., that entire shipping income of the petitioner, was exempt from tax in India.
(vi) In CIT v. P.V.A.L. Kulandagan Chettiar it was held that by virtue of articles II(1)(b), IV, V, VI, VII(1), XXII(2), where assessee does not have any P.E. in India, he is not assessable in India.
From all these decisions, which have been brought to our notice, we find that the main issue in the dispute has been the taxability of an item under IT Act. Thus, the issue has centered around assessability of an assessee in India or about computation of income as to whether certain item is to be included in the total income or not, which is apparently so includible but the provisions of DTAA provided otherwise and the Courts have held that they are not assessable or includible in the total income. In none of these decisions the question of applicability of rates after finally computing the total income was involved. Therefore, we cannot draw the inference from all these decisions that non-resident company after its total income is computed will be subjected to lower rate of tax by treating it equal to domestic company contrary to express provision of IT Act and Finance Act. In our considered opinion, it is one thing to say that provisions of agreement will prevail over the provisions of IT Act insofar as assessability of an item is concerned and it is different thing to say that the agreement (DTAA) will also control the applicability of Finance Act which provides the rates for different assessable entities.
2. To continue above reasoning, we are of the considered view that the DTAA gets the trade off only with the provisions of the IT Act and unless so specifically provided in a particular DTAA, the rate of tax which is prescribed in an Annual Finance Act cannot give way to the DTAA. Our view is supported by the careful reading of the provisions of Section 90. It reads as under :
90. Agreement with foreign countries. (1) The Central Government may enter into an agreement with the Government of any country outside India
(a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or
The following clause (a) is substituted for the existing clause (a) in Sub-section (1) of Section 90 by the Finance Act, 2003, w.e.f. 1-4-2004.(a) for the granting of relief in respect of
(i) income on which have been paid both income-tax under this Act and income-tax in that country; or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding Jaw in force in that country, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country,
and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
The following Sub-section (3) is inserted after sub-section
(2) of Section 90 by the Finance Act, 2003, w.e.f. 1-4-2004 :
(3) Any term used but not defined in this Act or in the agreement referred to in Sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.
Explanation. For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India.
Thus Section 90(1) grants authority to Central Government to enter into agreement with any Government outside India to grant relief in respect of income clause (a) and for the avoidance of Double Taxation of income clause (b), for exchange of information clause (c) and for recovery of tax clause (d). It does not provide any authority to the Central Government to enter into agreement for applicability of rates and taxes contrary to what it provided in Annual Finance Act. Thus prescription and application of particular rates of taxes on different entities come within the exclusive domain of Parliament. DTAA could not, therefore, cover a compromise on rates. It is, therefore, unacceptable to infer by the comparison of Section 90 of the IT Act with DTAA, that DTAA will also prevail over the Finance Act, which is to be passed in future by the Parliament. Indian tax laws created a distinction between a domestic and a non-domestic company. That distinction is on the basis of its definition provided in Section 2. The Finance Act also creates a distinction between the two on the basis of distribution of dividend. Where a Korean company having a permanent establishment in India declares and distributes dividend in India, it is to be treated as domestic company and is liable to be taxed accordingly. The dividend distributed in India lead to accrual of income in the hands of the recipients. This will lead further levy of tax on account of distribution of dividend in India. In our view, this distinction does not violate article 25 of the DTAA in any way. The activities of Indian Banks and Korean Bank are similar. Both carry banking operations but the activities of the two are not same or identical. Indian banks were nationalised by the Acts of the Parliament to promote certain social and economical objects of the State and they have to act for the manipulation of the resources for the common good. It cannot be said that Korean Bank is working in the same circumstances as the Indian banks because former has no such constraints and it is free to operate their profit-making apparatus to the maximum extent possible. In our view, the provision of non-discrimination has nothing to do with the rate of tax, which is dealt with separately by other articles of the DTAA. Article 25 has deliberately not used the words ‘tax was charged’ as against other articles, which provide for rates of tax. Curiously article 25 has used expression ‘levy of taxation’. In the context of all these articles levy of taxation in the article 25 cannot mean or cannot be construed in the sense of prescribing rate of tax on the total income of the assessee. So far as conflicting provisions of Income-tax Act, 1961 and article 25 are concerned, we do not envisage any conflict. Conflict, if any, must be between two clear and specific provisions of Income-tax Act, 1961 and DTAA. The Income-tax Act, 1961 does not provide the rate at which income tax will be levied. The rates are provided by the Annual Finance Act and are determined by the fiscal policy of the Government. Section 90(2) so does the agreement do override the provisions of the Finance Act by which the rates of tax are fixed annually.
Let us compare DTAA of India with Korea with DTAA of India with UK. Article 23(2) of agreement with UK reads as under :
2. The taxation on a permanent establishment which an enterprise of a Contracting State has in other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of article 7 of this Convention.
[Emphasis supplied]
The UK agreement makes it clear that the non-discrimination paragraph cannot be interpreted to mean that rate of tax in respect of PE of a UK and an Indian company must be the same. What is explicit in the UK agreement is implicit in Korean agreement. Whenever required application of rates of taxes on different items of income has been provided in Korean Agreement. For example, para 2 of article 11 provides 15/20 per cent of gross dividend as taxes. In case of interest article 12(2) provides 15 per cent rate on gross interest. Article 13(2) provides rates not exceeding 15 per cent of gross amount of royalties or fee for technical services. Article 9(2) provides taxes not more than 50 per cent of tax chargeable in other State. Therefore, clause 2 of article 25 of the Korean agreement cannot be construed to mean that no tax can be levied on a foreign company at a rate higher than the rate payable by Indian company. Thus, in our considered view, the DTAA in general does not prevail over the Finance Act and hence over the tax rates. Section 90 does not provide so. However, we may add, wherever DTAA has provided the taxation of a particular category of income at certain rates, then charging of that income at different rates as per Income-tax Act, 1961 may come in conflict with DTAA and hence the taxes over that category of income will be levied at that rates so provided in DTAA. But where no such rates on an income or a category of income on the status of an assessee has been prescribed in DTAA then, there cannot be any conflict with the Income-tax Act, 1961. Therefore, DTAA as such will not prevail over Income-tax Act, 1961 and hence rates as applicable to domestic companies cannot be applied to non-domestic companies. In the present case, no rates for charging non-domestic companies has been provided in DTAA with Korea. Hence, it cannot be said that DTAA is in conflict with Income-tax Act, 1961. In fact, no such real conflict has been demonstrated.
3. Let us examine article 25 of the DTAA with Korea so as to find out whether it is in conflict with any provisions of the Act:
Article : 25
1. The nationals of a Contacting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other, or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.
This provision shall not be constituted as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.
3. Except where the provisions of article 10, paragraph 7 of article 12, or paragraph 7 of article 13 apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same condition as if they had been paid to a resident of the first-mentioned State.
4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected.
5. The provisions of this article shall, notwithstanding the provisions of article 2, apply to taxes of every kind and description.
8. This article 25(1) provides that Contracting States will not discriminate ‘nationals’ of other Contracting State in the matter of taxation, if that ‘national’ is working ‘under same circumstances’, then taxation on such enterprise will not be less favourable than the taxation on the enterprises of that other State. Based on article 25(1) and article 25(2), the learned Counsel for the assessee had submitted that it is discrimination that domestic companies are subjected to lower rates where as the non-resident company (P.E in India of foreign bank) is subjected to higher rates. It is discrimination to tax the PE of foreign bank at higher rates when the Indian Bank and the branch of foreign bank acting as P.E. are engaged in same activities. However, we find that article 25(1) contains some important words/phrases which testify as to when and under what circumstances this non-discrimination clause would be applicable. One is ‘nationals’ and the other is ‘in the same circumstances’.
8.1 The concept of ‘national’ has been considered in the decision of ITAT ‘J’ Bench, Mumbai in Credit Llyonnais v. Dy. CIT [2005] 94 TTJ (Mum.) 1074 : 94 ITD 401 (Mum.). The question involved therein was whether deduction under Section 80M is available to foreign companies like it is available to Indian domestic companies, and if not, whether it is a discrimination, hit by non-discrimination clause in article 21 of Indo-French DTAA, the language of which is pari materia with that of article 25(1) of Indo-Korean DTAA. Para 6 of that order reads as under :
6. The applicable India France Double Taxation Avoidance Agreement is India-France DTAA dated 26th March, 1969 (reported in 76 ITR Statute 1). In this tax treaty, article XXI provided as follows :
Article XXI
The nationals of one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirements connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other Contracting State in the same circumstances are or may be subjected. In particular, the citizens of one Contracting State who are subjected to tax in the other Contracting State shall be entitled to the same extent as the citizens of that other Contacting State, to any exemption, deduction, credit or other allowance accorded in consideration of the family circumstances.
A plain reading of the above tax treaty provision makes it clear that it deals with discrimination on the ground of nationality alone. To put it in simple words, it provides that nationals of France in India will not be subjected to any taxation, or any requirement connected with such taxation, which is more burdensome than similar taxation or requirement in connection therewith on an Indian national in India. The same principle would naturally also apply on Indian nationals in France vis-a-vis French nationals in France. As second limb of the non-discrimination clause lays down, this non-discrimination clause is particularly aimed at ‘exemption, deduction, credit or other allowance accorded in consideration of the family circumstances’, such as allowances in respect of dependants etc., which anyway do not find place in the Indian tax laws. The non-discrimination clause seeks to ensure that the Contacting States do not decline any such allowance only on the ground of taxpayer’s nationality. That will be the situation, for example, in a case in which dependant allowance in computation of total income is allowed only to the nationals of that country and the same is not extended to the nationals of the other country who are residents in the first country. In the Indian perspective, such a situation may arise when, for example, deduction under Section 80DD, for deduction in respect of maintenance of a dependant with disability, is restricted to Indian nationals only. In such an eventuality, in view of the provisions of article XXI, the benefits of that provision would have been available to the French nationals as well. Another situation in which the provisions of article XXI may affect the provisions of the Income-tax Act is perhaps the entitlement for deduction under Section 80R which is available only to an Indian citizen. Since one of the necessary conditions for entitlement of deduction under Section 80R, in respect of remuneration from certain foreign incomes in the case of professors and teachers etc., is an Indian citizenship, this Section appears to discriminate on the ground of nationality. It is interesting to note that while Sections 80R and 80RRA deal with the citizenship also, many similar Sections such as Section 80QQB, Section 80RR, Section 80RRB, there is no reference to citizenship, and the requirements are only with respect of residence. It is also very important to appreciate that such Indian and French nationals, as are compared for the purpose of finding out whether or not taxation etc. of one of which is more burdensome than the other, must be ‘in the same circumstances’. Elaborating upon the scope of expression ‘in the same circumstances’, OECD commentary, inter alia, observes as follows :
The expression “in the same circumstances” refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of ordinary taxation laws and regulations, in substantially similar circumstances both in law and on fact…. The expression “in the same circumstances” would be sufficient by itself to establish that a taxpayer who is resident of a Contracting State and one who is not a resident of a Contracting State are not in the same circumstances. In fact, whilst the expression ‘in particular with respect to residence’ did not appear in the 1963 Draft Convention or in 1977 Model Convention, the Member countries consistently held that, in applying and interpreting the expression “in the same circumstances”, that the residence of the taxpayer must be taken into account. However, in revising the Model Convention, the Committee on Fiscal Affairs felt that a specific reference to the residence of taxpayer would be useful clarification as it would avoid any possible doubt as to the interpretation to be given to the expression “in the same circumstances” in this respect.
In the light of the above, in applying this non-discrimination clause, what is to be really seen is whether two persons who are residents of the same State are being treated differently solely by reason of having a different nationality, because differential tax status on the ground of residence of the tax payer cannot be construed as non-discrimination. In other words, when different tax treatments are being given to the assessees on the basis of criterion connected with requirements regarding residence of the tax payer, it will not be covered by the scope of non-discrimination clause. This is so stated in the authoritative commentary issued by the OECD itself which is one of the bodies making immense contribution to the development of standardization of tax treaties, and thus developing, what is often termed as, ‘international tax language’. The importance of OECD commentary in interpretation of tax treaties can hardly be overemphasized. This proposition finds support from the judgment of Hon’ble Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust and Tribunal decisions in the cases of Graphite India Ltd. v. Dy. CIT [2003] 86 ITD 3842 (Kol.) and Dy. CIT v. ITC Ltd. [2003] 85 ITD 162 (Kol.). In any event, on a plain reading of the provision also it is unambiguous that it deals with discrimination on account of nationality alone. It is so stated in clear words of the DTAA.
8.2 The concept of discrimination based on nationality was also discussed in explanatory notes on UN Model convention from which the language in most of DTAA’s including the Indo Korean DTAA and Indo French DTAA has been borrowed. The relevant article in UN Model convention is article 24. The non-discrimination clause in article 24(1) of UN Model convention and so the article 25(1) of Indo Korean DTAA provided that the term ‘national’ in article 3(g) of Indo Korean DTAA showed that those who may be entitled to invoke article 25 of Indo Korean DTAA arc individuals (possessing the nationality of a Contracting State), legal persons, partnerships and associations. Article 3(g) of Indo Korean DTAA reads as under:
3(g) the term ‘national’ means any individual possessing the nationality of a Contracting State and any legal person, partnership, association or other entity deriving its status as such from the laws in force in the Contracting State.
8.3 From this it appears to us that corporate bodies are not covered in the definition of nationals. Since ‘legal person’ come side by side with individual in the above definition, than from the principal of ‘Nocitur-a-soccii the ‘legal person’ would not be a corporate body. Further, ‘other entity’ as used in article 3(7) would also not include ‘corporate bodies’ unless they are declared ‘nationals’ under the law of that State. Similar views were expressed by professor Dr. Klaus Vogel, University of Munich, in his treatise on ‘Double taxation convention’ third edition (being a commentary to the OCED UN – US Model Convention for the DTAA on income and capital) on page 1291.
(c) Rule : Article 24(1) MC provides that
? nationals of a Contracting State
? whether or not residents of one of the Contracting States
? must not be subjected in the other Contracting State to any taxation or any requirement connected therewith
? which is other or more burdensome than the taxation or connected requirements
? to which nations of that other State in the same circumstances are or may be subjected.
(d) Regarding the term ‘national’ cf. Article 3(1)(f). It shows that those who may be entitled to invoke Article 24 are individuals, legal persons, partnerships and associations. Contrary to Article 3(1)(a), Article 24(2) expressly mentions associations. On the other hand, Article 24(2) does not refer to entities treated as bodies corporate for tax purposes [Art. 3(1)(b)]. It might be fair to assume that they should be included in Article 24 as ‘legal persons as understood for the purposes of tax law’. However, an argument against such an assumption is the fact that Article 3 expressly mentions them side by side with legal persons. Therefore, it will not be possible to avoid the conclusion that such entities do not enjoy any protection against discrimination on the grounds of nationality….
9. For the sake of argument presuming that the assessee-company is a national of the Contracting State (i.e., Korea) it still cannot be said that it is functioning in India under the same circumstances like a domestic company. In the commentary of Klaus Vogel referred above, the place of residence has been considered to be an essential criteria in determining whether two taxpayers are functioning ‘in the same circumstances’. Similar views were expressed in the decision by ITAT in Credit Llyonnais’s case (supra). Another distinction between domestic company and non-domestic company is the declaration of dividend or making arrangement therefor. Indian domestic company has to declare dividend or make prescribed arrangement therefor. But there is no such binding upon the non-domestic company, as they do not have the shareholders in India. Thirdly, the domestic banking company has to abide by the additional conditions imposed by Reserve Bank of India about advances to agriculture or to weaker Sections of society. The percentage of advances to priority sector is more in case of domestic banking company as compared to non-domestic banking company. Hence it cannot be said that domestic banking company and non-domestic company arc working under the same circumstances. Klaus Vogel’s commentary on Page 1288 refers to this aspect as under :
17.3. [same circumstances] : “The expression ‘in the same circumstances’ refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of the applications of the ordinary taxation laws and regulations, in substantially similar circumstances both in law and in fact. The expression ‘in particular with respect to residence’ makes clear that the residence of the taxpayers is one of the factors that arc relevant in determining whether taxpayers are placed in similar circumstances. The expression ‘in the same circumstances’ would be sufficient by itself to establish that a taxpayer who is a resident of a Contracting State and one who is not a resident of that State are not in the same circumstances. In fact, whilst the expression ‘in particular with respect to residence’ did not appear in the 1963 Draft Convention or in the 1977 Model Convention, the Member Countries have consistently held, in applying and interpreting the expression ‘in the same circumstances’ that the residence of the tax payer must be taken into account. However, in revising the Model Convention, the Committee on Fiscal Affairs felt that a specific reference to the residence of the taxpayers would be a useful clarification as it would avoid any possible doubt as to the interpretation to be given to the expression ‘in the same circumstances’ in this respect.
9.1 In view of above reasoning we are of the view that domestic banking company and non-domestic banking company do not function under ‘same circumstances’ and hence discrimination clause in article 25 of Indo-Korean DTAA is not applicable.
10. Let us consider the definition of domestic and non-domestic companies provided in Section 2(22A) of Income-tax Act, 1961, which reads as under :
2(22A) ‘domestic company’ means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income;
10.1 It shows that not only Indian Company but also any other company can be termed as domestic company provided it has made prescribed arrangement for distribution of dividend (including dividend on preference shares) payable out of income to tax. Section 2(23A) defines a foreign country as a company, which is not a domestic company.
10.2 The non-discrimination clause, in our considered view, can be invoked among the members of the ‘same set of persons’. Those domestic companies, which belong to one set and those, which are not domestic companies fall into other set. A nonresident company who falls in the definition of domestic company by virtue of its having made prescribed arrangement for distributing dividend, cannot be discriminated. From this definition also, we do not find any case of discrimination as Indian domestic company and non-resident company fall in two different sets. Within the group (or set) there should not be any discrimination on the basis of nationality.
11. Now let us see how Explanation to Section 90(2) affects the applicability of non-discrimination clause, Section 90 has been referred above, elsewhere in this order, Explanation to it was introduced with effect from 1-4-1962 with retrospective effect. It clearly provided that charging of a foreign company at a higher rate will not be regarded as less favourable as compared to domestic company. The Departmental Circular No. 14 of 2001 explains the effect of Explanation as under :
54. Amendment in Section 90 relating to agreement with foreign countries
54.1 Through Finance Act, 2001, an Explanation has been inserted in Section 90 of the Income-tax Act to clarify that the charge of the tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as a less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India.
54.2 This amendment takes effect retrospectively from 1st April, 1962 and, accordingly, applies in relation to the assessment year 1962-63 and subsequent assessment years. [Section 48]
11.1 In our view this Explanation is an umbilical cord to the main section. Main Section 90(2) provides that provisions of this Act shall apply to the extent they are beneficial to the assessee. As a consequence, if the provisions of DTAA are beneficial as compared to the provisions of the Act, then the provisions of DTAA will apply. In other words, wherever DTAA is in force, the beneficial provisions either in DTAA or in the Act, will apply to an assessee. He can ask the Court or Tribunal to invoke provisions beneficial to him in the Act or in the DTAA. Thus Section 90(2) provides an exception to the General rule that the computation of income of an assessee will be done on the basis of provisions of IT Act. It is the Act which provides the exception. The Explanation further creates an exception out of the general exception. It carves out an area, where provisions of Section 90(2) would not be applicable. It provides that so far as applicability of tax rates are concerned applying higher rate to a non-domestic company would not be treated as less favourable. This is an exception to the general exception that assessees who are non-resident and with whose countries India has DTAA, will be treated as favourably or equally vis-a-vis, the resident taxpayers. In other words, in the event of allegation of discrimination on the basis of rates on nonresident companies, the Explanation clarifies the position. This Explanation, as we understand, confirms to our proposition that rates of taxes, which are provided by Annual Finance Act are beyond the provisions of the Income-tax Act and hence they are not subjected to the provisions of DTAA. The Explanation does not layout a new law but only clarifies the position as it stood earlier also, and which we have discussed in earlier paragraphs that Section 90(2) only authorizes Central Government to make agreement with foreign countries in respect of assessability and computation of income and not about rates of taxes on the income so computed as it falls in the domain of Annual Finance Act. Further, the power of Parliament to make amendment in law is not assigned or compromised by virtue of DTAA being in force. It has only to be seen as to whether new provision is in conflict with DTAA. In our considered view the Explanation introduced in 2001 by Finance Act, 2001 w.r.e.f. 1-4-1962 is no way in conflict with the DTAA with Korea. In fact the DTAA provides for a mechanism for communicating with each other any amendment in law made by one country. Article 2 para 4 of DTAA is relevant. It is extracted below :
4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any substantial changes, which have been made in their respective taxation laws.
11.2 It is, thus, evident that DTAA recognizes the fact that the amendments made in the IT Act are not affected in so far or they are not in conflict with the specific provisions of the DTAA. Therefore, we are of the view that the amendment made in Section 90(2) by way of insertion of Explanation is applicable insofar as it is not in conflict with the provision of DTAA. In the context of amendment made in the Section 90 w.r.e.f. 1 -4-1962 it is useful to quote para 49 in ABN Amro Bank NV’s case (supra) wherein Hon’ble ITAT has quoted from the decision of Hon’ble SC in Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey :
49. Before considering the claim of the assessee in the light of the amendment of Section 90 with retrospective effect from 1st April, 1962, we consider it useful to keep in mind the applicability of the Indian tax laws vis-a-vis DTAA with the foreign country. In this connection, reference to the decision of the Hon’ble Supreme Court in the case of Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey is relevant. In this case, Their Lordships of the Hon’ble Supreme Court held that in the event of conflict between international law, the Court must follow municipal law. The relevant para 5 is quoted hereunder for the sake of convenience.
5. There can be no question that nations must march with the international community and the municipal law must respect rules of international law even as nations respect international opinion. The comity of nations requires that rules of international law may be accommodated in the municipal law even without express legislative sanction provided they do not run into conflict with Acts of Parliament. But when they do run into such conflict, the sovereignty and the integrity of the Republic and the supremacy of the constituted Legislature in making the laws may not be subjected to external rules except to the extent legitimately accepted by the constituted Legislatures themselves. The doctrine of incorporation also recognizes the position that the rules of international law arc incorporated into national law and considered to be part of the national law, unless they are in conflict with an Act of Parliament. Comity of co-nations or no municipal law must prevail in case of conflict. National Courts cannot say ‘yes’ if Parliament has said ‘no’ to a principle of international law. National courts will endorse international law but not if it conflicts with national law. National courts being organs of the National State and not organs of international law must perforce apply national law if international law conflicts with it. But the Courts are under an obligation within legitimate limits, to so interpret the municipal statute as to avoid confrontation with the comity of nations or the well established principles of international law. But if conflict is inevitable, the later must yield.
11.3 Thus, in the present case, we hold that, firstly there is no conflict of the Explanation with DTAA as :
(i) The area of operation of Explanation and of Article 25(1) are in different field.
(ii) Explanation clarifies the position as it always stood.
(iii) DTAA did not prescribe any separate or specific rate or any particular criteria to be applied on income of Korean companies assessed in India.
(iv) Explanation does not deal with assessability of any item of income. Secondly, even if any conflict is envisaged, still then the provision of DTAA will yield to law passed independently by Parliament in view of decision of Hon’ble Supreme Court in Gramophone Co. of India Ltd. ‘s case (supra).
12. The last argument of the learned Counsel is that, at least sub-paragraph 2 of Article 25, will hold the field. According to the assessee, as existence of a P.E. of assessee-company is not disputed, Indian Enterprises such as domestic companies and cooperative societies are charged with lesser rates as compared to non-resident companies. This situation is less favourable for assessee-company. Therefore, according to Learned Counsel, it hits Article 25(2). In our view this stand is misconceived. The words less favourable’ have not been defined either in the DTAA or in IT Act. Therefore, it cannot be construed to mean that levy of higher rate on the income on non-domestic company would be ‘less favourable’. This paragraph [Article 25(2)], as per model convention is designed to curb the discrimination in the treatment of P.E. as compared with resident enterprises belonging to the same sector of activities. Even though, broadly Indian domestic Bank and P.E. of assessee-bank are engaged in banking activities but as highlighted earlier, the activities are not the same, they may only be, similar. Secondly, co-operative societies are charged with different rates looking to their social involvement and upliftment of poor and the prospects of their betterment though co-operative sector. Clauses (6), (1) and (8) of model conversions on Article 25(2) provide that it will not be a discrimination, if the Contracting State provides special privilege to public bodies, or whose activities are performed for public benefit, or to its own bodies being integral part of the State etc. (Ref.-Page 1200 of Klaus Voyel’s commentary on Double Taxation Convention). Therefore, it is not acceptable to compare cooperative societies with non-resident banking companies upon whom there is no such social burden. Further, as held earlier, explanation to Section 90 so introduced w.e.f. 1-4-1962 is an integral part of section. It clearly lays down that charging of foreign company at a higher rate will not be treated as less favourable.
13. As a result, we confirm the order of CIT(A) and dismiss the appeal of the assessee.