Income Tax – Discrimination, DTAA and a path breaking judgement
Today we bring you a landmark order from the ITAT Pune Bench, which was briefly covered in yesterday's DDT.
This decision is important for the reason that for the first time it was held that “in order to establish discrimination, not only that a taxpayer has to demonstrate that he has been subjected to different treatment vis-à-vis other taxpayers, but also that the ground for this differentiation in treatment is unreasonable, arbitrary or irrelevant” (Paragraph 35). This is quite a paradigm shift from the approach of the judicial authorities in India, which have considered a differentiation per se as discrimination. The ITAT has linked the same to the non discrimination provisions in Indian Constitution i.e. Article 15 and 16 and added that, “While construing the scope of this right to equality, Hon'ble Supreme Court of India has time and again held that notwithstanding wide scope of this constitutional guarantee, Article 14 does not rule out classification for the purpose of legislation” to justify reasonable classification being out of the ambit of non discrimination clauses.
Of course, it could be argued, that the above observations are India-US tax treaty specific because the ITAT order also states that “Unlike the thrust of OECD Model Convention, as argued before us, the differentiation between resident taxpayers and non resident taxpayers is thus institutionalized in the Indo US tax treaty itself “( Para 64) and ITAT noted that certain provisions in the US tax laws for permanent establishment tax levied on foreign companies, higher withholding tax requirements for foreign companies, higher penalties for foreign companies, which are kept out of discrimination by the US on the basis of reasonableness. (Para 36,37 and 38).
What is now interesting is whether this approach will also hold good for non discrimination clauses in other tax treaties that India has entered into.
Another interesting aspect is that the ITAT has referred to Technical Explanation to the US Model Convention and relied upon the same to find out meanings of the terms employed in the Indo US tax treaty ( Para 28 to 33), and concluded that “In the case of tax treaties in which United States is a partner, Technical Explanation to the US Model Convention is indeed the best guide for contemporaneous thinking on the expressions finding place in the tax treaty…………..for the reason that, as mentioned in the preamble to US Model Convention itself, ‘a principal function of the Model is to facilitate negotiations by helping the negotiators identify differences between income tax policies in the two countries' which presupposes that the other negotiating treaty partner is aware of the US Model Convention and its accompanying Technical Explanation” (Para 31).
Finally, there is an interesting discussion on the question “Does a difference in wording of a treaty provision, as used in two different treaties signed by a contracting State, necessarily imply difference in intent and scope of the treaty provision?” (Heading of paragraphs 54 to 59). On this question, the Tribunal concluded:
Unlike a piece of tax legislation, which is creature of a sovereign state, a tax treaty is a result of bilateral negotiations. Therefore, the wordings of a tax treaty are essentially dependent on the priorities of, and acceptability by, the Contracting States parties to such a tax treaty……………. particularly bearing in mind the fact that treaties are products of bilateral negotiations and that the wordings of a treaty essentially depend on comfort level of the treaty partners with the words so employed, we are of the considered opinion that merely because different expressions are used in two different tax treaties entered into by a country, it is not necessary that these different expressions must lead to distinct results. There can be more than one path to reach the same destination, and merely because someone has chosen a different path, it is not necessary that he must reach a different destination as well. Not too much needs to be read into deviations in wordings employed in tax treaties, particularly when the meaning of the words so employed is clear and unambiguous. (Para 58 and 59).