M/S. STATE BANK OF ARURITIUS LTD., V. THE DY DIT (IT) RG.2(1),

ITA 9606/MUM/2004

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1246 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Assessment Year: 1998-1999
• Appeal Filed On: 30-12-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K VED
• Assessee Lawyers: NARENDRA SINGH
• Keywords: Double taxation relief; Retrospective amendment; Permanent establishment; Advance ruling; Capital expenditure
• Section: 143(3); 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI P.M. JAGTAP (AM) AND SMT. ASHA VIJAYAR AGHAVAN (JM) ITA NO. 9606/MUM/2004 ASSESSMENT YEAR-1998-99 STATE BANK OF MAURITIUS LTD., 101, RAHEJA CENTRE, FREE PRESS JOURNAL ROAD, NARIMAN POINT, MUMBAI-400 021 PAN - AABCS 4465K VS. THE DY. DIRECTOR OF INCOME TAX, (IT) RANGE 2(1), SCINDIA HOUSE, BALLARD ESTATE, MUMBAI-400 038 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI PERCY J. PARDIWALA SHRI NISHANT THAKKAR & SHRI N.K. VED RESPONDENT BY: SHRI NARENDRA SINGH O R D E R PER SMT. ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DT. 10.9.2004 PASSED BY THE LD. CIT(A)-XXXI, MUMBAI FOR THE ASSESSMENT YEAR 1998-99. 2. THERE IS A DELAY IN FILING THE MEMO OF APPEAL BY 19 DAYS. THE REASON FOR DELAY IN FILING THE SAID APPEAL HAS BEEN SUBMITTED IN THE FORM OF AFFIDAVIT AND THE ASSESSEE IS REQUESTING FOR CON DONATION OF DELAY. THE ASSESSEE PLEADS THAT THE REASON FOR DELAY IN FILING THE MEMO OF APPEAL WAS ON ACCOUNT OF DELAY IN GETTING INSTRUCTIONS FRO M THE HEAD OFFICE. WE CONDONE THE DELAY AND ADMIT THE APPEAL. 3. THE ASSESSEE IS A FOREIGN BANK INCORPORATED IN MAURITIUS AND HAVING INDIAN OPERATIONS THROUGH ITS BRANCH IN MUMB AI. THE ASSESSING ITA NO. 9606/M/04 2 OFFICER COMPLETED THE ASSESSMENT U/S. 143(3) DT. 17 .1.2001 OF THE I.T. ACT WHEREIN TOTAL INCOME WAS ASSESSED AT RS. 12,05 ,28,310/-. WHILE MAKING THE ASSESSMENT, THE AO HAD MADE CERTAIN ADDITIONS/DISALLOWANCES. 4. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE T HE LD. CIT(A). BEFORE THE LD. CIT(A), ASSESSEE RAISED THE FOLLOWIN G GROUNDS: 1. THE AO HAS ERRED IN APPLYING THE RATIO OF THE RU LING GIVEN BY THE AUTHORITY FOR ADVANCE RULINGS (AAR) IN THE CASE OF SOCIETE GENERALE TO THE APPELLANT BANK AND IN LEVYING TAX ON THE APPELLANT BANK AT THE RATE APPLI CABLE TO NORMAL NON-RESIDENT COMPANIES. 5. BEFORE THE LD. CIT(A), ASSESSEE SUBMITTED AS FOL LOWS: THE PROVISIONS OF SEC. 245-S(1) OF THE I.T. ACT, 1 961, AN ADVANCE RULING SHALL BE BINDING ONLY ON THE APPLICA NT WHO HAD SOUGHT IT AND IN RESPECT OF THE TRANSACTION IN RELA TION TO WHICH THE RULING HAD BEEN SOUGHT. THE ASSESSEE FURTHER SU BMITTED THAT CONSIDERING THE FACT THAT ARTICLE 26(2) OF THE INDO-FRENCH DTAA AND ARTICLE 24(2) OF THE INDO-MAURITIAN DTAA A RE DIFFERENT FROM EACH OTHER, THE ADVANCE RULING IN TH E CASE OF SOCIETE GENERALE IS NOT APPLICABLE TO THE APPELLANT BANK. THE ASSESSEE SUBMITTED THAT THE AO BE DIRECTED TO LEVY TAX ON THE ASSESSEE AT THE RATE APPLICABLE TO INDIAN COMPANIES IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTEREST VIZ @ 35%. 6. THE LD. CIT(A) CONFIRMED THE AOS ACTION OF TAXI NG THE ASSESSEES INCOME @ 48% APPLICABLE TO NORMAL NON-RESIDENT COMP ANIES. 7. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE U S. THE LD. COUNSEL FOR THE ASSESSEE SHRI PARDIWALA BROUGHT TO OUR NOTICE THAT THE ORDER OF THE ITAT L BENCH IN ITA NO. 525/M/2001 F OR A.Y. 1997-98 WHEREIN SIMILAR ISSUE HAD BEEN CONSIDERED. THE REL EVANT PORTION IS EXTRACTED HEREIN UNDER: ITA NO. 9606/M/04 3 WE HAVE HEARD BOTH THE PARTIES. IN REGARD TO GROUN D NO. 1, WE FIND THAT THE ASSESSEE HAD CLAIMED THAT IT SHOULD BE TAXED AT THE RATE OF 40% AND THIS CLAIM WAS MADE BY WAY OF FOLLOWING NOTE IN THE RETURN: IN VIEW OF ARTICLE 24 OF THE AGREEMENT FOR AVOIDAN CE OF DOUBLE TAXATION BETWEEN INDIA AND MAURITIUS THE ASSESSEE SUBMITS TH AT ITS STATUS IS EQUIVALENT TO DOMESTIC COMPANY AS DEFINED IN SECT ION 2(22A) OF THE INCOME-TAX ACT, 1961 AND HENCE THE TAX RATE OF 40% WILL BE APPLICABLE TO IT AS AGAINST THE NORMAL TAX OF 55% APPLICABLE T O OTHER NON-RESIDENT COMPANIES AND SURCHARGE SHALL NOT BE PAYABLE BY IT AS IT IS A NON-RESIDENT COMPANY AS DEFINED IN SECTION 6(3). HOWEVER, THE ASSESSING OFFICER WAS OF THE VIEW THAT IN VIEW OF THE RULING OF AUTHORITY FOR ADVANCE RULINGS IN A.A.R. NO. 362 OF 1997 IN THE CASE OF SOCIETE GENERALE WHEREIN IT WAS HELD THAT A NON-DO MESTIC COMPANY HAS TO PAY TAXES AT THE GIVEN RATE IN THE FINANCE ACT. ACCORDINGLY, HE APPLIED THE TAX RATE OF 55%. ON APPEAL, THE CIT(A) OBSERVED THAT THERE WAS NO LI MITATION OR RESTRICTION TO THE NON-DISCRIMINATION PROVISION PROVIDED IN D TA AGREEMENT AND ONCE SOME PROVISION WAS DISCRIMINATORY THEN THE SAM E CANNOT BE APPLIED BECAUSE PROVISION OF DTAA HAVE TO PREVAIL AND THERE FORE, ACCORDING TO HIM THE COMPANY COULD BE TAXED ONLY AT 40%. WE CONSIDERED THE ARGUMENTS OF BOTH THE PARTIES IN DETAIL AND FIND THAT EARLIER THERE WERE CERTAIN DECISIONS IN F AVOUR OF THE ASSESSEE WHEREIN IT WAS MAINLY OBSERVED THAT SINCE THE PROVI SIONS REGARDING LEVY OF HIGHER TAXATION WAS LESS FAVOURABLE TO THE ASSESSEE COVERED BY DTAA AND THEREFORE, PROVISIONS OF DTAA WOULD OVERRIDE TO THE NORMAL PROVISIONS OF THE ACT AND HENCE THESE TYPES OF ASSESSEES WOULD BE CHARGEABLE AT THE RATES PRESCRIBED FOR DOMESTIC COMPANIES. TO CURTAIL THIS CONTROVERSY EXPLANATION 1 WAS INSERTED TO SECTION 90 BY THE FIN ANCE ACT 2001 WITH RETROSPECTIVE EFFECT FROM 1.4.1962 WHICH READS AS U NDER: FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT THE CHARGE OF TAX IN RESPECT OF A FOREIGN COMPANY AT A RATE HIGHER THAN THE RATE AT WHICH A DOMESTIC COMPANY IS CHARGEABLE, SHALL NOT BE REGARDED AS LESS FAVOURABLE CHARGE OR LEVY OF TAX I N RESPECT OF SUCH FOREIGN COMPANY. THEREFORE, NOW IT IS CLEAR THAT TAX RATES PRESCRIBE D IN THE FINANCE ACT HAS TO BE APPLIED EVEN IF AN ASSESSEE COMPANY IS CO VERED BY THE PROVISIONS OF DTAA. FURTHER SIMILAR VIEW WAS TAKEN IN THE CASE OF ITA NO. 9606/M/04 4 CHOHUNG BANK V. DY. DIRECTOR OF INCOME-TAX (INT.TAX ATION)-1(2), MUMBAI (2006) 102 ITD 45 (MUM). IN THAT CASE, IT WAS HEL D AS UNDER: IT IS ONE THING TO SAY THAT PROVISIONS OF AGREEMEN T WILL PREVAIL OVER THE PROVISIONS OF THE INCOME-TAX ACT IN SO FAR AS ASSESSABILITY OF AN ITEM IS CONCERNED AND IT IS A DIFFERENT THING TO SAY THAT THE AGREEMENT (DTAA) WILL ALSO CONTROL THE APPLICABILIT Y OF THE FINANCE ACT WHICH PROVIDES THE RATES FOR DIFFERENT ASSESSABLE E NTITIES. THE CHARGING OF THE ASSESSEE AT HIGHER RATE APPLICA BLE TO NON- DOMESTIC COMPANIES WAS NOT HIT BY NON-DISCRIMINATIO N CLAUSE OF ARTICLE 25 OF THE DTAA WITH KOREA BECAUSE CLAUSE (2 ) OF ARTICLE 25 COULD NOT BE CONSTRUED TO MEAN THAT NO TAX COULD BE LEVIED ON A FOREIGN COMPANY AT A RATE HIGHER THAN THE RATE PAYA BLE BY INDIAN COMPANY. FURTHER, THE DTAA IN GENERAL DOES NOT PRE VAIL OVER THE FINANCE ACT; HENCE, OVER THE TAX RATES. SECTION 90 DOES NOT PROVIDE SO. HOWEVER, WHEREVER DTAA HAS PROVIDED THE TAXATI ON OF A PARTICULAR CATEGORY OF INCOME AT CERTAIN RATES, THE N CHARGING OF THAT INCOME AT DIFFERENT RATES AS PER THE INCOME-TAX ACT MAY COME IN CONFLICT WITH DTAA AND, HENCE, THE TAXES OVER THAT CATEGORY OF INCOME WILL BE LEVIED AT THE RATES SO PROVIDED IN DTAA. B UT, WHERE NO SUCH RATES ON AN INCOME OR A CATEGORY OF INCOME ON THE S TATUS OF AN ASSESSEE HAVE BEEN PRESCRIBED IN DTAA, THEN THERE C ANNOT BE ANY CONFLICT WITH THE INCOME-TAX ACT. THEREFORE, DTAA AS SUCH WOULD NOT PREVAIL OVER THE INCOME-TAX ACT, AND HENCE, RATES AS APPLICABLE TO DOMESTIC COMPANIES CANNOT BE APPLIED TO NON-DOMESTI C COMPANIES. IN THE INSTANT CASE, NO RATES FOR CHARGING NON-DOME STIC COMPANIES HAVE BEEN PROVIDED IN DTAA WITH KOREA. HENCE, IT CO ULD NOT BE SAID THAT DTAA WITH KOREA WAS IN CONFLICT WITH THE INCOM E-TAX ACT. ARTICLE 25(1) PROVIDES THAT CONTRACTING STATES WOUL D NOT DISCRIMINATE NATIONALS OF OTHER CONTRACTING STATE IN THE MATTER OF TAXATION, AND IF THAT NATIONAL IS WORKING UNDER SAME CIRCUMSTANCES, THEN TAXATION ON SUCH ENTERPRISE WOULD NOT BE LESS FAVOURABLE THAN THE TAXATION ON THE ENTERPRISES OF THAT OTHER STATE . BASED ON ARTICLE 25(1) AND ARTICLE 25(2), THE ASSESSEE SUBMITTED THA T IT WAS DISCRIMINATION THAT DOMESTIC COMPANIES WERE SUBJECT ED TO LOWER RATES WHEREAS THE NON-RESIDENT COMPANY (PE) IN INDIA OF F OREIGN BANK WAS SUBJECTED TO HIGHER RATES AND THAT IT WAS DISCRIMI NATION TO TAX THE PE OF FOREIGN BANK AT HIGHER RATES WHEN THE INDIAN BAN K AND THE BRANCH OF FOREIGN BANK ACTING AS PE WERE ENGAGED IN SOME A CTIVITIES. HOWEVER, ARTICLE 25(1) CONTAINS SOME IMPORTANT WORD S/PHRASES WHICH TESTIFY AS TO WHEN AND UNDER WHAT CIRCUMSTANCES THI S NON- DISCRIMINATION CLAUSE WOULD BE APPLICABLE. ONE IS NATIONALS AND THE OTHER IS IN THE SAME CIRCUMSTANCES. THE MUMBAI B ENCH OF THE TRIBUNAL IN THE CASE OF CREDIT LLYONNAIS V. DY CIT [2005] 94 ITD 401 ITA NO. 9606/M/04 5 CONSIDERED THE CONCEPT OF NATIONAL AND IN THE SA ME CIRCUMSTANCES AND IN THE SAME CIRCUMSTANCES AND HELD THAT WHEN DIFFERENT TAX TREATMENTS ARE BEING GIVEN TO THE ASSESSEE ON THE B ASIS OF CRITERION CONNECTED WITH REQUIREMENTS REGARDING RESIDENCE OF THE TAX-PAYER, IT WOULD NOT BE COVERED BY THE SCOPE OF NON-DISCRIMINA TION CLAUSE. FURTHER, THE CONCEPT OF DISCRIMINATION BASED ON NAT IONALITY WAS ALSO DISCUSSED IN EXPLANATORY NOTES ON UN MODEL CONVENTI ON FROM WHICH THE LANGUAGE IN MOST OF DTAAS INCLUDING THE INDO K OREAN DTAA AND INDO-FRENCH DTAA HAS BEEN BORROWED. THE RELEVANT AR TICLE IN UN MODEL CONVENTION IS ARTICLE 24. THE NON-DISCRIMINA TION CLAUSE IN ARTICLE 24(1) OF UN MODEL CONVENTION AND SO THE ART ICLE 25(1) OF INDO- KOREAN DTAA PROVIDED THAT THE TERM NATIONAL IN AR TICLE 3(G) OF INDO KOREAN DTAA SHOWED THAT THOSE WHO MAY BE ENTITLED T O INVOKE ARTICLE 25 OF INDO KOREAN DTAA ARE INDIVIDUALS (POSSESSING THE NATIONALITY OF A CONTRACTING STATE), LEGAL PERSONS, PARTNERSHIPS A ND ASSOCIATIONS. FURTHER, FROM ARTICLE 3(G) OF INDO-KOREAN DTAA, IT APPEARS THAT CORPORATE BODIES ARE NOT COVERED IN THE DEFINITION OF NATIONALS. SINCE, LEGAL PERSON COMES SIDE BY SIDE WITH INDIVIDUAL I N THE ABOVE DEFINITION, THEN FROM THE PRINCIPLE OF NOCITUR-A-SO CCII, THE LEGAL PERSON WOULD NOT BE A CORPORATE BODY. FURTHER, O THER ENTITY AS USED IN ARTICLE 3(G) WOULD ALSO NOT INCLUDE CORPORATE B ODIES, UNLESS THEY ARE DECLARED NATIONALS UNDER THE LAW OF THAT STAT E. SIMILAR VIEWS WERE EXPRESSED BY PROFESSOR, DR. KLAUS VOGEL, UNIVE RSITY OF MUNICH, IN HIS TREATISE ON DOUBLE TAXATION CONVENTION THIRD EDITION (BEING A COMMENTARY TO THE OCED UN US MODEL CONVENTION FOR THE DTAA ON INCOME AND CAPITAL) ON PAGE 1291, [PARAS 8,8.1, 8.2 AND 8.3] PRESUMING THAT THE ASSESSEE COMPANY WAS A NATIONAL OF THE CONTRACTING STATE (I.E. KOREA) IT STILL COULD NOT B E SAID THAT IT WAS FUNCTIONING IN INDIA UNDER THE SAME CIRCUMSTANCES L IKE A DOMESTIC COMPANY. ANOTHER DISTINCTION BETWEEN DOMESTIC COMP ANY AND NON- DOMESTIC COMPANY IS THE DECLARATION OF DIVIDEND OR MAKING ARRANGEMENT THEREFORE. INDIAN DOMESTIC COMPANY HAS TO DECLARE DIVIDEND OR MAKE PRESCRIBED ARRANGEMENT THEREFORE. BUT THERE IS NO SUCH THING BINDING UPON THE NON-DOMESTIC COMPANY, A S THEY DO NOT HAVE THE SHAREHOLDERS IN INDIA. THIRDLY, THE DOMES TIC BANKING COMPANY HAS TO ABIDE BY THE ADDITIONAL CONDITIONS I MPOSED BY RESERVE BANK OF INDIA ABOUT ADVANTAGES TO AGRICULTU RE OR TO WEAKER SECTIONS OF SOCIETY. THE PERCENTAGE OF ADVANTAGES TO PRIORITY SECTOR IS MORE IN CASE OF DOMESTIC BANKING COMPANY. HENCE, I T COULD NOT BE SAID THAT DOMESTIC BANKING COMPANY AND NON-DOMESTIC COMPANY ARE WORKING UNDER THE SAME CIRCUMSTANCES [PARA 9]. THEREFORE, DOMESTIC BANKING COMPANY AND NON-DOMESTI C BANKING COMPANY DO NOT FUNCTION UNDER SAME CIRCUMS TANCES AND, ITA NO. 9606/M/04 6 HENCE, DISCRIMINATION CLAUSE IN ARTICLE 25 OF THE I NDO-KOREAN DTAA IS NOT APPLICABLE [PARA 9.1] SECTION 2(22A) SHOWS THAT NOT ONLY INDIAN COMPANY B UT ALSO ANY OTHER COMPANY CAN BE TERMED AS DOMESTIC COMPANY , PROVIDED IT HAS MADE PRESCRIBED ARRANGEMENT FOR DISTRIBUTION OF DIVIDEND (INCLUDING DIVIDEND ON PREFERENCE SHARES) PAYABLE O UT OF INCOME-TAX. SECTION 2(23A) DEFINES A FOREIGN COMPANY AS A COM PANY, WHICH IS NOT A DOMESTIC COMPANY. THE NON-DISCRIMINATION CLAUSE CAN BE INVOKED AMONG THE MEMBERS OF THE SAME SET OF PERSONS. THOSE DOMESTI C COMPANIES, WHICH BELONG TO ONE SET AND THOSE WHICH ARE NOT DOM ESTIC COMPANIES, FALL INTO OTHER SET. A NON-RESIDENT COM PANY WHO FALLS IN THE DEFINITION OF DOMESTIC COMPANY BY VIRTUE OF I TS HAVING MADE PRESCRIBED ARRANGEMENT FOR DISTRIBUTING DIVIDEND CA NNOT BE DISCRIMINATED. FROM THIS DEFINITION ALSO, ONE DOES NOT FIND ANY CASE OF DISCRIMINATION AS INDIAN DOMESTIC COMPANY AND NON-R ESIDENT COMPANY FALL IN TWO DIFFERENT SETS. WITHIN THE GROU P (OR SET) THERE SHOULD NOT BE ANY DISCRIMINATION ON THE BASIS OF NA TIONALITY [PARAS 10.1 AND 10.2]. EXPLANATION WAS INSERTED IN SECTION 90 WITH RETROSP ECTIVE EFFECT FROM 1.4.1962. IT CLEARLY PROVIDES THAT CHARGING O F A FOREIGN COMPANY AT A HIGHER RATE WILL NOT BE REGARDED AS LESS FAVOU RABLE AS COMPARED TO DOMESTIC COMPANY. THE DEPARTMENT ALSO ISSUED A CIRCULAR NO. 14 OF 2001 TO EXPLAIN THE EFFECT OF THE EXPLANATION. T HE EXPLANATION INTRODUCED IN 2001 BY THE FINANCE ACT, 2001 WITH RE TROSPECTIVE EFFECT FROM 1.4.1962 IS NO WAY IN CONFLICT WITH THE DTAA W ITH KOREA. THEREFORE, THE AMENDMENT MADE IN SECTION 90 BY WAY OF INSERTION OF EXPLANATION IS APPLICABLE INSOFAR AS I T IS NOT IN CONFLICT WITH THE PROVISIONS OF DTAA [PARAS 11.1 AND 11.2]. THEREFORE, THERE IS NO CONFLICT OF THE EXPLANATION TO SECTION 90 WITH THE DTAA WITH KOREA, AS THE AREAS OF OPERATION OF EXPLANATION TO SECTION 90 AND ARTICLE 25(1) ARE IN DIFFERENT FIELD S. EXPLANATION CLARIFIES THE POSITION AS IT ALWAYS STOOD; DTAA WITH KOREA DI D NOT PRESCRIBE ANY SEPARATE OR SPECIFIC RATE OR ANY PARTICULAR CRI TERIA TO BE APPLIED ON INCOME OF KOREAN COMPANIES ASSESSED IN INDIA. THE E XPLANATION DOES NOT DEAL WITH ASSESSABILITY OF ANY ITEM OF INCOME, AND EVEN IF ANY CONFLICT IS ENVISAGED, STILL THEN THE PROVISION OF DTAA WITH KOREA WOULD YIELD TO LAW PASSED INDEPENDENTLY BY THE PARL IAMENT [PARA 11.3]. ITA NO. 9606/M/04 7 THE WORDS LESS FAVOURABLE HAVE NOT BEEN DEFINED E ITHER IN THE DTAA WITH KOREA OR IN THE INCOME-TAX ACT. THEREFORE , IT COULD NOT BE CONSTRUED TO MEAN THAT LEVY OF HIGHER RATE ON THE I NCOME OF NON- DOMESTIC COMPANY WOULD BE LESS FAVOURABLE. ARTICL E 25(2), AS PER MODEL CONVENTION, IS DESIGNED TO CURB THE DISCRIMIN ATION IN THE TREATMENT OF PE AS COMPARED WITH RESIDENT ENTERPRIS ES BELONGING TO THE SAME SECTOR OF ACTIVITIES. EVEN THOUGH, BROADLY INDIAN DOMESTIC BANK AND PE OF THE ASSESSEE BANK WERE ENGAGED IN BA NKING ACTIVITIES BUT THE ACTIVITIES WERE NOT THE SAME; THEY MIGHT ON LY BE SIMILAR. SECONDLY, CO-OPERATIVE SOCIETIES ARE CHARGED WITH D IFFERENT RATES LOOKING TO THEIR SOCIAL INVOLVEMENT AND UPLIFTMENT OF POOR AND THE PROSPECTS OF THEIR BETTERMENT THOUGH CO-OPERATIVE S ECTOR. CLAUSES (6), (1) AND (8) OF MODEL CONVENTIONS ON ARTICLE 25 (2) PROVIDE THAT IT WILL NOT BE A DISCRIMINATION, IF THE CONTRACTING ST ATE PROVIDES SPECIAL PRIVILEGE TO PUBLIC BODIES, OR WHOSE ACTIVITIES ARE PERFORMED FOR PUBLIC BENEFIT, OR TO ITS OWN BODIES BEING INTEGRAL PART O F THE STATE, ETC. THEREFORE, IT WAS NOT ACCEPTABLE TO COMPARE CO-OPER ATIVE SOCIETIES WITH NON-RESIDENT BANKING COMPANIES UPON WHOM THERE IS NO SUCH SOCIAL BURDEN. FURTHER, EXPLANATION TO SECTION 90, SO INTRODUCED WITH EFFECT FROM 1.4.1962 IS AN INTEGRAL PART OF SECTION . IT CLEARLY LAYS DOWN THAT CHARGING OF FOREIGN COMPANY AT A HIGHER RATE WOULD NOT BE TREATED AS LESS FAVOURABLE [PARA 12]. IN VIEW OF THE ABOVE DECISION AND THE AMENDED PROVI SION, WE SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND DECIDE THE ISSU E IN FAVOUR OF THE REVENUE. 8. RESPECTFULLY FOLLOWING THE SAME, WE ALLOW ASSESS EES APPEAL ON THIS GROUND. 9. THE SECOND GROUND WHICH WAS AGITATED BEFORE THE AO IS REGARDING DISALLOWANCE OF CAPITAL EXPENDITURE OF PURCHASE OF FIXED ASSETS AMOUNTING TO RS. 35,48,153/-. 10. BEFORE THE LD. CIT(A) THE ASSESSEE RAISED THE F OLLOWING GROUND: THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLO WANCE MADE BY THE AO IN RESPECT OF THE EXPENDITURE OF RS. 35,48,153/- INCURRED ON PURCHASE OF FIXED ASSETS. ITA NO. 9606/M/04 8 11. BEFORE THE LD. CIT(A), ASSESSEE SUBMITTED AS FO LLOWS: CONSIDERING THE SPECIFIC PROVISIONS OF ARTICLE 7(3 ) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND MAURITIUS, THE TOTAL EXPENDITURE INCURRED BY IT FOR THE PURPOSES OF ITS BUSINESS IS DEDUCTIBLE IN COMPUTING ITS TO TAL INCOME AND THE CIT(A) OUGHT TO HAVE DIRECTED THE AO ACCORDINGL Y. HE FURTHER SUBMITTED THAT THE AO BE DIRECTED TO DELETE THE DISALLOWANCE TO MADE BY HIM AND RECOMPUTE ITS TOTA L INCOME AND TAX THEREON ACCORDINGLY. 12. THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO IN RESPECT OF THE EXPENDITURE OF RS. 35,48,153/-INCUR RED ON PURCHASE OF FIXED ASSETS. 13. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE ISSUE IS COVERED BY THE DECISION OF THE MUMBAI TRIBUNAL IN ITA NO. 7 14/M/01 FOR A.Y. 1997-98 WHEREIN IT HAS BEEN HELD AS FOLLOWS: WE FIND THAT IDENTICAL ISSUE CAME UP BEFORE THE TRI BUNAL IN THE CASE OF THE SAME ASSESSEE IN ITA NO. 4147/MUM/98 AND TH E SAME WAS DECIDED VIDE PARA 5, WHICH READS AS UNDER: WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND FIND OURSELVES IN COMPLETE AGREEMENT WITH THE FINDINGS O F THE LEARNED CIT(A) IN THIS REGARD. THE PROFITS MENTI ONED IN DTAA ARE COMMERCIAL PROFITS WHICH WILL HAVE TO BE COMPUT ED IN ACCORDANCE WITH THE PROVISIONS AND SUBJECT TO THE L IMITATION OF THE TAXATION LAWS OF THE CONTRACTING STATE IN WHICH PERMANENT ESTABLISHMENT IS SITUATED. THE LEARNED CIT(A) HAS CORRECTLY COME TO A CONCLUSION THAT IN ARRIVING AT THE PROFIT S AND GAINS OF BUSINESS OF THE PERMANENT ESTABLISHMENT COMMERCIAL PRINCIPLES CANNOT BE IMPORTED. WE AGREE WITH HIM A ND DO NOT FIND ANY INFIRMITY IN THE ORDER WHICH CALLS FOR OUR INTERFERENCE. ITA NO. 9606/M/04 9 RESPECTFULLY FOLLOWING THE ABOVE, WE DISMISS THE G ROUND RAISED BY THE ASSESSEE. 14. THE THIRD ISSUE IS WITH RESPECT TO DISALLOWANCE OF DONATION OF RS. 15,000/-. 15. BEFORE THE LOWER AUTHORITIES, THE ASSESSEE SUBM ITTED THAT THE DONATION IN QUESTION HAS BEEN MADE TO STANISLAUS HI GH SCHOOL AT RS. 10,000/- AND MAURITIAN STUDENTS ASSOCIATION AT RS. 5,000/-. THE ASSESSEE CONTENDED THAT EVEN THOUGH THE PAYMENTS IN QUESTION HAS BEEN REFERRED TO AS DONATION IN ITS BOOKS , IN LAW AND I N SUBSTANCE THE PAYMENTS IN QUESTION ARE NOT DONATIONS AS SUCH, BUT EXPENDITURE ESSENTIAL AND NECESSARY FOR THE PURPOSE OF ITS BUSI NESS AND HENCE DEDUCTIBLE AS SUCH. 16. THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO. 17. ON FURTHER APPEAL BEFORE US THE LD. COUNSEL FO R THE ASSESSEE RELIED ON THE DECISION IN THE CASE OF MAHINDRA & MA HINDRA VS CIT 261 ITR 501 WHEREIN IT HAS BEEN HELD AS FOLLOWS: (IV) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE DONATION FOR RS. 92,500 TO AN EDUCATION SOCIETY WAS ALLOWABLE AS EXPENDITURE INCURRED FOR B USINESS PURPOSES ? ANSWER : THE TRIBUNAL HAS GIVEN A FINDING OF FACT WHICH SHOW S THAT MAHINDRA AND MAHINDRA HAD PAID RS. 92,500 TO AN EDUCATION SOCIET Y WHICH RUNS THE SCHOOL IN WHICH CHILDREN OF THE EMPLOYEES OF TH E COMPANY STUDY. WE DO NOT WISH TO INTERFERE WITH THIS FINDING OF FA CT. THE TRIBUNAL HAS HELD THAT THE AMOUNT SHOULD BE ALLOWED AS BUSIN ESS ITA NO. 9606/M/04 10 EXPENDITURE BECAUSE IT WAS INCURRED PREDOMINANTLY F OR STAFF WELFARE. IN THE CIRCUMSTANCES, WE ANSWER THE QUESTION IN THE AFFIRMATIVE, I.E., IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMEN T. 18. THE LD. COUNSEL FOR THE ASSESSEE ALSO RELIED O N THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF MYSORE KIRLOSKA R LTD. VS CIT 166 ITR 836. IN THE PRESENT CASE NO PROOF HAS BEEN GIV EN BEFORE THE LOWER AUTHORITIES. ALSO THE ASSESSEE WAS UNABLE TO PRODU CE THE EVIDENCE BEFORE US TO PROVE THAT DONATION WAS MADE DUE TO BUSINESS EXIGENCY. IN THE CASE OF MAHINDRA & MAHINDRA 261 ITR 501(SUPRA), THE COURT HAD DECIDED BASED ON THE FACT THAT EXPENDITURE WAS INCURRED PRE DOMINANTLY FOR STAFF WELFARE. THE SAME HAS NOT BEEN ESTABLISHED IN THE CASE UNDER APPEAL AND HENCE WE CONFIRM THE ORDER OF THE LOWER AUTHORI TIES. 19. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 25 TH DAY OF JUNE, 2010 SD/- SD/- (P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 25 TH JUNE, 2010 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR L BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 9606/M/04 11 DATE INITIALS 1 DRAFT DICTATED ON: 14.6.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 14. 6 .2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______