Pramod Kumar, Accountant Member :

This is an appeal filed by the taxpayer and is directed against the order dt. 19th Oct., 2004 passed by the CIT(A), in the matter of assessment under s. 143(3) of the IT Act, 1961 (hereinafter referred to as 'the Act') for the tax asst. yr. 2001-02. The taxpayer before us is company incorporated in the USA, which has a PE in India by way of a branch office.

2. By way of this appeal, the taxpayer has raised three grievances—first, against the CIT(A) holding that the loss incurred by the taxpayer, in respect of new unit eligible for deduction under s. 10A, was not eligible for set off against other business profits of the taxpayer; second, that the CIT(A) has erred in rejecting taxpayer's claim for deduction under s. 44C in respect of head office expenses; and, third, that the CIT(A) has erred in rejecting taxpayer's claim for incentive deduction under s. 80HHE in respect of profits of business of software exports. In last grievance, the taxpayer has alleged that denying him deduction under s. 80HHE constitutes discrimination against the taxpayer—something which is expressly forbidden by art. 26(2) of Convention for the Avoidance of Double Taxation dt. 12th Sept., 1989 entered into between India and the United States (hereinafter referred to as 'Indo-US tax treaty'). We will take up this issue, which is the main issue in this appeal, first.

Grievance of the assessee regarding discrimination

3. Grievance of the assessee is that non-granting of deduction under s. 80HHE to the assessee amounts to 'discrimination' against the Indian branch of the assessee company, which is not permissible in terms of art. 26 of the Indo-US tax treaty. The assessee also contends that the CIT(A) has erred in not granting this deduction on merits, as also in holding that having withdrawn this claim before the AO, the assessee was not entitled to revive this claim in the appellate proceedings. The assessee before us is a company incorporated in the USA, and is taxable in India in respect of profits attributable to its PE in India which consists of its Indian branch office. The branch office is engaged in the business of export of computer software. The assessment year involved is 2001-02, and the tax assessment impugned in appeal before us was framed under s. 143(3) of the IT Act, 1961 (hereinafter referred to as 'the Act').

Core issue for adjudication

4. The core issue that we need to adjudicate on is whether or not the assessee being denied deduction under s. 80HHE in respect of export of software by its Indian branch office indeed amounts to discrimination against the assessee company in terms of the provisions of the Indo-US tax treaty. However, before we deal with the developments leading to this litigation before us, it is necessary to take a quick look at the general scheme of the s. 80HHE and relevant non-discrimination clause in the Indo-US tax treaty.

The nature of deduction under s. 80HHE

5. Sec. 80HHE, as it stood at the material point of time, provided an incentive deduction equivalent to eighty per cent of the profits in respect of business of export out of India, of computer software or its transmission from India to a place outside India by any means, or providing technical services outside India in connection with the development or production of computer software.

6. This deduction was permissible to two categories of taxpayers engaged in the aforementioned business—first, Indian companies; and,—second, a person other than a company which is resident in India.

7. The expression 'person' is defined under s. 2(31) as including "(i) an individual, (ii) an HUF, (iii) a partnership firm, (iv) an AOP or BOI—whether incorporated or not, (v) a local authority, and (vi) every artificial juridical person, not falling under any of the preceding sub-clauses". The common thread in all these six clauses is that all these clauses refer to taxable entities, and that is the reason we have used the expression 'any oth