AAR: Denial of benefit of Indexed cost of acquisition of asset to a non-resident in a LTCG not discriminatory under Art. 24 of the India-Canada DTAA

Applicant: Transworld Garnet Company Limited on 22^nd February, 2011

AAR No. 843 of 2009

Assessment Year: 2009-10

Question/s before the Hon’ble Authority:

(1) The Second proviso to section 48 provides that no indexation benefit is available to a non-resident in the computation of long term capital gain arising from transfer of shares in an Indian company. Will not the denial of indexation benefit tantamount to discriminatory tax treatment under Article 24 of the India-Canada tax Double Taxation Avoidance Agreement

(2) Whether in computing the capital gains, deduction is admissible under section 48 of the Act on account of the following expenses incurred in connection with transfer of shares? Fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges incurred in connection with transfer.

http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITAC&schT=&csId=b2ad777a-30b9-4442-9a64-5a501395669c&rdb=sec&yr=707cfd24-61fa-4e54-afbd-a98ca85903da&sec=48&sch=&title=Taxmann%20-%20Direct%20Tax%20Laws

Relevant facts: The applicant entered into a share purchase agreement with VV Minerals, a partnership firm registered in India for transfer of its shareholding in TGI. 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 be deducted from the full value of consideration from computation of capital gains. As these expenses are allowable deductions in computing capital gains under section 48, the same should be reduced in calculating the taxable capital gains.

Dismissing the plea of the assessee, the Hon’ble Authority held that:

Para 6: “The Art.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 the residents are taxable on their worldwide income and the 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 the nationals may be non-residents. But being of different nationalities and being non- residents, the nationals cannot be said to be discriminated in terms of Art 24 of the DTAA.”

Para 11: “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.”

The decision is available here.