TMI Blog2012 (8) TMI 433X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, without resort to them, the capital gains from an international transaction cannot be determined. Only on determining whether capital gains have arisen, would the question arise whether the gain is chargeable to tax or not under the Act. The application of Section 92 cannot be kept at bay by jumping to the second stage straight away. Therefore, whether ultimately the gain or income is taxable in the country or not, Sections 92 to 92F would apply if the transaction is one coming within those provisions. Liability to withhold taxes u/s 195 – Held that:- In cases where there is no chargeability to tax, there will be no obligation to withhold. Requirement to file return of income u/s 139 – Held that:- Since the income is not taxable in this country, under the Act, there is no obligation on the applicant to file a return of income u/s 139 Applicability of Section 112 when the proposed transfer or sale of shares is not through a recognized stock exchange – Held that:- Section 112(1) would be attracted when the income of an assessee includes income chargeable under the head capital gains under the Act. In the present case, the income of the applicant would be capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant, it is a capital asset of the company. 4. Glaxo Smithlkine (Pte) Limited (GSK Pte) is a company incorporated in the Republic of Singapore. It is also a part of the GSK Group. It is the Asia Pacific regional office of the GSK group of companies. As a part of reorganization of the group structure, GSK and the applicant, the Mauritius Company, propose to transfer the shares of GSKPL to GSK Pte, the Singapore Company. The transfer of 3,192,328 shares in GSKPL by the applicant to GSK Pte, Singapore will be for cash consideration at fair market value. The transfer of shares is proposed off the market and not through a recognized stock exchange, without attracting securities transaction tax. The applicant has no office, employees or agents in India and hence there is no permanent establishment in India. The applicant being a foreign company, it is not obliged to maintain books of accounts in India as prescribed by the Companies Act, 1956. It is on these allegations that the applicant filed this application under section 245Q of the Income-tax Act, seeking advance rulings on the chargeability to tax of the proposed transaction of sale of shares of GKPL, the Indian compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 245R(4) of the Act, the question whether the transaction is designed for avoidance of tax in India. 5. The Revenue made queries to the applicant as to the source for purchase of shares. The Revenue came up with the plea that this was a clear case of an attempt to avoid the payment of legitimate taxes in India that would be due on the transaction. It also controverted the claims of the applicant on section 92 to 92F and the other claims covered by the questions. 6. Before going into the other relevant facts and considering the other questions, it seems profitable to consider question no. 1 even at this stage. This question is whether the shares held by the applicant are capital assets within the meaning of section 2(14) of the Act or not. The answer to this question will also govern the approach to the other questions posed. 7. The Revenue has not really joined issue on this question. The shares were held by the applicant from the year 1993 in one and from the year 1996 in the other. The applicant has submitted that it had no intention to trade in those shares and they were held as investments. They had also not been dealt with till date. In this situation I am sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the beneficial owner of the shares is some other entity. The materials produced by the applicant pursuant to the request in that behalf by the Revenue cannot be said to have been discredited on the facts of this case. Even if one takes it that there was treaty-shopping, that has been held to be not taboo in UOI v Azadi Bachao Andolan, by the Supreme Court. Even if it is taken that the Vodafone decision of the Supreme Court has indicated that the presumption arising out of a Tax Residency Certificate is capable of being rebutted, it cannot be said that the presumption has been rebutted in this case. Thus, on the whole, on the facts, it cannot be said that the Revenue has established a case of an attempt at tax avoidance in this case. 11. It is true that if the proposed sale is through a recognized stock exchange, the sale would have suffered Securities Transaction Tax under the Act. The sale here proposed is outside the Stock Exchange and Securities Transaction Tax would not become payable. But then, it is not shown that a company holding shares in another company cannot sell the shares otherwise than through the Stock Exchange. Therefore, the argument that the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This Authority is bound by this decision. If the Revenue wants to persist in this line of argument, it has to raise it in the Supreme Court and not here. 16. Thus, on question no. 2, I rule that the capital gains that would arise would not be chargeable to tax in India in view of paragraph 4 of Article 13 of the DTAC between India and Mauritius. 17. In view of the ruling on question no. 2, it has to be ruled on question no. 3 that the question does not arise. So, no ruling is given on that question. 18. Question no. 4 is whether the transfer pricing provisions, sections 92 to 92F would apply in the case on hand. According to the applicant, section 92 can be applied only to a transaction chargeable to tax under the Act. The applicant does not seriously dispute that the transaction in question is an international transaction within the meaning of section 92 of the Act. But, since the transaction in question is not chargeable to tax in India in view of paragraph 4 of Article 13 of the DTAC, Section 92 of the Act is not attracted. The applicant relies on the earlier Rulings of this Authority in M/ s. Praxair Pacific Limited [326 ITR 276] and in Vanenburg Group BV v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warrant for restricting the scope of the expression 'income' occurring in Section 92 of the Act. Section 92(1) clearly speaks of computation of income from an international transaction. The Explanation to section 92(1) and sub-section (2) of section 92 do not restrict but only expand the concept of income under section 92(1). Section 92(3) only manifests the intention of not reducing the income as calculated under sub-sections 1 and 2. It cannot certainly be said to be restricting the scope of the expression 'income'. I also do not see anything in Section 92A to 92C warranting the restricting of the meaning of the expression 'income' in section 92 of the Act. The DTAC also does not define the expression 'income'. 22. In the Ruling in Canaro Reserves Ltd. , In re (313 ITR 2), a complement of this Authority spoke on section 92 to 92F thus: "Sections 92-92F, on the other hand, provide for determination of fair and equitable profits and tax in India in relation to international transactions, regardless of their nature. The wordings used in those sections suggest that they apply to all kinds of international transactions entered into between a resident and a non-resident and bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o suggest that the expression income arising, must not be understood in its plain and grammatical meaning, but the words should be understood as income arising under any of the charging provisions of the Act. 26. Praxiar Pacific Limited, In re (326 ITR 276) merely states that in the absence of liability to pay tax on the capital gains, the provisions of sections 92 to 92F are not attracted. 27. On an anxious consideration of the purpose for which sections 92 to 92F are enacted and on an interpretation of its provisions under the golden rule of construction, I am satisfied that the applicability of section 92 does not depend on the chargability under the Act. Literally in this case, the capital gains are chargeable to tax under the Act. They escape only in view of paragraph 4 of Article 13 of the DTAC and the ratio of the decision in Azadi Bachao Andolan on the applicability of the DTAC even when there is actually no double taxation. 28. I, therefore, rule on question no. 4 that the provisions of section 92 to section 92F of the Act are applicable. The aspect that the exercise may not be fruitful in this case, cannot affect the applicability of the statutory provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to seek it and that would be during the consideration of his return of income or at best while filing his return. If so, the obligation under section 139 of the Act cannot simply disappear merely because a person may be entitled to claim the benefit of a DTAC. 32. There is an argument that a Convention overrides the Act and it is not like an exemption to be claimed. Surely, in terms of section 90(2) of the Act, it has to be shown that the benefit of a DTAC is being claimed, that the claimant is eligible to make that claim and that DTAC is more beneficial to the concerned person. Obviously, that has to be shown before the assessing authority. This emphasizes the need for such a person to file a return of income to claim such a relief. I have, therefore, no hesitation in ruling that the applicant in this case will have the obligation to file a return of income in terms of section 139 of the Act. 33. The fact that this Authority is now giving an advance ruling will not bring about any difference in principle. The applicant may also have to appraise the assessing officer that an advance Ruling has been given on the transaction at the instance of the applicant and that it is bin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of [eighteen per cent]." On a reading of this sub-section, which is said to prevail over the other provisions of the Act, what emerges is that a company has to pay tax as provided for in this sub-section if the tax payable by it as otherwise determined under the Act, is less than the minimum prescribed herein. It also provides the rate at which the tax is to be paid. This section does not need any aid from tools of interpretation for its understanding. It is plain and clear. Sub-section (2) of section 115JB which is sought to be shoved in to deprive sub-section (1) of its width actually reaffirms the independent operation of sub-section (1). It exhorts every company, for the purpose of sub-section (1) to prepare its profit and loss account as provided for therein. The operation of sub-section (1) does not depend on the applicability of sub-section (2). It is on the applicability of sub-section (1) that the obligation under sub-section (2) arises. It is a fallacy to think that unless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the law" and where the language is plain and admits of but one meaning, the task of interpretation can hardly be said to arise [See Maxwell on the Interpretation of Status - 12th Edition - pages 1, 28 29]. In fact, in the ruling of this Authority reported in 234 ITR 335, it was held that the special provision under section 115JA of the Act would apply to foreign companies as well. Section 115JA is parallel to section 115JB, but, of course, this Ruling was sought to be distinguished in the ruling in Timken based on the existence of a Permanent Establishment in that case. In the Ruling reported in 234 ITR 335 this Authority dealing with the argument that section115JA of the Act is confined in its operation to Indian companies, after a discussion stated "a large number of decisions were cited, relating to well-known rules of construction of a taxing Statute. What is important to bear in mind is the object of introduction of section 115JA. A number of companies with huge profits were avoiding payment of tax by adjusting their profits against various allowances which are permitted under the Income-tax Act. To circumvent this strategy, section 115JA was inserted. The simple method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit' as explained in Explanation I were made. Dealing with deductions, in the proviso, clause (ii) was modified by showing the amount of income to which any of the provisions of "section 10 (other than the provisions contained in clause 38 thereof)" were introduced, thus, taking out income from long term capital assets from the reckoning. Simultaneously, the proviso to section 10(38) of the Act was also inserted bringing income from long term capital gains in for the purpose of section 115JB of the Act while calculating the book profit. If the notes to the Finance Bill of 2002 or in his speech the Minister mentioned domestic companies, can it be taken to indicate that the operation of section 115JB is confined to domestic companies? With respect, it appears to me that the relevant aspects require further consideration. After all, when a Statute defines an expression and uses that expression generally without confining it to Indian companies (like the provisions in section 88HH series; for example), can one so easily discard the defined meaning of the expression when construing a section in the Act using that expression? Generally, when a word has been defined in the interpretatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a company to which section 115JB (1) is attracted to prepare an account in terms of the Companies Act, 1956. It is not as if the liability to be taxed depends on the obligation to prepare an account in terms of the Companies Act, 1956. The liability to tax depends on the profit earned or deemed to be earned. The deemed profit is specified in sub-section (1) and the rate of tax is also specified. Only the mode of determining the book profit is left to sub-section (2) and a duty is cast on the assessee to determine the book profit as set out in sub-section (2). Taking note of the inconvenience that may be caused by this mandate to some of the companies coming under the proviso to section 211(2) of the Companies Act, the requirement to comply with the mandate has been done away with by the Finance Act, 2012, leaving untouched the liability under sub-section (1) of that section. This also would support the soundness of the reasoning in 234 ITR 335 and would indicate that section 115JB(1) of the Act always subjected even the companies coming under the proviso to section 211(2) of the Companies Act. Section 115JB is the overriding provision. It overrides all the other provisions in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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