the principle of non-discrimination in tax treaties...variants of taxation-related discrimination 14...

The Principle of Non-discrimination in Tax Treaties

Research and Insights

June 2019

2 PwC | The Principle of Non-discrimination in Tax Treaties

Contents

Preface 4

Chapter 1. The ‘what’ and ‘how’ of non-discrimination 5 • Whatistaxnon-discrimination? • Paragraph1:Nationality-relatednon-discrimination • Paragraph2:Non-discriminationforstatelessperson • Paragraph3:PE-relatednon-discrimination • Paragraph4:Expense-relatednon-discrimination • Paragraph5:Ownership-relatednon-discrimination • Paragraph6:Taxescovered • Howtoinvokenon-discrimination

Chapter 2. Expense-relatednon-discrimination 11 • AreIndianThinCapitalisationrulesdiscriminatory? • Cannon-discriminationbeexploredinallcasesofdisallowanceof

ThinCapitalisationinterest?

Chapter 3. Variants of taxation-related discrimination 14 • POEMofforeigncompanyandtaxation-relatednon-discrimination • PE-relatednon-discriminationfordeductionofexpenses • Non-discriminationfor‘companyinwhichthepublicaresubstantially

interested’ • Foreigncompanyholding-subsidiarymergerandtaxnon-discrimination • Transferpricingprovisionandnon-discrimination • Requisitioningadditionalinformationfromforeigncompanies–

adiscriminatorymeasure?

Chapter 4. Conclusion 17

3PwC|ThePrincipleofNon-discriminationinTaxTreaties

Glossary

Abbreviation Terminology

BIPA BilateralInvestmentPromotionandProtectionAgreement

OECD OrganisationforEconomicCo-operationandDevelopment

OECDMC OECDModelConvention

PE PermanentEstablishment

POEM PlaceOfEffectiveManagement

TaxTreaty DoubleTaxationAvoidanceAgreement

UN United Nations

UNMC UNModelConvention

US United States

USMC USModelConvention


PrefaceDearreaders,

TheArticleonnon-discriminationwasconceptualisedintaxtreatiesfromoldfriendship,navigationandcommercetreaties,inwhichforeignnationalsweretreatedatparwiththenationalsofspecificcountries.Overtheyears,theambitofthenon-discriminationArticlehasexpandedtocoverotherelementsofnon-discrimination,includingforthepermanentestablishmentofaforeigncompany,expensedeductibility,etc.

Inthisreport,wehavewalkedyouthroughtheframeworkoftheextanttaxnon-discriminationArticlewithelementaryillustrationsandbusiness-relatedtaxincidents.Thisisnotatechnicalresearchpaper,butaimstohelpyoucomprehendtheapplicabilityofthenon-discriminationArticle.Andwhiletheremaybediverseschoolsofthoughtontaxnon-discrimination,whatwehaveattemptedtodointhisreportissimplifytheframeworkofthenon-discriminationArticle.

Inthefollowingchapters,wehaveprovidedinstanceswherecourtsandinternationalcommentarieshaveevaluatedtheapplicationofthenon-discriminationArticleandelaboratedonthelegalroutetoinvokeit.Chapter2,interalia,dealswiththecontemporaneoustopiconwhetherthenon-discriminationArticlecanbeappliedtodisallowanceofinterest-relatedexpenseonaccountofThinCapitalisationrules.Ifyouwanttoquicklymoveahead,youcouldomitChapter1andjumptoChapter2orChapter3,sincethechaptersareorganisedinsuchamannerthatthecontentineachiscomplete in itself.

Non-discriminationisnotgenerallyseenasaforefrontargumentintaxanalysis.Ihopethispublicationhelpstosimplifythenon-discriminationArticleforyou.Foracomprehensivetaxanalysis,youcandeliberateonnon-discrimination-relatedargumentstoensurethatanylegitimatetaxpositiononaccountofdiscriminationindomestic tax laws is not missed.

Wewillbehappytoreceiveyourinputandfeedbackonthisreport.

Happyreading! Frank D’Souza


Chapter 1: The ‘what’ and ‘how’ of non-discrimination

“…a difference in treatment is discriminatory…if it ‘has no objective and reasonable justification’, that is if it does not pursue a ‘legitimate aim’ or if there is not a reasonable relationship of proportionality between the means employed and the aim sought to be realized….”

-EuropeanCourtofHumanRights1

1.1 The nucleus of the ‘non-discrimination’ principle isaptlycapturedintheexcerptabovefromthejudgmentonthenon-discriminationArticle(i.e.Article14)oftheConventionfortheProtectionofHumanRightsandFundamentalFreedoms.Article142providesfornon-discriminationongroundsofsex,race,colour,etc.

1.2 Asthewordsuggests,non-discriminationmeansanti-discriminationoragainstdiscrimination.EventheIndianConstitutionincludesthenon-discriminationprincipleinitsArticle14,whichprovidesthat“…the state shall not deny to any person equality before the law or the equal protection of the laws within the territory of India…”. Non-discrimination principles are also included intheIndiaModeloftheBilateralInvestmentTreaty3,whichstatesthatintentionalandunlawful

discriminationagainstforeigninvestmentonthebasisofnationalityconstitutesbreachoftheBilateralInvestmentTreaty.

1.3 Ingeneral,non-discriminationrulesincludeprinciplesthatdealwithprovisionsofthedomesticlawsofacountrydiscriminatingagainstcertaincategoriesofpersons.Theunderlyingobjectiveisrootedinensuringequality,sothatsuchpersonsarenottreateddifferentlyduetotheirdisparatecharacteristics.Theaimistoresolvenon-discrimination-relatedproblemsbymeansoffairandequitabletreatment. This is enshrined in taxation laws in taxtreaties.Ourreportseekstoprovidefocusedinsightsontax-relatednon-discriminationfromthe standpoint of direct tax and its practical applicationinIndia.

1. InthecaseofWalkerv.theUnitedKingdom,Applicationno.37212/022. Article14oftheConventionfortheProtectionofHumanRightsandFundamentalFreedomsprovidesthat“The enjoyment of the

rights and freedoms set forth in Convention shall be secured without discrimination on any ground such as sex, race, colour, lan-guage, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.”

3. Article4.1oftheIndiaModelofBIPAprovidesthat‘each Party shall not apply to Investments, Measures that accord less favourable treatment than that it accords, in like circumstances to domestic investments with respect to the management, conduct, operation, sale or other disposition of Investments in its territory.’

FurtherArticle4.2providesthat,‘a breach of Article 4.1 will only occur if the challenged Measure constitutes intentional and unlawful discrimination against the Investment on the basis of nationality.’


What is tax non-discrimination?1.4 Article24oftheOECDMC(2017),theUNMC

(2018)4andUSMC20065 comprise the non-discriminationArticle.OneoftheprimeobjectivesoftheArticleistoensurethatthesourcecountrydoesnotlevyanadditionaltaxationburdenonforeigninvestmentsvis-à-visdomesticinvestments.ThisArticleismeanttosupportthegoalofefficientallocationoftaxingrightsbetweenasourcecountryandanationalorresidentcountry,andthereby,supplementsthetax-relatedprinciplesofthetaxtreaty.Thenon-discriminationArticleisincorporatedinmosttaxtreatiessignedbyIndia,withafewexceptionssuchasitstaxtreatywithOman,SaudiArabiaandGreece.

1.5 Beforeweconcentrateonthegranularaspectsofthetax-relatednon-discriminationArticleandunderstanditspracticalapplication(asdetailedinChapter2andChapter3),itisimperativeforustounderstanditsbasicstructureanddenotation.

1.6 Thenon-discriminationArticleintheOECDMCisdividedintosixparagraphs.Thefirstfivedealwithdifferenttypesofdiscriminationinasourcecountry,i.e.nationality-baseddiscrimination,discriminationagainststatelesspersons,anddiscriminationrelatingtoPE,expenseandownership.ThelastparagraphdealswiththescopeoftaxescoveredundertheArticle.However,everyparagraphisaself-containedprovisioninitselfandshouldbereadon its own.

1.7 TheprimeobjectiveofArticle24istoidentifydiscriminativetreatmentinspecificcircumstances.Therefore,anyotherformofdiscriminationthatisnotcoveredinthefiveparagraphsofthenon-discriminationArticlecannotberegardedasanunwarrantedprovision.Moreover,insuchcases,thepleaofnon-discriminationcannotbeused.

Paragraph Particulars

Paragraph1 Nationality-relatednon-discrimination

Paragraph2 Non-discrimination of stateless person

Paragraph3 PE-relatednon-discrimination

Paragraph4 Expense-relatednon-discrimination

Paragraph5 Ownership-relatednon-discrimination

Paragraph6 Taxescovered

4. ConsideringthatOECDMCandUNMChavesimilarlanguagefornon-discriminationprovision,whereverinthepublication‘OECDMC’isreferred,thesameanalogycanalsobeappliedfortheUNMC

5. TheUSMCissimilarinlanguagetoOECDMC,withexceptionofanadditionalparagraphfordividend,‘Nothing in this Article shall be construed as preventing either Contracting State from imposing a tax as described in Paragraph 8 of Article 10 (Dividends)’

1.8 Paragraph1dealswithnationality-relatedtaxnon-discrimination.Itestablishesthatfortaxationpurposes,discriminationonthebasisofnationalityisforbidden,i.e.nationalsofonecountrycannotbesubjectedtoadditionaltaxationcomparedtothenationalsofthesourcecountry.Thisishoweversubjecttoboththenationalsbeinginthesamecircumstancesinthesourcecountry.Andunlikeintherestofthetaxtreaty,thepeculiarityofthisparagraphliesinitsemphasisonthenationalityof persons rather than on their residential status. Therefore,apersonmaybeanationalofonecountryandyetnotaresidentofthatcountry,andviceversa.Asacorollary,thisparagraphalsocoversanationalofonecountry,whomaynotbearesidentofanyofthetwocountriesinvolved.

1.9 Toillustratethisfurther,‘A’,anAustraliannationalearninganincomeinIndia,shouldnotbetreateddifferentlyinIndiavis-à-visIndiannationals,othercircumstancesremainingthesame.Thisisthecase,irrespectiveoftheresidentialstatusof‘A’inAustralia.Inthiscontext,thetaxationtreatmentaccordedto‘A’inAustraliaisirrelevant.

Paragraph 1: Nationality-related non-discrimination

“…Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States…”

-Paragraph1inArticle24ofOECDMC


1.10 Thenationalityandresidentialstatusofacompanyisgenerallybasedonthecountryofitsincorporation.ThecommentaryonOECDMCprovidesaclassicexamplethatelucidatesnationality-baseddiscriminationwithrespecttocompanies.ThefollowingcasestudyisexplainedwithareferencetoDiagram1.1:

• UnderthedomesticIncomeTaxlawof‘countryS’,companiesincorporatedinitorwiththeirPOEMinitareitsresidents.

• UnderthedomesticIncomeTaxlawof‘countryN’,onlycompaniesthathavetheirPOEMinitareits residents.

• Company‘N’hasitsPOEMin‘countryS’,andthereforeisitsresidentaccordingtothetaxlawsof‘countryN’and‘countryS’.

• Companies ‘S1’ and ‘S2’ are incorporated in ‘countryS’andareresidentinit.

• Thedomestictaxlawof‘countryS’providesthatdividendspaidtoacompanyincorporatedin‘countryS’byanothercompanyincorporatedinitare exempt from tax.

Diagram 1.1

Country N Country S

Dividend Exempt? Dividend exempt

Company S1

Company NPOEM in country S Company S2

1.11 Inviewofthis,‘companyN’willhaveitsPOEMin‘countryS’andwillbearesidentof‘countryS’forthepurposeofthetaxtreatyofcountrySandcountryN.However,dividendspaidby‘companyS1’to‘companyN’willnotbeeligibleforthisexemption,ascompanyNisnotincorporatedin‘countryS’,eventhoughit(therecipientcompany)is in the same circumstances with respect to its residencyas‘companyS2’(whichisincorporated

in‘countryS’).Therefore,taxationofdividendsinthehandsofcompanyNwouldbediscriminatorytreatmentandconstituteabreachofParagraph1.

1.12 Againstthebackdropgivenabove,itispertinenttodwellonthemeaningoftheexpression‘taxation and connected requirements’usedinParagraph1.ThisisalsorelevantforotherparagraphsofArticle24.Theterm ‘taxation’goesbeyondonlytaxrates.Itreferstodifferentparametersintaxcomputationandincludesthoseparametersreferringtodeductionofbaddebts6 andprofit-linkeddeductions7.Practicalinsightson

‘taxation’arefurtherelaboratedinChapter3.

1.13 Theexpression‘connected requirements’ does not refer to taxation as such8,buttoallotherobligationsthatmayberequiredtomakethetaxlevyconcrete.Inthiscontext,theOECDMCsuggeststhat‘connected requirements’ include formalities connected with taxationsuchastaxreturnfiling,paymentoftaxesandprescribedtimelines9.AcaseinpointistheobservationmadebythePunebenchoftheTribunalin Daimler Chrysler India10thatanypreconditionsuchascarryforwardoflossesthathasavitalbearingondeterminationoftaxliabilityisarequirementconnected with taxation.

1.14 Thecrucialelementofthisparagraphisthatnationalsofbothcountries(i.e.thesourcecountryandthenationalcountry)needtobeinthe‘same circumstances’. This means that the nationals need tobeinsubstantiallysimilarcircumstances,bothinlawandfact,forapplicationoftaxationlawsandregulations.Moreover,the‘same circumstances’ can beseenintheirformofconstitution,forinstance,aforeignproprietorshipconcerncannotbesaidtobeinthesamecircumstancesasadomesticcompany.Similarly,thePEofaforeignbankcannotbesaidtobeinthesamecircumstancesasadomesticbank.

1.15 InthecontextofIndiantaxlaw,Paragraph1canbeinvokedincircumstanceswhenanyprovisionoftheIncome-taxAct,1961orataxtreatydiscriminatesagainsttaxationofthenationalofanothercountryvis-à-visthatofanIndiannational.Forinstance,section80R11andsection80RRA12oftheIncome-taxAct,1961wereobserved13tobediscriminatoryunderParagraph1,asthesesectionsonlyapplytocitizensofIndia.

6. StandardCharteredBankv.IAC(1991)39ITD57(MumbaiTribunal)7. CreditLlyonnaisv.DCIT(2005)94ITD401(MumbaiTribunal)8. Reginav.InlandRevenueCommissionersExp.CommerzbankAG[S.T.C.]271(QBD),publishedinCommonMarketLawReview3,

633(1991)9. OECDMC(2017)para15ofArticle2410. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)11. Section80RoftheIncome-taxAct,1961istheprovisionfordeductioninrespectofremunerationreceivedbycitizensofIndiafromcertain

foreignsourcesinthecaseofprofessors,teachers,etc.However,nodeductionisavailableunderthissectionwitheffectfrom01April,200412. Section80RRAoftheIncome-taxAct,1961providesfordeductioninrespectofremunerationreceivedbycitizensofIndiaforser-

vicesrenderedoutsideIndia.However,nodeductionisavailableunderthissectionwitheffectfrom01April,200413. CreditLlyonnaisvsDCIT[2005]94ITD401(Mum)


1.16 Tosumup,fromtheperspectiveofIndia’staxlaw,ifyouareanationalofanycountry(otherthanIndia),andaresubjectedtoburdensometaxationinIndiavis-à-visanIndiannational,youmightwanttoexplorehowthisArticlecanhelpyouagainstsuchdiscrimination.

1.19 Paragraph3dealswithtax-relatednon-discriminationforaPE.ItemphasisesthattaxationleviedonthePEofaforeignenterpriseinitssourcecountryshouldnotbelessfavourablethantaxationoftheenterprisesofthecountryconductingthesameactivities.ThesourcecountrymaychoosetobutisnotobligedtograntpersonaltaxallowancesorreductionstothePEsofnon-residentindividuals,whichitmayhavegrantedtoitsownresidents.Theparagraphdoesnotprohibitthis.

1.20 Toillustratethisfurther,acompanyincorporatedinSpainmayhaveaprojectofficeinIndia,whichistobeconsideredaPEfortheIndia-SpainTaxTreaty.ByvirtueofParagraph3,suchaPEshouldnotbetaxedlessfavourablyinIndiavis-à-visanIndiancompanycarryingonthesameactivitiesinthecountry.

1.21 TheequaltreatmentgrantedbythisparagraphtoPEsvis-à-visresidententitieshaswidespreadinferences.Attheveryoutset,thisparagraphdoesnotrequirethe same rate of tax15tobeleviedontheprofitsofthePEofaforeigncompanyasthatleviedonaresidentcompany.Thisanalogyisderivedasresidentsareusuallytaxedontheirglobalincome,whereasnon-residentsareonlytaxedonincomesourcedfromaparticularcountry.Tofurtherfortifyitsposition,IndiahasreserveditsrighttoclarifyinthecommentarytotheOECDMCthatahighertaxrateleviedontheprofitsofaPEthanthatforasimilarIndiancompanywillnotbeinconflictwiththisparagraph.16

14. IndianTaxTreatywithRomaniaandLatviacontainstheParagraphofnon-discriminationforstatelesspersons15 AdvanceRulingApplicationNo.P-16of1998,Inre[1999]236ITR103(AAR)16. IndiahasalsoinsertedanExplanationtosection90oftheIncome-taxAct,1961,stating,‘…the charge of tax in respect of a foreign

company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.’

Paragraph 2: Non-discrimination of a stateless person

“…Stateless persons who are residents of a Contracting State shall not be subjected in either Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of the State concerned in the same circumstances, in particular with respect to residence, are or may be subjected…”.


1.17 Paragraph2isrelevantforastatelesspersonwhoisnot considered a national of either of the countries foraparticulartaxtreaty.Thisparagraphprovidesthatstatelesspersonsshouldnotbesubjectedtomoreburdensometaxation,comparedtothenationalsoftheconcernedcountry.However,itisimportantthatstatelesspersonsandcomparativenationalsareinthesamecircumstances,especiallywith respect to their residential status.

1.18 Theintentofincludingthisparagraphwastoextend ‘national treatment’ to stateless persons whoreceiveassistancefromUNagenciesandperhapsenjoyprivilegesattachedtothosewhoarenationalsofaparticularcountry.Butthesestatelesspersonsarestillnotregardedasthecountry’s‘nationals’.However,thereislimitedapplicationofthisparagraph,andsomecountriessuchasIndia14,Japan,theUSAandSwitzerlandhavereservedtherightnottoinsertit.

Paragraph 3: PE-related non-discrimination

“…Taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents…”.



1.22 Thephraseology‘less favourable’ treatment in Paragraph3iswithrespectto‘taxation’alone.Thus,equaltreatmentintaxationshouldbeaccorded,e.g.deductionofexpenses,claimofdepreciation,carryforwardorbackwardoflossesandclaimingoftaxincentives.Consequently,itisclearthatParagraph3doesnotextend‘lessfavourable’treatmentto‘connectedrequirements’.Asacorollary,connectedrequirementssuchasstringentinformation-relatedrequirements,groupconsolidationrulesandtransferpricing-relatedenquiriesfortransactionswithassociatedenterprisescannotbeconsideredtobeprohibitedbyimplyingthisparagraph.ThismakesitdistinctfromParagraph1,whichdealswith‘taxation and connected requirements’.

1.23 InthecontextofParagraph3,Indiancourt17 hasobservedthatthePEofaforeignenterprisewhoseactivitiesincludeborrowingandlendingofmoney,butwhichisnotregisteredasabankinIndia,cannotbesaidtobecarryingonthesameactivitiesasthoseconductedbyadomesticbank.Inanotherinstance,whereinPEnon-discriminationwasapplied,theCourt18 held that claimofataxincentiveprovisionfordevelopmentofeconomicallybackwardareascannotbedeniedtoaPEifitfulfilsthesameconditionsasthoserelevantforresidententerprises.

1.24 Tosumup,fromtheperspectiveofIndiantaxlaw,ifyouareaforeigncompanywithaPEinIndia,thisPEcannotbeaccordedlessfavourabletaxation-relatedtreatmentthananIndiancompany,whichiscarryingonthesameactivities.

1.25 Paragraph4dealswithexpense-relatednon-discrimination.Itemphasisesthataresidentcompanyshouldbeeligibletoclaimdeductionfordisbursementstoanon-residentforthepurposeofdeterminingitstaxableprofits,ifdeductionunderthesameconditionsisavailablewhenpaidtoaresident.SuchanexpenseclaimissubjecttotherigoursoftheArm’sLengthprincipleoftransferpricingenumeratedinArticle9(1),Article11(6)andArticle12(4)oftheOECDMC.Thesamesituationmayalsooccurinthesphereofcapitaltaxationinregardtodebtscontractedtoanon-resident.19 Thisparagraphdoesnotprecludecountriesfromintroducingmeasurestocurbtaxavoidanceordoublenon-taxationbyeitherbilaterallymodifyingtheirtaxtreatiesorintroducinganti-avoidancedomestictaxrules,aslongasthesemeasuresarecompatiblewiththeprovisionsofthetaxtreaty.

1.26 Toillustratetheabove,byvirtueofParagraph4,anIndiancompanyshouldbeeligibletoclaimexpenseforinterestpaidtoaFrenchcompanyif the interest expense in the same conditions is deductibleifpaidtoanotherIndiancompany.

1.27 Torecapitulate,fromtheperspectiveofIndiantaxlaw,ifyouareanIndiancompanymakingpaymenttoanon-resident,andsuchpaymentwouldbeaneligibleexpensehaditbeenmadetoaresidentpayee,thenpaymenttoanon-residentshouldalsobedeductiblefromitstaxableprofits.Moreover,onthebasisofthisparagraph,anyrestrictiononsuchpaymentsbyvirtueofdomestictaxlawwouldbediscriminatory.Chapter2ofthispublicationappraisesthisparagraphandanalyseswhethertherecentlyintroducedIndianThinCapitalisationrulesarediscriminatoryinnature.

17. ChohungBankvsDDIT[2006]286ITR231(Mum)18. RajeevSureshbhaiGajwanivsACIT[2011]8ITR(T)616(Ahmedabad)(SB)19. OECDMC,Para73toArticle24

Paragraph 4: Expense-related non-discrimination

“…Except where the provisions of Paragraph 1 of Article 9, Paragraph 6 of Article 11, or Paragraph 4 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State…”



1.28 Paragraph5dealswithownership-relatednon-discrimination.Theobjectiveofthisparagraphistoensurenon-discriminativetreatmenttoresidenttaxpayers,irrespectiveofwhoownsorcontrolscapital.Itdoesnotextendthebenefittonon-residents that own or control capital.

1.29 Toelaborateonthisfurther,letustaketheinstanceofahypotheticalIndiancompanywithItalianshareholders.ThecompanyshouldnotbesubjectedtomoreburdensometaxationorconnectedrequirementsthanthosesubjectedtoanIndiancompanywithIndianshareholders.

1.30 Thephrase‘taxation or connected requirements’ is similarlyinterpretedinParagraph1ofthisArticle.The term ‘other similar enterprises’ implies that foreign-ownedandlocallyownedsubsidiariesshouldbecomparable,andthatsuchforeign-ownedsubsidiariesshouldnotbecomparedwithsubsidiariesownedbytheresidentsofathirdcountry.

1.31 IncontextofParagraph5,theIndianCourt20 held thatanIndiancompanywhoseforeignholdingcompanyhasshareslistedonaforeignstockexchangeshouldbetreatedatparwithanotherIndiancompanythathasshareholderswhosesharesarelistedonanIndianstockexchange.

1.32 Tosummarise,fromtheperspectiveofIndiantaxlaw,ifyouareanIndiancompanywithaforeignshareholding,youcannotbesubjectedtomore

1.33 Paragraph6isgeneralinnatureandseekstocoverallformsoftaxes,irrespectiveoftheprovisionsofArticle221,whichcoveronlytaxesonincomeandcapital.TheUSCommentarytoitsMCconsidersCustomsDutytobeoutsidetheambitofthisparagraph.ManyIndiantaxtreaties22havelimitedthescopeofthisparagraphtoonlycoverthetaxestowhichthetaxtreatyapplies.

How to invoke non-discrimination1.34 Thebasicframeworkofthenon-discrimination

Articlecoverswithinitsambitfivespecificcircumstanceswhereindiscriminationcanbechallengedbyataxpayer.ThenextgermanepointisthemannerinwhichtheArticleisinvoked.

1.35 Theobligationtoproveapplicationofthenon-discriminationArticleisonthetaxpayer.UndertheIndiantaxationregime,taxpayershavetwobroadroutestheycanfollowtofacethetaxauthority―areactiveoneandaproactiveone.Theycanapplythisinterpretationwhilefilingtaxreturnsandanswerthetaxofficeratthetimeofassessmentorauditproceedings(inthereactivemodel).Andifthetaxofficerdoesnotagreewiththeirinterpretationofnon-discrimination,theycanoptforthetraditionalappellatemechanismorfileanapplicationwiththecompetentauthoritiesthroughtheMutualAgreementProcedure23.Alternatively,taxpayerscanfileanapplicationwiththeAuthorityforAdvanceRulings24toobtaincertaintyonitstaxinterpretation(inthepro-activemodel),eitherbeforeorafterfilingtaxreturns,butbeforetheissueisraisedbythetaxofficerinauditproceedings25.

20. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)21. Article2providesforTaxesCoveredundertheTaxTreaty22. Thetermtaxationisdefinedtomean,‘taxes to which this Convention applies’intheIndianTaxTreatieswithBrazil,Mauritius,Slovak

Republic,NewZealand,Japan,Morocco,SwissConfederation,China,Denmark,Kuwait,Italy,Singapore,Bangladesh,Indonesia,UK,SouthAfrica,China,Poland,UAE,UAR(Egypt),Philippines,Bhutan,Bulgaria,Ukraine,Qatar,Malta,Mongolia,Zambia,Thailand,Belarus,Uzbekistan

23. MAPisfiledunderTaxTreaty(correspondingtoArticle25oftheOECDMC),withinthreeyearsfromthefirstnotificationoftheaction,resultingintaxationnotinaccordancewiththeprovisionsoftherespectiveTaxTreaty

24. AdvanceRulingApplicationNo.P-16of1998,Inre[1999]236ITR103(AAR)25. Section245RoftheIncome-taxAct,1961prohibitstheacceptanceofapplicationfiledbeforetheAAR,iftheissueisalreadypending

beforeanyincome-taxauthorityorappellatetribunaloranycourt

Paragraph 6: Taxes covered

“…The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description…”


Paragraph 5: Ownership-related non-discrimination

“…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 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…”


burdensometaxationorconnectedrequirementsvis-à-visthatleviedonanyIndiancompanywithanIndianshareholding.


Chapter 2: Expense-related non-discrimination

intheIndia-USAtaxtreatywastoensurenon-discriminationintheconditionofdeductibilityofpaymentinthehandsofthepayerwherethepayeeiseitheraresidentoranon-resident.Thisobjectivewouldbedefeatedduetothediscriminationagainstthenon-residentpayee,bydisallowingtheexpenseinhandsofpayerifnotaxwaswithheldwhilemakingpaymentforadministrativeservicesintermsofsection40(a)(i)oftheIncome-taxAct,1961,whenanalogousprovisionsforresidentpayeeswerenotprovidedforinthetaxlaws.29

2.4 Whatalsomeritsattentionarethefollowingexceptions of expense-related non-discrimination outlinedatthebeginningofParagraph4:

• Article9(1):Transferpricingadjustmentfortransactionsbetweenassociatedenterprises

• Article11(6):Non-applicationofbeneficialprovisionsofthetaxtreatyfortaxabilityofinterest in the source state due to a special relationshipbetweenthepayerandthebeneficialowner of such interest income

• Article12(4):Non-applicationofbeneficialprovisionsofthetaxtreatyfortaxabilityofroyaltyin the source state due to a special relationship betweenthepayerandthebeneficialownerofsuchroyaltyincome

2.5 Paragraph4providesthatexceptinthescenariosmentionedabove,deductibilityofpaymentstonon-residentsshouldbeatparwithdeductibilityofpaymentsmadetoresidents.Againstthisbackground,itisrelevanttoanalysewhetherIndianThinCapitalisationrules,whichprovidefordisallowance of interest-related expense paid to non-residentassociatedenterprises,canbesaidtobediscriminatoryinnature.

2.1 Paragraph4ofthenon-discriminationArticle26 aims toprovideparityindeductibilityofexpensestopayerswhenpaymentismadetonon-residents,comparedtopaymentmadetoresidents.Thisparagraphprovidesforexpense-relatednon-discriminationforthebenefitofpayers(andnotpayees).Whatisimportanthereisthatdeductibilityofexpensesistobeviewed‘under the same conditions’whiledeterminingtaxableprofits,subjectto‘exceptions’providedinArticle9(1),Article11(6)orArticle12(4).

2.2 The expression ‘under the same conditions’ refers to the nature of receipt and conditions of deductibility.Acaseinpointissection40(a)(i)oftheIncome-taxAct,1961,whichprovidesfordisallowanceofpaymentmadetonon-residentsontheir failure to withhold taxes. Prior to the insertion ofsection40(a)(ia)27,similarpaymentsmadetoresidentswerenotdisallowed.Insuchscenarios,whenthesamepaymentwasmadewithoutwithholdingtaxestoresidentsandnon-residents,disallowancewasonlyattractedonpaymentmadetonon-residents.Thus,paymentsweremadeunderthesamecircumstances,butdisallowanceofpaymenttoonlynon-residentswasdiscriminatoryin nature.

2.3 Dealingwiththephrase‘under the same conditions’,theDelhiHighCourt(inthecaseofHerbalife)28heldthatlackofparityinallowingpayment(tonon-residentvsresidentpayees)asdeductionresultedindiscrimination.Inthiscase,thetaxofficerdisallowedpaymentmadebyanIndianpayertoaUSentityforcertainadministrativeservicesrenderedbythelatter.TheDelhiHighCourtobservedthattheobjectoftheexpense-relateddiscriminationparagraph

26. Article24(4)oftheOECDMC27. FinanceAct(No2)2004introducedsection40(a)(ia)toendthediscriminativetreatment,andprovidesfordisallowanceofexpenses

madetoresidentsonaccountoffailuretowithholdapplicabletaxes28. CITvsHerbalifeInternationalIndia(P.)Ltd[2016]384ITR276(DelhiHC)29. Therehavebeennumerousjudgmentsonthisissuewhereinitwasheldthatsection40(a)(i)oftheActwasdiscriminativetowards

non-residents.MillenniumInfocomTechnologiesLtdvsACIT[2008]117TTJ456(Delhi);CentralBankofIndiavsDCIT[2010]42SOT450(Mumbai);B4UInternationalHoldingsLtdvsDCIT[2012]18ITR(T)62(Mumbai);DCITvsIncentTours(P.)Ltd.[2012]25taxmann.com222(Delhi)


Are Indian Thin Capitalisation rules discriminatory?2.6 Attheoutset,countriessuchasArgentina,Russia

andTunisiareservedtherighttoincludeaprovisiontoapplyThinCapitalisationmeasuresintheirdomesticlaws,notwithstandinganyotherprovisionsoftheOECDMC.IndiahasnotmadesimilarreservationsorclarificationforThinCapitalisationrulestotheOECDMC.

2.7 India’sThinCapitalisationruleswereintroducedundersection94BintheIncome-taxAct,1961witheffectfrom1April2017.Section94Bprovidesthatinterest-relatedexpensesclaimedbyanIndiancompanyorthePEofaforeigncompany(inrelationtointerestpaidtoitsnon-residentassociated enterprise or to a lender that is not anassociatedenterprise,buttheloanisbeingexplicitlyorimplicitlyguaranteedbyanassociatedenterprise)willbedisallowedforthelowerofthefollowingamounts:

• Totalinterestminus30%ofitsearningsbeforeinterest,taxes,depreciationandamortization

• Interestpaidorpayabletoassociatedenterprise

2.8 Toillustratethefactsmentionedabove,letustakethehypotheticalcaseofanIndiancompany,whichavailsaloanfacilityfromitsassociatedenterprisewhoisataxresidentofFrance.TheIndia-FranceTaxTreatyincludesrelevantprovisionscorrespondingtoArticle9(1),Article11(6)andArticle24(4)oftheOECDMC.TheIndiancompanypaysaninteresttotheFrenchassociatedenterpriseaccordingtothetermsoftheagreement.Withregardtothistransaction,Article10(1)oftheIndia-FranceTaxTreaty[correspondingtoArticle9(1)ofOECDMC]providesfortransferpricing-relatedadjustmentinthetaxableprofitsofthepayer,iftheinterestpaidisinexcessoftheArm’sLengthprice.Similarly,Article12(7)oftheIndia-FranceTaxTreaty[correspondingtoArticle11(6)oftheOECDMC]providesthatbeneficialprovisionofthetaxtreatywillnotbeavailabletothepayeetotheextentoftheinterestpaymentinexcessoftheArm’sLengthprice.

2.9 Thisinterestpayment,beinganinternationaltransaction,wouldhavetocomplywiththetransferpricingArm’sLengthprinciple,andthusbeinlinewithArticle10(1)andArticle12(7)oftheIndia-FranceTaxTreaty.Ontheotherhand,

IndianThinCapitalisationrulesarebasedontheprofitabilityparametersofanIndiancompany,i.e.subjectto30%ofitsearningsbeforeinterest,taxes,depreciationandamortisation.Therefore,theIndiancompanyhavingbusinesslossesorwithoutsufficientprofit,willsufferduetodisallowance of interest expense under section 94BoftheIncome-taxAct,1961,irrespectiveofthisbeingatArm’sLength.

2.10 Inviewoftheillustrationaboveunderpoint2.8,theissuetobeanalysediswhetherdisallowanceofArm’sLengthinterestpaymentbyanIndianpayertoitsFrenchassociatedenterpriseisinviolationoftheexpense-relatednon-discriminationparagraphoftheIndia-FranceTaxTreaty.

2.11 Thisissuecanbeanalysedfromtwoperspectives.Accordingtooneschoolofthought,disallowanceofinterestduetoIndianThinCapitalisationrulesisdiscriminatory,andhence,notpermitted.Thereasoningisthatsection94BoftheIncome-taxAct,1961isonlyapplicableinrespectofinterestpaymentsmadetoanon-residentassociatedenterprise,andthereisnosimilarprovisionundertheActtodisallowsimilarpaymentstoresidentassociatedenterprises.Consequently,accordingtoArticle26(4)oftheIndia-FranceTaxTreaty[correspondingtoArticle24(4)oftheOECDMC],interestpaidbyanIndiancompanytoaresidentofFranceshouldbedeductiblebyvirtueoftheexpensenon-discriminationparagraph.

2.12 Accordingtotheotherschoolofthought,discriminationinArticle26(4)oftheIndia-FranceTaxTreaty[correspondingtoArticle24(4)oftheOECDMC]iswithrespecttocomparisonofdeductibilityofnon-residentpaymentvsresidentpayment.India’sThinCapitalisationrulesonlylimit deduction of interest paid to non-resident associated enterprises and not all non-residents. Therefore,ThinCapitalisationrulescannotbesaidtobediscriminatory,butarebasedontheresidentialstatusofthepayee.Hypothetically,ifThinCapitalisationruleshadprovidedforlimitationoftheinterestpaidtonon-residents,whetherornottheywereassociatedenterprises,thenintheabsenceofasimilarprovisionforresidentpayees,ataxpayermayhaveresortedtotheoptionofexpense-relatednon-discrimination.WiththeextantframeworkofThinCapitalisationrules,itispossibletotakeastandthattheserulesarenotdiscriminatoryvis-à-vistheresidentialstatusofthepayee(residentvsnon-resident).


2.13 Inviewofcontraryschoolsofthought,thisintricateissuemaycreateconvolutedtaxpositionsintheindustryandresultinprotractedlitigation.Theneedofthehouristhereforetoreceivecomprehensiveguidanceonthisfromlawmakers.Andifthisisnotforeseen,taxpayersmayneedtotakeproactiveactiontoobtaincertaintyontheirtaxpositionsbyseekingadvancerulings.

Can non-discrimination be explored in all cases of Thin Capitalisation disallowance of interest?2.14 Indiahasenteredtaxtreatieswithmorethan95

countries,andthecountisgrowing.However,not

alltaxtreatieshavesimilarlanguageforexpense-relatednon-discriminationasthatoftheOECDMC.Forexample,India’staxtreatieswiththeUK,Singapore,etc.donotincludeaparagraphonexpense-relatednon-discrimination.However,itstaxtreatieswithAustralia,China,Finland,France,Germany,Israel,Japan,Korea,Malaysia,theNetherlands,Norway,SouthAfrica,Spain,SwitzerlandandtheUSAincludeaparagraphonexpense-related non-discrimination such as that oftheOECDMC.Thisimpliesthatpaymentofinterest to associated enterprises in the countries mentionedabovecouldberelevantforapplicationof the expense-related non-discrimination argumentifthisisnotdeductibleunderIndia’sThin Capitalisation rules.

Australia China Finland France Germany

Israel Japan Korea Malaysia Netherlands

Norway South Africa Spain Switzerland USA

Diagram 2.1: India’s tax treaties with expense-related non-discrimination paragraph


Chapter 3: Variants of taxation-related discrimination

theapplicablesurchargeandcess)willcontinuetoapplytoforeigncompanieswithPOEMinIndia.

3.4 Withthetaxratesapplicableforaresidentforeigncompanybeingdifferentfromthoseforaresidentdomesticcompany,themootpointiswhetherdifferenttaxratesfortworesidentcompaniescanbeconsideredasdiscriminationunderthenon-discriminationArticle.Inthisinstance,itisrelevanttorefertotheexamplefromthecommentarytotheOECDMCdiscussedinpoint1.10andpoint1.11above.InreferencetothediscussionondiscriminationintheOECDMC,foreigncompanieswithIndianPOEM,sufferingfromdifferenttaxtreatmentbasedexclusivelyontheirnationality32,mayconsidertakingrecoursetothenon-discriminationArticle.

PE discriminated against for deduction of expenses3.5 Section44CoftheIncome-taxAct,1961restricts

deductionofheadoffice-relatedexpenses(i.e.executiveandgeneralexpenses)uptoamaximumof5%oftheadjustedtotalincomefromthebusinessorprofessionofaPEinIndia.Article7(3)ofthetaxtreatyprovidesthataPEshouldbeallowed deduction for expenses in accordance withtheprovisionsofdomesticlaw.Article24(3)oftheOECDMCprovidesfornon-discriminationinrelationtotaxationofthebusinessprofitsofPEsvis-à-visresidentcompanies.

3.6 Therefore,thequestioniswhetherdomesticlaw-related restrictions amount to discrimination

3.1 The expression ‘taxation’findsitsplaceinmultipleparagraphsofthenon-discriminationArticle.Theseparagraphsprovidethat‘taxation’cannotbediscriminatoryinthefollowingcases:

• Paragraph1:Onthebasisofthenationalityofthetaxpayer

• Paragraph2:Forstatelesspersons

• Paragraphs3:ForPEs

• Paragraph5:ForanIndiancompanythatisforeign-owned

3.2 Thenon-discriminationArticleofmanyIndiantaxtreaties30definethephrase‘taxation’asthetaxestowhichtheyapply.Incaseswheretheterm‘taxation’isnotdefined,itneedstobeinterpretedin a manner that is wider than the rate of tax levied.Thismeansthattheambitof‘taxation’isdiverse.Againstthisbackdrop,thefollowingparagraphsdelvefurtherintothepracticalaspectsofdiscriminatorytreatmentenshrinedinArticle24oftheOECDMCvis-à-vis‘taxation’.

POEM of foreign company and tax-related non-discrimination3.3 POEMisanewlyintroducedconceptinIndia’s

domestictaxlaws.ThedefinitionofacompanyresidentinIndiahasbeenrevisedtoincludeaforeigncompanywhosePOEMisinIndiainaparticularyear.TobuttressimplementationofPOEMprovisionsinIndia,theGovernmenthasissuedanotification31dated22June2018,which,interalia,providesthatthetaxrateof40%(plus

30. Thetermtaxationisdefinedtomean,‘taxes to which this Convention applies’ intheIndianTaxTreatieswithBrazil,Mauritius,SlovakRepublic,NewZealand,Japan,Morocco,SwissConfederation,China,Denmark,Kuwait,Italy,Singapore,Bangladesh,Indonesia,UK,SouthAfrica,China,Poland,UAE,UAR(Egypt),Philippines,Bhutan,Bulgaria,Ukraine,Qatar,Malta,Mongolia,Zambia,Thailand,Belarus,Uzbekistan

31. NotificationNo.S.O.3039(E)dated22June201832. AcompanyincorporatedoutsideIndiaisgenerallytreatedasnationalofthecountryofitsincorporation


againstthePEsofforeigncompanies,sincethereisnosimilarrestrictionforIndiancompanies.TheMumbaibenchoftheTribunal,inthecaseof Metchem Canada,33 held that restriction on admissibilityoftheheadofficeoverheadsofthePEofaCanadiancompanyconstituteddiscriminationagainstthePEvis-a-visadomesticIndianentitybecausenosuchrestrictionwasapplicablefordeductionoftheheadofficeoverheadsoftheIndiancompany.Accordingly,Article24(2)oftheIndia-CanadaTaxTreaty[similartoArticle24(3)oftheOECDMC]washeldtooverridetheprovisionsofArticle7(3)andtherestrictionimposedbysection44CoftheIncome-taxAct,1961washeldasdiscriminatory.AnanalogycanalsobeinferredforthebenefitofthePEsofforeigncompaniesfromothercountries,whoseIndiantaxtreatiesuseasimilarlanguage,e.g.Mauritius.

3.7 CertaintaxtreatiessignedbyIndia,suchasthosewithVietnam,theUSA,Spain,Sweden,Germany,FinlandandCyprus,specificallyprovidethattheprovisionsofArticle7(3)willprevailoverPE-relatednon-discrimination.Therefore,insuchcases,therestrictionsindomesticlawswillnotbetreatedasdiscriminatoryagainstaPE.

Non-discrimination for a ‘company in which the public are substantially interested’3.8 Section2(18)oftheIncome-taxAct,1961defines

a ‘company in which the public are substantially interested’toincludeacompany,thesharesofwhoseparentcompanyarelistedonarecognisedstockexchangeinIndia,inaccordancewiththeSecuritiesContracts(Regulation)Act,1956.Thisconceptof‘companyinwhichthepublicaresubstantiallyinterested’isrelevantinmultipleprovisionsoftheIncome-taxAct,1961,suchasdeemeddividendtaxabilityprovidedinsection2(22)(e)34,carryforwardandset-offofbusinesslossesprovidedinsection7935.

3.9 InthecaseofDaimler Chrysler India36,thePunebenchoftheTribunalexaminedwhetheranIndiancompanycanbesaidtobea‘company in which the public are substantially interested’ if

thesharesofitsGermanshareholdingarelistedoninternationalstockexchanges(andnotonanIndianstockexchange).TheTribunalobservedthatthesharesofaforeignparentcompanycouldneverhavebeenlistedonarecognisedstockexchangeinIndia,andtherefore,anIndiansubsidiaryofaforeigncompanywouldalwaysbeinadisadvantageouspositioninthesensethatthesharesofitsforeignparentcompanywouldonlybelistedoninternationalstockexchanges,andsoitwouldnotbetreatedasa‘company in which public are substantially interested’.Ontheotherhand,accordingtotheTribunal,theIndiansubsidiaryofadomesticcompanywouldbeentitledtobea

‘company in which public are substantially interested’ ifthesharesofitsdomesticparentcompanywerelistedinarecognisedstockexchangeinIndia.

3.10 Inthisfactualmatrix,theprecisepointofownership-relateddiscriminationwasthatanIndiansubsidiarywithanIndianparentcompany,whoseshareswerelistedonarecognisedstockexchangeinIndia,wouldbetreatedasa‘company in which the public are substantially interested’.However,ifthesubsidiaryofanIndiancompanyhasaGermanparentcompany,whoseshareswerelistedinanyinternationalstockexchange,itwillnotbegiventhe status of a ‘company in which public are substantially interested’.Thereisnorationalbasisforthisdifferenceintreatment,andthereforetheprovisionsofsection79,readwithsection2(18),wereheldtobeincompatiblewiththeownership-relatednon-discriminationprovisioninArticle24(4)oftheIndia-GermanyTaxTreaty[correspondingtoArticle24(5)oftheOECDMC].

3.11 Similartotheabove,theanalogyinapplyingnon-discrimination to a ‘company in which the public are substantially interested’canalsobeappliedinothersectionssuchasthatontaxabilityofadeemeddividend.TakingacuefromthedecisiononDaimler Chrysler India37,theIndiansubsidiaryofaforeignlistedshareholdercantaketheshelterofownership-relatednon-discriminationprovisionswhileprovidingloansoradvancestoitsshareholdersoronbehalfofitsshareholders,andarguenon-applicationoftaxabilityasdeemeddividends.

33. MetchemCanadaInc.vsDCIT99TTJ70234. Section2(22)(e)oftheIncome-taxAct,1961,interalia,providesthatifacompany(otherthanthecompanyinwhichpublicaresubstantially

interested)givesaloanand/oradvancetoitsshareholders,thensuchloanistreatedasadeemeddividendinthehandsoftheshareholder.35. Section79oftheIncome-taxAct,1961providesthatataxpayer(otherthana‘companyinwhichthepublicaresubstantially

interested’),shallhavetherighttocarryforwardandsetoffthebusinesslossonfulfillmentofcertainconditions.Onesuchconditionbeingthatonthelastdayoftheyearpertainingtoset-offofbusinesslosses,thesameperson/s,whoheld51%ofthesharesonthelastdayoftheyear/swhensuchlosswasincurred,beneficiallyheld51%oftheshares.

36. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)37. DaimlerChryslerIndia(P)Ltd.v.DCIT(2009)29SOT202(Pune)


Foreign company holding subsidiary merger and tax-related non-discrimination3.12 India’sdomestictaxlawsprovideforexemption

fromCapitalGainsTaxincertaincorporaterestructuringcases.Acaseinpointissection47(via)oftheIncome-taxAct,1961,whichprovidesforexemptionontransferofanIndiancompany’ssharesbyaforeignshareholdercompanyamalgamatingwithaforeignamalgamatedcompany,subjecttosatisfactionofthefollowingconditions:

(a) Atleast25%oftheshareholdersoftheamalgamatingforeigncompanycontinuetoremainshareholdersoftheamalgamatedforeigncompany.

(b) Suchatransferdoesnotattracttaxoncapitalgainsinthecountryinwhichtheamalgamatingcompanyisincorporated.

3.13 Condition(a)stipulatedaboveraisesaquestionaboutwhetherthemergerofawhollyownedforeignsubsidiarywithaforeignholdingcompanyshouldbecoveredunderthissection47(via),hypotheticallyassumingthatcondition(b)abovewillbefulfilled.However,basedonstringentapplicationofthelaw,theanswerseemstobeinthenegative.Interestingly,theFinanceAct2012introducedanexceptioninsection47forissueofsharesbyanamalgamatedcompanyinthecaseofthemergerofaholding-subsidiary.TheMemorandumtoFinanceBill2012aptlysuggeststhatinaholding-subsidiarymerger,itisnotpossibleforanamalgamatedcompanytoissuesharestoitself.Hence,legislativeamendmentswereproposed.Thereafter,theprovisionsofsection47(vii)relatingtodomesticamalgamationsofholdingsubsidiarieshavebeenrelaxed.However,nosimilarrelaxationisavailableforforeignmergersinsection47(via).

3.14 Inthecaseoftheforeignmergermentionedabove,theamalgamatingforeigncompanymaynotbeeligiblefortaxexemptionundersection47(via)duetonon-satisfactionoftheconditionmentionedabove.Inthisregard,itmaybearguedthattheforeigncompanyisdiscriminatedagainstincomparisonwithanIndiancompany,whichiseligiblefortaxexemptiononaholdingsubsidiarymergerundersection47(vi).Thislineofthoughtisworthexploring,althoughitcouldbeargued

thatsection47(vi)envisagestheresultingentitytobeanIndiancompany,andtherefore,cannotbecomparedwithsection47(via),whichenvisionsaforeigncompany.

Application of transfer pricing provision – a case of discrimination?3.15 Article7oftheOECDMCprovidesthat

attributionofincomeorexpensestoaPEshouldbeaccordancewithArm’sLengthstandards.Similarly,byvirtueofArticle9,transactionsbetweenaresidententerpriseandaforeignenterpriseshouldbeinlinewiththeArm’sLengthprinciple.Thus,onecannotimplythatapplicationoftransferpricingrulestothePEofaforeignenterpriseinIndiaresultsintaxationofthePE,whichislessfavourablyleviedthanthatondomestic enterprises38,andtherefore,thereisnodiscrimination in this case.39

Requisitioning additional information from foreign companies – a discriminatory measure?3.16 In Indian audit or assessment proceedings, a tax

officer may seek additional information from a non-resident company to ensure similar levels of compliance and verification. In this context, there is no discrimination when a foreign enterprise is required to provide additional information, including transfer pricing-related enquiries that may be different from the requirements imposed on a local enterprise during tax proceedings.40

38. OECDMC(2017)para42ofArticle2439. M/sTechnipItalyS.P.AvsDCITITANo.7171/DEL/201740. OECDMC(2017)para75ofArticle24


Chapter 4: Conclusion

4.1 Theconceptoftax-relatednon-discriminationiscomplexandthought-provoking.AndwiththedearthofIndianrulingsonthesubjectofnon-discriminationandevolvingtaxation,thereisenoughroomforopendebate.Inthiscontext,taxpayersfirstneedtoidentifytheapplicabilityofthenon-discriminationArticletotheircircumstances.Thiscanbedeterminedbyundertakingadetailedanalysisofthecategoryofdiscriminationincoherencewiththelanguageoftherelevanttaxtreatiesandconditionsprovidedtherein.

4.2 Thisreportprimarilyfocusesonnon-discriminationinIndiantaxlawsforinboundinvestments,butthebenefitofnon-discriminationcanalsobeexploredforIndia’soutboundinvestmentsmadeinforeigncountries,subjecttotheirtaxlaws.


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