SUVRA GHOSH,J. - (1.) The Court : The short question involved here is as to the rate of tax which would be applicable to a permanent establishment of a foreign State which has contracted with the Government of India to avoid double taxation. At the time that this reference was entertained, three questions were framed at paragraph 7 of the order dated November 24, 1997. It is a matter of regret and shame that the reference has remained pending for such a long time. Paragraph 7 from the relevant order is quoted:- "7. From the aforesaid facts, the following questions are referred to the Hon'ble High Court which would, in our opinion, highlight preciously the legal issue: 1. Whether on the facts and in the circumstances of the case, the tribunal was right in law in holding that the rate of tax applicable to the assessee would be the rate of 65% and not the rate applicable to a domestic company? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that in computing the profits attributable to the permanent establishment in India of the applicant deduction for expenses ought to be allowed in accordance with the provisions of Section 37(2A), 37(3), 37(4) and 40A(3) ? 3. Whether on the facts and in the circumstances of the case, the Tribunal ought to have held that the provisions of the Income-tax Act, 1961 relating to the allowability of expenses in the nature of entertainment, travelling, business promotion and cash payments exceeding specified limits could have application on to expenditure which are 'executive and general administrative' in nature ?"
(2.) Section 90 of the Income Tax Act, 1961 in Chapter IX of the statute deals with double taxation relief. Section 90(1)(a) of the Act recognises that the Central Government may enter into an agreement with the Government of any country outside India for granting relief "in respect of income on which have been paid both income tax under this Act and income tax in that country." Sub- section (2) of Section 90 of the said Act provides that where the Central Government has entered into an agreement with the Government of any foreign country for granting relief of tax or for 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."
(3.) There is no dispute that there is a double taxation avoidance agreement between India and Japan. Article 7 of such agreement permits the income directly or indirectly attributable to a permanent establishment in the foreign country to be taxed by the foreign country. In other words, if there is a foreign establishment of an Indian entity in Japan, the direct and indirect income attributable to that permanent establishment of the Indian entity in Japan may be taxed in accordance with the laws of taxation in Japan. Likewise for a Japanese entity having a permanent establishment in India. Article 23 of the said agreement provides for the laws in force of the contracting State to govern the taxation of income in the respective contracting State except where there is any express provision to the contrary in the agreement. Article 24(2) of the double taxation avoidance agreement provides the key to the legal questions raised here and should be seen in its entirety: " Article 24. ... 2. 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 Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities." ;