Denial of export benefit to US co not discriminatory

MUMBAI: In a verdict crucial to foreign companies operating in India, the Pune Income-Tax Appellate bench has held that the denial of export benefits under Section 80 HHE of the Income-Tax Act to an American company operating in India could not be construed as discrimination between Indian and foreign companies.

This decision is critical in view of the increasing complaints from foreign companies alleging discrimination in tax treatment between them and Indian companies. The company, which approached ITAT claiming that the denial of Section 80 HHE benefit is discrimination under Article 26 of the Indo-American tax treaty, is a US company — Automated Securities Clearance.

The division bench of Pramod Kumar and Mukul Shrawat said differential treatment does not always amount to discrimination. Only when the difference in treatment is proved to be unreasonable — arbitrary and irrelevant — can it be construed as discriminatory. ITAT also pointed to the provisions in the US tax laws for permanent establishment tax levied on foreign companies, higher withholding tax requirements for foreign companies, higher penalties for foreign companies. Therefore, differences in treatment between domestic and foreign companies are institutionalised in the Indo-US DTAA, the tribunal held.

The tribunal further held that difference in treatment was based on the residential status of the company and not on the basis of the location of incorporation.

In this case, the difference in treatment on the issue of tax incentive for export is also in tune with the objectives of the legislation of such laws. The objective of such legislation was to enhance the foreign exchange reserve of the country. Therefore, the difference in treatment in this case is based on a certain rationale. There can be difference in tax treatment between the companies in India and the permanent establishment of other countries in India, but as long as the differential treatment is justified on the basis of dissimilarities in their situation, such treatment cannot be accounted as discriminatory, the tribunal concluded.