DIRECT TAX - Nangia & Co

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Tax & Regulatory Newsletter Issue 05 – AUGUST, 2010 NANGIA & CO. Chartered Accountants New Delhi – Mumbai - Dehradun Applying the above principles to the facts of the case where some of the agreements were renewed, the vessels were situated in India on the date of such renewal, therefore, to that extent, the delivery pursuant to the renewed agreements was deemed to have taken place in India and, consequently, hire charges were to be taxed in India; Since the hire charges were covered by the special provision i.e. Section 44AB of the Income Tax Act, 1961 and the ‘Royalty’ definition in the Indian tax law excluded such amounts referred to in the special provision from its ambit, the hire charges could not be taxed as ‘Royalty’. [Source: AAR No. 829 of 2009 dated July 23, 2010] Applicability of MAT provisions to Non Resident companies Timken Co. *“the applicant”+, a company incorporated in the United States of America proposed to transfer shares held by it in Timken India, a company incorporated in India to Timken Mauritius Limited, a Mauritian company as a part of its global restructuring exercise. Since the applicant had held the shares in the Indian company for more than 12 months and proposed to transfer them through a recognized stock exchange the transaction was exempt from capital gains tax. The questions put forth by the applicant before the Authority for Advance Ruling were - Whether the provisions of Section 115JB relating to payment of Minimum Alternative Tax ["MAT"] were applicable only to domestic Indian companies or to foreign companies that have a physical business presence in India as well? In case the MAT provisions were held to be applicable to Foreign Companies, since the applicant was a foreign company which did not have any physical presence in India in the form of an office or branch and also in the light of the declaration provided by the applicant that it did not have a permanent establishment in India in terms of Article 5 of India-USA Double Taxation Avoidance Agreement, whether the provisions of Section 115JB of the Act would be applicable on the sale of shares of a listed company i.e. Timken India Limited, by the applicant, which has suffered Securities Transaction Tax and accordingly was tax exempt under Section 10(38) of the Act? The applicant contended as under – Page | 3
Tax & Regulatory Newsletter Issue 05 – AUGUST, 2010 NANGIA & CO. Chartered Accountants New Delhi – Mumbai - Dehradun Since long term capital gain on transfer of shares was exempt under the Income Tax Act, the same could not be brought to tax under the MAT regime; The expression ‘company’ used in the MAT provisions was defined in the general definition section of the Indian Tax Law to mean any Indian company or a company incorporated under the laws of a country outside India, however this definition was qualified by the expression ‘unless the context otherwise requires’, therefore the use of the definition required an evaluation of the circumstances and the context in which it was to be used, which clarified that the definition meant only an Indian company; The MAT regime mandated the preparation of financial statements as per the Indian Company Law which would imply that a foreign company would have to recast its global financial statements in accordance to the Indian Company Law for the MAT provisions to apply and it was hence difficult to accept that the legislature intended to apply the MAT regime to foreign companies; The administrative circulars issued also indicated that the MAT rate was arrived at based on the rate applicable to domestic companies. The Authority for Advance Ruling ruled that – Application of the definition of the term ‘company’ to a foreign company without enquiring into the opening words used, i.e., ‘unless the context otherwise requires’ would make the MAT regime unworkable. Furthermore, several provisions under the Indian Tax Law were to be read together as part of a larger scheme and every clause was to be construed with reference to the context and other clauses of the Law to make a consistent enactment of the whole statute; The context of the MAT regime, the Finance Minister’s speech and the administrative circulars did indicate that the MAT regime was not designed to be applicable to a foreign company, which had no presence or a Permanent Establishment in India; The ruling in the case of P. No. 14 of 1997 (supra), relied upon by the Revenue, was rendered in a different context wherein the entity was doing business in India and also had a Permanent Establishment in India and, therefore, was required to comply with the provisions of the Indian Company Law and maintain books of accounts. The applicant had no established place of business in India in the form of an office or branch or a Permanent Establishment and was therefore not required to prepare its financial statements as per the Indian Company Law and hence Page | 4
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