ITAT buries "Reverse Discrimination"

arun's picture

The recent ITAT ruling in Abu Dhabi Commercial Bank case ( ) , though important, has gone a bit unnoticed or to put it more appropriately – ‘undebated.’ Well it could open a can of worms!

By relying on 5 member ITAT Special Bench ruling in Sumitomo ( in my humble opinion - wrongly ) and allowing deduction for HO expenses to foreign banks pre-2008, what the ITAT has done is quite far reaching – it has affirmed “Reverse Discrimination.” So, it means that Indian cos will be worse off than foreign cos though a special benefit has not been conferred upon foreign cos by the concerned tax treaty. While foreign companies routinely claim the benefit of “non discrimination” ( i.e. foreign company cannot be worse off than Indian company under IT Act ), why should they not be subject to the concept of “Reverse Discrimination”, which was brilliantly explained by a ITAT Bench itself in Mashreq Bank’s case ( which also was incidentally overruled by ITAT in Abu Dhabi Commercial Bank).

ITAT ruling in Mashreq Bank relied on well accepted international principles to lay down this ratio and concept… I quote an important para of ITAT from Mashreq Bank ruling: “In the case of Utah Mines v. The Queen 92 DTC 6194, (1992) 1 CTC 306, and while dealing with the issue whether in view of the provisions of art. 7(3) of Canadian US tax treaty, royalties paid by PE of US company to the provincial Government, which were not tax deductible under the Canadian domestic tax law, could be allowed as deduction, the court observed: “ The interpretation proposed by the appellant, on the other hand, would have the effect of giving a US taxpayer with a PE in Canada a more favourable tax treatment than its Canadian competitor engaged in the same business in this country. Such a result would not be in accordance with the policy expressed in the preamble to the Convention and indeed would be contrary to it, It would take much clearer language than a simple reference to 'all expenses' to bring it about. "

Renowned tax expert Philip Baker ( UK QC ) had these observations to make about Mashreq bank judgment (quoting from 9 ITLR 1062) : " This case turns on specific provisions in DTAA between India & UAE ( which was in a form not found in treaties based on OECD models )..Nevertheless the case is very interesting because of the approach to the interpretation of double taxation agreements. In particular it is interesting to see Indian Tribunal citing foreign court cases, the writings of foreign academics, the Viennna convention of law of treaties & even guidance issued by a foreign revenue authority.. "

In the end I rest my case with the below sentence in the above mentioned Canadian court ruling, quoted by ITAT in Mashreq Bank: “Such a result would not be in accordance with the policy expressed in the preamble to the Convention and indeed would be contrary to it.” ITAT Special Bench ( in Sumitomo ) and now this bench in Abu Dhabi Commercial Bank have loudly given the concept of “Reverse Discrimination” a complete burial. The sad part is – they haven’t even found it fit to discuss the concept in detail or refer to foreign court rulings etc. The Abu Dhabhi ruling of ITAT deserves a reconsideration at the very least........