In commercial sense, even tax losses are valued assets and hence need to be carefully evaluated at the time of acquisition.

Recently, the Pune Tribunal in case of DaimlerChrysler India (DIPL) examined the provision relating to carry forward and set-off of losses under Section 79 of the Income Tax Act, 1961 in the backdrop of non-discrimination clause in the India— Germany Tax Treaty (the Treaty). The majority of shares of DIPL, an Indian Company, were held by Daimler-Benz (DBAG), a German company. Pursuant to the merger of DBAG with DaimlerChrysler AG (DCAG), majority of the share capital of DIPL was held by DCAG.

Section 79 restricts the carry forward and set-off of losses in the case of companies in which public is not substantially interested if there is a change of more than 49% of voting power on the last day of year in which loss was incurred and the last day of the year in which  set-off is being claimed.

The law defines the term “company in which the public is substantially interested”. In simple terms, a subsidiary of a company listed on a recognized stock exchange in India is regarded as a “company in which the public is substantially interested”. The tax authorities disallowed the claim of DIPL for set-off of the brought forward losses on the ground that due to the merger there was a change of more than 49% voting rights of DIPL and according to Section 79 such losses are  not allowed to be carried forward and set-off against profits.

Before the Tribunal, DIPL argued, that the provisions of Section 79 of the Act were discriminatory based on the non-discrimination clause of the treaty. The precise point of ownership discrimination was that an Indian subsidiary of an Indian listed parent is treated as a company in which the public is substantially interested whereas an Indian subsidiary of a foreign parent listed on a foreign stock exchange was not treated as a company in which the public was substantially interested. The assessee argued that it was entitled to treaty protection provided by Article 24(4) since a substantial part of the capital was directly owned by listed German parent.

The Tribunal observed that as per the prevalent laws it was not possible for any foreign company to be listed in India and an Indian subsidiary of a foreign parent would thus always stand in a disadvantageous position in comparison to an Indian subsidiary of an Indian listed company. It held that there was no rationale for this differential treatment and held that in light of the provisions of the treaty, the losses of an Indian subsidiary of a German listed parent would not be impacted by the provision of Section 79. The Tribunal had relied on judgments by judicial bodies abroad.

It is interesting to note that Section 79 was amended with effect from 1st April 2000, to make an exception for change in shareholding in Indian subsidiaries of foreign companies, on account of amalgamation / demerger of foreign parent companies. The decision would still be of great value where an Indian subsidiary having carried forward losses is sold by its foreign parent to another listed foreign company based on the non-discrimination ground.

Another aspect is that whilst the amendment in Section 79 provides that the merger of the two foreign companies (irrespective of its status) will not impact the ability of its Indian subsidiary to carry forward and set-off losses, it acts as a discrimination against a merger/demerger between Indian private companies, wherein any transferor companies subsidiary will stand to loose the benefit of brought forward losses as a result of a change of more than 49% voting  rights. It would be appropriate that the law makers amended this anomaly. It is true when they say ‘Even when laws have been written down, they ought not always to remain unaltered”.

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