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Subvention receipts

By Gayatri Sridharan

Many OECD countries have some sort of formal group taxation system. No common approach to consolidation or group taxation, in general, is followed. There are usually two approaches:

Ø Consolidation system also called fiscal unity system which taxes the members of the corporate group as if they were one entity and all their profits and losses are consolidated.

Ø The other approach is the loss transfer system also called the group relief system whereby one member of a group transfers its losses to another group company. The identity of the members is kept intact. By setting off the losses of one entity against the profits of another entity the overall taxable profits of the corporate group is brought down.
In Germany the Organschaft system requires that the profits and losses of the subsidiaries are rolled up into the parent company’s profits. The parent company is required to enter into contracts with each of its subsidiaries in this regard. In Finland also, there is a subvention system providing for shifting of taxable income between groups.
One notices variation in the percentage of common ownership required for group members to participate in the system. Many countries have ownership thresholds of 90 percent or higher. The Bombay High Court had occasion to point out in the case of Indian Textile Engineers (P) Ltd., as reported in [1983] 141 ITR 69 that subvention payment  related to the deficit, expressly made in an agreement between the paying company and the payee company, is governed by Section 20 of the Finance Act, 1953 (UK).

Subvention payments came up again for scrutiny recently once by the Income Tax Appellate Tribunal at Delhi, in the case of Deputy Commissioner of Income Tax v. Lurgi India Co. Ltd reported in 302 ITR (AT) 67 (Delhi bench) and yet again by another bench of the same Tribunal in an unreported decision in the case of Assistant Commissioner of Income Tax Circle 10(1) v. M/s Deutsche Post Bank Home Finance Ltd., [formerly known as BHW Home Fin. Ltd.] in ITA 1405 (Del) of 2010 for the Assessment Year 2005-06 vide order 14th October 2011 which held that such receipts in the hands of the subsidiaries would amount to capital receipts.
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[The author is Consultant, Direct Tax, Lakshmikumaran & Sridharan, Bangalore]
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