(i) In view of Explanation 1 in S. 90, higher rate of
tax applicable to foreign company cannot be said to be discriminatory.
(ii) In view of absence of ‘subject to limitation under
domestic law’ provision in Article 7(3) of India-Mauritius DTAA, restrictions
under Income tax Act on allowance of travel, entertainment, etc. expenses do
not apply.
Facts :
The appellant was a Mauritius company. It had a PE in
India.
In accordance with the provisions of the Finance Act,
stipulating 55% as the rate of tax applicable to a foreign company, the AO
sought to tax the income of the appellant @ 55%. The appellant contended that
in terms of Article 24, which provides for non-discrimination, its status was
equivalent to domestic company as defined in S. 2(22A) of the Act and hence,
the rate of tax should be 40%, as applicable to a domestic company. However,
relying on the ruling of AAR in Societe Generale (1999) 236 ITR 103 (AAR), the
AO applied tax rate of 55%.
The PE had incurred certain travelling and entertainment
expenditure. While assessing the income, the AO restricted the allowance of
expenditure by applying limitation provisions of S. 37(2) of the Act. The
appellant contended that such restriction cannot be enforced as
India-Mauritius DTAA did not incorporate such restriction.
In appeal, the CIT(A) accepted the contention of the
appellant and upheld that :
(a) The rate of tax applicable to the income of the
appellant should be the same as that applicable to a domestic company and
(b) The restriction u/s.37(2) cannot be enforced.
Held :
On appeal by the department, the ITAT held as under :
(i) Applicable rate of tax :
The Finance Act 2001 inserted Explanation 1 in S. 90 with
retrospective effect from 1st April 1962. The said Explanation provides that
in case of a foreign company, the charge of tax at a rate higher than that in
case of a domestic company shall not be regarded as less favourable. In
Chohung Bank v. DDIT, (2006) 102 ITD 45 (Mum.), the Tribunal has also
taken similar view. Following the said decision and the amended S. 90, the
rate of tax should be the higher rate applicable to a foreign company.
(ii) As regards limitation on allowance of
expenditures :
Unlike the ‘subject to the limitations of the taxation laws
of that Contracting State’ provision normally incorporated in Article 7 of
most DTAAs, Article 7(3) of India-Mauritius DTAA does not incorporate such
restriction. Therefore, restriction provided in S. 37(2) of the Act cannot be
enforced. The ITAT took note of provision of India France treaty to conclude
that restriction of income computation as per provisions of the Act needs to
be specifically agreed upon.
