HYOSUNG CORPORATION ,KOREA V. ACIT, CIRCLE INT. TAX- 2(1)(1), DELHI

ITA 2943/DEL/2023

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Hyosung Corporation, a foreign company with a Permanent Establishment in India, appealed against the final assessment order which disallowed the set off of business losses of its PE against the income from FTS. The income from FTS was taxed at a special rate under the DTAA between India and Korea. The Assessing Officer had disallowed the set off based on the interpretation that the PE and HO are separate entities for tax purposes under the DTAA. However, the Tribunal, referencing various case laws and the provisions of the Income Tax Act, concluded that the losses of the PE could be set off against the FTS income, as both streams of income should be considered under the unified tax framework of the Income Tax Act, allowing for inter-head adjustments.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 126204 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2021-2022
• Other Referred Cases: IBM India Pvt. Ltd. vs. Hitachi Zosen Corporation vs. DCIT, Samsung Heavy Industries Co. Ltd. vs. DIT, Foramer S.A vs DCIT, Sumitomo Mitsui Banking Corporation vs. DDIT, Prudential Assurance Co. Ltd. vs. ADIT, Channel V Music Networks Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY B VASANTA
• Assessee Lawyers: SALIL KAPOOR
• Keywords: Business income; Depreciation; TDS; Source of fund; Double taxation relief; Permanent establishment; Grounds of appeal; Special Bench; Chapter VIA; Dismissed; Franchise fees; Business or profession; Effective Connection; HRA; Commissioner; Disallowing; Commissioner of Income Tax; Barred by time; Double Taxation Avoidance Treaty; Advertisement; Services rendered; Directions; Accrual of income; Accrual; Explanation; Special provisions; Legal and bad in law; Services; Allowability; ADIT
• Section: 143(3); 43; 13; 28; 72; 44BB; 115A; 44DA; 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’: NEW DELHI BEFORE SHRI SAKTIJIT DEY, HON’BLE VICE PRESIDENT and SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No.2943/DEL/2023 (Assessment Year: 2021-22) Hyosung Corporation, vs. ACIT, C/o Advocate Ananya Kapoor, Circle Int. Tax 2(1)(1), 12, Central lane, Bengali Market, Delhi. New Delhi – 110 001. (PAN : AACCH1033M) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Salil Kapoor, Advocate Shri Anil Chachra, Advocate REVENUE BY : Shri Vijay B Vasanta, CIT DR Date of Hearing : 29.01.2025 Date of Order : 23.04.2025 ORDER PER S.RIFAUR RAHMAN,AM: 1. This appeal has been filed by the assessee against the final assessment order dated 24.08.2023 passed u/s 143(3) r.w.s.144C (13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) subsequent to the directions of the Ld. Dispute Resolution Panel (DRP)/TPO vide order dated 25.07.2023 for Assessment Year 2021-22. 2. Brief facts of the case are, assessee had filed its return of income for AY 2021-22 on 15.03.2022 declaring total income as Nil and claimed refund 2 ITA No.2943/DEL/2023 of TDS amounting to Rs.63,41,430/-. The case was selected for scrutiny and notices u/s 143 (2) and 142 (1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee along with questionnaire through ITBA portal. In compliance, assessee filed the relevant information as called for through online. 3. Assessee is a company incorporated under the laws of Republic of Korea. It functions in a variety of industrial and technology areas. In India, the assessee is engaged in power business. As per the information available on record, assessee is having Permanent Establishment (PE) in India. During the year under consideration, there is no offshore supply, hence, no profit attribution was made during the year. During assessment proceedings, a notice dated 15.12.2022 was issued to the assessee and asked to explain that assessee had adjusted the losses under the head ‘PGBP’ with your FTS income of Rs.60,19,976/- and the FTS income is not attributable to the PE in India, therefore, why the same should not be disallowed and added back to the income of the assessee. In this regard, it was submitted that assessee has set off of losses under the head ‘Profit and gains from business or profession’ (PGBP) amounting to Rs.4,81,02,640/- from the head ‘income from other sources’ amounting to Rs.1,82,89580/-. The income earned under the head ‘income from other sources’ pertains to interest earned on income-tax refund and ‘fee for 3 ITA No.2943/DEL/2023 technical services’ (FTS). It was submitted that set off of business losses from FTS income is allowed under the relevant provisions of the Act as well as by Income Tax return filing utility (ITR-6). The assessee has elaborately submitted the setting off of business losses against the FTS income in accordance with law as per section 71 of the Act and set off of high tax rate loss with low tax rate income by relying on India-Korea DTAA and decisions of ITAT, Bangalore in IBM India Pvt. Ltd. in ITA Nos.489 to 498/Bang/2013 and Hitachi Zosen Corporation vs. DCIT (1999) 68 ITD 235 (Mum.) wherein ITAT Mumbai has relied upon. After considering the detailed submissions of the assessee, the Assessing Officer found not tenable and he observed that assessee has relied on the application of section 70 of the Act in this case, however assessee itself considered that there is no specific provision which allows the setting off of losses against the income from royalty and FTS. The Assessing Officer relying on the jurisdictional ITAT, Delhi in the case of M/s. Iveco Spa, Italy vs. ADIT in ITA No.5696/Del/2012 and decision of Hon’ble Uttarakhand High Court in the case of Samsung Heavy Industries Co. Ltd. vs. DIT 42 taxmann.com 140 dismissed the contentions of the assessee and he observed from Article 7 of India-Korea DTAA that such set off of business loss of PE with the income of HO is not allowed as royalty and FTS income cannot be attributed to PE without any 4 ITA No.2943/DEL/2023 connection and the income of above two are practically separate entities cannot be set off against each other gains/loss. Therefore, the set off of business loss of PE was disallowed by the Assessing Officer against the FTS income of the HO and he observed that FTS income would be taxed at the rate prescribed either under DTAA or the Act, whichever is beneficial to the assessee. Accordingly, he proceeded to make above said addition after considering the findings of DRP in the final assessment order. 4. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :- “Ground 1: That, the DRP directions dated 25.07.2023 passed under Section 144C(5) of the Act is illegal, bad in law and without jurisdiction as the same is not in conformity with law and legal principles. The said directions are in direction violation to the CBDT Circular No. 19/2019 dated 14.08.2019 and as such the same are illegal, liable to be quashed and deemed to never have been issued. Ground 2: That, the final assessment order dated 24.08.2023 passed under Section 143(3) r.w.s 144(C)(13) of the Act is illegal, bad in law, without jurisdiction and is barred by time limitation. Ground 3: That on the facts and circumstances of the case and in law, the draft assessment order passed by the Learned Assessing Officer (\"Ld. AO\") [Assistant Commissioner of Income Tax, Circle 2(1 )(1), International tax, New Delhi] under section 143(3) read with section 144C(1) of the Income Tax Act,1961 (\"the Act\") on issue of disallowing the set off of business loss with the income from FTS is erroneous and bad in law. Ground 4: That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that Loss under head Profit or Gain from Business or Profession cannot be set off under Income under head Other Source under provisions of Section 71 of the Act. Ground 4.1:That on the facts and circumstances of the case and in law, the Ld. AO erred in holding by relying on DTM that business loss of PE cannot be set off against income of HO is complete disregarding of provisions of the Act. 5 ITA No.2943/DEL/2023 Ground 4.2: That on facts and circumstance of the case, the Ld. AO had grossly erred in concluding that Head Office and Permanent Establishment are separate entities. Ground 4.3: That on facts and in law, the learned AO has erred in not appreciating the fact set off of losses is not governed by DTM, and according to the provisions of the Act, set off of Inter head loss is allowed under section 71 of the Act. Ground 4.4: That in view of the facts and circumstances of the case, and in law, the disallowances made and tax calculated thereon are illegal and bad in law. Ground 5:That in view of the facts and circumstances of the case, and in law, the documents and explanations filed by the Assessee and the material available on record have not been properly considered and judicially interpreted. Ground 6: That in view of the facts and circumstances of the case, and in law, the disallowance made are based on mere surmises and conjectures and therefore, illegal, bad in law and unjust. Ground 7:That on facts and in law, the learned AO has erred in initiating penalty proceedings under section 270A of the Act against the appellant. Ground 8: That on facts and circumstance of the case and without prejudice to the grounds raised as above, the Ld. AO has erred in law and on facts in preparing tax calculation as contained in the Computation Sheet issued along with the section 143(3) read with section 144C(1) of the Act.” 5. At the time of hearing, ld. AR for the assessee submitted that assessee has raised DIN issue in the grounds of appeal, however, he submitted that the assessee prefers not to press at this stage. 6. Ld. AR for the assessee submitted that the solitary issue under consideration is that assessee has claimed the loss of PE against the FTS income earned by the assessee. In this regard, he brought to our notice page 7 of the assessment order and findings of the Assessing Officer at page 9 of the assessment order. In this regard, he submitted that PE also 6 ITA No.2943/DEL/2023 belongs to the same entity, therefore, the assessee should be allowed to claim the set of inter head adjustment. In this regard, he brought to our notice page 39 of the case law paper book which is the decision of ITAT, Mumbai – Special Bench in Sumitomo Mitsui Banking Corporation vs. DDIT (2012) 19 taxmann 364 (Mumbai)(SB) and he brought to our notice para 56 of the order wherein it was held that under the domestic law, the PE in India and the GE abroad of which said PE is part, are not independent persons i.e. Indian Income-tax Act and they are not assessed to tax separately in India. The taxable entity is only one i.e. overseas GE which is the assessee bank in the present case who is a non-resident in India and the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to income of the PE in India. There is thus only one person assessable to tax i.e. GE and PE is not an independent person who is assessed to tax separately in India. Further, he brought to our notice page 18 of the paper book which is the computation made by the Assessing Officer. He himself adjusted the loss of current year and set off against the total income of the assessee and he disallows the set off of FTS income. Further, he brought to our notice page 53 of the case law paper book which is the decision of ITAT, Mumbai in Prudential Assurance Co. Ltd. vs. ADIT (2012) 19 taxmann 292 (Mum) wherein it was allowed the set off of loss from one head against the 7 ITA No.2943/DEL/2023 income from other sources u/s 71 of the Act. Further, he brought to our notice page 50 of the case law paper book wherein ITAT, Mumbai Bench in DCIT vs. Channel V Music Networks Ltd. (2022) 143 taxmann.com 41 (Mumbai-Trib.) allowed the brought forward business loss which has resulted from sale of advertisement, distribution of channels and syndication of content as receipts from business and profession taxed at 42.23% including surcharge and education cess while the current year income is the receipt from the franchise fees which is in the nature of royalty income and taxed on a gross basis in accordance with the provisions of section 115A(1)(b) of the Act @ 27.04%. He prayed that the facts in the present case are exactly similar. 7. Further Ld AR submitted that explanation to section 9(1)(v) specifically provides for considering the PE and HO as two different entities whereas no such distinction is provided in the section 72 of the Act. The bar to claim of expenditure and carry forward of losses are to be specifically mentioned by the legislature. 8. On the other hand, ld. DR for the Revenue submitted that the income from business is determined as per section 28 to 44 of the Act whereas the income of the PE is determined u/s 44DA of the Act. He submitted that section 115A is applied for non-PE entities and as per section 115A(1)(b), the income is chargeable to tax on gross basis. Therefore, 8 ITA No.2943/DEL/2023 the income attributable to PE should not be allowed to claim from the income of FTS. He submitted that the assessee company is registered in Korea, therefore, the tax payable in India by utilising DTAA benefit on the basis of TRC method. Therefore, two different streams of income cannot be clubbed. 9. In the rejoinder, ld. AR submitted that the same issue of section 115A(1)(b) is discussed in the decision of ITAT, Mumbai in Channel V Music Networks Ltd. (supra) and he submitted that the provisions of section 44DA are applicable which does not allow expenses and there is no bar on set off of losses. Further, he submitted that section 115A(1)(b) is only for determination of rates. 10. Considered the rival submissions and material placed on record. We observed that the assessee has PE in India and during the current year, the ‘PE’ has no offshore supply and it has attributed expenses for running the same in India, therefore, it has declared loss attributing to its PE in India. Therefore, it has incurred a business loss of Rs.4,81,02,640/- and it has earned income from other sources in the form of FTS and interest from Income Tax refund. It is fact that FTS income is taxable at special rate @ 10% under DTAA. While filing the return of income the assessee has adjusted the current year losses under the head ‘business income’ against the income under the head ‘income from other sources’ including FTS 9 ITA No.2943/DEL/2023 income which is chargeable to tax @ 10%. Assessee has made elaborate submissions by relying on certain case laws to make its case that the set off of business loss of PE against the FTS income earned by the HO. 11. After careful consideration, we need to understand the process of determining the total income of the assessee in any assessment year. As per the provisions of section 70 and 71, the total income has to be determined based on the provisions of section 14 of the Act, which deals with the determination of income under six heads of income. Under the Income Tax Act, it is taxed on income, which is determined in the manner specified in section 14 of the Act, as per which it is sum total of six heads of income, it is not chargeable to tax separately for each head of income and then aggregate of the same is not taxed under the Act. Therefore, the Income Tax is chargeable to tax on the net income. It is on the principle that income tax is only one tax and there are not as many taxes as there are heads of income. It is determined based on the provisions of the section 70 and 71 of the Act. That is inter head adjustment and intra head adjustment. If there is loss sustained in any year under one head of income should be set off against income under another head of income in that year, in order to arrive at the actual total income of the assessee. 10 ITA No.2943/DEL/2023 12. In the given case, the assessee is a foreign company taxable in India to extent of the income earned or sourced by it in India. We noticed that the assessee has two sources or stream of income, one is from the services to its clients through its PE and another is by providing services to its clients directly. We noticed that the first stream falls under the Art.7 and the other under Art.12 of the DTAA. However, both stream of income falls under the head business as far as the assessee is concerned. It is only classification and inter play between the two articles of the DTAA. There is no dispute as far as the classification of income is concerned. The AO has accepted that the loss claimed by the assessee is attributable to the PE and the FTS earned by the assessee is from the other services provided directly. The issue under consideration is, whether the two steam of income to be treated as one income for the taxation purpose. As discussed in the above para 11, as far as Income tax is concerned, the income is one and has to be determined under the six heads of income and then if there is any loss, net income has to calculated by applying the provisions of Sec.70 and 71 of the Act. Once the total income is determined then the provisions of taxation relating to Chapter VIA to XI are applicable. The Chapter XI, in which the provisions of double taxation and tax treaties are mentioned and applicable. Therefore, the 11 ITA No.2943/DEL/2023 Income tax has to be charged to tax only after determining the total income after application of Chapter VI. 13. In the given case, no doubt the assessee has declared loss in the PE and at the same time, the income earned by it falls under FTS, as far as assessee is concerned it has earned the above income or loss sourced thru India. Therefore, the provisions of section 71 are applicable. Just because the income is chargeable to tax under special provisions and also TDS is collected, it does not change the determination of income under the Act. The Provisions of section 44DA and 115A are applicable or not and how it will impact the income declared by the assessee has to be analysed. 14. As per the provisions of section 44DA, the income of Royalty or FTS earned by the assessee through its PE is concerned, the same is chargeable to tax under this provisions and it is chargeable to tax on gross basis. In the given case, the assessee has earned the FTS directly without the assistance of its PE. Therefore, the above section has no application. Coming to the provisions of section 115A, the provisions starts with the words, ‘Where the total income of’ connotes the meaning that first we have to determine the total income and if the above total income includes the FTS as per the provisions of section 115A(1)(b) then the relevant FTS has to be excluded from the above income and then chargeable to tax at the specified rate (as per section 115A(1)(b)(B) of the Act). We observe 12 ITA No.2943/DEL/2023 that as per the provisions of section 115A(3) of the Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under the sections 28 to 44C and 57 of the Act in computing the income referred in section 115A(1) of the Act. Therefore, from the above it is clear that first we need to determine the total income which includes FTS as under: Income or loss from the PE (on net basis) (XX) FTS income (on gross basis without allowance of expenditure) XX Net Taxable income XX If there is any loss in the PE, the same can be set off against the Gross income of FTS. The next question arises, the provisions of section 115A(3) does not allow any expenditure or allowance, the set off of loss is to be allowed or not. We observe that the legislature normally specifies if the intention is to restrict the same. Unlike section 115A, the provisions of section 115BBDA(2) and 115BBH(2), bar the claim of expenditure as well as loss, the same is extracted below: Sec.115BBDA.. (2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of 13 ITA No.2943/DEL/2023 this Act in computing the income by way of dividends referred to in clause (a) of sub-section (1). Section 115BBH(2).. (a) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub-section (1); and (b) …. From the above, it is clear that the legislature specifies the restrictions specifically in the statute. Therefore, the provisions of sec.115A is silent, hence, the assessee is eligible to set off of the loss of its PE against the income earned through other sources in India under the provisions of section 71 of the Act. 15. We observed that the AO and DRP has relied on the case of coordinate bench in Iveco Spa, Italy vs. ADIT in ITA No.5696/Del/2012, the relevant findings are: “22. It was submitted by assessee before ld DRP and Ld AO that in the FY 200607, three of the employees of assessee company visited India from Italy and provided the needful support and training to the licensee. All these three employees of the assessee were in India for execution of agreement for technical services and none of them stayed in India for more than 90 days. It is also contended that as the services of training and technical support was to be provided on need basis, after that neither there was any need nor any such assistance was provided by employees of the assessee. In any case, no 14 ITA No.2943/DEL/2023 services have been provided by the employees of the BO of assessee in India. Letter dated 23rd December 2009 explains the whole issue before Ld AO and DRP. Contents of this letter remain uncontroverted. Therefore, it is incorrect to state that assessee has not provided the details of the persons who provided services in connection with that agreement. Further, it is also not brought on record by revenue that whether during the year any services were in fact provided by the assessee to the licensee or not. Revenue has not made any inquiry with the licensee also about the nature of services provided by the assessee during the year and who are the persons who provided these services. In absence of this inquiry and material on record, and in view of affirmative statement by the assessee at all stages that employees of the BO of the assessee are not at all capable and are engaged in performance of the contract, it is not possible to say that the activities of the contract are effectively connected with the BO of the assessee. The contention of the Ld AO and DRP is that these services to be provided by the assessee to New Holland Tractors P Ltd are sophisticated and in absence of support of employees of the BO of the assessee could not have been accomplished. As the BO employs technically qualified staff, it is inferred by revenue that employees of the BO has provided these services. In fact, prior to this agreement with the New Holland Tractors Limited, assessee was having such technical agreement with other party in India and at that, time branch of office of India did not exist at all. Further there is mere allegation by the revenue that the services have been performed by the persons employed by the BO of the assessee in relation to the impugned contract even when assessee has categorically given information vide letter dated 23/12/2009. Merely having some staff with its BO, that are technically qualified, it cannot be inferred that they have provided services for performance of the impugned contract. In fact the services rendered by the branch office in India which are tabulated in the letter of permission dated 11/12/2004 of the Reserve bank of India, are also technical in nature which inter alia includes providing technical support services to the clients of its HO in India, after sales support services, warranty services etc., therefore to perform that activity also BO of the assessee in India needs technically qualified employees. Therefore, the revenue has not shown any material that services have been provided by the employees of the BO of the assessee. 15 ITA No.2943/DEL/2023 No presumption can be drawn by revenue regarding involvement of the PE in earning royalty income. To effectively connect royalty with a PE one has to evaluate the „asset test‟ and to effectively connect Fees for technical services with PE one has to evaluate „ activity test‟ or „function test‟. In the present case the sum is offered and accepted for taxation as Royalty , then for evaluation of its effective connection with the PE only “assets test” should be applied which fails miserably in this case. Assuming that sum is Fees for technical services even then the “Activity test” or “function test” is also not satisfied. To “effectively connect” this royalty income with the PE revenue should establish that (1) PE should be engaged in the performance of technical services or should be involved in actual rendering of such services, or (2) it should arise as a result of the activities of the PE , or (3) The PE should, at least, facilitate, assist or aid in performance of such services irrespective of the other activities PE performs. Revenue could not bring any material on record, which proves above facts in substance. Honourable Delhi high court in CIT V Sumitomo Corporation [382 ITR 75] held as under : “27. Article 12(5) of the Double Taxation Avoidance Agreement is on the lines of the OECD Model Convention. It is noticed that the clause in the OECD Model Convention allows the State, where the permanent establishment is located, to \"tax only those profits which are economically attributable to the permanent establishment\". The clause makes a distinction between those incomes which are the result of activities of the permanent establishment and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the permanent establishment. Thus, article 12(5) adopts the \"no force of attraction principle\". The rationale behind the said rule was to avoid restricting entrepreneurial freedom of disposition \"through fictitiously allocating profits by way of generalising standards\". Another principle is that the \"material date for determination of accrual of income arising through the permanent establishment is the existence of the permanent establishment at the time when whatever decisively caused the profits to accrue, actually accrued\". The income producing activities 16 ITA No.2943/DEL/2023 should be connected with the permanent establishment not only economically but also in substance.” 16. The issue considered by the coordinate bench was to determine the relevant income under Royalty or FTS earned by the assessee through its PE by deputing its employees in India. The AO heavily relied on the point that “the clause makes a distinction between those incomes which are the result of activities of the PE and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the PE.” In the given case, there is no doubt about the earning of income through PE and direct earning of income. This fact was very much established and the AO has accepted the sources of income. The issue under consideration is whether the same assessee who earns the income from two sources i.e., through its PE and direct earning, can this be allowed. 17. We have noticed a reported decision of the coordinate bench in the case of Foramer S.A vs DCIT (1995) 52 ITD 115 (Delhi) wherein the bench had considered the issue of allowability of depreciation of rigs owned by the assessee, with the following facts on record: “The assessee, a French company engaged in carrying on drilling operation off-shore in India under contract with the ONGC, claimed that its 'income should be determined under article III of the Double Taxation Avoidance Treaty, between France and India which had an overriding effect on the deeming provisions of section 44BB. The Assessing Officer held , that section 44BB was more specific than article III and applied section 44BB. On appeal, 17 ITA No.2943/DEL/2023 the Commissioner (Appeals) held that section 44BB did riot 'override article III and as such, income had to be computed under article III of the Treaty, b held that depreciation on the rigs owned b the assessee was to be determined on the basis of the straight line method without recourse to the provisions of the Act and by taking into account the wear and tear of the rig with reference to its original cost, its age, and the condition in which it was used. The Commissioner (Appeals) also directed that the wear and tear in each year of use outside India should be deducted in arriving at the actual state of the rig before its use in India. The Commissioner (Appeals) rejected the claim of the assessee that depreciation was to be allowed as per the provisions of the Act in accordance with section 32(1), read with section 43(6), and it was to be computed at cost as the rig was neither operated in India before, nor was any depreciation claimed on it earlier in India.” They held as under :- “10. The following provisions of the Treaty dated March 26, 1969 between the Government of India and the Government of French Republic may be extracted : Sub-article (2) of Article II: In the application of the provisions of the present agreement in either Contracting State, any term not otherwise defined in the present agreement shall, unless the context otherwise requires, have the meaning which it has under the laws in force in that Contracting State relating to the taxes which are the subject of the present Agreement. Sub-article (3) of Article III: In determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deduction all expenses, wherever incurred, reasonably allocable to such permanent establishment, including executive and general administrative expenses so allocable. Sub-article (1) of Article XIX : 18 ITA No.2943/DEL/2023 The law in force in either of the Contracting State will continue to govern the taxation of income in the respective Contracting States except where express provisions to the contrary is made in the present Agreement. Article XXI: The nationals one of the Contracting States 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 Contracting State in the same circumstances are or may be subjected. In Circular No. 333 dated 2-4-1982 it is provided as under:- 2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income Tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under Section 90 of the Income Tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the country have been made in the agreement. In the case of CIT v. Davy Ashmore India Limited [1991] 190 ITR626, the Hon'ble Calcutta High Court held as under :- “Thus where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income Tax Act. Whether there is no specific provision in the agreement, it is the basic law, i.e. the Income Tax Act, that will govern the taxation of income.” 11. From the above, it is clear that income/loss from operation of IDA was to be computed as per provisions of the Treaty under the head \"Industrial or commercial profits\". In fact, the learned C1T(A) has held so and his finding to the above fact has not been disputed by either of the parties. It is further not in dispute that the depreciation has to be allowed as an item of expenditure for computing reasonable profits. The 19 ITA No.2943/DEL/2023 quantum of depreciation to be allowed is in dispute. At what rate and on what written down value (WDV) the depreciation is to be computed is to be determined. The learned C1T(A) held that actual \"wear and tear of the rig\" both in India and outside India should be taken into account for quantification of depreciation. The assessee, on the other hand, contends that depreciation be allowed as per provisions of Income Tax Act. In other words, it is claimed that depreciation be computed with reference to Section 32(1) read with Section 43(6) and allowed as per the rate prescribed in the schedule to the Income Tax Rules. For working out WDV, actual cost of rigs and other machinery be taken into account and not depreciation allowed outside India under any law other than those mentioned in Sub-section (6) of Section 43 of the Indian Income-tax Act. On careful consideration of provision of double taxation treaty and income-tax law, we are inclined to agree with the assessee. 12. The Assessing Officer or CIT(A) in their orders, or learned D.R. during the course of hearing of appeal, could not bring to our notice any provision in the Treaty defining WDV or providing any method for computation of depreciation. On the other hand, Sub-article (2) of article II extracted above, clearly provides that terms not defined in the agreement will have the meaning which these should have under the law in the Contracting State. Here, for our purposes, \"Contracting State\" is India and relevant law is Income Tax Act, 1961. Thus there is no scope but to refer to the Indian Income-tax Act, 1961 for adopting written down value and rates at which depreciation should be allowed. Sub- article (3) of article III further provides that while determining commercial profits, all reasonable deductions are to be allowed. It is difficult to contend that provisions relating to allowance of depreciation under the Indian Income-tax Act for computing business income do not relate to reasonable deduction. The Circular No. 333 dated 2-4-1982 of CBDT and decision of Hon'ble Calcutta High Court in the case of Davy Ashmore India Ltd. (supra) also enjoin that basic law, i.e., Income-tax Act will govern the taxation of income where there is no specific provision in the agreement governing the situation. The other article XXI relied upon by the assessee also supports the view of the assessee. The said article provides that national of other State cannot be subjected to more burdensome taxation than the national of the Contracting State under similar circumstances. If the assessee was Indian national, the depreciation was required to be allowed at cost or WDV as per the rate prescribed under the Indian Income-tax Act without deduction of depreciation, if any, allowed under the foreign law. Having regard to the article referred to above, there is no question of giving a different treatment to the foreign company and putting on it a heavier burden of tax. Thus, even when commercial profits are determined with reference to Treaty, the depreciation is to be computed and allowed under 20 ITA No.2943/DEL/2023 the Income-tax Act. We, therefore, see no bar or justification for not entertaining the claim of the assessee to allow depreciation under the Indian Income-tax Act. 13. Our aforesaid conclusion is further strengthened by provision of Sub-section (2} to Section 90 of the Act relating to double taxation avoidance treaties inserted by the Finance (No. 2) Act, 1991 with effect from 1-4-1972. The said sub-section provides as under :- “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 total 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.” [Emphasis supplied] It is clear from the aforesaid sub-section that a foreign national governed by avoidance of double taxation treaty is entitled to ask for application of provision of this Act, \"to the extent they are more beneficial to that assessee\". The sub-section is applicable only to the cases governed by avoidance of double taxation treaty. There is thus no justification for holding that foreign nationals, having selected to be governed by double taxation treaty cannot ask for application of any provision of the Income-tax Act even when such provision is beneficial to them. The choice of selection is clearly with the foreign nationals and not with revenue authorities. The intention of the Legislature and spirit to grant benefit and choice to the foreign national is manifestly clear. In view of above provision and other reasons recorded earlier, we direct the Assessing Officer to allow depreciation to the assessee as per provisions of the Income-tax Act. As we have accepted the main ground of the assessee, the other grounds raised in the Memo are not being considered.” 18. In the above decision, the coordinate bench has considered the issue of allowability of depreciation, when the rate of depreciation and allowability of the same are not prescribed under the Treaty, the assessee may choose to apply the relevant provisions contained in the provisions of the Act applicable in the contracting state and also it was held that the 21 ITA No.2943/DEL/2023 a foreign national governed by avoidance of double taxation treaty is entitled to ask for application of provision of the Income Tax Act, to the extent they are more beneficial to that assessee. Similarly in this case, the issue involved is the issue of allowability of Set off of intra head of income, the similar provisions are not present in the relevant treaty, in case of absence of relevant provisions of set off, the assessee has liberty to follow the provisions of Income Tax Act, which is beneficial to it. In the absence of any provision of set off in the treaty, the relevant findings of the coordinate bench applicable to the present case mutatis mutandis. 19. Therefore, we are inclined to accept the submissions of the assessee and allow the grounds raised by it. 20. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 23rd day of April, 2025. Sd/- sd/- (SAKTIJIT DEY) (S.RIFAUR RAHMAN) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 23.04.2025 TS Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals). 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "