DCIT vs. Gupta Overseas (ITAT Agra)
The issue is covered against the revenue by the Special Bench decision in Rajeev Sureshbahi Gajwani’s case (supra) and this decision binds this division bench. The theory of differentiation vs discrimination was relevant, relevant if it was, only for the India US tax treaty, primarily on the ground of reciprocity in treatment and on the ground of India US tax treaty institutionalizing the validity of differentiation in treatment by the US on the ground of reasonableness, and it may not apply to the other tax treaties. As held by a special bench in the case of Rajeev Sureshbhai Gajwani (supra), a different treatment to the foreign enterprise per se is enough to invoke the nondiscrimination clause in the tax treaties. Finally, as opined in the UN and OECD Model Convention Commentaries, with which we are in considered agreement, deduction neutrality clause in non-discrimination provisions is designed to primarily seek parity in eligibility for deduction between payments made to the residents and non-residents. Clearly, therefore, it will be contrary to the scheme of the tax treaties in question that if appropriate tax withholding by the person making the payment is a sine qua non for business deduction so far as payments to non-residents are concerned, unless there is a similar precondition for deductibility of related expenses to the payments to residents as well, that disabling provision cannot be enforced in respect to payments made to non-residents either.
However, so far as India Spain tax treaty is concerned, a protocol clause to the treaty states that, “Notwithstanding the provisions of paragraph 4 of Article 26 (Non-discrimination) it is understood that in the case of India, payments by way of interest, royalties and fees for technical services made by an enterprise of India to a resident of Spain, shall not be allowed as a deduction for the purpose of determining the taxable profits of such enterprise unless tax has been paid or deducted at source from such payments under Indian law and in accordance with the provisions of this Convention”. Therefore, even if there is legal requirement for inadmissibility of deduction unless proper taxes are deducted from payment of interest, royalties or FTS is made by the Indian enterprise to a resident of Spain, such a requirement cannot be hit by the deduction neutrality clause under Article 2 6(4). As is the settled legal position, DCIT Vs ITC Limited (82 ITD 239), in the case of a protocol is an integral part of the tax treaty and it is to be given effect in the same manner as any other substantive part of the tax treaty.
In view of the above discussion, it is clear that so far payments made to the residents of Ireland, Denmark and Austria are concerned, these are indeed protected by the deduction neutrality clauses, and any pre conditions for deductibility, which are harsher than payments made to the residents, are ineffective in law by the virtue of non-discrimination clauses in the respective tax treaties. Coming to the remaining payments, i.e. payments to the residents of Belgian, UK, Italy and Spain, learned counsel’s contention is that even these payments will be eligible for deduction neutrality because of the scope of sub article (1) in non-discrimination clauses in the respective tax treaties. It is submitted that this provision is a general omnibus provision which covers all types of non-discrimination against nationals of a treaty partner country. We, however, are not inclined to accept this plea. A plain reading of this clauses shows that, in broad terms, the discrimination, which is prohibited under this clause, is nationals of the other Contracting State vis-a-vis nationals of the host State in the same circumstances and same conditions, and, therefore, for the discrimination, which is sought to be prohibited by art. 24, all that is relevant is that national of one of the Contracting State should not be discriminated against, for the reason of the nationality, in the other Contracting State. That is what was observed by a coordinate bench of this Tribunal in the case of Daimler Chrysler India Pvt Ltd Vs DCIT (120 TTJ 803). English House of Lords, in the cases of Boake Alleen Ltd. & Ors. vs. HM Revenue & Customs (2007) UKHL 25 (HL), has also followed the same approach and observed, with approval, that
“In relation to art. 24(1) of the OECD Model Convention, which prohibits discrimination between residents on grounds of nationality, the commentary says that the ‘underlying question’ is whether two residents are being treated differently ‘solely by reason of having a different nationality’ ”. It is not enough to invoke this clause that national of a tax treaty partner country may ends up getting discriminated, but what is equally, if not more, important is that person should be discriminated because of such nationality. It is not even necessary that a person seeking treaty protection under this clause should be resident of any of the Contracting States, and, therefore, residential status, which is all relevant in the present context, is irrelevant for this kind of a discrimination. It is also important to bear in mind the fact that this provision refers to the comparison between nationals ‘in the same circumstances and similar conditions’. The expression “in the same circumstances” would be sufficient by itself to establish that a taxpayer who is a resident of a Contracting State and one who is not a resident of that State are not in the same circumstances. The situation that we are dealing with right now is the differentiation, if at all, between the treatment given to the payments made to the residents and the non-residents. That is not a situation, in view of the fact that the differentiation is due to residential status and not the nationality, which can be dealt with by non-discrimination measures in Article 24(1). In our considered view, a differentiation in treatment due to residential status cannot be covered by the scope of Article 24(1) as such a differentiation is not due to nationality factor. As regards learned counsel’s reliance on Herbalife decision by a coordinate bench, that is a case dealing with Indo US tax treaty which has a specific deduction non-discrimination provision under Article 2 6(3) of the said tax treaty. There is no corresponding provision in the treaties that we are now dealing. The assessee, therefore, derives no advantage from Herbalife decision in this context. We, therefore, reject this plea of the learned counsel. As a result, the assessee succeeds in claiming deduction neutrality so far as the payments to residents of Ireland, Denmark and Austria are concerned. To that extent, we uphold the plea of the assessee in principle.