In part 3 of the series, I have discussed Article 24(2) which deals with stateless person in detail. In this part, I will discuss Article 24(3) dealing with PE non-discrimination.
This paragraph deals with a ‘permanent establishment’ (PE) that an ‘enterprise of a Contracting State’ has in the other ‘Contracting State’. Thus, it deals with non-discrimination of a resident of a Contracting state in respect of the enterprise carried on through a PE by such person in other contracting state.

Article 24(3) applies when following conditions are satisfied –
- There is a PE of an ‘enterprise’ of a contracting state in other contracting state
- Such PE is subject to taxation in other contracting state
- Such taxation is less favourably levied than taxation levied on enterprise of other contracting state
- The enterprise of other contracting state carry on same activities as that of the PE
Understanding certain important terms –
- Enterprise/ PE: This article applies only if the taxpayer has PE and not otherwise. It seeks to end discrimination on the actual residency of overseas entity
- Less favourably: PE of the Residence State shall not be treated ‘less favourably’ in taxation matters by the Source State as compared with an ‘enterprise’ of the Source State
- Same activities: OECD commentary has explained the term through illustrations. It states that regulated and unregulated activities would generally not constitute the ‘same activities’
- Levied: Levy means to access, raise, execute, exact, tax, collect, gather, take up, seize
- In the same circumstances: The expression implies that a PE and a local enterprise that is the object of comparison with the PE should always be in the ‘same circumstances’
Application of Article 24(3) in certain situations
- Computation of taxable income – PE must be given the same right as resident enterprises are given in relation to –
- Claim of deduction of trading expenses
- Deduction of depreciation
- Deduction for provision for re-investment in fixed assets
- Carry forward or backward a loss
- Claim benefit of tax incentive provisions
- Structure and rate of tax – Manner of levy of taxes may vary from country to country. Indian IT Act expressly permits differential rates of domestic and overseas companies. Relevant extract is reproduced below –
“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.”
- Credit for WHT suffered by a PE – A PE in Source State may receive overseas income (e.g., dividend, interest, etc.) and such income may be taxed in the Source State. It appears that by invoking Article 24(3), a PE may be able to avail of a credit in the Source State for the foreign withholding tax on dividends, interest, etc. if such credit is granted to resident enterprises of the Source State
- Miscellaneous situations – As article 24(3) applies to taxation of PE’s own business, hence, PE may not be able to invoke Article 24(3) in the following situations –
- Rules relating to group consolidation
- Rules relating to the distributing profits
Principle emanating from Indian judicial pronouncements in context of Article 24(3) on Non-discrimination –
- Section 44C of the Income tax Act, 1961 limitation on deduction of head office expenditure would not apply in the case of non-resident companies in light of non-discrimination clause in the tax treaty (Metchem Canada Inc. v. Deputy Commissioner of Income-tax [2006] 100 ITD 251 (MUM.))
- Benefit of certain Export linked deductions under Section 80HHE and Section 80HHC of the Income tax Act, 1961 should be allowable to PE of the foreign company (Bhagwan T. Shivlani v Income-tax Officer (IT)-2(2), (Mumbai) [2012] 20 taxmann.com 821)
Distinction between Article 24(1) and Article 24(3) on Non-discrimination clause –
