Treaty non-discrimination and export incentive limits: denial of section 80HHE upheld, section 10A loss set-off allowed.

The article explains that a treaty non-discrimination clause does not automatically invalidate a domestic tax incentive restriction; the differential treatment must be shown to be arbitrary, unreasonable, or lacking a rational nexus with the statutory object. It notes that denial of section 80HHE deduction to a foreign company's Indian permanent establishment was upheld because the restriction was tied to residential status and the export incentive objective. It also records that loss of a section 10A eligible unit was treated as allowable for set-off against business profits, while a section 44C deduction claim failed because it was raised late and supported by inadequate particulars for computation.

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Issues: (i) whether denial of deduction under section 80HHE of the Income-tax Act, 1961 to the foreign company's Indian permanent establishment amounted to discrimination under article 26(2) of the Indo US tax treaty; (ii) whether loss of the section 10A eligible unit could be set off against the assessee's other business profits; and (iii) whether deduction under section 44C of the Income-tax Act, 1961 could be allowed on the basis of the material furnished.

Issue (i): whether denial of deduction under section 80HHE of the Income-tax Act, 1961 to the foreign company's Indian permanent establishment amounted to discrimination under article 26(2) of the Indo US tax treaty.

Analysis: The non-discrimination clause was read as requiring parity only between similarly situated taxpayers. The treaty context and the US Technical Explanation were treated as relevant guides, and a differential treatment was held not to be discriminatory merely because it existed. The restriction of section 80HHE to resident taxpayers was found to rest on residential status, with a rational connection to the object of encouraging exports and augmenting domestic foreign exchange retention. The exclusion of non-residents from the incentive was therefore held not to be arbitrary, irrelevant, or unreasonable. The assessee's challenge based on civil status was also rejected.

Conclusion: The denial of section 80HHE deduction was not discriminatory, and the assessee was not entitled to the deduction.

Issue (ii): whether loss of the section 10A eligible unit could be set off against the assessee's other business profits.

Analysis: The issue was treated as covered by coordinate bench decisions in favour of the assessee. Following that view, the loss of the section 10A unit was held to be eligible for set off against business profits for the year under appeal.

Conclusion: The assessee was entitled to the set off of the section 10A unit loss against business profits.

Issue (iii): whether deduction under section 44C of the Income-tax Act, 1961 could be allowed on the basis of the material furnished.

Analysis: The claim was raised belatedly and the material placed did not furnish the necessary particulars of head office expenditure attributable to the Indian operations. In the absence of verifiable details, the deductible amount could not be computed.

Conclusion: The claim under section 44C was not allowable.

Final Conclusion: The appeal succeeded only in respect of the set-off of the section 10A unit loss, while the challenges to denial of the section 80HHE deduction and the section 44C claim failed.

Ratio Decidendi: A treaty non-discrimination clause does not invalidate a domestic tax incentive restriction unless the differential treatment is shown to be unreasonable or arbitrary and lacking a rational nexus with the statutory object.

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