IN THE ITAT MUMBAI BENCH ‘L’
State Bank of Mauritius Ltd.
versus
Deputy Director of Income-tax, (International Taxation) – 2(1)
IT APPEAL NOS. 2254 & 3005 (MUM.) OF 2005
[ASSESSMENT YEAR 1999-2000]
OCTOBER 3, 2012
ORDER
R.S. Syal, Accountant Member
These two cross appeals – one by the assessee and the other by the Revenue – arise out of the order passed by the Commissioner of Income-tax (Appeals) on 17.01.2005 in relation to the assessment year 1999-2000.
2. First ground of the assessee’s appeal is against the direction of the ld. CIT(A) to levy tax at the rate of 48% applicable to normal non-resident companies. At the very outset the learned Counsel for the assessee conceded that similar issue was there in assessee’s appeal for assessment year 1997-98 and the Tribunal was pleased to decide it against the assessee. In view of the fact that the circumstances and the legal position continue to remain same in the year under consideration, respectfully following the order passed by the Tribunal in ITA No.525/Mum/2001 for assessment year 1997-98, we uphold the impugned order on this issue. This ground is not allowed.
3. Ground no.2 is against the confirmation of disallowance of expenditure on purchase of fixed assets at Rs. 3,43,28,114. On this issue also the learned AR was fair enough to admit that the Tribunal decided similar issue against the assessee in its order for assessment year 1997-98. Respectfully following the precedent, we uphold the impugned order on this score. This ground is not allowed.
4.1 Ground no. 3 is against the sustenance of disallowance out of bonus expense. The facts apropos this ground are that the assessee claimed deduction of Rs. 66,500 as bonus. The Assessing Officer found that only a sum of Rs. 24,000 was paid before the due date of filing the return of income. As per the tax audit report in Form no.3CD, the auditor had reported that the remaining amount of Rs. 42,500 was not paid on or before the due date. Invoking the provisions of section 43B, the Assessing Officer made disallowance for Rs. 42,500. The learned CIT(A) upheld the disallowance. The assessee is aggrieved against the sustenance of this disallowance.
4.2 We have heard the rival submissions and perused the relevant material on record. There is no dispute about the fact that the assessee is a banking company incorporated in Mauritius. The fact that the assessee is entitled to the benefit of Double Taxation Avoidance Agreement between India and Mauritius (hereinafter called “the DTA”), is not in dispute. The authorities below have made and sustained the said disallowance by testing the facts of the case on the touchstone of prescription of section 43B and also the provisions of Article 7 of the DTA.
4.3 The claim of the Revenue is that the provisions of section 43B should be applied for the purpose of confirming disallowance amounting to Rs. 42,500. Any amount of bonus debited to the Profit and loss account which is not paid on or before the due date of filing of the return, is not deductible as per the provisions of section 43B. There is no quarrel on the fact that the assessee failed to pay the aforesaid amount on or before the due date of filing the return of income as per section 139(1) of the Act. Thus, when we compute the income of the assessee as per the provisions of the Act, no deduction can be allowed to this extent and the view canvassed by the authorities below becomes acceptable.
4.4 Section 90 deals with the rationale and consequences of Agreement with foreign countries or specified territories. Sub-section (1) provides that the Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, inter alia, for granting of relief in respect of income on which tax is payable both in India and the other country. Sub-section (2) of section 90 provides that where the Central Government has entered into an agreement with the Government of any country outside India or a specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double 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. In other words, if a particular item of income is taxable under the Income-tax Act, 1961 (hereinafter called “the Act”), then it shall cease to be taxable in India if the DTA provides exemption in respect of such income. In the like manner, if any expenditure incurred by the assessee is not deductible as per the provisions of the Act, the same shall still be allowed as deduction if the DTA provides for such deduction. The crux of the matter is that the DTA overrides the regular provisions of the Act, in so far as it is more beneficial to the assessee. If the DTA provides for a more liberal mode of computation of income, then it is this mode of computation, which needs to be followed notwithstanding any contrary provision contained in the Act. However, if there is no specific provision in the DTA concerning a particular aspect, then it is the basic law, that is, the Act, which applies.
4.5 Having seen that the disallowance u/s 43B is called for in the determination of income under the Act, let us see the position under the DTA. The assessee is admittedly a tax resident of Mauritius. The authorities below have not disputed the entitlement of the assessee to avail the benefit, if any, available to it as per the terms of DTA. Rather, the ld. CIT(A) has considered the claim of the assessee as per the DTA and thereafter rejected it as having been not maintainable.
4.6 Article 7 of the DTA provides for the computation of ‘Business Profits’. It provides that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as are attributable to that permanent establishment. The assessee is admittedly having an Indian branch, which constitutes its permanent establishment as per Article5 of the DTA. As the issue rotates around the computation of business profits, let us have a look at the relevant paras of Article 7 of the DTA, as under : –
Article 7
BUSINESS PROFITS
“1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprises may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. Where the correct amount of profits attributable to a permanent establishment cannot be readily determined or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis.
3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.
4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
