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| Discrimination against foreign company: Tribunal takes liberal view |
| H P Agarwal / May 02, 2011, 00:59 IST |
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The Government of India has entered into agreements with the Governments of other countries for granting relief of tax or for the purpose avoidance of double-taxation. Now, it is a well settled that where there is a conflict between the provisions contained in the Tax Treaty and the provisions of the Income Tax Act, the foreign taxpayer can take advantage of that provision which is more beneficial to him (see Azadi Bachao Aandolan, 263 ITR 706).
Besides above, various Tax Treaties invariably contain a provision of non-discrimination against foreign enterprises. Under this clause a foreign enterprise in India will not be subjected to any taxation, which is more burdensome than the taxation to which Indian firms are subjected to under similar conditions.
The non-discrimination clause is based on the UN model of tax treaties which reads as under:
“Nationals of a contracting 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 nations of that other state in the same circumstances are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the contracting states”.
In view of the above, the issue of discrimination against the foreign company has often been raised on the ground that foreign companies are discriminated against Indian resident companies either by charging a higher rate of tax or by denying the benefit of tax incentives available to the Indian companies.
In the above background and to put an end to the controversy Government made an amendment in the Income-tax Act by inserting an Explanation to section 90 retrospectively w.e.f. Assessment Year 1962-63. The amendment implies that a higher rate of tax can be charged from a foreign company compared to the tax chargeable on the Indian company, and such higher rate shall not be regarded as discrimination against the foreign company. This, therefore, settles the issue of higher rate of tax.
However, the amendment to section 90 does not cover the situation arising from discrimination in respect of the incentive provisions. In this context, reference may be made to Automated Securities Clearance Inc. v ITO, (ITAT-Pune) [118 TTJ 619].
In the said case, the appellant, a USA based company, was operating in India through a PE in India. The appellant was engaged in the business of export of software. The appellant claimed that denial of deduction under section 80HHE constitutes discrimination against the appellant which is expressly forbidden by of the DTAA between India and USA.
Section 80HHE provides an incentive deduction upto a certain percentage in respect of profits from business of export of computer software or providing technical services outside India in connection with the development or production of computer software.
The Hon’ble Tribunal held that “we are of the considered opinion that, on the facts and in the circZumstances of this case and in the light of the provisions of the Indo US Tax Treaty, restricting entitlement to deduction under section 80HHE only to the resident taxpayers did not constitute discrimination against the non-resident taxpayers.”
It is interesting to note that the similar controversy on section 80HHE has again been considered by a Special Bench of Hon’ble Tribunal in the case of Shri Rajeev SureshBhai Gajwani, Prop. Amtel Exports India v Asst. CIT, ITA Nos. 1807 and 1978/Ahd/ 2006 and 3111/Ahd/2007.
Under the similar facts and circumstances as in the case of Automated Securities Clearance Inc. (Supra), the Special Bench has overruled the decision in the case of Automated Securities Clearance Inc. (supra) and clearly held that “exemptions and deductions available to Indian enterprises would also be granted to the US enterprises if they are carrying on the same activities”.
The Special Bench decision will go a long way in eliminating discrimination against foreign companies.
(Author is a Sr. Partner in S.S. Kothari Mehta & Co.)
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