Shri Rajeev Sureshbhai Gajwani, Baroda V. The ACIT., Circle-6, Baroda

ITA 1807/AHD/2006

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1914 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 08-06-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 02-08-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K GUPTA; SHELLEY JINDALCIT
• Keywords: Residential status; Double taxation relief; Permanent establishment
• Section: 10B; 90

Judgement Text

- 1 - 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. SHRI RAJEEV SURESHBHAI GAJWANI, PROP. AMTEL EXPORTS INDIA, 704/706, CITADEL, WINDSOR PLAZA, RACE COURSE CIRCLE, BARODA. VS. ASSTT. CIT, CIRCLE-6, BARODA. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI MILIN MEHTA, AR RESPONDENT BY:- SHRI SHELLEY JINDAL,CIT, DR & SHRI V. K. GUPTA, SR. D.R. O R D E R PER BENCH: 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 WI TH REGARD TO THE ALLOWABILITY OF DEDUCTION UNDER SECTION 80 HHE OF T HE I.T. ACT, 1961(THE ACT FOR SHORT) IN RESPECT OF EXPORT OF SOFTWARE O UT 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 PERMANE NT ESTABLISHMENT IN INDIA (PE FOR SHORT) FOR EXPORT OF SOFTWARE, H E WAS ASSESSABLE UNDER THE ITA NOS.1807 & 1978/AHD/2006 & ITA NO.3111/AHD/2007 ASST. YEARS 2002-03, 2003-04 & 2004-05 ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 2 ACT, SUBJECT TO DEDUCTIONS AND EXEMPTIONS, IF ANY, AVAILABLE TO IT. THE AO AS WELL AS THE CIT(A) WERE OF THE OPINION THAT DEDUCTI ON AVAILABLE TO AN INDIAN COMPANY OR INDIAN RESIDENT, UNDER SECTION 80 HHE O F THE ACT, IN RESPECT OF EXPORT OF SOFTWARE OUT OF INDIA, IS NOT AVAILABLE T O 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 WHE REAS 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 J URISDICTION, PROVISIONS OF THE ACT SHALL APPLY TO THE EXTENT THE Y ARE MORE BENEFICIAL TO THE ASSESSEE. PRESSING INTO SERVICE THE LANGUAGE EMPLOYED IN ARTI CLE 26 OF DTAA, IT WAS CONTENDED BEFORE THE TAX AUTHORITIES T HAT 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 O F INDIA, SUBJECT TO OTHER CONDITIONS. THEREFORE, IN THE SAME LINE OF ACTIV ITY IN INDIA, THE PROFITS OF PE OF THE ASSESSEE CANNOT BE TREATED LESS FAVOURA BLY FOR TAXATION WHEN COMPARED TO THE TAXATION OF PROFITS OF AN ENTERPR ISE OWNED BY A RESIDENT IN INDIA. THUS, ASSESSEE SHOULD ALSO BE EXTENDED BENEF IT OF DEDUCTION UNDER SECTION 80 HHE OF THE ACT. THE AO AS WELL AS THE CI T(A) REJECTED THE CONTENTION OF THE ASSESSEE. ON AN APPEAL FILED BEFO RE THE TRIBUNAL, THE DIVISION BENCH NOTICED THAT CO-ORDINATE BENCHES OF THE TRIBUNAL HAVE TAKEN DIVERGENT VIEWS ON THE SAME ISSUE AND THUS IT REQUI RES TO BE CONSIDERED BY ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 3 SPECIAL BENCH SO AS TO RESOLVE THE CONTROVERSY. ACC ORDINGLY VIDE ITS ORDER DATED 17.6.2010, THE BENCH PLACED RECORDS BEFORE TH E HON. PRESIDENT TO CONSTITUTE A SPECIAL BENCH ON THE FOLLOWING QUESTIO N:- WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, 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 AS SESSEE 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 C ONCERNED, IN GROUND NO.1 ASSESSEE HAS CHALLENGED DISALLOWANCE OF RS.1,00,00 0/- ALSO, REFERABLE TO PERSONAL EXPENDITURE INCLUDED AS PART OF BUSINESS E XPENDITURE. AT THE TIME OF HEARING, LD. COUNSEL APPEARING ON BEHALF OF THE ASS ESSEE 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 APPEAL S ARE SET OUT HERE IN BRIEF. THE ASSESSEE, A CITIZEN OF AMERICA, IS AN EX PORTER 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 DTA A. 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 H HE IS VERY CLEAR TO THE ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 4 EFFECT THAT DEDUCTION IS NOT ADMISSIBLE TO A NON-RE SIDENT. ACCORDINGLY THE CLAIM WAS DENIED BY HIM. THE MATTER WAS AGITATED B EFORE 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 C ONCLUSION 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 O UT OF INDIA CANNOT BE EQUATED WITH THE ASSESSEE AS BOTH OF THEM ARE NOT F UNCTIONING 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 PROVI SIONS CONTAINED IN SECTION 80 HHE. IT IS FAIRLY ADMITTED BY HIM THAT THE ASSESSEE, BEING A NON- RESIDENT PERSON, IS NOT ENTITLED TO THE DEDUCTION O N THE BASIS OF THIS PROVISION. HOWEVER, IT IS SUBMITTED THAT THE ASSESSEE IS A RES IDENT 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 DEDU CTION 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-ASSE SSEE SITUATED IN THE SAME CIRCUMSTANCES. HE READ OUT THE PROVISION, WHICH STA TES 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 TH E OTHER CONTRACTING STATE ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 5 SHALL NOT BE LESS FAVOURABLY LEVIED IN THE OTHER ST ATE 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 PE RSONAL 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 DISTINC T 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 OT HER 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 AMERIC AN ENTERPRISE SHALL NOT BE TREATED LESS FAVOURABLY IN THE MATTER OF TAXATION. THE SECOND PART OF THE ARTICLE PROVIDES FOR PERSONAL ALLOWANCES ETC. GRANT ED ON THE BASIS OF CIVIL STATUS, FOR WHICH A NON-RESIDENT ENTERPRISE MAY B E DIFFERENTIALLY TREATED BY THE OTHER CONTRACTING STATE. HE ALSO DREW OUR ATT ENTION TO SECTION 90(2) OF THE ACT WHICH PROVIDES THAT IN RELATION TO THE ASSE SSEE 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. COU NSEL, ON THE BASIS OF THIS PROVISION, IS THAT THE PROVISIONS OF THE DTAA ARE M ORE BENEFICIAL AND, THEREFORE BY DINT OF THAT, THE CLAIM OF THE ASSESS EE 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 PR OVISION IS NON- DISCRIMINATION. SINCE SUCH MEASURES RELATE TO ECON OMIC ACTIVITIES, THE ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 6 PROPER COURSE FOR THE STATE-CONCERNED IS THAT BE NEFIT 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 CONDITI ONS AND REQUIREMENTS ATTACHED TO THE GRANT. IT IS ARGUED THAT VARIOUS DECISIONS R ENDERED BY INDIAN COURTS HAVE HELD THAT THE COMMENTARY MAY BE REFERRED TO US EFULLY FOR UNDERSTANDING THE PROVISIONS OF THE DTAA. IN THIS C ONNECTION 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 R EFERENCES TO THE OECD MODEL HAS BEEN MADE. AT PAGE 741 IT IS MENTION ED THAT THERE IS A FURTHER REASON IN SUPPORT OF OUR VIEW. THE EXPRESSI ON LIABLE TO TAXATION HAS BEEN ADOPTED FROM THE OECD MODEL CONVENTION. SIMIL ARLY, 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 R EFERENCES, HIS CASE IS THAT ALTHOUGH THE COMMENTARY IS NOT BINDING ON INDIAN T AX AUTHORITIES AND COURTS, REFERENCES CAN BE USEFULLY MADE TO IT IN CA SE 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 SUBMITT ED THAT THE PROVISIONS CONTAINED IN PARAGRAPH (2) OF THE ARTICLE 26 OF THE DTAA ARE ANALOGOUS TO THE PROVISIONS CONTAINED IN PARAGRAPH (3) OF ARTICL E 24 OF OECD MODEL CONVENTION. KLAUS VOGEL HAS OPINED THAT THE QUESTI ON 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 RESID ENT OF THE CONTRACTING STATE, ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 7 AND (II) HE IS THE RESIDENT OF THE OTHER CONTRA CTING 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-GRANTI NG OF DEDUCTION WOULD MEAN THAT THE ASSESSEE WOULD PAY HIGHER TAX THAN S IMILARLY SITUATED INDIAN ENTERPRISE, ARTICLE 26(2) COMES TO THE AID OF THE A SSESSEE FOR TREATING HIM AT PAR WITH INDIAN ENTERPRISE. IT IS ALSO HIS CASE THA T THERE CANNOT BE ANY CASE FOR REASONABLE DISCRIMINATION IN VIEW OF THE CLEAR PR OVISION IN THE DTAA. 6. IN REPLY, LD. DRS REFERRED TO CIRCULAR NO.621 DA TED 19.12.1991. IT EXPLAINS THE PROVISIONS CONTAINED IN FINANCE (2) AC T, 1991. IN REGARD TO SECTION 80HHE, IT IS MENTIONED THAT INDIAN COMPANIE S AND NON-CORPORATE RESIDENT TAX PAYERS WILL BE ELIGIBLE FOR DEDUCTION, IN COMPUTING THEIR TAXABLE INCOME, OF AN AMOUNT EQUAL TO THE PROFITS DERIVED F ROM THE EXPORT OF COMPUTER SOFTWARE. THEREFORE, IT IS ARGUED THAT TH E BENEFIT IS NOT AVAILABLE TO NON-RESIDENT ASSESSEES OR FOREIGN COMPANIES. CIRCUL AR NO. 333 DATED 2.4.1982 CLARIFIES THAT WHERE DOUBLE TAXATION AVOID ANCE 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 DOME STIC LAW THAT WILL GOVERN THE TAXATION OF INCOME. HIS CASE IS THAT THE DTAA D OES NOT CONTAIN ANY SPECIFIC PROVISION FOR DEDUCTION UNDER SECTION 80 H HE. THEREFORE, THE DEDUCTION IS NOT AVAILABLE TO THE ASSESSEE. IT IS A LSO HIS CASE THAT THE SECTION WAS IN OPERATION PRIOR TO THE SIGNING OF THE DTAA A ND SPECIFIC MENTION HAVING NOT BEEN MADE FOR SUCH DEDUCTION IN THE DTAA , PROVISIONS OF THE ACT WILL BE APPLICABLE. ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 8 6.1 REFERRING TO THE PROVISION CONTAINED IN PARAGR APH (2) OF ARTICLE 26, IT IS SUBMITTED THAT IT HAS TWO PARTS. THE FIRST IS GE NERAL ONE AND THE SECOND IS SPECIFIC ONE. THE BENEFIT OF SECTION 80 HHE IS GRAN TED 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 NON- RESIDENT WHO IS ENTITLED TO TAKE AWAY THE PROFIT FR OM INDIA WITHOUT ANY RESTRICTION, THUS NOT AUGMENTING THE FOREIGN EXCHAN GE RESERVES OF INDIA. HE ALSO REFERRED TO PARAGRAPH 46 OF THE OECD COMMENTAR Y IN WHICH IT IS MENTIONED THAT NON-RESIDENT ENTERPRISES ARE NOT ENT ITLED TO TAX ADVANTAGES ATTACHED TO THE ACTIVITIES, EXERCISE OF WHICH IS S TRICTLY RESERVED, ON ACCOUNT OF NATIONAL INTEREST, DEFENCE PRODUCTION OR NATIONA L 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 H IS CASE THAT GRANT OF BENEFIT UNDER SECTION 80HHE TO A FOREIGN ENTERPRISE DOES NO T PROTECT THE NATIONAL ECONOMY AS THE NON-RESIDENT PERSON CAN TAKE AWAY TH E FOREIGN EXCHANGE EARNED BY IT OUT OF INDIA. PARAGRAPH (2) OF ARTICL E 26 WILL APPLY ONLY WHEN THE RESIDENT AND NON-RESIDENT PERSONS ARE PLACED UN DER SIMILAR SITUATIONS. SINCE THE ASSESSEE IS NOT SIMILARLY PLACED AS RESID ENT SOFTWARE EXPORTERS, THE BENEFIT OF THIS PROVISION WILL NOT BE AVAILABLE TO HIM. 6.2 IT WAS SUBMITTED THAT THE OECD COMMENTARY IS NO T BINDING ON INDIAN AUTHORITIES AND INDIA HAS ALSO EXPRESSED RESERVATIO N ON A NUMBER OF POINTS MADE IN THE COMMENTARY. IN THIS CONNECTION, HE R EFERRED TO THE DECISION IN THE CASE OF CIT VS. P V A L KULANDAGAN CHETTIAR (DE CD.), THROUGH LRS, ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 9 (2004) 267 ITR 654 (SC), IN WHICH IT IS MENTIONED T HAT TAXATION POLICY IS WITHIN THE POWER OF GOVERNMENT AND SECTION 90 OF TH E IT ACT ENABLES THE GOVERNMENT TO FORMULATE ITS POLICY THROUGH TREATIES ENTERED INTO BY IT. IN DETERMINING THE QUESTION OF FISCAL DOMICILE IN O NE STATE OR THE OTHER, PROVISIONS OF THE TREATY PREVAIL OVER THE PROVISI ON 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.133 1 ETC., IN WHICH IT IS INTER ALIA MENTIONED THAT WHILE CONFIRMING THE ORDE R OF ITAT, HONBLE MADRAS HIGH COURT REJECTED THE APPLICATION OF COMME NTARY AND MODEL CONVENTION OF 1977 PRESENTED BY THE OECD FOR THE R EASON THAT IT WOULD NOT BE SAFE TO DO SO. THE REFERENCE IS MADE TO HIGHLIGH T 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 D ECISION IN THE CASE OF AUTOMATED SECURITY CLEARANCE INC. VS. ITO (2008) 11 8 TTJ (PUNE) 619, IN WHICH IT HAS BEEN HELD THAT A NON-RESIDENT ENTERPRI SE OF THE USA IS NOT ENTITLED TO DEDUCTION UNDER SECTION 80 HHE OF THE I T ACT BY TAKING RECOURSE TO ARTICLE 26(2), IT HAS BEEN STRONGLY ARGUED TH AT THE ASSESSEE IS NOT ENTITLED TO THE DEDUCTION. THE LD. DR DISTINGUIS HED THE CASE OF METCHEM CANADA INC.VS. DCIT (2006) 99 TTJ (MUM) 702, BY ST ATING THAT THIS DECISION DEALS WITH THE PROVISION CONTAINED IN SECT ION 44C REGARDING DEDUCTION OF HEAD OFFICE EXPENSES AND IT DOES NOT D EAL WITH ANY EXEMPTION BY WAY OF INCENTIVE. ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 10 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 THA T INCENTIVES ON EXPORT OF SOFTWARE ARE AVAILABLE TO THE RESIDENTS ONLY. UND ER SECTIONS 10A AND 10B OF THE ACT, INCENTIVES ARE ALSO AVAILABLE TO NON-RESI DENTS. 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 T HAT PARA NO.46 OF THE COMMENTARY ON ARTICLE 24 CONCERNING NON-DISCRIMINAT ION ACTUALLY FAVOURS THE ASSESSEE BECAUSE IT GOES WITHOUT SAYING THAT NO N-RESIDENT ENTERPRISES ARE NOT ENTITLED TO TAX ADVANTAGES ATTACHING THE ACTIVI TIES, THE EXERCISE OF WHICH IS STRICTLY RESERVED, ON THE GROUND OF NATIONAL INT EREST, 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 SO FTWARE, THE ASSESSEE IS VERY MUCH ENTITLED TO THE CLAIM OF DEDUCTION UNDER SECTI ON 80HHE OF THE ACT. THE LD. COUNSEL ALSO REFERRED TO PARA NO.6 OF THE MUMBAI TRIBUNALS ORDER IN THE CASE OF METCHEM CANADA INC. (SUPRA) OBSERVING T HAT 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. THEREFO RE, THE OECD CONVENTION COMMENTARY PLAYS KEY ROLE IN DETERMININ G THE SCOPE AND CONNOTATION OF ARTICLE 24(2) OF THE INDO-CANADIAN D TAA. 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. ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 11 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 UN DER CONSIDERATION. HE HAS CARRIED ON THE BUSINESS OF EXPORT OF SOFTWARE OUT O F 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 ADMIT TED 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 T HE ACT, SO AS TO EXCLUDE PROFITS FROM THIS BUSINESS FROM THE TOTAL GROSS INC OME. 8.1 WE MAY PROCEED WITH THE RELEVANT PROVISIONS CO NTAINED IN THE ACT AND THE DTAA IN THIS MATTER. SECTION 80 HHE WAS IN SERTED IN THE INCOME- TAX 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 T HE 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 T HAT THE BENEFIT IS GRANTED ONLY TO AN INDIAN COMPANY OR A PERSON WHO IS A RESI DENT IN INDIA. THE ASSESSEE BEFORE US IS A NON-RESIDENT PERSON. THEREF ORE, 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 AG REEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPECIFIE D TERRITORY OUTSIDE INDIA FOR GRANT OF RELIEF OF TAX OR AVOIDANCE OF DOUBLE T AXATION, THEN IN RELATION TO ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 12 THE PERSON TO WHOM SUCH AGREEMENT APPLIES, THE PRO VISIONS 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 PERSO N 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 PERS ON, 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 ASS ESSMENT OF SUCH PERSON SHALL BE MADE IN ACCORDANCE WITH THE PROVISION CONT AINED 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, TH E PROVISIONS OF THE ACT ARE NOT MORE BENEFICIAL TO THE ASSESSEE, IT IS ARG UED 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) O F ARTICLE 7 (BUSINESS PROFITS) APPLY, THE TAXATION OF A PE OF AN ENTERPRI SE OF A CONTRACTING STATE IN THE OTHER CONTRACTING STATE SHALL NOT BE LESS FAVOR ABLY LEVIED IN THAT OTHER STATE CONTRACTING THAN THE TAX LEVIED ON ENTERPRISE S OF THAT OTHER CONTRACTING STATE CARRYING ON THE SAME ACTIVITIES. THE PARAGRAP H CONTAINS SOME MORE PROVISIONS REGARDING DEDUCTION ON ACCOUNT OF CIVIL STATUS ETC., WHICH ARE NOT RELEVANT TO THE FACTS OF THIS CASE. WHILE INTERPR ETING THIS PARAGRAPH, IT IS ALSO NECESSARY TO EXAMINE THE CONTENTS OF PARAGRAPH (3) OF ARTICLE 7. THIS PARAGRAPH DEALS WITH DEDUCTION OF EXPENSES INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE PE, INCLUDING A REASONABLE ALLOCATI ON OF EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES, RESEARCH & DEVELOP MENT EXPENSES, INTEREST AND OTHER EXPENSES INCURRED FOR THE PURPOSE OF THE ENTERPRISE AS A WHOLE. ON CONSIDERATION, IT IS SEEN THAT THESE PROVISIONS AR E NOT MATERIAL IN SO FAR THE ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 13 FACTS OF OUR CASE ARE CONCERNED BECAUSE THERE IS NO DISPUTE ABOUT THE COMPUTATION OF INCOME WHICH INCLUDES DEDUCTION OF E XPENSES FROM THE INCOME EARNED BY THE PE. THEREFORE, WE HAVE NOW TO EXAMINE AND INTERPRET THE INTENT AND PURPOSE OF THE PARAGRAPH (2) OF ART ICLE 26. IN SIMPLE LANGUAGE AND TAKING INTO ACCOUNT THE FACTS OF OUR CASE, THE LANGUAGE EMPLOYED IN THE PROVISIONS MEANS THAT TAXATION OF A PE OF THE USA S HALL NOT BE LESS FAVORABLE THAN THE TAXATION OF RESIDENT ENTERPRISE CARRYING O N THE SAME ACTIVITIES. IT APPEARS TO US THAT THERE IS NO DISPUTE BETWEEN THE RIVAL PARTIES TILL NOW. THE DISPUTE IS IN REGARD TO THE WORDS SHALL NOT BE LESS FAVORABLY LEVIED AND THE WORDS SAME ACTIVITIES. 8.2 THE CONTROVERSY IN RESPECT OF FORMER WORDS ARIS E ON ACCOUNT OF THE DECISION OF THE TRIBUNAL IN THE CASE OF AUTOMATED S ECURITIES CLEARANCE INC. (SUPRA), WHEREIN THE TRIBUNAL CAME TO THE CONCLUSIO N THAT THE BENEFIT OF SECTION 80 HHE OF THE ACT IS NOT AVAILABLE TO THE ASSESSEE. THE TRIBUNAL INTER ALIA CONSIDERED THE COMMENTARY ON OECD MODEL CONVENTION, AND TECHNICAL EXPLANATION. IT IS MENTIONED THAT THE OEC D MODEL CONVENTION IS INTENDED TO BE AN AMBULATORY DOCUMENT, WHICH MAY BE UPDATED FROM TIME TO TIME TO REFLECT FURTHER DEVELOPMENTS IN THE FIELD. THE TECHNICAL EXPLANATION IS ALSO INTENDED TO BE AMBULATORY. IT HAS BEEN HELD T HAT DIFFERENTIAL TREATMENT METED OUT TO THE PE OF THE US TAX RESIDENT, BY ITS ELF, CANNOT BE TREATED AS COVERED BY THE SCOPE OF THE RULE PROHIBITING NON-DI SCRIMINATION. THE TRUE TEST IS WHETHER OR NOT THERE IS NON-DISCRIMINATION OF T HE US ENTERPRISE WHO IS SIMILARLY SITUATED. AFTER ANALYZING THE PROVISIONS CONTAINED IN SECTION 80 HHE OF THE IT ACT, IT HAS BEEN FURTHER HELD THAT SI NCE ONLY RESIDENT ASSESSEES ARE ELIGIBLE FOR THE DEDUCTION, WHICH IS BASED ON A REASONABLE ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 14 DIFFERENTIATION, THERE IS NO DISCRIMINATION IF DEDU CTION UNDER THESE PROVISIONS IS NOT GRANTED TO THE ENTERPRISE OF THE US. ACCORDI NG TO THIS DECISION IF THE PROVISIONS OF THE ACT CONFORM TO ARTICLE 14 OF THE CONSTITUTION OF INDIA, THEN DIFFERENTIAL TAX TREATMENT OF THE US ENTERPRISES WI LL NOT AMOUNT TO DISCRIMINATION. IN OTHER WORDS ARTICLE 26(2) OF THE DTAA WILL NOT COME TO THE AID OF THE ASSESSEE FOR GRANT OF THE DEDUCTION. IN THE COURSE OF HEARING OF THE APPEAL, A NUMBER OF ARGUMENTS WERE MADE BY BOTH THE SIDES. THE CASE OF THE LEARNED COUNSEL IS THAT MODEL CONVENTIONS HAVE BEEN REFERRED TO IN A NUMBER OF JUDGMENTS BY INDIAN COURTS, BEING AZADI B ACHAO ANDOLAN, VIJAY SHIP BREAKING CORPORATION ETC. THEREFORE, REFERENC E CAN USEFULLY BE MADE TO THE COMMENTARY ON OECD MODEL CONVENTION. HOWEVER , THE CRUX OF THE MATTER IS AS TO WHAT WILL CONSTITUTE TAXATION NOT BEING LEVIED LESS FAVORABLY. ACCORDING TO HIM, THE COMMENTARY MENTIONS THAT IN S UCH A CASE CALCULATION CAN BE MADE BY TREATING THE ASSESSEE AS NON-RESIDEN T AND THEREAFTER AS RESIDENT PERSON. IF THE TAX IS CALCULATED AT A HIGH ER AMOUNT BY TREATING HIM AS A NON-RESIDENT PERSON, IT CAN BE CONCLUDED THAT THE ASSESSEE HAS BEEN TAXED LESS FAVORABLY THAN THE RESIDENT PERSON CARRYING ON SAME ACTIVITIES. IT IS ALSO HIS CASE THAT THERE IS NO QUESTION OF THERE NOT BE ING A REASONABLE DISCRIMINATION, AS UNDERSTOOD IN ARTICLE 14, FOR TH E SIMPLE REASON THAT PROVISIONS OF THE ACT HAVE TO BE IN CONFORMITY WITH THE CONSTITUTION OF INDIA. IT IS NOT HIS CASE THAT SECTION 80 HHE OF THE IT AC T IS ULTRA-VIRES THE CONSTITUTION. HIS CASE IS THAT BY DINT OF ARTICLE 26 (2), THE ASSESSEE HAS TO BE TREATED AT PAR WITH THE RESIDENT PERSON CARRYING ON THE SAME ACTIVITIES. 8.3 HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE MAY NOW DEAL WITH THEM. IN SO FAR AS THE STATUS OF COMMENTARY ON OECD MODEL CONVENTION IS ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 15 CONCERNED, FOR INTERPRETATION OF DTAA, IT IS CLEAR FROM THE DECISIONS REFERRED TO BY THE LEARNED COUNSEL THAT THE COMMENTARY DOE S NOT LAY DOWN ANY BINDING PRECEDENT. THE COMMENTARY CONTAINS THE VIEW S OF THE AUTHOR ABOUT THE MODEL CONVENTION. THIS VIEW CAN BE TAKEN AS AN ARGUMENT BY THE ASSESSEE BUT FINALLY, IT WILL BE FOR THE COURTS O R THE QUASI JUDICIAL AUTHORITIES IN INDIA TO DECIDE AS TO WHETHER THE V IEWS EXPRESSED BY THE AUTHOR ARE IN CONFORMITY WITH THE INTENT AND PURPOS E OF THE DTAA OR NOT. IN THE CASE OF P. V. A. L. KALANDAGAN CHETTIAR (SUPRA) , THE HONBLE SUPREME COURT HAS HELD THAT TAXATION POLICY IS WITHIN THE P OWER OF THE GOVERNMENT AND SECTION 90 OF THE IT ACT ENABLES THE GOVERNMENT TO FORMULATE ITS POLICY THROUGH TREATIES ENTERED INTO BY IT AND EVEN SUCH T REATIES CONTAIN PROVISION FOR DECIDING FISCAL DOMICILE IN ONE STATE OR THE OTHER AND THUS PREVAIL OVER OTHER PROVISIONS OF THE INCOME-TAX ACT. IT WOULD BE UNNECESSARY TO REFER TO THE TERMS ADDRESSED IN THE OECD OR IN ANY OF THE DE CISIONS OF THE FOREIGN JURISDICTIONS. THIS CAN ALSO BE ILLUSTRATED BY EXAMINING THE CONTENTS OF PARAGRAPH NO. (2) OF ARTICLE 26 OF THE TREATY WI TH UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, WHICH PERMITS THE LEVY OF HIGHER RATE OF TAX ON THE PROFITS OF THE PE OF THAT COUNTRY I N INDIA. THIS PARAGRAPH IS REPRODUCED BELOW:- 2. THE TAXATION ON A PERMANENT ESTABLISHMENT WHICH AN ENTERPRISE OF A CONTRACTING STATE HAS IN THE O THER CONTRACTING STATE SHALL NOT BE LESS FAVOURABLY LEVIED IN THAT OTHER STATE THAN THE TAXATION LEVIED ON ENTER PRISES OF THAT OTHER STATE CARRYING ON THE SAME ACTIVITIES IN THE SAME CIRCUMSTANCES OR UNDER THE SAME CONDITIONS. THI S PROVISION SHALL NOT BE CONSTRUED AS PREVENTING A CONTRA CTING STATE FROM CHARGING THE PROFITS OF A PERMANENT ESTAB LISHMENT WHICH AN ENTERPRISE OF THE OTHER CONTRACTING STA TE HAS IN THE ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 16 FIRST-MENTIONED STATE AT A RATE OF TAX WHICH IS HIGHER THAN THAT IMPOSED ON THE PROFITS OF A SIMILAR ENTE RPRISE OF THE FIRST-MENTIONED CONTRACTING STATE, NOR AS BEING IN CONFLICT WITH THE PROVISIONS OF PARAGRAPH 4 OF ARTICLE 7 OF THIS CONVENTION. THEREFORE, IN OUR CONSIDERED VIEW IT WILL BE UNNECE SSARY FOR US TO REFER TO THE COMMENTARY ON OECD MODEL CONVENTION, DECISION OF AN Y FOREIGN JURISDICTION OR OTHER JURISDICTION IF THE PROVISION S CONTAINED IN THE DTAA ARE CAPABLE OF CLEAR AND UNAMBIGUOUS INTERPRETATION. A CCORDINGLY, WE CONSIDER IT UNNECESSARY TO EXAMINE THE COMMENTARY OR THE TEC HNICAL EXPLANATION FOR COMING TO A CONCLUSION IN THE MATTER. 8.4 THE LEARNED DR REFERRED TO THE BOARD CIRCULAR N O.621 DATED 19 TH DECEMBER, 1991, ISSUED AFTER INTRODUCTION OF SECTIO N 80 HHE IN THE INCOME- TAX ACT. REFERENCE IS MADE TO PARA NO. 34 OF THE CIRCULAR WHICH STATES THAT WITH A VIEW TO PROVIDE FISCAL INCENTIVES FOR EXPORT OF COMPUTER SOFTWARE, A NEW SECTION 80 HHE HAS BEEN INSERTED IN THE ACT FOR PROVIDING TAX CONCESSION SIMILAR TO THE EARLIER SECTION 80 HHC OF THE IT ACT. WE DO NOT FIND ANYTHING IN THE CIRCULAR WHICH COULD BE OF AID IN INTERPRETING ARTICLE 26(2). FURTHER, REFERENCE HAS BEEN MADE TO CIRCULAR NO.333 DATED 02 ND APRIL, 1992, ISSUED IN RESPECT OF TREATY OVERRIDE . THE HEADING OF THE CIRCULAR IS SPECIFIC PROVISION MADE IN DOUBLE TAXA TION AVOIDANCE AGREEMENT WHETHER IT WOULD PREVAIL OR GENERAL PROVISIONS CO NTAINED IN THE INCOME-TAX ACT. IN PARA 3, IT IS MENTIONED THAT WHERE DOUBLE TAXATION AVOIDANCE AGREEMENT PROVIDES FOR A PARTICULAR MODE OF COMPUTA TION OF INCOME, THE SAME SHOULD BE FOLLOWED IRRESPECTIVE OF THE PROVISI ONS IN THE INCOME-TAX ACT, WHICH IS THE BASIC LAW, I.E. THE INCOME-TAX AC T WILL GOVERN TAXATION OF ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 17 INCOME. THE CASE OF THE LEARNED DR ON THE BASIS OF THIS CIRCULAR IS THAT SINCE THERE IS NO PROVISION IN THE DTAA ANALOGOUS TO SECT ION 80 HHE OF THE IT ACT, THE ASSESSEE IS NOT ENTITLED TO THE DEDUCTION. WE ARE OF THE VIEW THAT THE INTERPRETATION PLACED ON THE CIRCULAR BY THE LEARNE D DR IS MISPLACED. THE REASON IS THAT THE WORDING OF ARTICLE 26(2) IS TO T HE EFFECT THAT IF A US ENTERPRISE IS CARRYING ON A BUSINESS IN INDIA, IT S HALL NOT BE TREATED LESS FAVORABLY THAN AN INDIAN ENTERPRISE CARRYING ON THE SAME BUSINESS FOR THE PURPOSE OF TAXATION. IT FOLLOWS AUTOMATICALLY THAT EXEMPTIONS AND DEDUCTIONS AVAILABLE TO INDIAN ENTERPRISES WOULD ALSO BE GRAN TED TO THE US ENTERPRISES IF THEY ARE CARRYING ON THE SAME ACTIVITIES. THU S, FOLLOWING THE DECISION IN THE CASE OF PVAL KULANDAGAN CHETTIAR (SUPRA), THER E IS NO FURTHER NEED TO DISCUSS THE CASE OF GRACEMAC CORPORATION (SUPRA). OTHERWISE ALSO, THE RULING RENDERED BY THE AUTHORITY FOR ADVANCING RULI NGS IS WITH REFERENCE TO THE FACTS OF THAT CASE AND IS NOT APPLICABLE TO ANY OTHER CASE AS A PRECEDENT. SIMILARLY, IT IS ALSO NOT NECESSARY TO GO INTO THE RULING IN THE CASE OF DASSAULT SYSTEM K.K. IN RE (2001) 229 CTR 105. 8.5 AT THIS STAGE, WE MAY ALSO EXAMINE THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF METCHEM CANADA INC.(SUPRA). THE CRUX OF THE DECISION IS THAT RESTRICTION PLACED ON DEDUCTION OF HEAD OFFICE EXPE NSES UNDER SECTION 44C WILL NOT BE APPLICABLE IN THE CASE OF A CANADIAN CO . IN VIEW OF ARTICLE 24 CONTAINED IN THE TREATY BETWEEN INDIA AND CANADA. T HE DECISION HAS BEEN ARRIVED AT FOR THE REASON THAT ARTICLE 24 OF THE TR EATY WILL HAVE PRECEDENCE OVER ARTICLE 7, WHICH CONTAIN DEDUCTIONS OF GENERAL NATURE, AND IF PROVISIONS IN THE ACT COME IN CONFLICT WITH THE TREATY, THE PR OVISIONS OF THE ACT ARE APPLICABLE ONLY TO THE EXTENT THEY ARE MORE BENEFIC IAL TO THE ASSESSEE; IF NOT, ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 18 THE PROVISIONS OF THE TREATY SHALL PREVAIL. THE CAS E OF THE LD. DR IS THAT THIS DECISION HAS BEEN RENDERED UNDER SECTION 44C AND, THEREFORE, IT IS DISTINGUISHABLE. TO OUR MIND, THE DECISION HARMONI SES PROVISIONS OF THE TREATY AND THE PROVISIONS CONTAINED IN SECTION 44C OF THE ACT. SIMILAR EXERCISE IS INVOLVED IN THIS CASE AS THE PROVISIONS OF THE ACT AND THE TREATY ARE REQUIRED TO BE INTERPRETED IN A HARMONIOUS MANN ER. THEREFORE, THE RATIO OF THIS DECISION IS APPLICABLE TO THE FACTS OF THE CASE BEFORE US. 8.6 THERE IS ALSO A DISPUTE REGARDING THE WORDS SA ME ACTIVITIES USED IN ARTICLE 26. THE CASE OF THE LD. COUNSEL IS THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF EXPORT OF SOFTWARE IN THE SAME MANNER I N WHICH A NUMBER OF INDIAN ENTERPRISES ARE EXPORTING SOFTWARE. THE FACT THAT THE ASSESSEE HAS BEEN ALLOWED TO EXPORT SOFTWARE SHOWS THAT THE BUSINES S DOES NOT FALL IN THE PROHIBITED CATEGORY. ACCORDINGLY, THE ASSESSEES CA SE HAS TO BE COMPARED WITH THE CASE OF AN INDIAN ENTERPRISE ENGAGED IN TH E BUSINESS OF EXPORTING SOFTWARE. IF THAT IS DONE, THE ASSESSEE WOULD BE EN TITLED TO DEDUCTION UNDER SECTION 80HHE ON THE SAME FOOTING AND IN THE SAME M ANNER AS THE DEDUCTION IS ADMISSIBLE TO A RESIDENT ASSESSEE. ON THE OTHE R HAND, THE CASE OF THE LD. DR IS THAT VARIOUS DEDUCTIONS UNDER SECTION 80HHE, 10A OR 10B ARE AREA SPECIFIC OR INDUSTRY SPECIFIC. HOWEVER, HE WAS NOT ABLE TO CARRY THIS ARGUMENT ANY FURTHER. THE CASE OF THE LD. COUNSEL I S THAT THE PROVISION CONTAINED IN SECTION 80HHE IS INDUSTRY SPECIFIC A ND THE ASSESSEE IS NOT PRECLUDED IN ANY MANNER FROM CONDUCTING THIS BUSINE SS IN INDIA. WE AGREE WITH THIS VIEW AS NO DEBATE SEEMS TO BE FEASIBLE IN THIS REGARD. THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSEE IS CARRYING ON THE ACTIVITIES OF EXPORT OF SOFTWARE. AN INDIAN COMPANY OR ANY OTHER RESIDENT PERSON CARRYING ON THE ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 19 BUSINESS OF EXPORT OUT OF INDIA OF COMPUTER SOFTWAR E OR ITS TRANSMISSION FROM INDIA TO A PLACE OUTSIDE INDIA BY ANY MEANS IS ENTI TLED TO DEDUCTION U/S 80HHE. THEREFORE, THE DEDUCTION ADMISSIBLE TO AN IN DIAN COMPANY OR A PERSON RESIDENT IN INDIA WILL BE ALLOWABLE TO THE A SSESSEE ALSO. 9. BEFORE PARTING, IT MAY BE MENTIONED THAT THE DEC ISION IN THE CASE OF AUTOMATED SECURITIES CLEARANCE INC. (SUPRA) IS NOT IN CONFORMITY WITH THE PROVISIONS CONTAINED IN ARTICLE 26(2). IT APPEARS T HAT THE BENCH UNNECESSARILY CONSIDERED THE COMMENTARY AND THE TECHNICAL EXPLANA TION. THE PLAIN MEANING OF THE PROVISIONS WAS NOT CONSIDERED. THE BENCH LAID GREATER STRESS ON THE HEADING NON-DISCRIMINATION RATHER T HAN ON THE CONTENTS OF PARAGRAPH (2) OF ARTICLE 26, WHICH ARE CLEAR AND UN AMBIGUOUS. IT IS FOR THIS REASON THAT THE BENCH CONSIDERED ARTICLE 14 OF THE CONSTITUTION OF INDIA TO EXAMINE WHETHER REFUSAL TO GRANT DEDUCTION WOULD A MOUNT TO NON- DISCRIMINATION. CORRECT POSITION IS THAT THERE IS N O DISCRIMINATION WHEN WE TEST THE CONTENTS OF SECTION 80HHE ON THE BASIS OF ARTICLE 14 OF THE CONSTITUTION. BUT THAT IS NOT THE QUESTION BEFORE U S AND THAT WAS ALSO NOT THE QUESTION BEFORE THE DIVISION BENCH. THE QUESTION H ERE IS WHETHER PROVISIONS CONTAINED IN PARAGRAPH (2) OF ARTICLE 26 WILL OVER RIDE THE DISTINCTION MADE BETWEEN THE RESIDENT PERSONS ON ONE HAND AND THE NA TIONALS OF THE U.S.A. AND A NON-RESIDENT ON THE OTHER. ON THE FACTS OF THIS CASE, SUCH A DISTINCTION COULD NOT HAVE BEEN MADE. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE DIVISION BENCH ERRED IN COMING TO THE CONCLUSION TH AT THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION UNDER SECTION 80 HHE. ITA NOS. 1808& 1978/AHD/2006 & ITA NO. 3111/AHD/2007 ASSTT. YEARS 2002-03 TO 2004-05 20 10. IN THE RESULT, IT IS HELD THAT THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 80HHE ON THE SAME FOOTING AS IT IS AVAILABL E TO A RESIDENT PERSON IN INDIA. 10.1 THUS, THE APPEALS FOR ASSESSMENT YEARS 2002-03 & 2003-04 ARE ALLOWED AND THE APPEAL FOR ASSESSMENT YEAR 2004-05 IS PARTLY ALLOWED. 10.2 THIS ORDER WAS PRONOUNCED IN OPEN COURT ON 04 .03.2011. SD/- SD/- SD/- (K.G. BANSAL) (I.C. SUDHIR) (D. MANMOHAN) ACCOUNTANT MEMBER JUDICIAL MEMBER VICE PRESIDENT AHMEDABAD. DATED : 04.03.2011 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD