9911796707
TMI Blog2010 (7) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Company from TISCO in compliance with the laws of India. The dates of acquisition of shares of the Company by Timken USA are as below: Date of acquisition No. of shares 24-07-1991 (Public issue) 6,000,000 22-11-1991 (Public issue) 11,000,000 13-04-1994 (Rights issue) 8,500,000 15-0301999 (Acquisition of shares from TISCO) 25,499,988 50,999,988 Timken India Ltd is listed on the Bombay Stock Exchange. The applicant proposes to transfer 50,999,988 equity shares held by it in Timken India to Timken Mauritius Ltd as part of its global restructuring exercise. For this purpose the approval of concerned statutory authorities including RBI has been obtained. The applicant has held the said equity shares for more than 12 months and it is stated that transfer of such shares would be effected through the Bombay Stock Exchange during the current financial year. 2. On the above facts stated by the applicant, the following questions are formulated by the applicant for seeking advance ruling: "i). Whether the provisions of section 115JB of the Act relating to payment of Minimum Alternative Tax ("MAT") are applicable only to domestic Indian companies? ii) If the answer to Quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising on transfer of long term equity share in a company fulfilling the requirements in clauses (a) and (b) would not be included in the total income of a person. However, in the case of a company, it would be taken into account in computing the book-profit and income tax payable under section 115JB. Therefore, in a case where the income arising on transfer of long term equity share in a company is taken into account in computing the book-profit, the book profit so determined should be such on which income tax should be payable under section 115JB. Thus, if no income tax is payable under section 115JB even after including the income arising on transfer of long term equity share in a company, the applicant would be eligible to exclude such income from the total income as envisaged under section 10(38) of the Act. There is no doubt that the proviso under a particular section controls the operation of that section but its application cannot make the operative part of the section redundant. In other words, section 10(38) cannot be construed to rule out its applicability to a 'company' to which section 115JB does not apply. We are of the view that the exemption provided by section 10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation 1 - For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by - a) to (h) . . . . . If any amount referred to in clauses (a) to (h) is debited to the profit and loss account, and as reduced by - (i) to (viii) ......... Explanation 2 - (4) xxx (5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section." 6. Section 115JB of the Act applies notwithstanding anything contained in any other provision of the Act. It is attracted when the income-tax payable on the total income as computed under the Act is less than 15% of its book profit. In case the section applies, tax payable shall be 15% of book profit. The section requires every company assessee to prepare its profits and account (P & L account) for the relevant previous year in accordance with the provisions of Parts II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn our attention to the notes on clauses explaining the provisions of Finance Bill 2002, 254 ITR (St) 118, which provided for some amendments to section 115JB, which read as follows: "Clause 49 seeks to amend section 115JB of the Income-tax Act relating to special provision for payment of tax by certain companies. The existing provisions of the said section provide for levy of a minimum tax on domestic companies of an amount equal to seven and one-half per cent of the book profit, if the tax payable on the total income chargeable to tax as per the provisions of the Income-tax Act, 1961, is less than seven and one-half per cent of the book profit ..." (emphasis supplied) The Notes explaining the provisions have accepted/clarified the law that section 115JB is a levy of minimum tax on domestic companies. Thus, Government has recognized that section 115JB is not applicable to foreign companies. CBDT Circular No. 794 dated 9th August 2000(supra) explaining the newly introduced provisions of section 115JB, reads as follows: "The new provisions provide that all companies having book profits under the companies act, prepared in accordance with Part II and Part III of Schedule VI t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Act, understood that section 115JB as applicable only to domestic companies. On various other occasions, the Hon'ble Finance Minister in his speech had understood the MAT provisions to apply only to domestic companies. This is evident from the following extracts of Finance Minister's speeches before the Parliament while introducing/amending various MAT provisions and the Memorandum explaining these provisions in which it is observed that the effective rates of MAT have been worked out with reference to domestic companies only: "The various exemptions currently available while calculating Minimum Alternate Tax (MAT) and the credit system has undermined the efficacy of the existing provision and has also led to legal complications. To address these issues, I propose that the Minimum Alternate Tax be now levied at the revised rate of 7.5% of the "book profits" as determined under the Companies Act instead of the existing effective rate of 10.5%". The Memorandum explaining the provisions of the Finance Bill 2000, 242 ITR (St) 117, provides as follows: "In its place, it is proposed to insert a new provision which is simpler in application. The new provisions provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prepare its profit and loss account in accordance with the provisions of Part II and Part III of Schedule VI of the Companies Act, 1956 for the relevant previous year. This literally means that every foreign company is required to compile its entire global accounts in accordance with Part II and Part III of Schedule VI of the Companies Act 1956, because under section 2(17)(ii), company includes a foreign company. Recasting the entire global accounts in this manner is itself a massive exercise. Secondly, for the purpose of adjustments as provided in the Explanation below sub-section (2), as the net profits disclosed by the global profit & loss account would be the starting point, a foreign company may end up paying income-tax on its entire global income which may not have accrued/arisen or received in India. In the absence of any specific guidance provided for computation of book profits in the case of foreign companies in the statue, it is difficult to accept that the Legislature had intended to make the foreign companies chargeable to MAT. 6.6 The applicant took us to the provisions of section 115J (1A), inserted by Finance Act 1989, which were identical to section 115JB (2). Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Part II and III of Schedule VI to Companies Act. Hence, the applicant's counsel contends that MAT provisions should also not apply to foreign companies. 6.7 Then, it is submitted that many foreign companies claim treaty protection under section 90 of the Act and offer their different streams of income such as royalty, fees for technical services, dividend, interest etc. for tax at concessional rates (as compared to rates under the Act). In some cases, the foreign companies also claim complete exemption from tax in India on the basis of DTAA. Thus, if the proposition that MAT applies to foreign companies is accepted, then in every case, despite treaty protection, tax under MAT will be payable @ 15%. It is argued by the Learned Counsel for the applicant that simply because the opening sentence of Section 115JB begins with 'notwithstanding anything contained in any other provisions of this Act', it cannot be interpreted to override Section 90. In such event it leads to absurdity. 6.8 Then, it is pointed out that the two provisos to sub-section (1) provide that depreciation shall be calculated using the same method and rates that have been adopted for the purposes of preparing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord 'Company' has been used in the section give an indication that it would include a foreign company. Various reasons given above are also supported by CBDT Circulars, Finance Minister's speeches, Notes to clauses and Memorandum attached to the Finance Bill. Hence the definition of 'Company' in section 2(17) in the context of section 115JB should be read to exclude foreign company. 7. The contention of the deptt. is that the provisions of section 115JB(1) are applicable in case of 'any company' and there is no demarcation as such between a 'domestic company' and a 'foreign company'. Therefore, the provisions should apply to foreign companies as well. Its contention is that Explanation 1 of Section 115JB(2) of the Act simply provides the mode of computation of "book profits" of a company. The "book profit" as defined is nothing but the "net profit" of the company in the P/L account prepared as per Part II and III of Schedule VI of the Companies Act after making adjustments of certain items as enumerated in Explanation 1 of the said section. Even if it is assumed that it may not be obligatory on a particular Foreign Company to prepare its accounts as per Part II and III of the Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kin to section 115JB) applies to the foreign companies as well. We have perused the said ruling and we find that the case is factually different from the present case due to the following reasons. 8.1. In that case, the applicant was a company incorporated in the Netherlands having a project office in India. It executed several dredging contracts in India since 1985 and had a project office for executing contracts in India. The applicant was filing its returns of income annually and reported losses every year on the contracts executed in India. The losses were on account of depreciation claimed by the applicant on the dredgers and equipment utilized in India for executing the contracts. The applicant had unabsorbed losses, which were available for carry forward and set-off against the profits, which may be earned by the applicant in its dredging operations. The applicant was preparing and maintaining its accounts relating to the Indian projects at its project office. The applicant was preparing its accounts in accordance with Part-II and III of Schedule VI to the Companies Act, 1956, though it related only to the income and expenditure incurred out of the Indian bank account. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given in section 2(17) means a 'foreign company'. These considerations are based primarily on the peculiar facts of that case. In the above-referred case the applicant was doing business and had a PE in India. Its income was being assessed under the head "income from business and profession". It was required to maintain accounts under section 44AA of the IT Act and prepare accounts under section 594 of the Companies Act, 1956. However, under section 591 of the Companies Act, only such foreign companies, who have established a place of business within India, are required to make out a balance sheet and P&L Account as required under section 594 of the Companies Act. In the case referred supra, as it had a place of business by way of a PE in India, it was required to comply with Section 594 as if it was a company within the meaning of Companies Act, 1956. In order therefore to comply with the requirement under section 115JA(2) to prepare P&L Account in accordance with the provisions of Part II and III of Schedule VI of the companies Act, 1956, it is essential that the foreign company should have a place of business within India. Therefore, while giving ruling in the case referred su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apply the definition of "company" to a 'foreign company' without enquiring into the opening words used in the section "unless the context otherwise requires", section 115JB may become unworkable. The income, which does not have a source in India, cannot be made part of the book profits. The annual accounts, including the P&L Account, can not be prepared as per the first proviso to section 115JB(2) in respect of the world income and laid before the company at its AGM in accordance with the provision of Section 210 of the Companies Act. The speech of Finance Minister and the memorandum explaining the provision also become out of sync if the meaning of "company" appearing in section 115JB is adopted as 'foreign company'. Any other meaning would take away force and life from the true intent of the makers of the Act. It must be said that it is a trite law that several provisions in the Act must be read together and as parts of one larger scheme. Every clause of a statute is to be construed with reference to the context and other clauses of the Act to make a consistent enactment of the whole statute. Therefore, a construction that would render any part of the statute ineffective would ..... X X X X Extracts X X X X X X X X Extracts X X X X
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