The Application of DTAAs: Daimler Chrysler v. DCIT - Part I

In a recent decision (Daimler Chrysler India Pvt. Ltd. v. DCIT), the Pune Bench of the Income Tax Appellate Tribunal elaborately addressed several questions of law related to the application of Double Taxation Avoidance Agreements. This post will highlight the issues involved; while the reasoning and the decision will be looked at in a later post.

The facts:

Under the Indian Income Tax Act, 1961, Section 79 states that where there is any change in shareholding resulting in a change in more than 51% of the voting rights in the company, not being a company in which the public is substantially interested, no losses incurred in a year before the relevant previous year may be carried forward or set off against the income earned in the previous year.

Under Section 2(18) of the Act, a subsidiary of a public company whose shares are listed in a recognized stock exchange in India is treated as a company in which the public is substantially interested. On the other hand, a 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. Thus, a subsidiary of a company listed on the BSE will be a company in which the public is substantially interested; while that will not be the case with a subsidiary of a company listed on the NYSE.

In the facts of the case before the Tribunal, the assessee was a company incorporated in India. At the beginning of the relevant financial period, 81% of assessee’s share capital was held by a German company, Daimler Benz; and the balance 19% by an Indian company, TELCO. In the relevant financial period, Daimler Benz and the Chrysler Corporation, USA, decided to merge. A new company called Daimler Chrysler was formed in Germany for this purpose. In the process of the merger, all the assets and liabilities of Daimler Benz were transferred to Daimler Chrysler. One of these assets was the shareholding in the assessee company.

In view of these facts, there was a change in shareholding pattern of the assessee company as the shares held by Daimler Benz were transferred to Daimler Chrysler. Daimler Chrysler was not listed on any recognized stock exchange in India; and the assessee was prima facie not a “company in which public are substantially interested”. Therefore, the Revenue sought to apply the provisions of Section 79 to prevent the assessee from carrying forward and setting off its previous losses.

The assessee claimed that the provisions of Section 79 could not be validly invoked in view of the Indo-German DTAA. In particular, the contention of the assessee was that the invocation of Section 79 violated the “non-discrimination” clause in the DTAA. The contention was, effectively, that the assessee was being discriminated against, as other Indian companies were allowed to set off their losses. Notably, it was admitted that there was no double taxation as such.

The Tribunal had to deal with several issues, including the following ones:

• In the absence of any double taxation, can the provisions of a DTAA be invoked?
• If the provisions of the DTAA do apply, has there been any discrimination against the assessee, resulting in violation of the non-discrimination clause? Should the assessee be compared with any other Indian company (in which case, there would be discrimination as the other company would be treated as a company in which the public were substantially interested, thereby precluding the application of Section 79) or with another Indian company controlled by a foreign company (in which case there would be no discrimination, as Section 79 would continue to apply)?

The decision and the reasoning will be discussed in another post soon.