2004 (2) TMI 279 - AT - Income Tax

Disallowance of deduction u/s 80M - domestic companies - On what basis is a company classified as a domestic company and a foreign company under the Income-tax Act - Whether or not the provisions of section 80M are in discriminatory provisions vis-a-vis French companies assessed to tax in India -HELD THAT - During the course of hearing before us we shared our then prima facie impression with the learned representatives that the discrimination so far as non-availability of section 8M to the foreign companies is concerned if at all that can be termed as a discrimination is not on the ground of nationality but is on the ground as to whether or not the company in question has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of income liable to tax in India have not been made. Learned counsel s reply was that since the appellant company does not have any shareholders in India there is no question of making any prescribed arrangements for the declaration and payment within India of the dividends. It thus implies that conditions u/s 2(22A) of the Act for being classified as a domestic company are satisfied. We are of the considered view that the provisions of Article XXI only deal with the cases of discrimination on the ground of nationality and non-availability of deduction u/s 80M to the foreign companies i.e. companies which are not domestic companies has nothing to do with nationality of a company. On the contrary this classification is at best relatable to requirements connected with residence which as stated in the OECD commentary extracted earlier in this order cannot be a reason enough for invoking the non-discrimination clause. We may add that the provisions of Article 26(1) of the present India France DTAA (209 ITR Statute 130) is materially similar in scope. Accordingly non-discrimination clause in the Indian France DTAA cannot be invoked in the cases where provisions of Indian Income-tax Act more favourable to the domestic companies vis-a-vis foreign companies. Once we come to this conclusion it follows that the case of non-availability of deduction u/s 80M cannot be covered by the non-discrimination clause under the India France DTAA. We therefore see no need to address ourselves to the merits of assessee s grievance about discrimination against foreign companies even if such a discrimination actually exists. The assessee s grievance against CIT(A) s declining the deduction u/s 80M and assessee s reliance on Article XXI of the applicable India France DTAA in support of such a grievance is not sustainable in law. We therefore reject the same. The appeal is allowed.

Summary

Issues Involved:
1. Disallowance of deduction u/s 80M.
2. Disallowance of license fees paid to SEBI.
3. Disallowance of broken period interest.

Summary:

1. Disallowance of Deduction u/s 80M:
The main issue in this appeal is the disallowance of deduction u/s 80M amounting to Rs. 2,70,91,836. The assessee, a foreign company, contended that the deduction should be extended to it based on Article XXI of the India-France Double Taxation Avoidance Agreement (DTAA) regarding non-discrimination. The Assessing Officer and CIT(A) rejected this contention, stating that the deduction u/s 80M is specifically for domestic companies. The Tribunal held that the classification of a company as domestic or foreign under the Income-tax Act is based on the prescribed arrangements for the declaration and payment of dividends within India, not nationality. Therefore, the non-discrimination clause in the DTAA does not apply, and the disallowance of deduction u/s 80M is upheld.

2. Disallowance of License Fees Paid to SEBI:
The assessee's grievance regarding the disallowance of Rs. 5,00,000 paid to SEBI for membership of its merchant banking division was addressed. The Tribunal noted that this issue is covered in favor of the assessee by previous Tribunal decisions in the cases of Marvel Equity (P.) Ltd. and Magnum Equity Broking (P.) Ltd., where such fees were treated as revenue expenditure. Respectfully following these decisions, the Tribunal directed the Assessing Officer to delete the disallowance of Rs. 5,00,000.

3. Disallowance of Broken Period Interest:
The issue of disallowance of broken period interest amounting to Rs. 3,40,02,853 was discussed. The Tribunal observed that this issue is covered in favor of the assessee by the Hon'ble Bombay High Court's judgment in the case of American Express International Banking Corpn. v. CIT [2002] 258 ITR 601. Following this judgment, the Tribunal directed the Assessing Officer to delete the disallowance of broken period interest and give consequential effect accordingly.

Conclusion:
The appeal is partly allowed, with the Tribunal upholding the disallowance of deduction u/s 80M but directing the deletion of disallowances related to SEBI license fees and broken period interest.