2004 (2) TMI 279 - AT - Income Tax

Appeal Partially Allowed: Deduction u/s 80M Disallowed for Foreign Company; SEBI Fees, Interest Disallowances Deleted.

The Tribunal partially allowed the appeal, upholding the disallowance of deduction under Section 80M for the foreign company, as the non-discrimination ... Deduction under section 80M - Non-discrimination clause (Article XXI) of DTAA - Domestic company - residence-linked test - Residence criterion versus nationality - Revenue expenditure - membership/membership fees - Broken period interest - deductibilityDeduction under section 80M - Non-discrimination clause (Article XXI) of DTAA - Residence criterion versus nationality - Whether a foreign company assessed to tax in India is entitled to deduction under section 80M by invoking the non-discrimination clause of the India-France DTAA (Article XXI). - HELD THAT: - Article XXI of the India-France DTAA prohibits discrimination on the ground of nationality and ensures nationals of one Contracting State are not subjected in the other State to taxation or connected requirements more burdensome than nationals of that State. The Tribunal examined whether the domestic/foreign company classification under the Income-tax Act rests on nationality or on prescribed arrangements connected with residence. Section 2(22A) treats a 'domestic company' as an Indian company or any other company which, in respect of income liable to tax in India, has made prescribed arrangements for declaration and payment of dividends within India; section 2(23A) defines 'foreign company' as one not being a domestic company. Thus, the determinative criterion for entitlement to section 80M is the statutory test of prescribed arrangements (a residence linked requirement), not nationality simpliciter. OECD commentary confirms that the expression 'in the same circumstances' requires consideration of residence; differential treatment based on residence does not amount to discrimination within the meaning of such DTAA non discrimination clauses. Since non availability of section 80M to companies failing the prescribed arrangements is rooted in residence linked requirements and not nationality, Article XXI does not extend section 80M to foreign companies assessed to tax in India. The assessee's contention relying on Article XXI is therefore unsustainable. [Paras 6, 8, 10, 11]Assessee's claim to deduction under section 80M by invoking Article XXI of the India-France DTAA rejected; non discrimination clause not attracted as classification is residence linked and not based on nationality.Revenue expenditure - membership/membership fees - Whether SEBI membership fees paid for the merchant banking division are revenue expenditure and therefore allowable. - HELD THAT: - The Tribunal observed that precedents of the Tribunal treating membership fees paid for OTC Exchange as revenue expenditure are applicable. Following the ratio in the cited Tribunal decisions, the payment to SEBI for membership of the assessee's merchant banking division is to be treated as revenue in nature and not an asset of enduring nature. There is no reason to depart from those decisions. [Paras 12, 13]Disallowance of SEBI membership fees deleted; payment held to be revenue expenditure and deduction allowed.Broken period interest - deductibility - Whether the broken period interest disallowed by the Assessing Officer is deductible. - HELD THAT: - The Tribunal noted that the issue is covered in favour of the assessee by the decision of the Hon'ble Bombay High Court in American Express International Banking Corpn. v. CIT. Respectfully following the jurisdictional High Court's view, the Tribunal directed deletion of the disallowance and consequential relief in accordance with that precedent. [Paras 14, 15]Disallowance of broken period interest deleted; relief granted in accordance with the Bombay High Court decision.Final Conclusion: Appeal partly allowed: claim under section 80M rejected; disallowances of SEBI membership fees and broken period interest deleted and directions given to the Assessing Officer to give consequential effect. Issues Involved:1. Disallowance of deduction u/s 80M.2. Disallowance of license fees paid to SEBI.3. Disallowance of broken period interest.Summary:1. Disallowance of Deduction u/s 80M:The main issue in this appeal is the disallowance of deduction u/s 80M amounting to Rs. 2,70,91,836. The assessee, a foreign company, contended that the deduction should be extended to it based on Article XXI of the India-France Double Taxation Avoidance Agreement (DTAA) regarding non-discrimination. The Assessing Officer and CIT(A) rejected this contention, stating that the deduction u/s 80M is specifically for domestic companies. The Tribunal held that the classification of a company as domestic or foreign under the Income-tax Act is based on the prescribed arrangements for the declaration and payment of dividends within India, not nationality. Therefore, the non-discrimination clause in the DTAA does not apply, and the disallowance of deduction u/s 80M is upheld.2. Disallowance of License Fees Paid to SEBI:The assessee's grievance regarding the disallowance of Rs. 5,00,000 paid to SEBI for membership of its merchant banking division was addressed. The Tribunal noted that this issue is covered in favor of the assessee by previous Tribunal decisions in the cases of Marvel Equity (P.) Ltd. and Magnum Equity Broking (P.) Ltd., where such fees were treated as revenue expenditure. Respectfully following these decisions, the Tribunal directed the Assessing Officer to delete the disallowance of Rs. 5,00,000.3. Disallowance of Broken Period Interest:The issue of disallowance of broken period interest amounting to Rs. 3,40,02,853 was discussed. The Tribunal observed that this issue is covered in favor of the assessee by the Hon'ble Bombay High Court's judgment in the case of American Express International Banking Corpn. v. CIT [2002] 258 ITR 601. Following this judgment, the Tribunal directed the Assessing Officer to delete the disallowance of broken period interest and give consequential effect accordingly.Conclusion:The appeal is partly allowed, with the Tribunal upholding the disallowance of deduction u/s 80M but directing the deletion of disallowances related to SEBI license fees and broken period interest.