ABU-DHABI COMMERCIAL BANK LTD. v. JOINT COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0727-4]

Citation 2007-LL-0727-4
Appellant Name ABU-DHABI COMMERCIAL BANK LTD.
Respondent Name JOINT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 27/07/2007
Assessment Year 1995-96, 1996-97, 1997-98
Judgment View Judgment
Keyword Tags computation of income • banking activities • specific provision • higher rate of tax • co-operative bank • domestic company • foreign national • double taxation • foreign company • liaison office • charge of tax • head office • tax treaty
Bot Summary: 25(1) of the DTAA between India and UAE, the profits of the Indian branch or PE of the assessee bank would have to be determined in accordance with the domestic laws of India and all restrictions on allowance of various business expenses as contained in the Indian IT Act would be applicable on the profits of the PE. Regarding reliance placed by learned counsel of the assessee on various Tribunal Judgments, we find that in the case of Degremont International, the Tribunal has considered only art. In the miscellaneous application, it is the contention of the assessee that the expenditure of IOLO office was exclusively in connection with the indian operations and it had nothing to do with the expenditure on account of headoffice expenses; and hence, the same should be allowed as per the ratio of the decision of the Hon ble Bombay High Court in assessee s own case in CIT vs. Emirates Commercial Bank Ltd. 262 ITR 55. 26(2) of Indo-UAE tax treaty, tax rates to be charged to the assessee company has to be compared with tax rates being charged to other entities in India engaged in the same activities and since co-operative banks are also engaged in the banking activities in India, rate of tax to be charged to the assessee has to be compared with the rate of tax being charged to co-operative banks in India and since rate of tax being charged to co-operative banks in India is less, the assessee bank cannot be charged with higher rate of tax as per this art. The contention of the assessee in miscellaneous application is that various arguments advanced by the learned counsel of the assessee in course of hearing of the appeal are not considered by the Tribunal. 26(2) of India-UAE tax treaty, rate chargeable to the assessee company should be compared with the rate chargeable to co-operative bank in India because co-operative bank in India is also carrying on the same activities as being carried on by the assessee. In our humble opinion, circumstances and conditions to be compared includes the constitution of entity and hence, foreign company has to be compared with the domestic company and we find no force in this contention of the assessee and that in the present case, rate of tax to be charged to the present assessee should be compared with rate of tax being charged to co-operative bank in India. Now, we deal with second contention of the assessee that Explanation to s. 90 would not be applicable to the assessee s case; as it only seeks to allow discrimination between a domestic company and a foreign company; and since, co-operative bank is not a domestic company, the Explanation would not apply.


Tribunal has decided vide order dt. 14th Feb., 2007 cross-appeals of assessee and Revenue for asst. yrs. 1995-96, 1996-97 and 1997-98 n d vide same order, two cross-objections of assessee were also decided for asst. yrs. 1995-96 and 1996-97. In these years, three issues were involved in all these three years. first issue was regarding applicability of s. 44C for allowability of head office expenses. This issue was raised in assessee s appeal for asst. yrs. 1995- 96 and 1996-97; whereas, same issue was raised by Revenue in asst. yr. 1997-98. This issue has been decided by Tribunal as per para No. 5 of impugned Tribunal order as per which, Tribunal has restored this matter back to file of AO with direction that AO should decide this issue afresh in all three years as per amended provisions of s. 44C after considering judgment of Hon ble Bombay High Court relied upon by learned counsel of assessee rendered in case of Deutsche Bank AG as per order dt. 24th July, 2003 in IT reference No. 139 of 1997. AO was also directed to consider judgment of Authority for Advance Rulings relied upon by learned Departmental Representative of Revenue rendered in case of ABC, In re (1997) 141 CTR (AAR) 542: (1997) 228 ITR 487 (AAR). AO was also directed to consider fact as to what happened in intervening years i.e., asst. yrs. 1993-94 and 1994-95. Now, this miscellaneous application is filed by assessee and it is contended in miscellaneous application by assessee that tax treaty between India and UAE is applicable in their case for these assessment years and has in fact been referred to by learned CIT(A) in his order in para 2 at pp. 1 to 8 of his order for asst. yr. 1997-98. It is contention of assessee in miscellaneous application that Tribunal ought to have taken decision and decided issue by reversing order of learned CIT(A) in asst. yr. 1997-98 and by confirming order of learned CIT(A) on this issue in asst. yrs. 1995-96 and 1996-97. It is submitted by learned counsel of assessee that where, it was felt necessary that deduction for expenses attributable to PE incurred either in country where PE is situated or elsewhere should be restricted in accordance with taxation laws of such country, specific provisions have been made in art. 7(3) of DTAA wherein it has been provided that deduction for expenses attributable to PE would be allowable only to extent such expenses are allowable under provisions of domestic law of contracting state in which PE is situated as mentioned in DTAA with Nepal, Norway and Oman. It is also submitted that in DTAA entered into by India with Japan, Mauritius and Malaysia, wherein provisions of art. 7(3) relating to assessment of profits of PE are similar as in DTAA between India and UAE. Reliance have been placed on Tribunal Judgment rendered in case of ITO vs. Degremont International (1985) 11 ITD 564 (Jp) and also in case of Banque Indo-suez (ITA No. 2089 to 2091/Bom/1991). It has been submitted by him that provisions of art. 7(3) between of DTAA between India and UAE should be interpreted in same manner as done by Tribunal in these judgments relied upon by him and no restriction should be made under s. 44C of provisions in matter of allowance of head office expenses of assessee bank. As against this, it is submitted by learned Departmental Representative of Revenue that there is no mistake in Tribunal order on this issue; and hence, miscellaneous application of assessee on this point should be rejected. We have considered rival submissions and we find that all these arguments were raised before learned CIT(A) also and these judgments of Tribunal were also cited before him; and he has noted same in para No. 2.1 of his order for asst. yr. 1997-98. It has been noted by learned CIT(A) in para No. 2.2 of his order that since, art. 7(3) of DTAA between India and UAE does not contain express provision to lay down that Indian taxation law would not be applicable for computation of profits of PE, provisions of art. 25(1) relating to elimination of double taxation would prevail and laws in force in India should continue to govern taxation of income of PE situated in India. Learned CIT(A) has reproduced one para from treaties on double taxation conventions by Klaus Vogel (3rd Edition), wherein while interpreting provisions of art. 7(3) of DTAA between India and Germany; certain observations were made. From these observations, it is noted by learned CIT(A) that, wherever it was decided by contracting states that provision of domestic tax laws would not apply in computation of profits of PE situated in that state, it was specifically provided so in DTAA s entered into by Germany with Kuwait and UAE and express provision in this regard has been introduced in art. 7(3) to lay down that irrespective of limitations provided by internal law, expenses may be deducted (attributable to PE) provided that deductions are in accordance with international practices. On this basis, learned CIT(A) came to conclusion that provision of art. 25(1) of DTAA between India and UAE specifically clarify international principles of double taxation which is implicit in provision of art. 7(3) in matter of computation of income of PE that taxation of income of PE in contracting state must always be in accordance with domestic tax laws of said contracting state. On this basis, it was held by him in para No. 2.3 of his order that on combined reading of provisions of art. 7(3) and art. 25(1) of DTAA between India and UAE, profits of Indian branch or PE of assessee bank would have to be determined in accordance with domestic laws of India and all restrictions on allowance of various business expenses as contained in Indian IT Act would be applicable on profits of PE. Regarding reliance placed by learned counsel of assessee on various Tribunal Judgments, we find that in case of Degremont International (supra), Tribunal has considered only art. 111(3), which is similar to art. 7(3) of DTAA between India and UAE; but there is no reference to any article in that judgment similar to art. 25(1) between India and UAE, which is followed by learned CIT(A) in present case. Copies of other Tribunal judgments are not provided to us and these judgments are not reported; and hence, these judgments cannot be considered by us. It is noted by learned CIT(A) on page No. 3 of his order that learned Authorised Representative of assessee accepted in fairness that in this regard one would have to also consider provisions of art. 25(1) of DTAA with UAE, wherein it is provided that laws in force in either of contracting states shall continue to govern taxation of income and capital in respective contracting states except where express provision to contrary is made in this convention. contention of assessee before learned CIT(A) was that express provision to contrary in matter of allowance of expenses attributable to PE has been made in art. 7(3). It is also noted by learned CIT(A) that it was specifically provided in DTAA s entered into by Germany with Kuwait and UAE and express provision in this regard has been introduced in art. 7(3) to lay down that irrespective of limitations provided by internal law, expenses may be deducted (attributable to PE) provided that deductions are in accordance with international practices. In present case, art. 7(3) of India with UAE reads as under: "In determining profits of PE, there shall be allowed as deduction expenses, which are incurred for purposes of business of PE, including executive and general administrative expenses so incurred whether in state in which PE is situated or elsewhere." From above art. 7(3) of DTAA between India and UAE, it is clear that this article does not contain express provision to lay down that Indian Taxation Law would not be applicable for computation of profits of PE; hence, we are in agreement that provision of art. 25(1) relating to elimination of double taxation would prevail and laws in force in India should continue to govern taxation of income of PE situated in India. We dealt with objection of learned counsel of assessee that in impugned Tribunal order, applicability of art. 7(3) of DTAA between India and UAE to headoffice expenses was not considered and we find that even after considering applicability of art. 7(3) between India and UAE, conclusion remains same that in view of art. 25(1) of DTAA between India and UAE, headoffice expenses in present case has to be allowed as per provisions of s. 44C of IT Act. This contention of assessee in miscellaneous application is rejected that headoffice expenses is to be allowed without subjecting same to restriction contained in s. 44C of IT Act. Second issue involved in all these three years was regarding allowability of Indian Operations Liaison Office (IOLO) expenses. On this issue also, matter was decided by learned CIT(A) in favour of assessee in asst. yrs. 1995-96 and 1996-97 and against assessee in asst. yr. 1997-98. In miscellaneous application, it is contention of assessee that expenditure of IOLO office was exclusively in connection with indian operations and it had nothing to do with expenditure on account of headoffice expenses; and hence, same should be allowed as per ratio of decision of Hon ble Bombay High Court in assessee s own case in CIT vs. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom). It is contention of assessee that if for any reason, these are considered as head office expenses, based on provisions of treaty between India and UAE, entire expenditure ought to have been allowed. We have considered miscellaneous application of assessee on this account and we find no mistake in Tribunal order on this issue. This issue has been dealt with by Tribunal as per para No. 10 of impugned Tribunal order and matter was restored by Tribunal to file of AO for fresh decision for reason that judgment of Hon ble Bombay High Court in assessee s own case in Emirates Commercial Bank Ltd. s case (supra) was in respect of asst. yrs. 1983-84 and 1984-85; whereas, assessment years involved in present appeals before us are asst. yrs. 1995-96, 1996-97 and 1997-98. It is also noted by Tribunal that there is amendment in provisions of s. 44C w.e.f. 1st April, 1993 i.e., w.e.f. asst. yr. 1993-94 and because of this reason, issue was restored by Tribunal to file of AO for fresh decision after considering amended provisions of s. 44C. Regarding contention that these expenses i.e., expenses on IOLO are exclusively pertaining to branch at Bombay, it has been noted by Tribunal on page No. 7 of impugned Tribunal order that language of auditors certificate suggests that expenditure were allocated to indian branch and auditors have checked mathematical accuracy of allocation made. It is also observed by Tribunal that mathematical accuracy of allocation will be required to be checked if expenses are not pertaining to indian branch alone and some amount is allocated to indian branch as per some mathematical formulae on basis of some agreed criteria. Under these facts and circumstances, Tribunal came to conclusion that this matter should also go back to file of AO for deciding this issue afresh after examining fact as to whether these expenses incurred at head office were for indian branches alone. Regarding contention that even if these expenses are considered as H.O. expenses, same should be allowed in full as per treaty, we find that this issue was decided against assessee because it is held by us above that H.O. expenses are to be governed by s. 44C even after considering art. 7.3 of treaty. Under these facts and circumstances, we find no mistake in impugned Tribunal order regarding this issue also; and hence, this contention of assessee in all these miscellaneous applications is also rejected. third issue involved in all these three years was regarding tax rate applicable to business income of assessee. As per assessee, it should be 43 per cent (40 per cent tax and 7.5 per cent surcharge) and not 55 per cent being rate applicable to foreign companies for asst. yr. 1997-98. As per assessee in asst. yrs. 1995-96 and 1996-97, tax rate applicable to its business income should be 46 per cent (40 per cent tax and 15 per cent surcharge) and not 55 per cent being rate applicable to foreign companies for these years. Regarding this issue, it is submitted by assessee in its three miscellaneous applications that assessee is seeking to invoke provisions of art. 26(2) of India-UAE tax treaty. It is submitted in miscellaneous application that as per art. 26(2) of Indo-UAE tax treaty, tax rates to be charged to assessee company has to be compared with tax rates being charged to other entities in India engaged in same activities and since co-operative banks are also engaged in banking activities in India, rate of tax to be charged to assessee has to be compared with rate of tax being charged to co-operative banks in India and since rate of tax being charged to co-operative banks in India is less, assessee bank cannot be charged with higher rate of tax as per this art. 26(2) of India-UAE tax treaty. It is also submitted that Explanation to s. 90 is also not applicable to assessee s case because this Explanation seeks to allow rate discrimination between domestic company and foreign company, and because co-operative bank is not domestic company, Explanation would not apply. It is submitted in miscellaneous application that even amended Explanation does not alter legal position as definition of domestic company in s. 2(22A) itself includes condition that in order to constitute domestic company, foreign company must have "made prescribed arrangement for declaration and payment within India of dividends (including dividends on preference shares) payable out of its income in India". It is submitted that this condition is same as one that existed in Explanation to s. 90 prior to its deletion by Finance Act, 2004; and, therefore, ratio of rulings in case of Decca Survey Overseas Ltd., ITA No. 3604/B/1994, dt. 27th Feb., 2004 and Bank International Indonesia must continue to apply. It is also submitted by assessee in miscellaneous application that as per art. 26(1) and (2) and as per definition of term "National" in art. 3(h), term National includes any legal person and company would certainly be legal person; and therefore reading art. (3) with art. 26, non-discrimination provisions are required to be taken into account for purpose of determining tax rate applicable to UAE resident bank carrying on business in India. It is also submitted by assessee in miscellaneous application that list of 26 treaties of India with various countries had been handed over at time of hearing of appeal to show that wherever it was noted that PE may be subjected to higher tax rate, express provision to that effect has been made in relevant treaties; whereas, no such provisions exists in treaty between India and UAE. It is submitted that in impugned Tribunal order, there is no reference to these treaties of India with 26 countries. It is also submitted that it was also pointed out in course of hearing of appeal that treaty between India and New Zealand was introduced in 1987; and same was amended in 2000 and as per this amendment made in 2000, certain words were added in art. 24(2), which reads as under: "This provision shall not be construed as preventing contracting State from charging profits of PE which company of other contracting State has in first-mentioned state at rate of tax which is higher than that imposed on profits of similar company of first-mentioned contracting state." It is submitted that since, in tax treaty between India and UAE, there is no specific provision that rate differential between domestic company and foreign company is not to be construed as resulting indiscrimination, higher rate of tax cannot be charged on assessee company. It is also submitted by assessee in miscellaneous application that Revenue has relied upon decision of Mumbai Tribunal in case of Chohung Bank vs. Dy. Director of IT (2006) 104 TTJ (Mumbai) 612: (2006) 286 ITR 231 (Mumbai)(AT); but it is submitted in miscellaneous application that this decision should not be followed because this decision contains several inconsistencies, inaccuracies and contradictions. It is submitted in miscellaneous application by assessee that Tribunal has decided this issue without dealing any of these arguments advanced by assessee on basis of DTAA, which formed fundamental contention of assessee on footing that even if explanation is applied, non-discrimination clauses of DTAA would result in lower rate of tax to be applied. It is submitted that this is apparent mistake in impugned order and therefore this issue should be decided after considering these contentions and various statements made by learned counsel of assessee. As against this, learned Departmental Representative of Revenue submitted that Tribunal has decided this issue on merit and there is no mistake in Tribunal order and therefore miscellaneous application of assessee on this issue should be rejected. We have considered rival submissions and we find that this issue has been decided by Tribunal on basis that only comparables can be compared. It is also noted by Tribunal in impugned order that till date, higher rate of tax is charged in India from foreign companies only and not to any other foreign entity; and for these two reasons, this Explanation to s. 90 is talking rate of tax only to foreign company and domestic company. contention of assessee in miscellaneous application is that various arguments advanced by learned counsel of assessee in course of hearing of appeal are not considered by Tribunal. We want to make it clear that this is not so and issue has been decided by Tribunal after duly considering all arguments of assessee; although, same are not incorporated in body of order for sake of brevity; but, now, in following paragraphs, we deal with these contentions of learned counsel of assessee; although result will remain same. first contention raised in miscellaneous application is that in view of provisions of art. 26(2) of India-UAE tax treaty, rate chargeable to assessee company should be compared with rate chargeable to co-operative bank in India because co-operative bank in India is also carrying on same activities as being carried on by assessee. We find no merit in this contention of assessee because in our considered opinion, art. 26(2) of tax treaty between India and UAE does not provide that rate of tax to be charged to company has to be compared with any other entities carrying on same activity. If that be so, then in case of company of UAE carrying on business of retail trade, it can be claimed that rate of tax to be charged to it should be compared with individual in India because individual in India is also carrying on same activity of retail trade and is charged with low rate of tax along with initial exemption of certain amount in each year. Article 26(2) of Indo-UAE treaty reads as under: "The taxation on PE which enterprise of contracting state has in other contracting state shall not be less favourably levied in that other contracting state than taxation levied on enterprise of that contracting state carrying on same activities in same circumstances or under same conditions." From above provisions of art. 26(2), it can be seen that for comparing tax rate of foreign entity, and Indian entity not only carrying on same activity is required to be compared but also circumstances and conditions should be same. In our humble opinion, circumstances and conditions to be compared includes constitution of entity and hence, foreign company has to be compared with domestic company and we, therefore, find no force in this contention of assessee and that in present case, rate of tax to be charged to present assessee should be compared with rate of tax being charged to co-operative bank in India. Now, we deal with second contention of assessee that Explanation to s. 90 would not be applicable to assessee s case; as it only seeks to allow discrimination between domestic company and foreign company; and since, co-operative bank is not domestic company, Explanation would not apply. I t is also contended by learned counsel that assessee company is also national as per art. 3(h) and hence as per art. 26(1) of DTAA, higher rate of tax cannot be charged. We find no force in these arguments of learned counsel of assessee also because, we have already held above that only comparable can be compared and rate of tax to be charged to foreign company has to be compared with rate of tax being charged to domestic company and same cannot be compared with co-operative bank. In view of Explanation to s. 90, second argument regarding charging of higher rate of tax to foreign national also has no substance. These arguments of learned counsel of assessee also fail. Now, we deal with contention that definition of domestic company in s. 2(22A) itself includes similar contention as was there in Explanation to s. 90 prior to its deletion by Finance Act, 2004. We find no merit in this contention of assessee because we find that this argument has already been dealt with by us in para No. 33 of impugned Tribunal order; and it has been held by us in that para that for purpose to satisfy Explanation to s. 2(22A), arrangements prescribed (in r. 29 with regard to s. 194H are applicable and hence, it cannot be said that no arrangement is prescribed for purpose of domestic company as per definition of that term in s. 2(22A). Since, this argument was already specifically dealt with by us in para No. 33 of impugned Tribunal order, there is no need to deal it again. Now, we deal with contention of learned counsel of assessee that s per list given of tax treaty of India with 26 countries, where, it was intended that differential tax rate does not amount to discrimination, specific provision has been inserted in respective treaties. It is also contended by assessee in miscellaneous application that tax treaty between India and New Zealand, which was introduced in 1987, there was amendment made in 2000 in this regard. This is contention of assessee that since no such amendment has been made in tax treaty between India and UAE to effect that differential tax rate does not amount to discrimination; it has to be held that it amounts to discrimination and hence, in present case, tax rate cannot be charged to assessee in excess of tax rate being charged to Indian company. In this connection, we find that Explanation has been inserted in s. 90 by Finance Act, 2001 with retrospective effect from 1st April, 1962. Explanation reads as under: "Explanation. For removal of doubts, it is hereby declared that charge of tax in respect of foreign company at rate higher than rate at which domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company." From above, it can be seen that this Explanation was inserted for removal of doubts; and same is inserted by Finance Act, 2001. We also find that out of list of 26 treaties of India with various countries, all treaties are dt. prior to date of Finance Act, 2001, except, treaty of India with Ukraine, which is dt. 11th Jan., 2002; with Uganda, which is dt. 12th Oct., 2004; with Sudan, which is dt. 1st Nov., 2004 and with Malaysia, which is dt. 12th Oct., 2004. amendment in tax treaty between India with New Zealand was also in year 2000, which is also prior to date of Finance Act, 2001. From above, it can be seen that prior to insertion of this Explanation to s. 90, Government of India took precaution to provide specifically in these tax treaties with various countries that charging of higher rate of tax will not amount to discrimination. In absence of this Explanation to s. 90, this can be argued that in such cases, where there is no such specific provision in treaty, charging of higher rate of tax will amount to discrimination; but in light of this Explanation to s. 90, no such argument can be raised. It is also to be noted that tax treaties are entered into by Central Government of India with Government of outside India as per authorities given by same s. 90 of IT Act, 1961; and hence, insertion of Explanation in s. 90 or amendment in s. 90 cannot be overlooked or ignored. With regard to tax treaties with 4. countries, which are subsequent to insertion of this Explanation to s. 90 by Finance Act, 2001, we are of considered opinion that in spite of insertion of this Explanation in s. 90, insertion of such clause in tax treaties with outside countries is always advisable to avoid any confusion; but that does not mean that if there is no such specific provision in tax treaty with any country, this Explanation to s. 90 will not apply and hence, this contention of counsel of assessee also fails that because of reason that treaty of India with UAE does not contain specific provision to effect that charging of higher rate of tax will not amount to discrimination, no such higher rate of tax can be charged to assessee company. We are of considered opinion that in light of this Explanation to s. 90, charging of higher rate of tax to any foreign company shall not be regarded as less favourable charge or discrimination whether treaty contains any specific provision in this regard or not. This contention of assessee also fails. Now, we deal with last contention of assessee in miscellaneous application that Tribunal decision in case of Chohung Bank (supra) is not applicable in present case. In this regard, it is sufficient to mention that in impugned Tribunal order, Tribunal decision in case of Chohung Bank (supra) has not been followed; and therefore, this contention of assessee is not relevant. We have dealt with all arguments of learned counsel of assessee; but result remains same. In result, all these miscellaneous applications of assessee stands disposed of as above. *** ABU-DHABI COMMERCIAL BANK LTD. v. JOINT COMMISSIONER OF INCOME TAX
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