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.
(i) Provisions of tax treaty may be relevant even when
income is not taxed in the hands of assessee. Substitution of Clause (a) of S.
90(1) reflects the ground realities and rightly indicates that in today’s
world, the role of treaties is not only confined to avoiding double taxation
or to give relief in respect of doubly taxed income. Tax treaties are seen as
instruments of fostering economic relations, trade and investment. Treaty
override, even before amendment in 2004, covered all the provisions of the tax
treaties, including the provisions relating to non-discrimination.
(ii) 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, and a resident assessee would qualify for protection under
DTAA. As per Article 24(4) of the treaty, it is not necessary that the
taxpayer, in whose cases non-discrimination is invoked, should be a resident
of the other contracting state. Since the capital of the taxpayer is
substantially owned by a resident of Germany, the coverage criteria under the
enterprise non-discrimination clause of the treaty is satisfied.
(iii) Having regard to the provisions of Article 24(4), the
disability [u/s.79 read with S. 2(18)], of carry forward and set off of
accumulated losses on account of change in shareholding pattern, cannot be
extended to Indian subsidiaries of German parent companies so long as German
parent companies are listed on a German stock exchange recognised under their
domestic laws. To this extent, the rigours of the domestic law relating to
carry forward of losses must stand relaxed due to treaty overriding domestic
tax.
