Transworld Garnet Company Ltd. v. DIT (2011) TII 02 ARA-Intl. Article 24 of India-Canada DTAA; Sections 48, 90(2), 197 of Income-tax Act Dated: 22-2-2011

Facts:
Taxpayer, a Canadian company (CanCo) held 74% shares in TGI, an Indian company. Shares of TGI were acquired by CanCo in various lots and at different points in time by remitting foreign currency. CanCo transferred shares of TGI to VV Minerals (VV) a partnership firm registered in India and made significant profits. There was no dispute that:

(a) Shares were long-term capital asset in the hands of CanCo.
(b) Income arising on transfer of shares was income chargeable to tax in India.

CanCo computed capital gain by applying both the provisos to section 48. Capital gain in terms of the first proviso to section 48 (i.e., neutralising exchange fluctuation gain), worked out to Rs.14 crore and in terms of the second proviso it worked out to Rs.7 crore (i.e., considering indexation benefit). Since indexation benefit was more beneficial, CanCo claimed that:

(a) Resident taxpayers under comparable circumstances are provided benefit of indexation for the cost of acquisition, whereas non-residents are denied such benefit;

(b) Such treatment results in discrimination of a Canadian National vis-à-vis Indian National, which is violative of provisions of Article 24(1). The Tax Department contended that: (a) The second proviso to section 48 of the Act provides that benefit of indexation is not available to ‘non-resident’ covered by the first proviso. (b) The non-residents stand protected from the vagaries of exchange fluctuation under the first proviso to section 48 of the Act. (c) Hence, in terms of clear language of the sections, no benefit of indexation can be granted.

Held:
The AAR held as follows: Discrimination is understood to be unequal treatment in identical situations. Different treatment does not constitute discrimination unless it is arbitrary. Article 24(1) of DTAA seeks to prevent differentiation solely on the ground of nationality and against nationals as such. Discrimination on account of nationality alone may be prohibited but a discrimination based on residence is permitted.