INCOME TAX
INSTRUCTION NO. 1982/2000
Dated: April 11, 2000
Subject: Tax rate applicable to foreign companies - Non-Discrimination Article under the Double Taxation Avoidance Agreements (DTAA)- clarification regarding
The Board has had the occasion to examine this question of the rate of tax applicable to foreign companies doing business through a permanent establishment in India. The article on "Non-Discrimination" in the Double Taxation Avoidance Agreements between India and various countries normally contains the following sentence:-
"The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other state than the taxation levied on enterprises of that other State carrying on the same activities."
Article 3 of DTAAs inter alia defines the term "Enterprise of a Contracting State" and "enterprise of the other Contracting State" respectively as an enterprise carried by a resident of a contracting State and an enterprise carried on by a resident of the other Contracting State.
2. The tax rates provided in the Finance Act are for "Domestic company" and "company other than a domestic company i.e. for a foreign company. By definition (under section 2(22A) of Income-tax Act, 1961), a domestic company means 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. A foreign company by definition (under section 2(23A) of Income-tax Act, 1961), is the one which is not a domestic company i.e. which has not made prescribed arrangements for declaration and payment of dividends in India. As against this, 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 the same rate of tax as a resident company declaring and distributing dividends in India. Thus there is no discrimination/ differentiation in the corporate tax rates in India on the basis of "residence". The different rates of tax provided for "foreign company" by the finance Acts in India consequently do not discriminate against a Permanent Establishment (PE) of the non resident company within the meaning of Non Discrimination of the DTAA.
2. Some of the DTAAs (for eg., the one with UK) contain an additional sentence in the clause pertaining to Permanent Establishments(PE) in the Non-Discrimination Article specifically permitting taxation of Pes at a rate higher than domestic companies. This cannot be taken to mean that the same rule of construction will not apply to the DTAAs where such a sentence is absent. In fact, what was implicit in the DTAAs where such a sentence is not present has been made explicit in these DTAAs (like the one with UK).
3. This may be brought to the notice of all the assessing Officers working in your charge.
F.No.500/134/99-FTD
Rajat Bansal
(Officer on Special Duty (FTD)