TaxTMI 
TaxTMI 
2009 (1) TMI 339
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....of substantial justice, the assessee has also the following plea: "In view of art. 24(4) of the DTAA between India and Germany, since the appellant is a subsidiary company of DaimlerChrysler AG, Germany (a company listed on several international stock exchanges], which held about 76 per cent shares in the appellant, the appellant ought to be held a company in which public are substantially interested under s. 2 (18) of the IT Act, 1961, and, accordingly, s. 79 has no application in this case." 4. Learned counsel appearing for the AO, vehemently opposes the admission of the additional ground of appeal. He submits that since admission of this ground of appeal will require further investigation of facts, the same may not be admitted at this stage. It was submitted there is nothing on the record to even suggest, leave aside establish, that the assessee is entitled to any protection by the agreement, dt. 19th June, 1995, between the Republic of India and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on Income and Capital [reported in (l996) 136 CTR (St) 50 : (l997) 223 ITR (St) 130; hereinafter referred to as 'the Indo-German tax treaty']. ....
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....ee is not entitled to carry forward and set off the accumulated business losses. It is so for the reason that, in view of the specific provisions of treaty override enshrined in the Indian IT Act, 1961, it cannot be open to the tax authorities to read the provisions of the Act in isolation of the applicable tax treaty provisions. The tax treaty provisions constitute enforceable law and are not on any inferior pedestal than the provisions of the domestic legislation in this aspect. As Late Prof Klaus Vogel, in his oft referred book 'Klaus Vogel on Double Taxation Conventions', has observed that, "the treaty acts like a stencil that is placed over the pattern of domestic law and covers over certain parts". Dr Vogel's perception on this issue quite appropriately sums up the legal position in India as well. To the extent treaty provisions are beneficial to the assessee, these provisions simply override the Indian domestic law provisions. The benefits of treaty provisions cannot be viewed as options being available to the assessee, which the assessee mayor may not invoke. These are the provisions which restrict the scope of and relax the rigour of domestic law. The domestic law cannot b....
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....forward and set off accumulated losses on account of change in shareholding is concerned, and such a mandate can only be ascertained when the provisions of the Act and the applicable tax treaty, if any, are read together. 7. As regards the questions raised by the learned special counsel about assessee's ineligibility to seek protection of Indo-German tax treaty and the factual contentions which are not unsubstantiated, these aspects, which essentially deal with the merits of assessee's plea, need determination on merits. Just because questions are raised on assessee's eligibility to seek treaty protection and on certain factual elements said to be embedded in assessee's contentions, the case of the assessee cannot be dismissed at threshold without even considering the matter on merits. 8. We will, therefore, take up the ground No. 3 raised by the assessee, as also the additional ground of appeal so admitted, together. As we do so, our concern is to adjudicate on the question whether or not, on the facts and circumstances of the case and in the light of the provisions of the Act read with the applicable tax treaty, if any, the CIT(A) was justified in holding that the assessee was ....
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....nbsp; ^ | | | | | | 81.33% | | 100% | 81.33% | holding in | Merged | subsidiary | holding in | | | | v v ....
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....f future years." 12. It was in this backdrop that the AO, in the course of scrutiny assessment proceedings, required the assessee to show cause as to why should the losses carried not be treated as disentitled for carry forward and set off in view of clear applicability of s. 79 to the facts of the case. It was also pointed out that there is a change in more than 51 per cent of the shareholding and that the assessee company is a not a company in which public are substantially interested. The assessee's contention was that the change in share holding was due to global merger of the parent company and that, by no stretch of logic, it could be said to be a tax avoidance driven change in shareholding pattern. It was also submitted that s. 79 itself has been amended, though w.e.f. 1st April, 2000, to make an exception for a change in shareholding, in Indian subsidiaries of foreign companies, on account of amalgamation and demerger of such foreign parent companies. The assessee urged the AO to treat this amendment as a retrospective and clarificatory amendment. On the strength of these and other submissions to the same effect, the assessee urged the AO to hold that disability under s. 7....
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....rd and set off of business loss, which has been rightly disallowed by the AO, is confirmed." 15. The assessee is not satisfied with the verdict of the CIT(A) and is in further appeal before us. The grievance raised by the assessee is that the CIT(A) has erred in disallowing carry forward and set off of business losses under s. 79 of the IT Act. In the addition ground, the assessee has invoked the protection under ownership non-discrimination clause under art. 24(4) of the Indo-German tax treaty. We have admitted the additional ground to the extent that the action of the CIT(A), on the facts and circumstances of the case, in holding that the assessee was disentitled to carry forward and set off accumulated business losses, is to be examined in the light of the provisions of the Indian IT Act read with the applicable tax treaty, if any. 16. We must first state as to what, in our considered view, is the correct legal position. 17. The case of the Revenue authorities hinges on whether or not the provisions of s. 79, as they stood at the relevant point of time, will apply to the facts of this case. However, as we have noted earlier, the provisions of the domestic law are to read alon....
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.... 19. With effect from 1st April, 2004, s. 90(1)(a) was redrafted, and the s. 90(1) then read as follows: "The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country; or (ii) Income-tax chargeable under this Act and* under the corresponding law in force in that country to promote mutual economic relations, trade and investment. (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under any corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement." 20. The portion in bold italics above shows the words inserted by the amendment-w.e.f. 1st April....
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.... justified by the argument that the purpose of a OTC is to avoid double taxation and prevent fiscal evasion; a rule against discrimination is not necessary to achieve these goals". These observations further indicate the existence of school of thought that non-discrimination principles are not relevant for the purposes of avoiding double taxation and prevention of fiscal evasion which are dominant objectives of the tax treaties, and which were so specifically recognized by the s. 90(1) as it stood prior to the amendments w.e.f. 1st April, 2004. 22. No doubt non-discrimination provisions in the tax treaties do contribute to promotion of mutual economic relations, trade and investment between two countries. By virtue of these provisions, level playing field is afforded to the residents of one of the Contracting States in the other Contracting State as well. This even handed treatment to the enterprises of the treaty partner jurisdiction vis-a-vis domestic enterprise, and sometimes even an enterprise in which capital of the residents of treaty partner jurisdiction is invested or which is controlled by the residents of the other Contracting State vis-a-vis enterprise in which domestic....
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....ment, with respect to the cases to which they apply, would operate even if inconsistent with the provisions, of the IT Act." 24. There is thus no room for the inference that after a tax treaty is entered into, and after it is notified, only such portion of such a treaty can have the overriding effect as is in direct conformity with the permissible objectives of the tax treaties under s. 90(1). 25. We also find that the Circular No. 333, dt. 2nd April, 1982 [(1982) 30 CTR (TLT) 18 : (1982) 137 ITR (St) 1), the CBDT had stated as follows: "It has come to our notice that sometimes effect to DTAA is not given by the AO when they find that the provisions of the agreement are not in conformity with the provisions of the IT Act, 1961. 2. The correct legal position is that where a specific provision is made in the double taxation agreement, that provision will prevail over the general provisions contained in the IT Act, 1961. In fact, the DTAA, which have been entered into by the Central Government under s. 90 of the IT Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where pr....
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.... Contracting State at a disadvantage vis-a-vis other taxpayers, s. 90 of the IT Act has been amended to clarify any beneficial provision in the law will not be denied to a resident of a contracting country merely because corresponding provision in a tax treaty is less beneficial." 28. It would thus appear that the treaty override is not only because of the provisions of s. 90(2). On the contrary, s. 90(2) is a rider to otherwise unqualified treaty override envisaged in s. 90(1), and it only clarifies that the treaty override is only to the extent the same is beneficial to the taxpayer. Once a tax treaty is entered into, and is notified under s. 90, such a tax treaty overrides the provisions of the IT Act, though the treaty, override is subject to the rider that it overrides the IT Act only to the extent such a treaty override benefits the taxpayer. 29. As regards Vogel's remarks that "Australia and New Zealand reject inclusion of a discrimination prohibition in their DTCs on principle", this is a policy matter of a sovereign State and it has nothing to do with the principles of treaty override. Having said that, we may also add that no matter howsoever undesirable these countries....
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....ng one for double taxation relief, is that the treaties are negotiated and entered into at a political level and have several considerations as their bases.....". Their Lordships then took note of the appellant's argument by taking on record the fact that "..... counsel of the appellant contend that the preamble of Indian Mauritius DTAC recites that it is for 'encouragement of mutual trade and investment' and this aspect of the matter cannot be lost sight of while interpreting the treaty...." This argument was approved by the Hon'ble Supreme Court, and their Lordships held that, "Overall, countries need to take, and do take, a holistic view..... The loss of tax revenues could be insignificant compared to other non-tax benefit to their economy". It is important to bear in mind that Hon'ble Supreme Court was dealing with the legal situation as it prevailed before the amendment in 2004. In the considered view of the Hon'ble Supreme Court of India, tax treaties are obviously much more than simply instruments to avoid double taxation of an income or charters to give relief to the taxpayers when their incomes do indeed get taxed twice in two different jurisdictions. These are instruments....
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....pital is owned, partly or wholly-directly or indirectly, by residents of the other Contracting State. Learned counsel submits that since substantial part of the capital of the assessee company is directly owned by a German company, the assessee is entitled to treaty protection in terms of non-discrimination. Learned counsel submits that the words of the non-discrimination clause are very clear and unambiguous, and admit no controversy. 34. Learned counsel for the AO, vehemently submits that the provisions of a tax treaty can only come into play when there is a double taxation of an income. Since the assessee before us is an Indian company, which is taxable in India on its world-wide income, it cannot be entitled to treaty protection in India. It is submitted that the assessee company is not a resident of Germany, which is the treaty partner State, and therefore, the assessee is not entitled to the benefits of Indo-German tax treaty in India. The objection of the learned special counsel is that there is no direct discrimination of the assessee company, which is an Indian company. It is submitted that the 'non-discrimination' provisions do not extend to the German parent company, wh....
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....on 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under, the same conditions are or may be subjected. This provision shall, notwithstanding the provisions of art. 1, also apply to persons who are not residents of one or both of the Contracting States. 2. The taxation of a PE which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as preventing a Contracting State from charging the profits of a PE which a company of the other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar company of the first mentioned Contracting State, nor as being in conflict with the provisions of para 3 of art. 7 of this agreement. Further this provision shall not be construed as o....
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....not be discriminated against, for the reason of the nationality, in the other Contracting State. As evident from the plain wordings of the art. 24(1), it is not even necessary that a person seeking treaty protection under this clause should be resident of any of the Contracting States. In the second category, the discrimination is prohibited against the PEs of the other Contracting States. That of course implies that an enterprise of a Contracting State has a PE in the other Contracting State, which, in turn, requires that in order to claim non-discrimination in the host State, the PE must belong to an enterprise of the other Contracting State. In the third category of non-discrimination provisions, payments made to the residents of the other Contracting State vis-a-vis payments made to the residents of the host State-so far as deductibility in computation of business profits is concerned, must be dealt at par. Therefore, it is not necessary that the assessee must belong to the other Contracting State; just a payment to the resident of the other Contracting State would suffice to claim the treaty protection under this clause. Finally, and that is the situation that we are dealing w....
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....tate, such a discrimination will be hit by the provisions of art. 24(4) of the Indo-German tax treaty. The questions whether or not such an enterprise is indeed discriminated against, and what are the principles on the basis of it is to be ascertained as to whether or not a discrimination existed, thus needs to be considered and adjudicated. 39. Let us once again look at the provisions of art. 24(4) and analyze the same in the context of the situation that we are dealing with. Article 24(4) provides, that "Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first mentioned State are or may be subjected". In our analysis earlier in this order, we have already recorded a finding of the undisputed facts that the capital of the assessee before us is partly owned by a resident of the other Contracting State, so the first limb of this non....
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....rolled resident enterprise must be compared to the treatment of an 'other similar' resident enterprise. The qualification 'other similar' is not remarkably precise. In view of the fact that the subject of non-discrimination of a foreign controlled enterprise, it would be obvious to interpret the term 'other' in the description of the enterprise to which it must be compared, as referring to control by local residents." 43. It is further submitted that where a contrary interpretation is intended, the same is specifically expressed as such, for example, in art. 24(5) of the Agreement between the Government of the Republic of India and the Government of Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital, as reproduced below: "Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar e....
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....hareholders regardless of whether or not they are residents or non-residents, but which, in order to avoid a multiple application of that tax. would not apply it to distributions made to related resident companies that are themselves subject to the tax upon their own distributions. The fact that the latter exemption would not apply to distributions to non-resident companies should not be considered to violate para 5. In that case, it is not because the capital of the resident company is owned or controlled by non-residents that it is treated differently; it is because it makes distributions to companies that, under the provisions of the treaty, cannot be subjected to the same tax when they redistribute the dividends received from that resident company. In this example all resident companies are treated the same way regardless of who owns or controls their capital and the different treatment is restricted to cases where distributions are made in circumstances where the distribution tax could be avoided." 46. It is also submitted that the contention of the Revenue that the German parent company or indirectly the Indian subsidiary company are not covered by art. 24(4) of the Indo-Ger....
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....ansfer by way of a gift to any relative of the shareholder making such a gift. (b) deleted" 51. The expression 'company in which public are substantially interested', appearing in s. 79 reproduced above, is a well-expression under the IT Act. Sec. 2(18) defined it as follows: "Sec. 2-Definitions (18) 'A company is said to be a company in which the public are substantially interested- (a) If it is a company owned by the Government or the RBI or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the RBI or a corporation owned by that bank; (aa) If it is a company which is registered under s. 25 of the Companies Act, 1956 (1 of 1956); or (ab) If it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested: Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, o....
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....tituted." 52. A plain look at the provision of s. 79, as it then stood, would show that unless a company is a company in which public are substantially interested, normally any change in shareholding beyond 51 per cent would disentitle the company to carry forward and set off the accumulated losses. A careful reading of s. 2(18), in turn, would show that while a subsidiary of a public company whose "shares were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder will be treated as a 'company in which public is substantially interested', subsidiary of a public company which is not listed in a recognized stock exchange in India will not be entitled to be treated as a company in which public are substantially interested. In other words, notwithstanding the fact that two Indian subsidiaries are Indian companies and shareholding pattern of their capital has changed, the listing or non-listing of their parent companies in a recognized Indian stock exchange will be determinative factor for whether or not the disability clause provide....
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....equirement connected with taxation and it has vital bearing on determination of tax liability on a taxpayer. 55. It is in this context that we are examining the impact of non-discrimination provisions under art. 24(4) of the Indo-German tax treaty, and addressing ourselves to the question as to with which similar enterprise that the assessee before us needs to be compared with-a company which is subsidiary of a foreign company, or a company in which subsidiary of a domestic company. 56. While there are no judicial precedents on this issue from Indian judicial forums, there are quite a few judgments by the judicial bodies abroad, which deal with this aspect of the matter. These judgments include judgments from German Federal Tax Court, US Court of Appeal, French Supreme Administrative Tribunal and the UK's House of Lords. Undoubtedly, judicial precedents from judicial bodies abroad cannot have any binding value, but these precedents surely deserve due and careful consideration. This is a truly two way traffic now and not only that Indian judicial forums are taking note of and following the judicial precedents abroad, even the foreign judicial bodies are taking due note of judicial....
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.... interpretation given to it by the US Treasury, the result would be unfortunate if it were interpreted differently in the two countries when this would lead to double taxation. Unless, therefore, it can be concluded that the interpretation given in the US is manifestly erroneous it is not desirable to reach a different conclusion, and I find no compelling reason for doing so." 58. In rather recent case of Prevost Car Inc. (10 ITLR 736), the Tax Court of Canada was influenced by evidence of the interpretation of treaties in the Netherlands where expert testimony stated that the Netherlands would have treated such a holding company as the beneficial owner in a reverse situation. relying on a 1994 decision in the Hoge Raad under the Netherlands-UK tax treaty. 59. In the light of these discussions, we are of the considered view that it is a desirable practice to follow that as far as possible, interpretation assigned to the expressions found in the bilateral tax treaties should be such that it is in harmony with the judicial opinion abroad and, where there is a divergence of judicial opinion abroad, it should at least be in harmony with the judicial opinion in the treaty partner coun....
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....te tax liability in respect of the world-wide income. 65. As the group taxation was declined by, the tax authorities as also by the Tax Court., of First Instance, the taxpayer carried the matter before the Federal Tax Court. 66. The short issue before the German Federal Tax Court was whether the requirements of ss. 14(3) or 18 EstG violated the ownership non-discrimination clause of art. 24 of the tax treaty between the US and Germany. The Court held the German company was controlled by a resident of the US, the taxation had to be no less favourable than the taxation of a similar German company controlled by a German company. The German company could have transferred all its income to a controlling German company. Therefore, the ownership non-discrimination clause of the treaty obliged Germany to allow the German company to transfer its income to a US company as well. It maybe noted that on peculiar treaty provisions in this case, the tie-breaker rule was not applicable and, therefore, even though the US company that had its seat in the US and its place of effective management in Germany, it could still be regarded as a resident of the US. 67. Interestingly, this judgment was fo....
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....m subjecting nationals of one residing in the other to more burdensome taxation than their own resident nationals. The subsection dealing with corporate subsidiaries likewise provides that enterprises of one State owned or controlled by residents of the other "shall not-be subjected to... any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first mentioned State are or may be subjected". Thus, an American subsidiary of a British corporation cannot be taxed more heavily than an American subsidiary of an American corporation. UnionBanCal's argument is, that, because Standard was British and it was American, they wound up worse off than if they had both been American. That doesn't violate the Treaty. UnionBanCal doesn't show that the US imposed "more burdensome" taxation or requirements on British owned subsidiaries than American owned subsidiaries, which is what the treaty addresses. It was merely fortuitous that, because the British and American tax authorities could not agree on how to recognize the deferred loss, UnionBanCal and Standard were worse off than if t....
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....l is held by French or Austrian residents. In reaction, the French Ministry of Finance reiterated its stand that the rules were not discriminatory as foreign parent companies were not in the same situation as French ones, given that, as non-residents, they were not subject to French corporate income-tax. The decision of the Tribunal was carried in appeal before the Court of Appeal. The Court of Appeals reversed the order of the Tribunal and held that the French thin capitalization rules were compatible with the non-discrimination clause of the 1959 France-Austria Treaty, arguing that the conditions required by art. 145 CGI to qualify as a parent company were not met by the Austrian company. The matter, however, did not rest there. It travelled to the Supreme Administrative Court in France. 73~ The Supreme Administrative Court held that claiming that art. 212 of the CGI is incompatible with the 1959 France-Austria Treaty constituted serious grounds which justified an appeal. The Supreme Administrative Court also held that the discrimination must be considered with regard to the French subsidiary (and not the parent company) and that the issue was whether or not the foreign parent w....
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.... 76. In all fairness to the AG, however, there is one judicial precedent from the House of Lords, which does support the stand of the learned counsel for the AG. We must deal with this judicial precedent as well. 77. This House of Lords judgment in the cases of Boake Alleen Ltd. & Ors. vs. HM Revenue & Customs (2007) UKHL 25 (HL) is also relevant in the present context. The taxpayer companies in this case, which were UK resident subsidiary companies but their parent companies that were residents either of Japan or of the US. These companies had paid dividends at various times between 1989 to 1999, and were consequently liable to pay advance corporation tax (ACT) under s. 14 of Income and Corporation Tax, 1988 i.e., the domestic tax law. It may be mentioned that if the parent companies had been residents of the UK, their subsidiaries and the parent companies could together have preferred taxability of group income under s. 247 of ICTA, as a result of which no ACT would have been payable by subsidiaries when paying dividends to their parent companies. The taxpayer companies claimed that the inability of the non-resident parent companies to join in a group income election together wi....
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.... dividend by entering into a group income election, unlike members of a UK group. To limit the availability of group income elections to subsidiaries of UK companies was a breach of the non-discrimination articles. None of the parties were satisfied by this order-the taxpayers were aggrieved against holding that non-discrimination articles were not incorporated under the domestic law, and the Crown was aggrieved of the finding that right to make a group election was violative of non-discrimination provisions under the applicable tax treaties. The matter finally travelled to the House of Lords, in appeal, on several issues and one of the issues before the House of the Lords was whether the denial of the right to make a group income election on the ground that the parent company is not a resident of the UK constitutes discrimination contrary to the non-discrimination articles of the double tax treaties between the UK and Japan and between the UK and the US. As a cor611ary thereto, another issue to be considered by the House of Lords was that if there was indeed a discrimination whether that discrimination gives rise to any (and, if so, what) remedy in UK domestic law. 79. The House ....
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....nality, which is underlying thrust of art. 24(1), could be relevant. 82. The view so taken by the House of Lords is quite at variance with a series of judgments by US; German and French Courts, as also with the opinions of well known international experts on the subject. That apart, even the very conceptual foundation of the judgment, i.e., for the purpose of non-discrimination of foreign capital, the same principle as non-discrimination on the ground of nationality, must apply, is highly questionable. That, in our humble understanding, proceeds on the fallacy that prohibition of discrimination of foreign capital is merely an extension of the prohibition against discrimination on account of nationality under art. 24(1). 83. This decision proceeds on the premises that "underlying question" for application of art. 24(5) of the OECD is whether two residents are being treated differently "solely by reason of having a different nationality". Lord Hoffman' did note that while Commentary on OECD Model Convention specifically notes so in the context of art. 24(1) and it does not repeat this observation in relation to art. 24(5), but Lord Hoffman inferred that the principle must be the sa....
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....n stated in so many words, that ownership non-discrimination clause under art. 24(5) of OECD Model Convention is to be viewed in conjunction with nationality non-discrimination clause in art. 24(1) of the OECD Model Convention. As we have seen earlier in this judgment, the discrimination under arts. 24(1) and 24(5) of OECD Model Convention has different basis and different purposes. While former ensures that no discrimination takes place on account of nationality of a taxpayer in the host country, latter seeks to ensure that investment of foreign capital is not made disadvantageous to the entity in which capital is so invested. It is difficult to fathom as to on what basis did House of Lord infer that even though the Model Convention Commentary does not repeat the observations made in the context of art. 24(1), "the principle must be the same". On the contrary, in our considered view, the principle as also the conceptual basis, of discrimination contemplated by art. 24(1) and art. 24(5) are altogether different. The OECD Model Convention Commentary itself discusses the approach to these two non-discrimination clauses as follows: ----------------------------------------------------....
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.... that applied to domestic entitled to invoke the benefit capital. of this provision as against the other Contracting State. This holds good, in particular, for nationals of the Contracting States who are not residents of either of them but of a third State. ------------------------------------------------------------ 86. A plain reading of these OECD Model Convention Commentary observations would show that these two non-discrimination clauses are quite different in scope and application. While art. 24(1) deals with discrimination on account of nationality, Art. 24(5) seeks to ensure that taxpayers residing in the same State are not discriminated on account of capital being foreign capital. The emphasis is on nationality in art. 24(1) and emphasis is on foreign vs. domestic capital in the hands of taxpayers residing in the State. In the former, residential status is irrelevant inasmuch as even non-residents are covered by the treaty protection, against discrimination on account of nationality. In the latter, nationality is irrelevant as the basis of comparison is foreign vs. domestic capital in the resident enterprises.....
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.... thinks......) 88. This school of thought is also subscribed by Prof. Kees van Raad, am eminent Dutch expert on interpretation of tax treaties, and Director of International Tax Centre, University of Leiden. In his book 'Non-Discrimination In International Tax Law', Prof. Kees van Raad makes, inter alia, the following observations in the context of art. 24(5) of the OECD Model Convention: "....... the clause on non-discrimination in respect of non-resident controlled enterprises concerns indirect discrimination, i.e. non-resident who operates an enterprise which is controlled by a non-resident is protected by the non-discrimination clause rather than the controlling non-resident." "The tax treatment of foreign controlled resident enterprises must be compared to the treatment of an 'other similar' resident enterprise. The qualification 'other similar' is not remarkably precise. In view of the fact that the subject of non-discrimination is a foreign controlled enterprise, it would be obvious to interpret the term 'other' in description of the enterprise to which it must be compared, as referring to control by local residents....." 89. We are in considered agreement with these emi....
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....4. Sec. 21 of the Securities (Contract) Regulation Act, 1956 lays down that "where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange". A plain look at the draft listing agreement, as are available on the website of several stock exchanges including Bombay Stock Exchange, would show that a listing agreement is possible only with 'a company duly formed and registered under the Indian Companies Act'. In terms of SEBI (Disclosure and Investment Protection) Guidelines, A company is defined as a company defined under s. 3 of the Companies Act, 1965. Sec. 3 of the Companies Act, in turn, defines a company as 'a company formed and registered under this Act' or under one of its predecessor Act. The only exception which is made out for issuance of the Indian Depository Receipts (IDRs) by foreign companies. SEBI guidelines are binding on the all the stock exchanges in India, and it is thus not possible for shares of any foreign company to be listed in India. As a corollary to the above legal and factual position, an Indian subsidiary of a foreign company would ....
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....imination, not only that a taxpayer has to demonstrate that he has been subjected to different treatment vis-a-vis other taxpayers, but also that the ground for this differentiation in treatment is unreasonable, arbitrary or irrelevant". We have noted that the basis of differentiation is the stock exchange in which shares of the parent company are listed but then it is an impossibility for a German parent company to get its shares listed on a recognized stock exchange in India. Therefore, assessee being subjected to requirements connected with taxation which are more burdensome vis-a-vis an Indian subsidiary of an Indian parent company is indeed unreasonable. That is one aspect of the matter. The other significant aspect of the matter is that the decision in the case of Automated Securities Clearance Inc. was given in the context of Indo-USA tax treaty in which differentiation on the ground of reasonableness is institutionalized in the treaty and the Technical Explanation to the US Model tax treaty. Whether or not the same principles will apply in the case of India's tax treaties with other countries is yet to be examined. Be that as it may, it is not necessary to go deeper into th....
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....preme Court's judgment in the case of CIT vs. Manmohan Das (1966) 59 ITR 699 (SC). However, since we have held that the very domestic law provisions, which were hotly debated and meticulously dissected before us spread over several sittings, may not be enforceable in the light of the treaty override, our adjudication on those aspects will be a purely academic exercise at this stage. We, therefore, decline to address ourselves to those aspects of the matter. 97. Ground No. 3, and the additional ground to the extent and in the manner admitted, is thus allowed for statistical purposes in the terms indicated above. 98. That leaves us with three more grounds of appeal raised by the assessee, i.e., ground Nos. 1, 2 and 4. 99. In ground No. 1, the assessee is aggrieved that the CIT(A) erred in disallowing Rs. 13,25,71,334 towards portion of technical know-how expenses paid in kind and claimed by the assessee under s. 35AB of the IT Act. 100. In the course of the assessment proceedings, the AO, following the stand he had taken in the asst. yr. 1998-99, disallowed the deduction of Rs. 13,25,71,334 claimed by the assessee under s. 35AB. Aggrieved by the stand so taken by the AO, assessee....
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....n upholding the_ disallowance of Rs. 4,77,19,411 paid towards designing and planning of layout of a new factory. 104. The relevant material fact are like this. In the course of assessment proceedings, the AO noted that the assessee has claimed a deduction of Rs. 4,77,19,411 as 'project assistance fees' for designing factory layout and for setting up engine manufacturing unit. In response to the AO requiring the assessee to show cause as to why this expenses not be allowed as capital expenditure, the assessee submitted that the expense in, question was incurred for designing the factory layout and setting up of engine manufacturing unit in the financial year 1995-96. However, due to changed market conditions, the assessee company altered its business strategy and proceeded to (a) take full fledged factory on rent, instead of setting up own factory; and (b) outsource engine manufacturing to a vendor specially developed for this purpose. Thus, the expenditure in question, which was earlier shown as work in-progress, was written off, and thus charged to the P&L a/c. This explanation given by the assessee did not impress the AO at all. The AO was of the view that the expense in questio....