Bombay High Court

Morgan Stanley Asset Management ... vs Joint Cit on 22 November, 2005

Equivalent citations: 2006 6 SOT 384 NULL

ORDER

A.K. Garodia, AM

This is an assessee's appeal directed against the order of learned Commissioner (Appeals)-XXXII, Mumbai, dated 27-3-2002 for assessment year 1998-99. First Ground of appeal reads as under:

"The learned Commissioner (Appeals) erred in confirming charging of tax on interest income at 20 per cent as per the provisions of section 115AD of the Income Tax Act, 1961 instead of at 15 per cent as per the provisions of article I I of the Tax Treaty between India and the USA."

The appellant submits that the Treaty provisions override the provisions of the Income Tax Act and learned Commissioner (Appeals) ought to have applied the correct rate being the lower rate of tax under the treaty. Reliance is placed on the decision of the Calcutta High Court in CIT v. Davy Ashmore India Ltd. (190) ITR 626 (Cal), as also Andhra Pradesh High Court in case of CIT v. Vishakhapatnam Port Trust, (144) ITR 146 (AP) and the CBDT's own circular No. 333 dated 2-4-1982.

The appellant contend that they had opted for rates of tax prescribed under the tax treaty but had adopted the beneficial rate of tax applicable to dividends, provided in Income Tax Act, in terms of section 90(2).

The appellant pray that the order of assessing officer be amended and he be directed to tax interest income at 15 per cent.

2. Briefly stated, the facts are that the assessee company is a company incorporated in U.S.A. During the year, the assessee company had income from Capital Gains, dividend and interest. In the return of income, the assessee claimed the benefit of DTAA between India and USA but while completing the assessment, the assessing officer has calculated the tax on interest at the rate of 20 per cent against 15 per cent as provided in article I I of DTAA between India and USA. On appeal, learned Commissioner (Appeals) upheld the assessment order by holding that since the assessee has applied the rate of tax as per Income Tax Act for capital gains and dividend incomes and since the rate of tax as per DTAA is applied by the assessee for only interest income, the same cannot be allowed. It is also observed by him that the assessee has to apply either the rates prescribed in the Income Tax Act or in the DTAA for all sources of income and the assessee cannot opt to the pick and choose policy' to pay the tax. For these reasons, learned Commissioner (Appeals) upheld the assessment order and now the assessee is in further appeal before us.

3. It was submitted by learned counsel of the assessee that learned Commissioner (Appeals) is not correct in saying that the assessee has adopted pick and choose policy for applying the tax rates for various sources of income. It was submitted by him that article 10 of DTAA deals with dividend income and as per this article, only the maximum rate i.e., 25 per cent (as applicable in this case) is provided, Our attention was drawn to section 90(2) of the Income Tax Act, 1961 as per which, the provisions of this Act shall apply to the extent they are more beneficial to the assessee. It was submitted by him that since the provisions of the Income Tax Act are more beneficial to the assessee regarding rate of Tax of Dividend Income ie., 20 per cent as against 25 per cent in the DTAA, the rate as per Income Tax Act is applicable to the assessee for this Dividend Income since as ocr article 10 of the treaty, the dividend is to be taxed according to law of that State i.e., India in the present case and only a maximum cap is provided, which is 25 per cent in the present case. It was submitted that in view of this, the application of rate as per Income Tax Act for dividend income is as per DTAA since the same is lower than the cap provided in DTAA i.e., 25 per cent. Regarding Capital Gains, it was submitted that article 13 of DTAA deals with tax on Capital Gains and as per this Article, Capital Gains are taxable as per the provisions of domestic law. It was submitted that since, no rate of tax is provided in DTAA regarding income from Capital Gains, the application of rate as per Income Tax Act is also as per DTAA. Regarding tax rate on interest, it was submitted that article 11 of DTAA deals with rate of tax on interest income and as per this article also, the local rate of tax is applicable subject to a cap, which is 15 per cent in the present case. It was submitted that the assessee has applied the rate of tax for all sources of income as per DTAA and hence, this issue should be decided in favour of the assessee.

4. As against this, learned Departmental Representative of the revenue supported the orders of authorities below and contended that pick and choose policy should not be allowed to the assessee. Reliance was placed on the book "Principles of International Tax Law", copy of one page of which was submitted and kept on record. Our attention was drawn to the first line of this page which reads as under :

"Most jurisdictions allow the taxpayer to choose either the domestic tax regime or the tax treaty."

It was contended that in view of the above, the assessee cannot be allowed to apply local rates as per Income Tax Act for Dividend and Capital Gains incomes and rate as per DTAA for interest income.

5. We have considered the rival submissions and perused the materials on record and have also gone through the provisions of relevant articles of DTAA between India and U.S.A. and we are inclined to accept the contentions of learned counsel of the assessee because we find that for all these three sources of income i.e., dividend, capital gains and interest, Articles 10, 11 and 13 of the DTAA provide that these incomes are taxable as per domestic law. A cap has been provided in article 10 for Dividend i.e., 25 per cent in this case and in article I I for interest ie., 15 per cent in the present case. For capital gains, even no cap has been provided in the article 13 of the DTAA. For ready reference, these three articles are reproduced here :

Article 10 :

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the contracting State of which the company paying the dividends is a resident, and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other contracting State, the tax so charged shall not exceed:

(a) 15 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends.

(b) 25 per cent of the gross amount of the dividends in all other cases.

Sub-paragraph (b) and not sub-paragraph (a) shall apply in the case of dividends paid by a United States person which is a Regulated Investment Company. Sub-paragraph (a) shall not apply to dividends paid by a United States persons which is a Real Estate Investment Trust, and sub-paragraph (b) shall not apply if the dividend is beneficially owned by an individual holding less than 10 per cent interest in a Real Estate Investment Trust. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term 'dividend' as used in this article means income from shares or other rights, not being debt-claims, participating in profits, income from other corporate rights which are subjected to the same taxation treatment as income from shares by the taxation laws of the State of which the company making the distribution is a resident; and income from arrangements, including debt obligations, carrying the right to participate in profits, to the extent so characterized under the laws of the contracting State in which the income arises.

4. The provisions of paragraphs I and 2 shall not apply if the beneficial owner of the dividends, being a resident of a contracting State, carries on business in the other contracting State, if which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the dividends are attributable to such permanent establishment or fixed base. In such case the provisions of article 7 (business profits) or article 15 (Independent Personal services), as the case may be, shall apply.

5. Where a company which is a resident of a contracting State derives profits or income from the other contracting State, that the other State may not impose any tax on the dividends paid by the company except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consists wholly or partly of profits or income arising in such other State.

Article 11

1. Interest arising in a contracting State and paid to a resident of the other contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other contracting State, the tax so charged shall not exceed :

(a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and

(b) 15 percent of the gross amount of the interest in all other cases.

3. Notwithstanding the provisions of paragraph 2 of this article, interest arising in a contracting State.

(a) and derived and beneficially owned by the Government of the other contracting State, a political sub-division or local authority thereof, the Reserve bank of India, or the Federal Reserve bank of the United State, as the case may be and such other institutions of either contracting State as the competent authorities may agree pursuant to article 27 (Mutual Agreement Procedure);

(b) with respect to loans or credit extended or endorsed.

(i) by the Export Import bank of the United States, when India is the first-mentioned Contracting State; and

(ii) by the Exim bank of India, when the United States is the first-mentioned Contracting State; and

(c) to the extent approved by the Government of the State, and derived and beneficially owned by any person, other than a person referred to in sub-paragraphs (a) and (b), who is a resident of the other Contracting State, provided that the transaction giving rise to the debt-claim has been approved in this behal by the Government of the first-mentioned Contracting State;

Shall be exempt from tax in the first-mentioned Contracting State.

4. The term 'interest' as used in this Convention means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums or prizes attaching to such securities, bonds, or debentures. Penalty charges for late payment shall not be regarded as interest for the purposes of the Convention. However, the term 'interest' does not include income dealt with in article 10 (Dividends).

5. The provisions of paragraphs 2 and 3 shall not apply if the beneficial owner of the interest, being a resident of a contracting State, carries on business in the other contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the interest is attributable to such permanent establishment or fixed base. in such case the provisions of article 7 (Business profits) or article 15 (Independent Personal Services), as the case may be, shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is what State itself or a Political sub-division, local authority, or resident of that State. Where however, the person paying the interest, whether he is a resident of a contracting State or not, has in a contracting State a permanent establishment or a fixed base, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last mentioned amount. In such case the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Convention.

Article 13 : Gains - Except as provided in article 8 (Shipping and Air Transport) to this convention, each contracting State may tax capital gains in accordance with the provisions of its domestic law.

From the plain reading of these three articles, it is clear that for dividend income, the local rates of tax is applicable subject to maximum 25 per cent in the present case. Similarly, we find that for interest also, the local rates of tax is applicable subject to maximum 15 per cent in the present case but since the local rate as per section 115AD is 20 per cent, the same cannot exceed 15 per cent as per DTAA. For Capital Gains, no rate or ceiling is provided in article 13 of DTAA and hence, only local rate is applicable. In this view of the matter, we are of the considered opinion that the assessee has not adopted pick and choose policy for applying tax rate for various sources of income and the rates applied by the assessee for all three sources is as per combined reading of Income-Tax Act and DTAA and hence, we hold that the assessee is liable to pay tax at the rate of 15 per cent on interest income being the maximum rate provided in DTAA for interest income. This ground of the assessee stands allowed.

6. Ground No. 2 of the appeal reads as under:

"The learned Commissioner (Appeals) erred in confirming non-grant of proper credit for taxes deducted at sources."

7. Learned counsel of the assessee submitted that this ground is consequential and the assessing officer should be directed to allow credit for TDS as per law. Accordingly, we set aside the order of learned Commissioner (Appeals) on this issue and restore the matter back to the file of the assessing officer with a direction to allow credit of TDS as per law after providing adequate opportunity of being heard to the assessee.

8. Ground No. 3 of the appeal reads as under :

"The learned Commissioner (Appeals) erred in confirming charge interest of Rs. 19,09,457 under section 234C of the Act.

The appellant submit that the total income of the appellant included capital gains, which arose in different periods of instalments, as per the summary which was filed with the return of income, and a copy of which is enclosed herewith.

The appellant therefore, contended that they have correctly paid advance tax in the relevant instalments in which capital gains arose and therefore, interest under section 234C levied by the assessing officer is wholly erroneous.

The appellants pray that the assessing officer be directed to compute interest under section 234C, if any, after considering the period-wise capital gains and advance tax paid thereon."

9. It was submitted by the learned counsel of the asscssee that in view of the direction of learned Commissioner (Appeals), this ground is academic and accordingly, we reject this ground, which is admittedly of academic interest only.

10. In the result, this appeal of the assessee stands partly allowed.