This issue was decided by the Authority for Advance Rulings (AAR) in Application No P-16 of 1998, In re (236 ITR 103). "The AAR observed that with full knowledge of the well-known and long standing distinction betweenan Indian company, domestic company and a foreign company, the non-discrimination clause in the DTAA (article 26) was drafted. It did not prohibit the long-standing distinction in Indian tax laws between a domestic company and a non-domestic company. Therefore, it was not right for the applicant to contend that discrimination had been made between a French company and an Indian company in the matter of levy of tax.

The distinction drawn by the Finance Act was on the basis of distribution of dividend. If a French concern declared and distributed dividends in India, it had to be treated as a domestic company and taxed as such. The basis of the distinction between a domestic and a non-domestic company was quite clear.

The object of a tax act is to collect tax. The dividends distributed in India led to fresh accrual of income in the hands of the recipients. That meant that there would be further levy of tax on account of distribution of dividend in India. This distinction did not violate article 26 of theDTAA in any way. No attempt had been made in article 26 to do away with this long standing classification of companies in the Income Tax Act.

In the present case before the AAR, distinction had been made on the basis of distribution of dividends in India. The court was of the view that the applicant had failed to establish that there had been discrimination under article 26(1).

Moreover, the protocol to the DTAA clearly recognised that a French company and an Indian company were not deemed to be in the same circumstances. The question was whether the Indian banks had been placed in a more favourable position than French banks by the annual Finance Acts. The case of the applicant was that the French banks had to pay tax at a higher rate than the Indian banks although they were carrying on the same activities.

The AAR held that this argument was of little merit. The activities of the Indian and French banks were similar in that both carried on banking operations. However, the activities of the Indian andFrench banks were not identical. Large Indian banks were nationalised by the two acts of Parliament to promote certain social and economic objectives of the state and had to function as instruments for mobilisation of resources for the common good. Clause 2 of article 26 prohibited discrimination between an Indian enterprise and a French enterprise carrying on the same activities. The court was of the view that a French bank and a nationalised Indian bank did not carry on the same activities.

According to the AAR, the Finance Acts had consistently drawn a distinction between a domestic and a non-domestic company. A foreign company which distributed dividends in India would be treated as a domestic company and would pay the same rate of tax as an Indian company which declared and distributed dividends in India. Moreover, article 26(2) laid down that "taxation on a permanent establishment ... shall not be less favourably levied.." This was not a case where a tax had been imposed upon a French company fromwhich an Indian company was immune. Both Indian and French companies came equally under the tax levied by the Income Tax Act. No special tax was levied on a French firm in India.

In the present case before the AAR, the French and the Indian companies had to pay income tax. The grievance of the applicant was that they had to pay tax at a higher rate. Clauses 1 and 2 of article 26 used the word "taxation" in preference to "tax" which had been used in most of the other articles of the agreement.

The meaning of the expression "taxation" as given by New Webster's Dictionary and Thesaurus (1992) is: "The imposition of a tax: the system by which taxes are imposed: the revenue obtained by imposing taxes." The meaning of the expression "taxation" in Black's Law Dictionary is "the process of taxing or imposing taxes."

"Taxation" does not mean "rate of tax" and has not been used in article 26 in that sense at all. In the DTAA between India and France, the words "taxation" and "tax" have been used in the objectsclause of the agreement where the purpose has been stated to be "avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital."

"Taxation" has again been used in articles 25 and 26. Article 25 deals with the elimination of double taxation. It lays down the manner in which double taxation has to be avoided. Article 26 seeks to prevent discrimination in taxation between nationals and non-nationals in clause 1. Clause 2 lays down that taxation levied on a foreign enterprise by a contracting state shall not be less favourable than the taxation on the same activities of the local enterprise.

Clause 5 of article 26 also refers to "taxation" and speaks of other or more burdensome taxation. Article 26 does not specifically lay down that the tax payable by an enterprise of one contracting state should be at the same rate as the tax payable by a domestic enterprise of a contracting state. Nor has it been laid down that the rate of tax payable by a national of onecontracting state should be the same as that payable by the national of the other contracting state.

Some arguments were advanced on behalf of the applicant on the significance of the word "levy" in article 26 of the Income Tax Act. The word "levy" has been interpreted by courts in a number of cases. According to Black's Law Dictionary (sixth edition), "levy" means "to assess; raise; execute; tax; collect; gather; take up; seize". Therefore, the word "levy" could have a number of meanings. It could simply mean to assess. It could also mean collection of tax. The word has been used in some statutes to describe the entire process of imposing a charge, assessment of tax as well as collection of tax. The meaning of the word "levy" has to be gathered from the context of the statute in which it has been used.

Clause 1 of article 26 does not use the word "levy" at all. Clause 2 uses the expression "the taxation... shall not be less favourably levied..." Taxation levied on an enterprise normally means, in thecontext of the Income Tax Act, levy of income tax on the income of an enterprise. It merely means that the charging section and the computation section of the income tax should not be so drafted as to place the French company in a less favourable position than the Indian company carrying on the same activities.The court observed that there were several articles in the DTAA which specifically deal with the rate of tax. In these articles, the words, "levy" as well as "taxation" had been scrupulously avoided. Wherever rates of tax had been mentioned in these articles, the language employed had been "the tax so charged" shall not exceed the percentage specified in those articles. Having regard to the context in which the words "levy" and "taxation" had been used, the court was of the view that clause 2 of article 26 did not place an embargo on imposing a higher rate of tax on the French concern than on the Indian concern.

Thus, the AAR concluded that a foreign company has to pay tax at the rates prescribed bythe Finance Act of each year, even if such rates are higher than the rates payable by an Indian company. The aforesaid ruling is significant as it considers the scope and ambit of the non-discrimination clause and analyses it thoroughly, which would be useful in the case of other foreigners who are residents of a country with which India has entered into a Double Taxation Avoidance Agreement.

The author is a Supreme Court advocate