TMI Blog2010 (7) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant could not have prepared its accounts in accordance with the provisions of Part II and III of Schedule VI of the companies Act, 1956 - Section 115JB is not designed to be applicable to the case of the applicant, a foreign company, who has no presence or PE in India. - section 115JB of the Act are not applicable on the sale of shares of a listed company Timken India Limited, by the applicant, which has suffered securities transaction tax and accordingly, tax exempt under section 10(38) of the Act. - A.A.R. No.836 of 2009 - - - Dated:- 23-7-2010 - Mr.Justice P.V. Reddi (Chairman) Mr.J.Khosla, (Member) Mr. V.K.Shridhar (Member) Name Address of the applicant The Timken Company 1835 Dueber Avenue Sw., Canton, Ohio - 44706 0 0928, USA Commissioner concerned Director of Income-tax (International Taxation) Kolkata. Present for the applicant Mr.Percy Pardiwalla, Sr. Advocate M/s.Rajan Vora, K.T.Chandy, Chavali Narayan, Chartered Accountants Ms. Preeti Goel, Advocate Mr.Sridharan R., CFO Present for the Department None RULING (By Mr. V.K.Shridhar) The applicant is a Company formed under the laws of the State of Ohio, USA and is a global manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities transaction tax and accordingly, tax exempt under section 10(38) of the Act? iv) If the provisions of section 115JB of the Act are applicable to the Applicant, whether the payments made to the Applicant on sale of the shares would suffer any withholding tax under section 195 of the Act and if yes, whether tax at 15% of the net capital gains would be required to be withheld? 3. The applicant is of the view that the capital gains, if any, arising from the above transaction would be exempt from tax under Section 10(38) of the Income Tax Act, 1961 (herein after referred to as Act) and therefore no tax is deductible under section 195. The applicant submits that the provisions of MAT contained in Section 115JB cannot be made applicable to foreign companies who do not have any presence or PE in India. 4. The relevant provision of section 10(38) is extracted as under: "10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - (38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where - (a) the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any previous year relevant to the assessment year commencing on or after the 1st day of April, 2007, is less than fifteen per cent of its book profit, such book profit shall be deemed to be total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax @ of fifteen per cent. (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956); Provided further that where the company has adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company covered by section 115JB. 6.1 The applicant submits that for the purposes of section 115JB while interpreting the meaning of the word 'Company' as appearing therein, it would be inappropriate to read only clause (ii) of section 2(17) without considering the opening line of section 2. Under the Act the term 'Company' is defined as follows: "In this Act, unless the context otherwise requires." "Company means (i) any Indian company; or (ii) any body corporate incorporated by or under the laws of a country outside India; or ." The applicant contended that the definition of "company" is qualified by the expression 'unless the context otherwise requires'. In CIT v. B C.Srinivasa Shetty (1981) 128 ITR 294, the Supreme Court held that the definitions in section 2 are subject to an overall restrictive clause that is expressed in the opening words of the section "unless the context otherwise requires". Hence it would be necessary to enquire as to whether contextually the expression capital asset as used in section 45 would include goodwill. The apex Court in this regard held that goodwill cannot be described as an asset within the meaning of section 45 and hence any capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t MAT applies only to domestic companies. 6.3 The applicant contended that it is well established that CBDT Circulars are not only binding on the tax department but quite apart from their binding character, they are clearly in the nature of contemporaneous exposition furnishing legitimate aid in the construction of the provisions. In this regard, reliance can be placed on K.P.Verghese v. ITO 131 ITR 597, wherein the Supreme Court has held as follows: "These two circulars of the CBDT are, as we shall presently point out, binding on the tax department in administering or executing the provision enacted in sub-s. (2), but quite apart from their binding character, they are clearly in the nature of contemporanea exposition furnishing legitimate aid in the construction of sub-s. (2). The rule of construction by reference to contemporanea exposition is a well-established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous . It is clear from these two circulars that the CBDT, which is the highest authority entrusted with the execution of the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. The relevant extracts of the Finance Minister's speech in the Parliament while placing the Finance Bill 1996 are as follows: "I propose to introduce a "Minimum Alternate Tax (MAT) on companies. In a case where the total income of the company, as computed under the Income-tax Act after availing of all eligible deductions is less than 30 percent, of the book profit, the total income of such a company shall be deemed to be 30 percent. Of the book profit and shall be charged to tax accordingly. The effective rate works out to 12 percent of book profit calculated under the Companies Act." Thus, while introducing section 115JA, the Finance Minister stated that the effective rate of tax was 12%. In the assessment year 1997-98, the tax rate applicable in case of domestic company was 40%. Accordingly, the rate of tax was worked out at 12% of book profits (as 30% of book profits was deemed to be the income). In case of a foreign company, in the assessment year 1997-98, the rate of tax was 55%. Accordingly, if the provisions were applicable to a foreign company, the rate of tax would be 16.5% and not 12%. It is evident from this distinction that the provisions of MAT, was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shown in the profit and loss account in the relevant previous year prepared in accordance with the provisions of Parts II and III of the Sixth? Schedule to the Companies Act, 1956, subject to certain adjustments, which increase or decrease the book profits. A large number of companies interpreted the provisions to mean that in case they were following an accounting year (under the Companies Act, 1956), which is different from the previous year under the Income-tax Act (i.e. period ending on 31st March) then the provisions of section 115J do not apply to them. This interpretation was based on the understanding that section 115J does not make it mandatory for a company to prepare its profit and loss account on 31st March of any year in case it is following an accounting year which ends on a different date. As this was against the legislative intent, the Amending Act has made it mandatory for all companies to prepare their profits and loss account for the previous year ending 31st March to determine "book profits" for the purposes of this section even if it is having a different accounting year for the requirements under the Companies Act. This amendment will come into force with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words, the first proviso cannot apply in case of foreign company. If the first proviso does not apply, one cannot compile profit and loss account for the purposes of the section. 6.9 Then, reference has been made to the Explanation below sub-section (2) various adjustments/deductions are to be carried out in the net profit as shown by the Profit and Loss Account. The deductions under chapter VIA of the Act are applicable only to an Indian Company and/or other resident non-corporate assesses. Similarly, clause (vii) of the Explanation provides that the profits of a sick industrial company under certain circumstances shall not be subject to tax under section 115JB. It may be noted that section 3(d) of the Sick Industrial Companies Act, 1985 defines a company as a company as defined in section 3 of the Companies Act, 1956. Section 3(1) of the Companies act, 1956 defines a, company as a company formed and registered under the Companies Act, 1956 or an existing company as defined in section 3(ii). A foreign company is not a company formed and registered under the Companies Act, 1956. Consequently, a foreign company can never be considered as a Sick Industrial Company. Thus clause (vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act are filed by the applicant with the return, nothing prevents the applicant from doing so for the heads of income shown in the return. The Department further contends that at the end of the day, Net Profit as per Part II and III of the Schedule VI of the Companies Act is nothing but excess of income over expenditure in the P/L account prepared in accordance with Part II and III of the Schedule VI of the Companies Act. In the case of the applicant, if items of income are credited in the P/L account without any corresponding debit of the expenditure in the same then the whole of the income would qualify as 'Net Profit' in the P/L account of the applicant as per Part II and III of the Schedule VI of the Companies Act. Now, for computation of "Book Profits", the Net Profit in the P/L account as per Part II and III of the Schedule VI of the Companies Act has to be increased or reduced by certain items as enumerated in Explanation 1 to section 115JB(2) of the Act. If these enumerated items do not exist in the case of the applicant, then the 'Net Profit' in the P/L account as per part II and III of the Schedule VI of the Companies Act would itself become the "Book Profit" of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was not convinced that there was any difficulty to determine the profit and loss made by a foreign company in its Indian business. Under the Companies Act, every foreign company has to maintain its books of account relating to Indian business in the manner provided under section 209 and in each calendar year it has to file its world account. Three copies of the world account are to be delivered under section 594. Copies of balance sheet of Indian business account duly audited have to be filed with the Registrar within 9 months of the close of financial year. Even though Section 115JA contain drastic measures for taxing the income of a company, this Authority held the view that provision will apply "notwithstanding anything contained in any other provision of this Act". It applies to all companies, which will include a foreign company according to the definition given by section 2(17) of the Act. When section 115JA speaks of a company, there is no reason to restrict the meaning of a company to a domestic company. The fact that applicant company is a tax resident of Netherlands and has got only a Permanent Establishment in India does not make any difference to the position in law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted." This has been reiterated in the case of Kerala State Industrial Development Corporation Ltd (259 ITR 51) as under: "That the Finance Minister's speech can be relied upon to throw light on the object and purpose of the particular provisions introduction by the Finance Bill has been recognized by this Court in K.P.Varghese vs. ITO (1981) 131 ITR 597 (SC), at 609." Again in the case of R B Falcon (A) Pty Ltd,301 ITR 209)(SC), it was held that: "Rules of executive construction in a situation of this nature may also be applied. Where a representation is made by the maker of legislation at the time of introduction of Bill or construction thereupon is put by the executive upon its coming in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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