TaxTMI 
TaxTMI 
2009 (1) TMI 339
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.... must be admitted to advance the cause 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 ref....
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....he provisions of s. 79 of the Act, the assessee 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 rigo....
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....f the law, so far as the disentitlement to carry 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 C....
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....sp; | ^ | | | | | | 81.33% | | 100% | 81.33% | holding in | Merged | subsidiary | holding in | | | | v  ....
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....ry forward the loss of earlier year i.e. upto asst. yr. 1998-99 and set off against taxable income of 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 ....
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....ess income. In view of the above facts and. in this view of the matter, the appellant's claim of carry forward 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....
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....m such agreement applies, the provisions of this Act shall apply only to the extent they are more beneficial to that assessee." 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....
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....', has observed that "Australia and New Zealand reject inclusion of a discrimination prohibition in their DTCs on principle." and that "This policy is 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 ....
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....ernment to issue a notification for implementation of the terms of the DTAA. When that happens (i.e. notification is issued) the provisions of such an agreement, 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,....
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....ed, reducing the incidence of tax to a level lower than what was provided in the tax treaty. Since the tax treaties are intended to grant relief and not put residents of a 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 m....
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....as taken note of this fact and observed that, An important principle that needs to be kept in mind in the interpretation of the provisions of an international tax treaty, including 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....
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....ubjected. This is a situation in which enterprise of a Contracting State is entitled to treaty protection in the very Contracting State to which it belongs, but on the ground that its capital 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 th....
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....an effort to understand the scheme of the prohibition against discrimination set out in the said provision. Article 24 of the Indo-German tax treaty is as follows: "ARTICLE 24 Non-discrimination 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 pro....
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....re quite distinct in character and in scope. In the first category of discrimination, which is sought to be prohibited by art. 24, all that is relevant is that national of one of the Contracting State should 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....
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....y. As we have noted earlier, in case an enterprise of the host State, in which capital is held by the residents of the other Contracting State, is discriminated vis-a-vis other similar enterprises of the host State, 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 earl....
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....re exclusively resident". Our attention is also invited to the observations made by Prof. Kees van Raad, in his book 'Non-discrimination in International Tax Law' which are as follows: 'The tax treatment of the foreign controlled 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....
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....ned or controlled by non-residents but, rather, on the fact that dividends paid to non-resident are taxed differently. A similar example would be that of a State that levies a tax on resident companies that make distributions to their shareholders 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 circu....
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....t day of the year or years in which the loss was incurred: Provided that nothing contained in this section shall apply to a case where a change in voting power takes place in previous year consequent upon death of a shareholder or on account of a transfer 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....
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....ction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, Item (B) shall have effect as if for the words "not less than fifty per cent", the words "not less than forty per cent" had been substituted." 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, notwithsta....
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.... company in which public are substantially interested' has important implications in terms of s. 79 inasmuch a company in which public are substantially interested is beyond the scope of disability on carry forward an set off of losses envisaged therein. Carry forward of losses is surely a requirement 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 h....
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....n much greater weight. As was said in the Federal Court in Canadian Pacific Ltd. vs. The Queen 76 DTC 6120 at p. 6135 in interpreting the 1942-Canada-US Treaty: "While it is true that this Court has the right to interpret the Canada-US Tax Convention and Protocol itself and is no way bound by the 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 p....
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....ement did not fulfil the first set of requirement, as B Inc was incorporated in Delaware. As regards the second category of requirements, while B Inc. was taxable in Germany, the tax liability was not a limited liability as the effective place of management of B Inc. was Germany and therefore it had unlimited corporate 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 w....
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....any success. In further appeal before the Court of Appeal also, the taxpayer did not get any relief, though the verdict of the Court of Appeal was a divided one. Judge Kleinfeld, while delivering the majority judgment, observed as follows: "Article 24 of the treaty, "Non-discrimination," generally prohibits either State from 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 impos....
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....by a French company. these thin capitalization rules did not apply. On these facts, the Administrative Tribunal of Orleans held the French thin capitalization rules to be incompatible with art. 24(3) of the 1959 France-Austria Treaty, which prohibits France from treating its resident companies differently depending on whether their capital 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 ....
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....' 75. In the light of the above judicial precedents from Germany, US and France, it would indeed appeal that for the purposes of non-discrimination prohibition under art. 24(4) in the present context, what is to be examined is whether Indian subsidiary of a German company is any worse off vis-a-vis an Indian subsidiary of an Indian company. 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 ....
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....espect of income or chargeable gains. The matter, however, did not rest there. The taxpayer companies appealed to the Court of Appeal. The Court of Appeal agreed that the ACT provisions, on their face, were inconsistent with the non-discrimination article, because the UK subsidiary of a foreign company could not avoid having to pay ACT when it paid a 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 contr....
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....ment is examined, which is obviously a sine qua non and the basic requirement for invoking the provisions of non-discrimination in a tax treaty, the differentiation is to examined vis-a-vis another resident with foreign capital and not with another resident with domestic capital. It is only in such a situation that the differentiation on the grounds of nationality, 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 t....
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....ly by reason of having a different nationality". It does not repeat this observation in relation to art. 24(5), but the principle must be the same." 84. As we see it, this inference of the House of Lords diametrically opposed to the well-settled norms of non-discrimination principles in tax treaties. 85. The decision proceeds on the basis, and that is what Lord Hoffman 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), "....
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....p; taxpayers residing in the contrary, extends to all same State, and not to nationals of each Contracting subject foreign capital, State, whether or not they be in the hands of the residents of one of them. In partners or shareholders, other words, all nationals of to identical treatment to a Contracting State are 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 bein....
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.... its capital being held by non-residents, be subjected to taxation other or more burdensome than taxation of similar enterprise of a Contracting State. A comparison should be made with an enterprise the shareholders or partners of which are exclusively residents. The protection against discrimination is not limited to discrimination in compassion with enterprise the capital of which is owned by the residents of a third State (as, however, UK Inland Revenue 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 ....
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....isting of their parent companies in a recognized Indian stock exchange will be determinative factor for whether or not the disability clause provided by s. 79, can be invoked. 53. The question then is whether a foreign parent company be listed in an Indian recognized stock exchange at all, or is it a requirement that no foreign company can ever fulfil and thus Indian subsidiaries of foreign companies will always stand in a disadvantageous position in this respect. 54. 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, de....
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....pany in which public are substantially interested' has important tax implications inasmuch as the disability of carry forward and set off of accumulated losses was not attracted in a case of a company in which public are substantially interested. 92. Having said so, we may also add that we are also alive to fact that, as held by this very Bench of the Tribunal in the case of Automated Securities Clearance Inc. vs. ITO (2008) 118 TTJ (Pune) 619, "In order to establish discrimination, 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 signific....
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....e AO shall allow the carry forward as such. The matter thus stands restored to the file of the AO with directions as above. 96. As we part with this issue, we must place on record that very extensive and erudite arguments were advanced by both the distinguished counsel on the scope and applicability of s. 79 as also on peripheral legal issues such as whether a finding on eligibility to carry forward the losses is at all necessary in this year or whether, in the light of Hon'ble Supreme 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., grou....
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....sue on merits at this stage. We, therefore, deem it fit and proper to remit this issue also to the file of the AO for fresh adjudication in the light of our above observations. While doing so, the AO will give due opportunity of hearing to the assessee and shall deal with all contentions of the assessee by way of a speaking order in accordance with the law. 102. Ground No. 1 is also thus allowed for statistical purposes. 103. In ground No. 2, the assessee is aggrieved that the CIT(A) erred in 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 chan....
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....rd, we are not inclined to uphold the grievance of the assessee at this stage. There is no dispute that the write off is In connection with a capital expenditure. The expenditure incurred in connection with the layout and design of a new factory are inherently in the nature of capital expenditure. The deduction is claimed on account of write off of such expenses in connection with an abandoned capital work. Such a claim can at best be examined on the touchstone of principles regarding admissibility of business losses, but that exercise has not been done by any of the authorities below. The CIT(A) has been somewhat superficial in rejecting the claim of business loss on the ground that the expenses in question were relevant only for the asst. yr. 1996-97. As far as asst. yr. 1996-97 is concerned, the expenses were admittedly capital expenses at that stage and could not have been, therefore, allowed as a deduction. The claim of deduction arose when the expenses were written off, and as such business loss was incurred, on the ground of commercial expediency-an act which certainly happened in the financial year relevant to the assessment year before us. However, there is no material bef....