Daimler Chrysler v. DCIT - Part III: Non-Discrimination

(In Part I of this post, I had looked at fact of a recent case before the Pune Bench of the Income Tax Appellate Tribunal in Daimler Chrysler v. DCIT. Part II analysed one of the issues covered by the Tribunal – whether a DTAA applies in the absence of double taxation. The present Part III looks at the issue of “non-discrimination”)

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 subsidiaries of a foreign company were being discriminated against vis-à-vis the subsidiaries of an Indian company; and this resulted in the non-discrimination provisions of the DTAA being violated.

The relevant provision of the DTAA was Article 24, which read in the relevant parts as follows:

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any other requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State … are or may be subjected…

...

4. 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 other 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…

(Clause 1 is typically known as a “nationality-based non-discrimination clause; while clause 4 is typically known as an ‘ownership-based non-discrimination clause”)

The issue turned on what “other similar enterprise” in Article 24(4) would mean. In determining whether Article 24(4) was violated or not, the Revenue contended that the Tribunal should compare the treatment accorded to the subsidiary of a foreign company with the subsidiaries of another foreign company. They cannot be compared with subsidiaries of a domestic company. In assessing whether any discrimination had occurred, against what class of companies was the assessee to be compared? Vis-à-vis any subsidiary of any foreign company, the assessee had suffered no discrimination. The claim of discrimination was sustainable only if a subsidiary of a foreign company was compared with a subsidiary of a domestic company (which would not be affected by Section 79).

The Tribunal surveyed the case-law on the point from different jurisdictions. American, German and French Courts had taken the position that to determine whether or not there has been any discrimination, what needs to be examined is the “differentiation in treatment of a company which was a subsidiary of a foreign company vis-à-vis a company which is a subsidiary of a domestic company…” On the other hand, a House of Lords judgment in Boake Alleen Ltd. v. HM Revenue (available here) supported the case of the Revenue.

The Tribunal analysed the House of Lords judgment in great depth, and came to the conclusion that the judgment was inaccurate. The House of Lords had assumed incorrectly that an ownership-based non-discrimination clause [Article 24(4)] was conceptually similar to a nationality-based non-discrimination clause [Article 24(1)]. A nationality-based non-discrimination clause seeks to ensure that no discrimination takes place on account of the nationality of a taxpayer in a host country. On the other hand, an ownership-based non-discrimination clause seeks to ensure that the investment of foreign capital is not made disadvantageous to the entity in which the capital is so invested. This rationale of the ownership-based non-discrimination clause would be defeated unless a comparison was made between a subsidiary of a foreign company vis-à-vis a subsidiary of a domestic company. The Tribunal therefore disagreed with the House of Lords, and cited with approval the following passage by an eminent expert, Kees van Raad, with approval:

The qualification “other similar” is not remarkably precise. In view of the fact that the subject of discrimination is a foreign controlled enterprise, it would be obvious to interpret the term “other” in description of the enterprise to which is must be compared, as referring to control by local residents…”

In view of this, the Tribunal rejected the contention of the Revenue. Therefore, according to the Indo-German DTAA, the rigour of Section 79 could not be applied to the assessee in the case. The carefully reasoned decision indicates that within the DTAA regime, foreign-owned subsidiaries must be treated on par with Indian-owned subsidiaries.