Purpose of DTAA may be relevant also in cases involving discrimination. (ii) India-Germany DTAA, Indian subsidiary of German parent company listed on German Stock Exchange considered ‘company in which public are substantially interested’.

The assessee is an Indian company (‘I Co’) in which Daimler
Benz AG (‘DBAG’), a German company held 81.33% equity share capital. DBAG was
listed on stock exchange in Germany.

During the relevant year, DBAG and Chrysler Corporation USA,
an American company decided to merge their respective businesses. Hence, a new
company, namely, Daimler Chrysler AG (‘DCAG’) was incorporated in Germany. DBAG
and Chrysler Corporation became wholly-owned subsidiaries of DCAG. Thereafter,
DBAG merged into DCAG. Thus, all the assets and liabilities of DBAG were
transferred to DCAG. Inter alia, these included DBAG’s shareholding in I
Co.

In terms of S. 2(18) of the Income-tax Act, I Co was not a
‘company in which public are substantially interested’.

S. 79 of Income-tax Act disentitles carry forward of losses
of a company in case shares having not less than 51% of the voting power are
transferred.

I Co had suffered loss in its business for several years and
had substantial carried-forward losses. Since DBAG’s shareholding in I Co was
transferred to DCAG, and since DBAG was not listed on stock exchange in India,
the AO proposed to apply provisions of S. 79 to I Co. In respect of the
immediately succeeding year, S. 79 was amended with a view to exempt all cases
similar to that of I Co from the rigours of S. 79. I Co contended that the
amendment was clarificatory and having retrospective effect and requested the AO
to hold that S. 79 was not attracted. The AO however did not accept the
contention and held that I Co was not entitled to carry forward and set off the
accumulated losses. The CIT(A) confirmed the decision of the AO.

Before the Tribunal, I Co also put forth the additional
ground for invoking of ‘ownership non-discrimination’ under Article 24(4) of
India-Germany DTAA.

The tax authorities contended that there was no question of
treaty override or treaty applicability since there was no double taxation of
any income. The Tribunal referred to S. 90(1)(a) of the Income-tax Act and noted
that Clause (a) of S. 90 was substituted with effect from 1st April 2004, to
grant relief even in respect of income only in one jurisdiction and the relief
could be with a view to ‘promote mutual economic relations, trade and
investment’.

The next issue before the Tribunal was whether a resident
assessee could qualify to access protection under DTAA. The Tribunal referred to
Article 24 of India-Germany DTAA and observed that excepting the case of
invoking of PE non-discrimination, it is not necessary that the assessee seeking
treaty protection in one country must belong to or be resident of or be national
of the other country.

To seek protection under Article 24(4) in India, it is
necessary that taxation or any requirement connected therewith in India should
not be other or more burdensome (for a company which is wholly or partly owned
or controlled by a German resident) than the taxation and connected requirements
to which similar Indian enterprises may be subjected. This requires examination
of a ‘similar Indian company’ and ‘taxation or any requirement connected
therewith’ applicable to such similar Indian company. The Tribunal noted that
the basis of differentiation was the stock exchange on which the shares of DBAG
were listed, since if they were listed on a stock exchange in India, S. 79 would
not be attracted. Further, considering that S. 21 of the Securities (Contract)
Regulation Act, 1956 and draft listing agreement indicate that listing agreement
is possible only with ‘a company duly formed and registered under the Indian
Companies Act’, it would not be possible for the German parent company to list
its shares on a stock exchange in India. The Tribunal thereafter observed that
while there were no judicial precedents in India, there were several judgments
by foreign judicial bodies. While such precedents cannot have binding values,
they do deserve due and careful consideration. The Tribunal did refer to these
decisions.