TMI Blog2011 (2) TMI 441X X X X Extracts X X X X X X X X Extracts X X X X ..... 27-11-1998 1,147,606 11,476,060 Lot III 25-6-1999 394,700 3,947,000 Lot IV 16-12-1999 6,392,748 63,927,480 Total 11,384,614 113,846,140 2. The applicant entered into a share purchase agreement on June 10, 2008 with VV Minerals, a partnership firm registered in India for transfer of its shareholding in TGI. The applicant does not dispute that the income arising out of the transfer of shares is income deemed to accrue or arise in India and chargeable to tax under the head Capital gains . As the shares have been held for a period of more than 12 months and are considered as long-term capital assets the gains on transfer of such shares are subjected to long-term capital gains. An application was preferred by TGI with the TDS officer for determining the rate of tax deduction required on the sale consideration and an order was passed on July 3, 2006, by the Income-tax Officer, International Taxation-II, Chennai, authorizing VVMinerals to deduct tax at the rate equal to 21.115 per cent. on long-term capital gains. 3. The applicant draws attention to section 48 of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmits that the second proviso to section 48 provides that where the capital gain arises from transfer of capital asset is long-term, the cost of acquisition to be deducted from the full value of consideration is the indexed cost of acquisition, i.e., after taking into account the inflated tax base. The second proviso also provides that the benefit of deducting the indexed cost of acquisition by taking into account the cost inflation index is not available to non residents on transfer of shares in an Indian company. Explanation (iii) to section 48 defines the indexed cost of acquisition as an amount which bears to the cost of acquisition the same proportion as the cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later . The applicant further submits that in the capital gain computation mechanism for non-resident assessees, the cost of acquisition of the asset, expenditure incurred for effecting the transfer and consideration for effecting the transfer is required to be converted into the same f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicant submits that it wishes to invoke the provisions of article 24 of the India-Canada DTAA providing protection against discrimination against nationals of the other Contracting State. It is submitted that resident assessees are provided with a benefit to claim indexation benefit for the cost of acquisition, whereas non-residents are denied the benefit on the basis of applicability of the second proviso to section 48 of the Act. Therefore, there arises a situation where Canadian companies (such as TGBC) holding shares in an Indian company are prevented from availing of the benefit of indexation in the computation of capital gains. This treatment is tantamount to discrimination of a Canadian national vis-a-vis an Indian national. The applicant submits that it had incurred expenses wholly and exclusively in connection with transfer of the shares mentioned supra. These expenses are : fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges. It is contended that section 48 of the Act provides that expenditure incurred wholly and exclusively in connection with transfer will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are or may be subjected. 9. The DTAA with Canada seeks to prevent discrimination of the nationals of the other Contracting State. The article aims at ensuring equality of treatment to nationals of the Contracting State so that they are not subjected to any taxation requirement, which is more burdensome than nationals of other State are subjected to in the same circumstances. Discrimination is understood to be unequal treatment in an identical situation. Different treatment does not constitute discrimination unless it is arbitrary. Article 24 therefore seeks to prevent differentiation solely on the ground of nationality and against nationals as such. A comparison cannot be made between a resident and a national of a State and a national of another State to contend that they must be taxed in the same way. The State is not obliged to extend the same privileges which it accords to its own residents to one who is not. For example residents are taxable on their worldwide income and non-residents are not. Therefore, discrimination on account of nationality other than residence may be prohibited. A foreign national may be resident and an Indian national may be non-resident. Both na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of any income arising from the transfer of securities (as long-term capital assets) exceeds 10 per cent. of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then such excess has to be ignored. In other words, without taking away the right of computation under the second proviso to section 48, FIIs have been extended the benefit of limiting the tax rate to 10 per cent. on the capital gains arising from the transfer of long-term capital assets being securities. Under the scheme of section 115AD which applies to FIIs like the applicant (which does not apply to domestic companies and resident assessees), FIIs are taxed at 10 per cent. of the gains computed under section 48 without indexation, therefore, the proviso puts them on par. Thus, there cannot be said to be any discrimination on that basis. Further, they cannot also be said to be operating in the same circumstances inasmuch as FIIs can undertake only delivery based transactions, they are not subjected to margin requirement ; they have no restrictions on repatriation of profit out of the country and they have overall cap in taking equity possession. It may be pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate is not obliged to extend the same privileges which are available to its own residents and to those who are not. No discrimination can be said to have occurred on the basis of nationality in this case. 11. The learned advocate for the applicant placed reliance in the case of Metchem Canada Inc. [2006] 284 ITR (AT) 196 (Mumbai). In this case the assessee was a non-resident company and engaged in the business of erecting, commissioning and running of HRC project in Gujarat. It claimed deduction in respect of the allocation of overhead expenses incurred by the head office. It was contended that in addition to the deduction of normal business expenditure of a permanent establishment as permitted under the domestic taxation laws, deduction is also required to be allowed for a proportion of overhead expenses incurred by the head office. Referring to article 24 of the DTAA, it was held that by placing a restriction on the deduction of head office expenditure, which was not applicable in the case of resident companies, constituted less favourable tax treatment in India than the taxation levied on Indian enterprises carrying on the same activity in India. Hence the limitation on dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation . . . all that is relevant is that national of one of the Contracting States . . . should not be discriminated against for the reason of nationality in the other Contracting State . . . . It is not even necessary that a person seeking treaty protection under this clause should be resident of any of the Contracting States . From these remarks of the learned Income-tax Appellate Tribunal, it can not rather be said that nationality is the only criteria for article 24(1) to apply as averred by the learned advocate. 13. The next case relied upon by the learned advocate is of SMS Demag Pvt. Ltd. [2010] TIOL-135-ITAT-DEL. In this case the appellant made payment to a non-resident company for the purchase of software. The appellant contended that the payment was not an expenditure which would fall under consideration under section 40(a)(i). It was held that as the provision of section 40(a)(i) was not applicable to the appellant for the assessment year 2000-01, it could not be made applicable to a foreign national because of non-discrimination clause 24(1) of the DTAA with India and Germany. The case simply lays down that the law as applicable should be applied. In fact, withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AAR). Even the DTAA agreement with the U. K. clarified that the non-discrimination clause should not be construed as a bar to the imposition of a higher rate of tax on a foreign company. 17. Regarding the expenses incurred in connection with the transfer of shares, the learned DIT referred to the letter dated July 23, 2008 addressed to the applicant by the Income-tax Officer (International Taxation), Chennai, on the subject deduction of tax under section 197 of the Act. The learned DIT pointed out that the applicant had estimated the expenditure to be Rs. 11,71,550 whereas the expenditure now claimed is Rs. 3,00,31,748. The extraordinary hike of the expenditure requires verification of the claim made before the Authority. The learned advocate responded by saying that the applicant could not make a proper estimate as it was made in August, 2008. Later there was a revision in the sale consideration. The learned advocate prayed that while giving ruling fetters may not be attached in case the allowability of the expenditure is to be considered after verification by the Revenue. 18. We have perused the details appearing in the invoices filed by the applicant for claiming expen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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