Shinhan Bank v. DCIT

Case snapshot

Sections / provisions: 90

Questions before the Court / Tribunal

• S. 90 : Double taxation relief-Foreign Company-discrimination allowed-Company has not made prescribed arrangement-DTAA-India -Korea. [S. 2(22A), Art. 25(1)] The assessee before us is a banking company incorporated in, and fiscally domiciled in, Korea. It is carrying on business, through its permanent establishment, in India as well. In light of Article 25, it was urged by the assessee that it should be charged to tax at 30 per cent and not 40 per cent. It was held that the levy of tax at a higher rate cannot be considered a less favourable levy of tax or more burdensome taxation vis-à-vis the domestic companies.…
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

Shinhan Bank ……………….………Appellant Wockhardt Towers, 5th floor, West Wing Bandra Kurla Complex, Bandra (East), Mumbai 400 051 [PAN: AAACC2144A]

Deputy Director of Income Tax (International Taxation) Range 2(1), Mumbai ……………….………Appellant

Appearances by Madhur Agarwal for the appellant Milind Chavan for the respondent

2. We will first take up the appeal filed by the assessee.

3. In the first ground of appeal, the assessee has raised the following grievance:

Appellant / assessee submissions

5. Learned counsel for the assessee invites our attention to the judgment dated 7th August 2019 passed by Hon’ble Calcutta High Court, in the case of Bank of Tokyo Mitsubishi Ltd Vs CIT [(2019) 108 taxmann.com 242 (Cal)] and submits that the issue is covered, in favour of the assessee, by the aforesaid decision of Hon’ble Calcutta High Court. However, when learned counsel’s attention was invited to Explanation 1 to Section 90 and he was asked to address us on the implications of this amendment, he simply pointed out that the aforesaid judgment was delivered on 7th August 2019- i.e.

after the retrospective amendment was bought to the statute, and yet the issue has been decided in favour of the assessee. He left the matter at that and submitted that he has nothing further to add to what has been held by Hon’ble Calcutta High Court in the case of Bank of Tokyo Mitsubishi (supra). Learned Departmental Representative, on the other hand, submits that there is no discussion at all in the said decision about the Explanation 1 to Section 90, which is in effect with effect from 1st April 1962, though inserted by the Finance Act 2001, and a decision which has been rendered without dealing with this foundational aspect of the matter, cannot be binding on us. Learned Departmental Representative submits that in any case, it is a non-jurisdictional High Court and there is no dispute about the scope of Explanation to Section 90, and the learned counsel for the assessee has not even advanced any arguments on merits. It is pointed out that the learned counsel has simply cited a judicial precedent and left it at that, and, therefore, we should treat this ground as not pressed in effect. We are thus urged to confirm the stand of the authorities below and decline to interfere in…

17. We must, therefore, be rather guided by the plain words of Explanation 1 to Section 90, as we do not have the benefit of Their Lordships’ guidance on the scope of this Explanation being inserted in the statute, which is the core issue requiring our adjudication. Learned counsel for the assessee has no other argument in support of the plea raised in the first ground of appeal against the applicable higher rate of tax for foreign companies.

24. Learned counsel, at the outset, submits that the assessee does not wish to pursue the grievance against the taxability of income received by the PE from its GE (i.e. GE-PE interest), even though this issue is covered, in favour of the assessee, by the five-member bench of this Tribunal in the case of Sumitomo Mitsui Banking Corp (supra).

Revenue / respondent submissions

The packaged judgment does not separately label the respondent's submissions in an independently extractable passage. No contention is inferred; read the full order.

Court / Tribunal analysis and reasoning

6. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position. Considering that this issue raised in the appeal it may affect several non-resident companies, we consider it appropriate to deal with this issue in some detail.

7. We find that, by Finance Act 2001, an Explanation (now known as Explanation 1) was inserted below Section 90, and it was with retrospective effect i.e. effective 1st April 1962. This Explanation states that “For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India”. It is important to bear in mind that it is by virtue of Section

90(2), which specifically provides that “Where the Central Government has entered into an agreement with the Government of any country outside India or 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”, that the provisions of the related double taxation avoidance agreement override the provisions of the Income Tax Act, 1961. As a corollary to this legal framework, it is only elementary that once a rider to this override is placed in the statute itself, to that extent the provisions of the Income Tax Act, 1961 will hold the field notwithstanding the more beneficial provisions in the tax treaties. In this light, when we look at the expression “less favourably levied” or “more burdensome…taxation and connected requirement”, appearing in Articles 25(2) and 25(1) respectively, in the then applicable tax treaty, we find that unless such a foreign company makes prescribed arrangements for declaration and payment within…

‘domestic company’ and ‘a company other than a domestic company’. Under section 2(22A), a domestic company is defined as “an Indian company or any other company, which in respect of its income liable to tax in India makes prescribed arrangements for declaration and payment of dividends within India”, and Section 2(23A), a foreign company is defined as a company “which is not a domestic company” i.e. which has not made prescribed arrangements for declaration and payment of dividends in India. The basis of different tax rates being applied is thus not the situs of fiscal domicile or incorporation but simply the arrangement for making arrangements for the declaration of payment of dividends within India. Quite clearly, therefore, the claim of the assessee proceeds on an erroneous assumption about the reason for charging different tax rates. In sharp contrast, under section 6(3) of the Income-tax Act, 1961, a company is said to be resident in India if either it is an Indian company or if control and management of its affairs is situated wholly in India. Thus, a non-resident company if it distributes dividends in India will be treated as a domestic company and will then be subjected to…

7. The stand taken in the Tribunal's order cannot be appreciated or accepted since a similar clause in the double taxation avoidance agreement between India and the Netherlands was interpreted by the Central Board for Direct Taxes and a circular issued thereupon. The Tribunal held, in the present case, that since there was no similar circular, the benefit as available to a permanent establishment of ABN Amro Bank in India could not be extended to this assessee.

26. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position.

Operative decision and relief

21. In the result, the first ground of appeal is dismissed.

44. The additional ground of appeal is thus admitted and allowed for statistical purposes.

45. In the result, the appeal is partly allowed in the terms indicated above.

49. To sum up, while the appeal is partly allowed, the cross-objections are dismissed as infructuous. Pronounced in the open court today on the 27th day of June, 2022.

Ratio and legal principle

• The packaged judgment addresses S. 90 : Double taxation relief-Foreign Company-discrimination allowed-Company has not made prescribed arrangement-DTAA-India -Korea. [S. 2(22A), Art. 25(1)] The assessee before us is a banking company incorporated in, and fiscally domiciled in, Korea. It is carrying on business, through its permanent establishment, in India as well. In light of Article 25, it was urged by the assessee that it should be charged to tax at 30 per cent and not 40 per cent. It was held that the levy of tax at a higher rate cannot be considered a less favourable levy of tax or more burdensome taxation vis-à-vis the domestic companies.…. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with s. 90 : double taxation relief-foreign company-discrimination allowed-company has not made prescribed arrangement-dtaa-india -korea. [s. 2(22a), art. 25(1)] the assessee before us is a banking company incorporated in, and fiscally domiciled in, korea. it is carrying on business, through its permanent establishment, in india as well. in light of article 25, it was urged by the assessee that it should be charged to tax at 30 per cent and not 40 per cent. it was held that the levy of tax at a higher rate cannot be considered a less favourable levy of tax or more burdensome taxation vis-à-vis the domestic companies.… Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 90 - apply the exact version considered in the judgment.

Case network

Similar issue / useful comparison

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Different outcome / possible distinction

• National Petroleum Construction Co. v. DCIT (International Taxation) - Quashed / set aside
• DCIT v. Marubeni Corporation, Japan - Dismissed

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