2011 (2) TMI 441 - AAR - Income Tax

DTAA - mode of computation of long term capital gains - denial of benefit of indexation in case of non resident - Held that - The denial of the benefit of the second proviso to section 48 of the Act to the applicant, a non-resident assessee while computing capital gains arising from the sale of shares of TGI would not amount to discriminatory treatment in terms of article 24 of the DTAA with Canada.

Issues Involved:

1. Denial of indexation benefit under the second proviso to section 48 of the Income-tax Act, 1961, and its potential discriminatory treatment under Article 24 of the India-Canada Double Taxation Avoidance Agreement (DTAA).
2. Admissibility of deduction for expenses incurred in connection with the transfer of shares under section 48 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Denial of Indexation Benefit and Discriminatory Treatment:

The applicant, a Canadian company, contended that the denial of the indexation benefit under the second proviso to section 48 of the Income-tax Act, 1961, for non-residents on the transfer of shares in an Indian company constituted discriminatory treatment under Article 24 of the India-Canada DTAA. The applicant argued that resident assessees are allowed to claim the indexation benefit, whereas non-residents are not, leading to discrimination against Canadian nationals.

The Authority for Advance Rulings (AAR) analyzed Article 24(1) of the India-Canada DTAA, which seeks to prevent discrimination against nationals of the other Contracting State by ensuring they are not subjected to more burdensome taxation than nationals of the other State in the same circumstances. The AAR noted that discrimination is understood as unequal treatment in an identical situation, and different treatment does not constitute discrimination unless it is arbitrary.

The AAR referred to previous rulings, including the Universities Superannuation Scheme Ltd. case, where it was held that discrimination under the DTAA is based on nationality and not on residential status. The AAR concluded that the different treatment in the computation of capital gains for residents and non-residents under section 48 of the Act is based on residential status and not nationality. Therefore, the denial of the indexation benefit to non-residents does not amount to discrimination under Article 24 of the DTAA.

2. Admissibility of Deduction for Expenses Incurred in Connection with Transfer of Shares:

The applicant sought a ruling on whether expenses incurred in connection with the transfer of shares, such as fees for valuation of business, professional fees, legal expenses, fees for escrow account, and travel and hotel charges, are deductible under section 48 of the Income-tax Act, 1961.

The AAR noted that section 48(i) of the Act allows for the deduction of expenditure incurred wholly and exclusively in connection with the transfer of a capital asset. However, the AAR emphasized the need for verification of the claimed expenses to establish that they were incurred wholly and exclusively for the transfer of shares.

The learned DIT argued that the applicant must establish the exclusivity of the expenses incurred for the transfer and not just for the purpose of the transfer. The AAR agreed that the extraordinary hike in the claimed expenditure required verification.

Given the need for factual verification, the AAR refused to answer the question on the admissibility of the deduction for expenses under section 48(i) of the Act.

Conclusion:

Question No. 1: The denial of the benefit of the second proviso to section 48 of the Act to the applicant, a non-resident assessee, while computing capital gains arising from the sale of shares of TGI, does not amount to discriminatory treatment in terms of Article 24 of the DTAA with Canada.

Question No. 2: The AAR refused to answer the question on the admissibility of deduction for expenses incurred in connection with the transfer of shares due to the need for factual verification.

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