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Foreign MNCs can now carry forward losses
February, 02nd 2009

Its a decision that is bound to make the acquisition of MNCs Indian subsidiaries more attractive on grounds of

The Pune bench of the Income Tax Appellate Tribunal (ITAT) has decided to allow the carry forward of losses incurred by the Indian subsidiary of a German company, after the parent company merged with a US company.

Carry forward of losses, as described under Section 79 of the Income Tax Act, is allowed in India when a companys ownership changes, only if the acquiring company is listed in India or is a subsidiary of a listed company here.

Companies use this accounting technique, which applies the current years net operating losses to future years profits, in order to reduce tax liability.

However, the section does not deal with a situation when the subject company is a subsidiary of a foreign company that is listed abroad. This was the question posed before ITAT by DaimlerChrysler India, a subsidiary of German parent DaimlerChrysler. The German company merged with US auto major Chrysler in May 1998. Post merger, the Indian subsidiary sought to carry forward losses.

Earlier, the I-T department, relying on Section 79 of I-T Act, had declined to allow carry forward of losses, post merger. The Commissioner of Income-Tax (Appeals) upheld the departments stand on the issue. The ground for denial was based on the fact that the parent company, in this case a German entity, and was not listed in India.

However, ITATs Pune bench, comprising accounting member Pramod Kumar and judicial member Mukul Shrawat, decided that the benefits of the tax treaty between the two countries should be accorded to the Indian subsidiary of the German company as well.

Tax treaties usually focus on avoiding a situation in which the same income is taxed in two jurisdictions. However, ITAT also took into account the fact that all Double Taxation Avoidance Agreements (DTAA) do contain provisions against discrimination.

ITAT, pointing out the non-discrimination clauses of the DTAA between India and Germany, held that the benefits given to an Indian subsidiary of a company listed in India cannot be denied to the Indian subsidiary of a German company.

The tribunal also observed that the functions of tax treaties in the current world do not confine to avoiding double taxation, but also for fostering economic ties, trade and investments. Said senior chartered accountant TP Ostwal: This is a very interesting decision wherein resident companies are given the benefit of non-discrimination.

This judgement lays down a very important principle of non-discrimination that could facilitate M&A transactions, especially divestment of Indian subsidiaries by foreign companies, Ketan Dalal, ED of PricewaterhouseCoopers, said.

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