Letter By Joint Secretary Can't Override Plain And Unambiguous Provision Of Income Tax Act, 1961 And Finance Act: Calcutta High Court

The Calcutta High Court has held that the letter by the joint secretary cannot override the plain and unambiguous provisions of the Income Tax Act, 1961, and the Finance Act.

The bench of Justice Surya Prakash Kesarwani and Justice Rajarshi Bharadwaj has observed that the letter of the Joint Secretary merely informs that “the matter has been looked into and the board is of the opinion that the tax rate applicable in the case of ABN AMRO BANK would be the same as for an Indian company at the relevant tax rate applicable for the concerned assessment years." The letter is a D.O. letter. It is not a circular issued in exercise of power conferred under Section 119 of the Income Tax Act, 1961. Apart from that, the letter is in conflict with the plain and unambiguous provisions of the Act of 1961 and the Finance Act.

The appellant/assessee is a branch of ABN Amro Bank NV (now The Royal Bank of Scotland N.V.) incorporated in the Netherlands with limited liabilities and its original office in Singapore. In India, the appellant is registered as a scheduled bank in terms of Schedule-II of the Reserve Bank of India (RBI) Act, 1934. The main activities of the appellant in India are accepting deposits, giving loans, discounting or collecting bills, issuing letters of credit or guarantees, executing forward transactions of foreign currencies for importers and exporters, money market lending and borrowing, investing in societies, etc., in terms of the existing rules and regulations governing such transactions.

There is an agreement between India and the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion (DTAA). Article 7 of the DTAA provides for the taxation in India of a foreign enterprise in respect of profits attributable to its permanent establishment (PE) in India. Since the appellant has a PE in India, they are therefore liable to tax with respect to income attributable to the PE. In the impugned order, the ITAT has held that the appellant or assessee is liable to income tax at the rate specified for companies “other than domestic companies." The case set up by the appellant is that in terms of Article 24(2) of DTAA between India and the Netherlands, containing provisions of non-discrimination, the appellant/assessee is liable to income tax at the rate applicable to a domestic company.

The ITAT has held that the rate of income tax as provided in the Finance Act applicable to a domestic company shall not apply to the appellant or assessee, and instead the appellant or assessee is liable to tax at the rate prescribed by the Finance Act for a company other than a domestic company.

The issue raised was whether the appellant is a domestic company.

The word 'domestic company' has been defined in Section 2(22A) of the Act, 1961, which has been reproduced above. As per definition, an Indian company or any other company fulfilling specified conditions is a domestic company. The word “company” has been defined in Section 2(17) of the Act, 1961, which means (i) an Indian company and (ii) any body corporate incorporated by or under the laws of a country outside India. Thus, the appellant is a company falling under Clause (ii) of Section 2 (17). As per the Act, 1961, there are two classes of companies, namely "domestic company” defined under Section 2(22A) and “company other than domestic company." It is admitted in the in the case of the appellant that it is not a “domestic company," but rather a “foreign company,” i.e., a “company other than a domestic company,” as defined in Section 2(23A) of the Act of 1961. Thus, the appellant company is not a domestic company, but it is a company other than a domestic company.

Section 4 is the charging provision, which provides that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of this Act in respect of the total income of the previous year of every person. Thus, every year, Parliament enacts the Finance Act, which provides for the rate of income tax to be charged in respect of the total income of the previous year. The Finance Act enacted by parliament relevant to the assessment year involved in these appeals is similar to the change of assessment year and rate of income tax.

The court held that once Parliament has legislated, the Court must first look at the legislation and construe the language employed in it. If the terms of the legislative enactment do not suffer from any ambiguity or lack of clarity they must be given effect to even if they do not carry out the treaty obligations. But the treaty or the Protocol or the convention becomes important if the meaning of the expressions used by the Parliament is not clear and can be construed in more than one way. Since the expressions used in the aforesaid provisions of the Act 1961 and the Finance Act are clear and capable of only one construction as discussed and there is no ambiguity or lack of clarity. Therefore, the provision of the Act 1961 and the provision of the Finance Act are bound to be given full effect.

The court held that the appellant is liable to tax at the rate applicable to a company other than a domestic company as provided in the Finance Act.

Counsel For Petitioner: Percy Pardiwalla

Counsel For Respondent: Smita Das De

Case Title: The Royal Bank Of Scotland N.V. @ Abn Amro Bank N.V. Vs Director Of Income Tax, International Taxation 2(1), Kolkata

Case No.: ITA/155/2005

Click Here To Read The Order