TMI Blog1998 (7) TMI 693X X X X Extracts X X X X X X X X Extracts X X X X ..... come and on capital entered into by India with the Netherlands ( the treaty ), whether in computing the profit attributable to the permanent establishment ( PE ) of the applicant which is a tax resident of Netherlands, recourse can be had to provisions of section 115JA ? In brief, the case of the applicant is that it is a company incorporated in the Netherlands having a project office in India. The management and the control of the company vests in its board of directors which is located wholly outside India and meets outside India, i.e., in the Netherlands. Since the control and management of the applicant is situated wholly outside India, it does not qualify as a resident under section 6(3)(ii) of the Income-tax Act, 1961, and, therefore, is a non-resident company for Indian tax purposes. The company has executed several dredging contracts in India since 1985 and has a project office for executing the contracts in India. The applicant has been filing its returns of income annually and reported losses every year on the contracts executed in India. The losses are on account of depreciation claimed by the applicant on the dredgers and equipment utilised in India for executi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on are not strictly applicable to a foreign company which is carrying on business in India. Our attention was drawn to the wording of section 115JA which according to counsel was not appropriate for a foreign company. It has been contended that a foreign company does not declare dividend in India, control and management of the applicant company is in the Netherlands. The profit and loss account for the relevant year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act can only be made up after taking into account the depreciation and other allowance. These profit and loss accounts will have to be placed at the annual general meeting of the company since the applicant maintains its books of account in the Netherlands and the annual general meeting is held there. The applicant s business in India is confined to a limited field and for that purpose, it maintains a project office in India. Therefore, it is under an obligation to file a return confined to its Indian business only. It has further been stated on behalf of the company that the first proviso to section 115JA(2) requires that depreciation is to be provided in the same method which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent. of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent. of such book profit. (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 profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account 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 a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (c) of clause (iv) of sub-section (2) of section 80-IA, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent. of the profits and gains under sub-section (5) of section 80-IA ; or (vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined under sub-section (12) of section 80-IA, and subject to fulfilling the conditions laid down in sub-section (4A) of section 80-IA ; or (vii) the amount of profits of a sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses ; Explanation.-For the purposes of this clause, net worth shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the necessity for this legislation, it was stated by the Finance Minister in his Budget Speech that corporate tax rates have been reduced and simplified over the past few years and the results have been very encouraging with a significant increase in corporate taxes as a percentage of GDP. However, there were two issues which needed to be addressed. The first was the promise made in the past that the corporate surchage will be temporary. The other was the phenomenon of zero tax companies which, according to many observers, reflects an excessive degree of laxity in the tax regime. It was further stated in the Budget Speech as follows (see [1996] 220 ITR (St.) 107 ) : 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 per cent. of the book profit, the total income of such a company shall be deemed to be 30 per cent. of the book profit and shall be charged to tax accordingly. The effective rate works out to 12 per cent. of book profit calculated under the Companies Act. Companies engaged in the power and infrastructur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er provision of the Act. There are many provisions in the Income-tax Act specially applicable to foreign companies. Likewise, there are very many provisions which apply to Indian companies or domestic companies only. We shall refer to some of these provisions. Section 44D contains provisions for computing income by way of royalties, etc., in the case of foreign companies. Section 44BB provides provision for computation of profits in the case of non-residents engaged in the business of supplying plant and machinery, etc., for extraction/production of mineral oils. Likewise, there are special provisions for computation of profits for operation of aircraft (section 44BBA), profits from shipping business (section 44B), computation of profits from turnkey power projects (section 44BBB), deduction of head office expenditure (section 44C). There are also special exemptions available to a foreign company under sections 10(6A) and 10(6B). Section 115A contains special provisions for tax on dividends, interest and royalty in the case of foreign companies. Sub-section (4) of section 115JA does not make any mention of foreign companies. It speaks only of every assessee, being a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be filed with the Registrars. The world accounts shall be delivered to the Registrars within a period of nine months from the close of the financial year of the foreign company. The Registrar at New Delhi may extend the said period by three months, vide rule 18A of the Companies (Central Government s) General Rules and Forms, 1956 (Appendix 1). (2) Indian business accounts.-Three copies of balance-sheets and profit and loss accounts of Indian business accounts of a foreign company duly audited by a practising Chartered Accountant in India, in the form prescribed in Schedule VI (as modified in terms of notifications, dated October 4, 1957, and January 6, 1959) shall be filed with the Registrars within nine months of the close of the financial year. The Registrar at New Delhi may extend this period by three months, vide rule 18A (ibid) in Appendix 1. The accounts shall be audited by such person and in such manner as provided in sections 226 and 227 (as modified in terms of the notifications cited above). The aforesaid accounts have to be filed with the Principal Registrar (i.e., Registrar of Companies, New Delhi) and the concerned Registrar having jurisdiction over the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person (other than a company). Deductions are allowable under section 80HHC in respect of profits of exporting business in certain circumstances for an assessee who is an Indian company or a person (other than a company) resident in India, who is engaged in an export business. Section 80HHD also applies to Indian companies. Deductions under section 80HHE can be allowed from profit from export of computer software by an Indian company or a person (other than a company). All these provisions go to show that if any provision was meant for Indian companies only, the Legislature specifically provided that in this Act. Chapter XIID (section 115-O to 115Q) contains special provisions relating to tax on distribution of profits of domestic companies. There are many other sections which are specifically applicable to Indian companies or domestic companies. For example, section 80M deals with the situation where income by way of dividends from a domestic company is received by another domestic company, section 80-O deals with Indian company whose income includes any income by way of royalty, commission, fees or any similar payments from foreign Government or enterprise. Section 80AA de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this article. 3. (a) In determining the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. Provided that where the law of the State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention between that State and a third State which enters into force after the date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery sections should be construed in a way to effectuate the charge and not to nullify the charge. Moreover, we find that there is hardly any practical difficulty in the instant case. The profit and loss account of the Indian business has to be prepared separately by the foreign company as required by section 594 of the Companies Act. Moreover, in exercise of the powers conferred by the proviso to sub- section (1) of section 594 of the Companies Act, 1956, the Central Government has directed that the requirements of clause (a) of sub-section (1) shall apply to a foreign company having a share capital subject to the exceptions and modifications specified below, namely : (i) A foreign company shall, in respect of its Indian business, submit to the appropriate Registrar in triplicate its balance-sheet and profit and loss account in such form containing such particulars and including or having annexed or attached thereto such documents as under the provisions of the Act it would, if it had been a company within the meaning of the Act, have been required to make out and lay before the company in general meeting. (ii) The working capital earmarked for its branch, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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