IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD (SPECIAL BENCH) “D” AHMEDABAD
Before S/Shri D. Manmohan, V.P.(MZ), I. C. Sudhir, JM & K. G. Bansal, AM.
ITA Nos.1807 & 1978/Ahd/2006 & ITA No.3111/Ahd/2007
Asst. Years 2002-03, 2003-04 & 2004-05
Shri Rajeev Sureshbhai Gajwani, Asstt. CIT, Circle-6, Baroda.
Prop. Amtel Exports India, 704/706,
Citadel, Windsor Plaza, Race Course Vs.
Appellant by :- Shri Milin Mehta, AR
Respondent by:- Shri Shelley Jindal,CIT, DR & Shri V. K. Gupta, Sr. D.R.
Date of Judgment: 04.03.2011.
AIT Head Note: Whether deduction under section 80 HHE of the Income-tax Act,
1961 is to be allowed in respect of export of software out of India to an assessee who is resident of USA
the assessee is entitled to deduction under section 80HHE on the same footing as it is available to a resident person in India.(Para 10)
O R D E R
These three appeals are filed by the assessee and they pertain to Asst. Years 2002-03 to 2004-05.
2. Common issue involved in all these appeals is with regard to the allowability of deduction under section 80 HHE of the I.T. Act, 1961(„the Act‟ for short) in respect of export of software out of India. The assessee is admittedly a non-resident and has been carrying on the business in India as a proprietary concern. Since assessee had a permanent establishment in India („PE‟ for short) for export of software, he was assessable under the Act, subject to deductions and exemptions, if any, available to it. The AO as well as the CIT(A) were of the opinion that deduction available to an Indian company or Indian resident, under section 80 HHE of the Act, in respect of export of software out of India, is not available to a non-resident in the light of the express language employed in section 80 HHE which speaks of an Indian company or a person “resident in India” whereas assessee is admittedly a non-resident.
3. The case of the assessee, on the other hand, was that section 80 HHE of the Act has to be read in conjunction with the tax-treaty entered into between India and United States of America (“DTAA” for short). Section 90(2) of the Act provides that where Government of India has entered into a DTAA with the Government of any other country or jurisdiction, provisions of the Act shall apply to the extent they are more beneficial to the assessee. Pressing into service the language employed in article 26 of DTAA, it was contended before the tax authorities that a resident of India is undoubtedly entitled to deduction under section 80 HHE of the Act in respect of profits from export of software out of India, subject to other conditions. Therefore, in the same line of activity in India, the profits of PE of the assessee cannot be treated less favourably for taxation when compared to the taxation of profits of an enterprise owned by a resident in India. Thus, assessee should also be extended benefit of deduction under section 80 HHE of the Act. The AO as well as the CIT(A) rejected the contention of the assessee. On an appeal filed before the Tribunal, the Division Bench noticed that co-ordinate Benches of the Tribunal have taken divergent views on the same issue and thus it requires to be considered by Special Bench so as to resolve the controversy. Accordingly vide its order dated 17.6.2010, the Bench placed records before the Hon. President to constitute a Special Bench on the following question:-
“Whether on the facts and circumstances of the case, deduction under section 80
HHE of the Income-tax Act, 1961 is to be allowed in respect of export of software
out of India to an assessee who is resident of USA?”
3.1 It may be noticed that except variation in the figures, grounds before the Appellate Tribunal revolve on the same question in all the years with the exception that in so far as Asst. Year 2004-05 is concerned, in ground No.1 assessee has challenged disallowance of Rs.1,00,000/- also, referable to personal expenditure included as part of business expenditure. At the time of hearing, ld. Counsel appearing on behalf of the assessee did not press this ground and thus we are left with the sole question which is referred by the President for consideration of the Special Bench.
4. The facts necessary for disposal of these appeals are set out here in brief. The assessee, a citizen of America, is an exporter of software, having PE in India. He claimed deduction under section 80 HHE, in respect of profits earned from export of computer software, by invoking the provisions contained in paragraph (2) of article 26 of the DTAA. Thus he claimed that for the purpose of this deduction, he should not be treated less favourably than a resident person in view of the aforesaid provision. The AO was of the view that the language employed in section 80 HHE is very clear to the effect that deduction is not admissible to a non-resident. Accordingly the claim was denied by him. The matter was agitated before the CIT(A). The submissions of the assessee before him were more or less the same as before the AO. The CIT(A) considered the provisions of the Act, the DTAA and the activities of the assessee and came to the conclusion that the discrimination on the basis of residence cannot be said to be discrimination on the ground of nationality. Further, it was held that an Indian Company or the resident assessee exporting computer software out of India cannot be equated with the assessee as both of them are not functioning under
similar circumstances. On a conjoint reading of paragraphs (1) & (2) of article 26, it was finally held that denial of deduction would be justified.
4.1 Aggrieved by this order, assessee is in appeal before us. The ground taken by him is already reproduced above.
5. Before us, the ld. Counsel referred to the provisions contained in section 80 HHE. It is fairly admitted by him that the assessee, being a nonresident person, is not entitled to the deduction on the basis of this provision. However, it is submitted that the assessee is a resident of U.S.A. Therefore, the provision contained in article 26(2) of the DTAA would be applicable to his case. Article 26 (2) specifically covers the controversy at hand, meaning thereby that if the assessee is denied deduction under section 80 HHE, then it will amount to taxation of the PE of the enterprise of the USA less favourably than an enterprise of resident-assessee situated in the same circumstances. He read out the provision, which states that except where the provision of paragraph (3) of article 7 apply, the taxation on PE which an enterprise of a contracting State carries on in the other contracting State shall not be less favourably levied in the other State than taxation levied on the enterprise of that other State carrying on the same activity. It is further provided that the provisions shall not be construed as obliging the State to grant to resident of other contracting State any personal allowance, relief and reduction for taxation purpose on account of civil status or family responsibility which it grants to its own residents. The case of the ld. Counsel is that this paragraph contains two distinct parts. The first part deals with taxation of business profits and provides that the taxation on the PE of the contracting State shall not be less favourably levied than the establishment of the other contracting State. In other words, if an American enterprise carries on business in India in the same line in which an Indian enterprise carries on the business, then the American enterprise shall not be treated less favourably in the matter of taxation. The second part of the article provides for personal allowances etc. granted on the basis of civil status, for which a non-resident enterprise may be differentially treated by the other contracting State. He also drew our attention to section 90(2) of the Act which provides that in relation to the assessee to whom the DTAA applies the provisions of this Act shall apply, to the extent they are more beneficial to the assessee. The case of the ld. Counsel, on the basis of this provision, is that the provisions of the DTAA are more beneficial and, therefore by dint of that, the claim of the assessee for deduction cannot be denied.
5. ld. counsel referred to paragraph 44 of the OECD Commentary wherein it is mentioned that the object of the provision is nondiscrimination. Since such measures relate to economic activities, the proper course for the State-concerned is that benefit should also be extended to the PE of an enterprise of contracting State. It should, however, be noted that although non-resident enterprises are entitled to claim tax advantage in the State-concerned, they must fulfill same conditions and requirements as the resident enterprise. They may, therefore, be denied such advantages if their PEs fail to fulfill all conditions and requirements attached to the grant. It is argued that various decisions rendered by Indian Courts have held that the commentary may be referred to usefully for understanding the provisions of the DTAA. In this connection reference is made to the decision in the case of Union of India and Anr. Vs. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC), in which
references to the OECD model has been made. At page 741 it is mentioned that there is a further reason in support of our view. The expression “liable to taxation” has been adopted from the OECD model convention. Similarly, in the case of CIT vs. Vijay Ship Breaking Corporation, (2002) 261 ITR 113 (Guj), such references have been made. On the basis of these references, his case is that although the commentary is not binding on Indian Tax Authorities and Courts, references can be usefully made to it in case of any ambiguity in the provision as words are borrowed in the convention from OECD model.
5.2 Reverting to facts of this case, it is submitted that the provisions contained in paragraph (2) of the article 26 of the DTAA are analogous to the provisions contained in paragraph (3) of article 24 of OECD model convention. Klaus Vogel has opined that the question whether the enterprise of the contracting State has been less favourably treated for taxation can be found out by computing tax as if -(i) he is a resident of the contracting State, and (ii) he is the resident of the other contracting State. If there is a difference between the two amounts, wherever it is adverse to the enterprise, it would be a case of treating the enterprise less favourably for taxation. Therefore, it has been argued that since non-granting of deduction would mean that the assessee would pay higher tax than similarly situated Indian enterprise, article 26(2) comes to the aid of the assessee for treating him at par with Indian enterprise. It is also his case that there cannot be any case for “reasonable discrimination” in view of the clear provision in the DTAA.
6. In reply, ld. DRs referred to Circular No.621 dated 19.12.1991. It explains the provisions contained in Finance (2) Act, 1991. In regard to section 80HHE, it is mentioned that Indian companies and non-corporate resident tax payers will be eligible for deduction, in computing their taxable income, of an amount equal to the profits derived from the export of computer software. Therefore, it is argued that the benefit is not available to non-resident assessees or foreign companies. Circular no. 333 dated 2.4.1982 clarifies that where double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions of the Act. Where there is no specific provision in the agreement, it is the domestic law that will govern the taxation of income. His case is that the DTAA does not contain any specific provision for deduction under section 80 HHE. Therefore, the deduction is not available to the assessee. It is also his case that the section was in operation prior to the signing of the DTAA and specific mention having not been made for such deduction in the DTAA, provisions of the Act will be applicable.
6.1 Referring to the provision contained in paragraph (2) of article 26, it is submitted that it has two parts. The first is general one and the second is specific one. The benefit of section 80 HHE is granted to all resident assessees and Indian companies with the intention of earning foreign exchange. This object is not fulfilled in the case of an enterprise of a nonresident who is entitled to take away the profit from India without any restriction, thus not augmenting the foreign exchange reserves of India. He also referred to paragraph 46 of the OECD commentary in which it is mentioned that non-resident enterprises are not entitled to tax advantages attached to the activities, exercise of which is strictly reserved, on account of national interest, defence production or national economy etc. to domestic enterprises, since non-resident enterprises are not allowed to engage in such activities. On
the basis of this paragraph, it is his case that grant of benefit under section 80HHE to a foreign enterprise does not protect the national economy as the non-resident person can take away the foreign exchange earned by it out of India. Paragraph (2) of article 26 will apply only when the resident and non-resident persons are placed under similar situations. Since the assessee is not similarly placed as resident software exporters, the benefit of this provision will not be available to him.
6.2 It was submitted that the OECD commentary is not binding on Indian authorities and India has also expressed reservation on a number of points made in the commentary. In this connection, he referred to the decision in the case of CIT vs. P V A L Kulandagan Chettiar (Decd.), through LRs, (2004) 267 ITR 654 (SC), in which it is mentioned that taxation policy is within the power of Government and section 90 of the IT Act enables the Government to formulate its policy through treaties entered into by it. In determining the question of fiscal domicile in one State or the other, provisions of the treaty prevail over the provision of Income-tax Act, therefore, it would be unnecessary to refer to the OECD commentary or any other decision of foreign jurisdiction or any other agreement. Reference has also been made to the decision of Mumbai Bench of the Tribunal in the case of Gracemac Corporation vs. ACIT in ITA No.1331 etc., in which it is inter alia mentioned that while confirming the order of ITAT, Hon‟ble Madras High court rejected the application of
commentary and model convention of 1977 presented by the OECD for the reason that it would not be safe to do so. The reference is made to highlight the argument that the decision in this case has to be taken in terms of the DTAA without placing much reliance on the commentaries. Relying on the decision in the case of Automated Security Clearance Inc. vs. ITO (2008) 118 TTJ (Pune) 619, in which it has been held that a non-resident enterprise of the USA is not entitled to deduction under section 80 HHE of the IT Act by taking recourse to article 26(2), it has been strongly argued that the assessee is not entitled to the deduction. The ld. DR distinguished the case of Metchem Canada Inc.vs. DCIT (2006) 99 TTJ (Mum) 702, by stating that this decision deals with the provision contained in section 44C regarding deduction of head office expenses and it does not deal with any exemption by way of incentive.
7. In rejoinder to the reply of the ld. DR, the ld. counsel submitted that it is not correct on the part of the ld. DR to say that incentives on export of software are available to the residents only. Under sections 10A and 10B of the Act, incentives are also available to non-residents. The ld. AR submitted that under paragraph (2) of Article 26 of the DTAA, there is no concept of discrimination or reasonable discrimination, but there is concept of “less favourable treatment”. The ld. counsel submitted that para no.46 of the commentary on article 24 concerning non-discrimination actually favours the assessee because it goes without saying that non-resident enterprises are not entitled to tax advantages attaching the activities, the exercise of which is strictly reserved, on the ground of national interest, defence protection or the national economy etc. to domestic enterprises, since non-resident enterprises are not allowed to engage in any such activities. Since assessee is allowed to engage in activities of export of software, the assessee is very much entitled to the claim of deduction under section 80HHE of the Act. The ld. counsel also referred to para no.6 of the Mumbai Tribunal‟s order in the case of Metchem Canada Inc. (supra) observing that provision of article 24(2) of Indo-Canadian treaty, and the provisions of article of 24(3) of
the OECD model convention are in pari-materia. Therefore, the OECD convention commentary plays key role in determining the scope and connotation of article 24(2) of the Indo-Canadian DTAA. Similar interpretation will have to be placed on the DTAA. Thus, article 26(2) is very much applicable in the present case to claim deduction under section 80HHE of the Act.
8. We have considered the facts of the case and the submissions made before us. Facts, in short, are that assessee is a citizen of America and is a non-resident person in India in all the years under consideration. He has carried on the business of export of software out of India. Profits earned from this business are claimed to be not-taxable in view of the provisions contained in Article 26(2) of the DTAA. It is admitted position of law, conceded by the rival parties, that but for this article, the assessee would not have been entitled to deduction u/s 80 HHE of the Act, so as to exclude profits from this business from the total gross income.
8.1 We may proceed with the relevant provisions contained in the Act and the DTAA in this matter. Section 80 HHE was inserted in the Incometax Act by Finance (No.2) Act, 1991, with effect 01-04-1991. Therefore, this provision applies to the proceedings of assessment year 1991-92 and subsequent assessment years. Under the provision, in the case of an assessee, being an Indian Company or a person other than a Company (resident in India), who is engaged inter alia in the business of export of computer software out of India or its transmission from India to a place outside India by any means, the profits are not to be included in the total income. It is abundantly clear from the provision that the benefit is granted only to an Indian Company or a person who is a resident in India. The assessee before us is a non-resident person. Therefore, the provisions of this section are not applicable to him. Section 90(2) of the Act provides that where the Central Government has entered into an agreement with the Government of any Country outside India or specified territory outside India for grant of relief of tax or avoidance of double taxation, then in relation to the person to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to the person. In a nutshell, this provision makes it obligatory in respect of a person to whom DTAA applies that the assessment shall be made in accordance to the DTAA, but if any provision of the Act is more beneficial to the person, then he shall be granted benefit under the Act. In common parlance this principle is known as “Treaty Override”. What it means is that the assessment of such person shall be made in accordance with the provision contained in the DTAA. However, if any provisions of the Act are found to be more beneficial, then the assessment shall be made in accordance with the provisions contained in the Act. Since according to the learned Counsel, the provisions of the Act are not more beneficial to the assessee, it is argued that the assessee ought to be assessed under the DTAA. In this connection, Article 26(2) provides that except where the provisions of Paragraph (3) of Article 7 (business profits) apply, the taxation of a PE of an enterprise of a contracting State in the other contracting State shall not be less favorably levied in that other State contracting than the tax levied on enterprises of that other contracting State carrying on the same activities. The paragraph contains some more provisions regarding deduction on account of civil status etc., which ar