TMI Blog2019 (10) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 77A of the Companies Act, 1956 can never be covered as per section 47A as the shares cease to exist after the buy-back. Such impossibility of application of section 47A, section 49 and section 155 could never be the intention of Legislature. The intention of the Legislature can never be to render any provision of the Act otiose. In the instant case, the special provision under section 46A would prevail over the general provision of section 45 read with section 47(iv) of the Income-tax Act - without going into the controversy whether or is to be read as and in section 47(iv), it is seen that the non obstante clause in section 47 covers only section 45 and not section 46A. Section 46A is a special provision brought in with a specific objective to tax share buy-back transactions. Therefore, the discussion whether the buy-back transaction is a transfer and is covered under section 47 is not relevant. Thus we hold that on the facts and circumstances of the case, the share buy-back transaction is taxable under section 46A and exemption under section 47(iv) is not exigible. MAT applicability on capital gains arising to the applicant from the proposed buy-back of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assembly and supervision of paint shop, including supply of materials, for various automobile companies. PQR India Pvt. Ltd., hereinafter referred to as PQR India, a wholly owned subsidiary of the applicant, is a private limited company, incorporated under the Indian Companies Act, 1956. The following is the shareholding pattern of PQR India : Sl. No. Name of the shareholder Number of shares held Percentage shareholding (a) PQR Gmbh 1,21,66,570 99.99984% (b) PQR International Gmbh 20 0.00016% Total 1,21,66,590 100% 2. The company mentioned in Sl. No. (b), PQR International Gmbh holds the shares in PQR India in the capacity of a nominee of the applicant. Accordingly, the applicant along with its nominees holds the whole of the share capital of PQR India. The applicant holds the shares of PQR India as an investment. PQR India is proposing to buy-back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section 47 of the Act lays down that certain transactions specifically set out therein are not to be regarded as transfer for the purpose of section 45 of the Act. One of the exceptions provided under section 47(iv) of the Act is in relation to transfer of a capital asset by a holding company to its wholly owned Indian subsidiary. 6. Based on the provisions of section 47(iv), the following conditions need to be satisfied in order to be eligible for capital gains tax exemption on the transfer of a capital asset : (a) The transferor must be a company. (b) The transfer should be to a company in which the transferor company or its nominees hold the entire share capital, and (c) The transferee should be an Indian company. 7. As per section 45 of the Act : Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections. . ., be chargeable to Income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place. Further, section 47 of the Act provides as follows : Nothing contained in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 pre paring 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). 10. From an analysis of the above, it emerges that section 115JB of the Act is applicable to a company if the Income-tax payable on total income is less than 18.50 per cent. of the book profits. This section further requires that every company is required to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. The notes explaining the provisions have accepted/clarified the law that section 115JB of the Act is a levy of minimum tax on domestic companies. Thus, the Government has recognised that section 115JB is not applicable to foreign companies. 17. Further, reference is also made to Central Board of Direct Taxes Circular No. 794, dated August 9, 2000 ([2000] 245 ITR (St.) 21 ) explaining the newly introduced provisions of section 115JB, which reads as follows : The new provisions provide that all companies having book pro fits under the Companies Act, prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of 7.5 per cent. as against the existing effective rate of 10.5 per cent. of the book profits. 18. It is emphasised that from the aforecited Central Board of Direct Taxes circular that the existing effective rate of 10.5 per cent. was arrived at by multiplying 30 per cent. of book profits [as under section 115JA of the Act] by the normal corporate tax rate of 35 per cent. (excluding surcharge), which was the rate of tax applicable to domestic companies. In those years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Legislature had intended to make the foreign companies chargeable to minimum alternate tax. 22. The applicant further argues 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, foreign companies also claim complete exemption of tax in India on the basis of the relevant treaty. Thus, if the proposition that minimum alternate tax applies to foreign companies is accepted, then in every case, despite treaty protection, minimum alternate tax will be payable at 18 per cent., which leads to absurdity. 23. In view of the above discussions, the applicant states that if due consideration is given to the context in which the word company has been used in section 115JB of the Act, it can be seen that what is meant is an Indian company. At no place, does the context in which the word company has been used in the section give an indication that it should include a foreign company. Various reasons given above are also supported by the Central Board of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held in the following cases : -Amiantit International Holding Ltd., In re [2010] 322 ITR 678 (AAR) ; (230 CTR 19) (AAR) -Goodyear Tire and Rubber Company, In re [2011] 334 ITR 69 (AAR) -Deere and Company, In re [2011] 337 ITR 277 (AAR) ; (AAR No. 934 of 2010) -ITO v. Prasad Production Ltd. [2010] 3 ITR (Trib) 58 (Chennai) ; [2010-TIOL-182-ITAT-MAD-SB] -CIT v. India Pistons Ltd. [2007] 295 ITR 550 (Mad). -Vijay Ship Breaking Corporation v. CIT [2009] 314 ITR 309 (SC). -CIT v. Eli Lily and Co. (India) P. Ltd. [2009] 312 ITR 225 (SC) ; [2009-TIOL-45-SC-IT] 29. In the present case, since the transfer of shares of PQR India is not taxable as per section 47(iv) of the Act, no tax would be deductible at source under section 195 of the Act. Submissions of Revenue 30. With regard to question No.1, the Department has averred that the applicant in its submission has stated that the proposed buy-back of shares by the Indian company from the applicant is in accordance with the provisions of section 77A of the Companies Act, 1956, which reads as under : 77A. Power of company to purchase its own securities.-(1) Not withstanding anything cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons have been brought into the Income-tax Act clarified the importance of the introduction of the new section into the Act. The clarification reads as follows : Clarification of tax issues relating to buy-back of shares The promulgation of the Companies (Amendment) Ordinance, 1998 has inserted section 77A in the Companies Act, 1956, which allows a company to purchase its own shares subject to certain conditions. The shares bought back have to be extinguished and physically destroyed and company is precluded from making any further issue of securities within a period of 24 months from such buy-back. The above newly introduced provisions of buy-back of shares have thrown open certain issues in relation to the existing provisions of Income-tax Act. The two principal issues are whether it would give rise to deemed dividend under section 2(22) of the Income-tax Act and whether any capital gains would arise in the hands of the share holder. The legal position on both the issues are far from clear and settled and there is apprehension that there will be unnecessary litigation unless the issues are clarified with finality. It is, therefore, proposed to amend clause (22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat transfer of a capital asset by a company to its subsidiary company where the parent company or its nominees hold the whole of the share capital of the subsidiary company and the subsidiary company is an Indian company, cannot be regarded as a transfer for the purpose of section 45 of the Act, the new section introduced under section 46A of the Act explicitly includes the purchase by the company of its own shares or other specific securities held by the shareholders. Hence section 47 has to be treated as the general clause where section 46A is an exclusive clause which includes the transfer of capital asset in the form of shares for capital gains tax liability. 39. Hence the Revenue contends that the transfer of shares by the applicant to PQR India in the course of buy-back would give rise to capital gains which is chargeable to tax under section 45 of the Act read with section 46A of the Income-tax Act, 1961. Further, it is submitted that section 47 does not have any relevance in defining the term transfer, since 46A includes the transfer of shares of capital asset. 40. Reliance is placed on the decision of the hon'ble Authority for Advance Ruling in the case of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pre scribed 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 sub-section (2) is independently attracted, sub-section (1) also cannot be operated. Sub-section (2) gets attracted when sub-section (1) operates propriovigore. It is for the purpose of the section that the account has to be prepared as detailed therein. The liability to tax under sub-section (1) does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in P. No. 14 of 1997, In re [1998] 234 ITR 335 (AAR), 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 Co., In re (supra) based on the existence of a permanent establishment in that case. . . . On a reading of the section 115JB it can be seen that sub-section (1) thereof imposes the liability to be taxed and sub-section (2) only charts out the procedure for calculating the taxable profit. In fact sub-section (2) casts an obligation on 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 deter mine the book profit as set out in sub-section (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be included in the income of a company for the purpose of its taxation under section 115JB of the Act. So far as a company is concerned, both the sections are clear and unambiguous. If so, both operate or do not operate together. If section 115JB of the Act does not apply to a foreign company, does it mean that it cannot be taxed at all ? Its income from long-term capital gains in that case may be exempt under section 10(38) of the Act, if the conditions, are fulfilled. But, by virtue of the proviso, that income has to be reckoned with for calculating the book profit for taxation under section 115JB of the Act. Section 115JB of the Act overrides sections 45 to 48 of the Act as well. So, by reading section 115JB of the Act as confined in its operation to domestic companies alone, we would be doing violence to the special scheme of taxation adopted for taxing certain companies. Unless there are compelling reasons, no such interpretation is justified. As pointed out in the ruling in P. No. 14 of 1997, In re [1998] 234 ITR 335 (AAR), there is no compelling reason to jettison the scheme of taxation adopted by the Act by reading section 115JB of the Act or section 10(38) of the Act as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d liberally as they have been inserted by the Legislature in order to provide certain exemptions and benefits to the assessee. For the said proposition the judicial precedents are as under : -Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC). -CIT v. Strawboard Mfg. Co. Ltd. [1989] 177 ITR 431 (SC) ; [1989] 44 Taxman 189 (SC) -Citizen Co-operative Society Ltd. v. Asst. CIT [2017] 397 ITR 1 (SC) -Muddeereswara Mining Industries v. CIT [1993] 204 ITR 550 (Karn). Therefore, the argument of the Revenue, that section 47(iv) of the Act which is beneficial/exemption section has to be strictly construed, is not tenable. 50. It is concluded by saying that thus, considering the aforesaid ; the purpose of the provisions of exemption in section 47(iv) of the Act, the transaction under consideration is squarely covered by the said section 47(iv) of the Act and thus, will not be taxable. Section 46A was introduced only to clarify and to avoid any further litigation that when there is buy-back of shares it should be deemed to be Capital Gains and should not be treated as Dividend which has been clarified by the Central Board of Direct Taxes vide Circular No. 779, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital being held in the name of the holding company. In fact, that situation is a legal impossibility in India. In case one is to proceed on the basis that the entire share capital of the subsidiary company should be held in the name of the holding company, there cannot be any situation in which section 47(v) can apply. That is certainly not an interpretation which can be termed as utresmagis valeat quampereat, i. e., to make the statute effective rather than making it redundant. As held by the hon'ble Supreme Court, in the case of CIT v. S. Teja Singh [1959] 35 ITR 408 (SC), a construction which results in rendering a provision redundant must be avoided. For this reason alone, the interpretation canvassed by the Revenue is to be rejected. Having seen the finding recorded by the Tribunal, no fault can be found with the view taken by the Tribunal. In this view of the matter, the appeal stands dis missed for want of substantial question of law with no order as to costs . 54. In addition, the learned authorised representative has also contended that concessional provisions must be construed liberally to provide benefit to the applicant. 55. The Department on the other ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulations, 1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public before Company (Buy-Back of Securities) Rules, 1999 pursuant to section 77A(2)(f) and (g) respectively. Consequently in the Income-tax Act, amendments were brought in section 2(22) and by insertion of section 46A, with effect from April 1, 2000. By these amendments buy-back of shares was excluded from the definition of dividends in section 2(22) and was specifically taxed as capital gains in section 46A of the Income-tax Act. These amendments were brought to clarify the ambiguity in regard to the taxation of buy-back of shares. The speech of the hon'ble Finance Minister is quoted below for reference : Very recently, the Companies Act, 1956 has been amended to permit transactions relating to buy-back of shares. There is some ambiguity in the interpretation of the law as to whether such trans actions would be treated as subject to dividend tax in addition to capital gains tax. In view of this, I propose to amend the law to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to dividend tax, and would only be liable to capital gains tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons that come under section 47 are transfers but by a deeming fiction they are not to be regarded as transfer for the purposes of section 45 of the Act. Clause (iv) of the said section provides that section 45 of the Act shall not apply in case of any transfer of a capital asset by a company to its subsidiary company if the parent company or its nominees hold the whole of the share capital of the subsidiary company, and the subsidiary company is an Indian company. 61. Section 47 is in statute right from inception. The transaction, i. e., transfer of capital asset by a holding company to subsidiary company is covered under section 47(iv). The reverse transaction, i. e., transfer of capital asset by a subsidiary to a holding company was brought in under section 47(v) with effect from April 1, 1965. From commentaries on the subject it is nowhere indicated that such share buy-back were ever contemplated to be covered under section 47. It is also not clear whether only certain type of capital assets were intended to be covered under section 47 or not. The only thing which is apparent from the Income-tax Act is that the buy-back of shares by means of a special provision, i. e., sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of exemption in certain cases. The relevant provisions of section 47A(1) of the Act reads as under : Where at any time before the expiry of a period of eight years from the date of the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47,- (i) such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business ; or (ii) the parent company or its nominees or, as the case may be, the holding company ceases or cease to hold the whole of the share capital of the subsidiary company, the amount of profits or gains arising from the transfer of such capital asset not charged under section 45 by virtue of the provisions contained in clause (iv) or, as the case may be, clause (v) of section 47 shall, notwithstanding anything contained in the said clauses, be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such transfer took place. 66. Further section 49 of the Act states : With regard to the computation of the subsequent capital gains, sub-clause (e) of section 49(1)(iii) of the Act clearly provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to as 'buy-back') out of- (i) its free reserves ; or (ii) the securities premium account ; or (iii) the proceeds of any shares or other specified securities . . . (7) Where a company buys-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back . . . (emphasis provided) 70. From the above, it seen that section 77A(7) of the Companies Act, 1956 specifically provides that where company buys-back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back. So, when companies buy-back their own shares from the existing shareholders the rights that the shares represent are extinguished with the destruction of the shares. As the shares are destroyed after the buy-back, there is no capital asset remaining with the transferee company. Therefore there is no further capital gains tax that can be imposed as the capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the earlier enactment continue to apply.' 32. The aforesaid passage clearly shows that if legislative intendment is discernible that a latter enactment shall prevail, the same is to be interpreted in accord with the said intention. We have already referred to the scheme of the Income-tax Act and how obscenity pertaining to electronic record falls under the scheme of the Act. We have also referred to sections 79 and 81 of the Income-tax Act. Once the special provisions having the overriding effect do cover a criminal act and the offender, he gets out of the net of the Indian Penal Code and in this case, section 292. It is apt to note here that electronic forms of transmission is covered by the Income-tax Act, which is a special law. It is settled position in law that a special law shall prevail over the general and prior laws. When the Act in various provisions deals with obscenity in electronic form, it covers the offence under section 292 of the Indian Penal Code. 72. In the instant case, the special provision under section 46A would prevail over the general provision of section 45 read with section 47(iv) of the Income-tax Act. 73. We also draw suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ominee holds the shares benami for the company. That would offend the Benami Transactions (Prohibition) Act, 1988. It would also offend the spirit of section 49 of the Act, and even its mandate. There is no case that the nominee is a trustee. Even otherwise such a claim may fail in the teeth of section 153 of the Companies Act. The result achieved by adding up the shares held by the parent company and its nominees would bring about the same result. The company under the Companies Act, can look to and cater only to its shareholders. It cannot go in search of beneficiaries or alleged beneficiaries. We are satisfied that we would not be justified in reading the word 'or' in section 47(iv) of the Act, as 'and'. Section 45 of the Act makes any profits or gains arising from the transfer of a capital asset effected, chargeable to tax under the Act. Section 47 of the Act is an exemption provision. It exempts certain transfers from within the purview of section 45 of the Act. Being an exemption, it has to be strictly construed. If we accept the plea that the word 'or' must be read as 'and', we would be recognizing an entity that would be violative of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislature hemmed in that exemption with an obligation to pay the tax on that transaction. Unless it is argued that imposing a tax itself is unjust, an argument that the taxing of the transaction would lead to an unjust result can only be rejected. It was argued that section 45 of the Act alone was the charging section and section 46A cannot be resorted to, to tax the capital gains arising out of such transaction. Section 47 of the Income-tax Act contains a non obstante clause as it were only in respect of section 45 of the Act. It says 'nothing contained in section 45 shall apply to the following transfers'. That means two things. One, it does not override section 46A and two, by virtue of section 47, a transfer is not deemed to be not a transfer. It is only an exempted transfer. Therefore, in the context of section 77A of the Companies Act, it is a permissible trans fer attracting section 46A of the Income-tax Act. It may be noted that section 77A was introduced with effect from October 31, 1998, and section 46A was inserted with effect from April 1, 2000. Specific securities used in the section is explained as having the meaning assigned to it in section 77A of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny con sideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities shall be, subject to provisions contained in section 48, deemed to be the capital gains.' It says that the gain would be 'deemed to be the capital gains'. That is obviously, by virtue of section 46A of the Act. Even if we accept the plea of the applicant to read 'or' as 'and' in section 47(iv) of the Act, it is of no avail to the applicant, in our view, that section 46A of the Act would be applicable in the case of a buyback of shares and section 46A is not subjected to section 47 which at best only overrides section 45. We are, therefore, of the view, that in the case of a buy-back of shares, section 46A of the Act will be attracted and resort to section 45 is not warranted. 74. In the case of CIT v. Papilion Investment Pvt. Ltd. relied on by the learned authorised representative, the assessee-company had transferred shares held in Morarjee Mills to Piramal Finance and Investments (P.) Ltd. ( PFIPL ). The assessee contended that PFIPL was its 100 per cent. subsidiary and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the country with which India has an agreement under section 90(1) and the applicant does not have a permanent residence in India in accordance with the provisions such agreement. 79. It has been admitted by the learned authorised representative that for the assessment year 2012-13 when the buy-back has taken place, the applicant had a supervisory permanent establishment in India and that for the assessment year 2014-15 the Department has treated PQR India itself as permanent establishment in India. In view thereof and express provisions, the Assessing Officer is required to compute the book profits of the supervisory permanent establishment and the minimum alternate tax liability would be restricted to the profit attributable to permanent establishment for the relevant assessment year. We have already held that the capital gains is taxable under section 46A in the hands of the applicant under the normal provisions and thus the final liability would be lesser of two amounts, i.e., one under normal provision and other under section 115JB. 80. Given that capital gains arising to the applicant as a result of the transfer of shares to its wholly owned subsidiary is held ..... X X X X Extracts X X X X X X X X Extracts X X X X
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