Section 115JB doesn’t apply to foreign company

ACIT Vs Credit Suisse AG (ITAT Mumbai)

Held that accounts of foreign company are not prepared as per companies act and are not laid in Annual General Meeting before the shareholders of the company. Hence, provisions of section 115JB of the Income Tax Act cannot be made applicable to a foreign company.

Facts-

Ld. AO sought to invoke the provisions of Section 115JB of the Act as the assessee being a foreign company during the course of assessment proceedings. The assessee vide letter dated 06/11/2017 stated that CSSB and CSMB are both branch offices of CSAG (assessee herein) as such they form part of the same legal entity i.e. CSAG (within the meaning of Section 2(31) of the Act. It was submitted that the Indian sourced income earned by all branches of CSAG have been reported in consolidated income tax returns filed by CSAG for A.Y.2015-16.

The assessee submitted that the provisions of Section 115JB were never intended to apply the foreign companies in support of which the assessee placed reliance on the speech of Hon’ble Finance Minister while introducing the relevant provisions in Parliament. The ld. AO however, disregarded the contentions of the assessee and proceeded to invoke the provisions of Section 115JB of the Act to the foreign company. This action of the ld. AO was upheld by the ld. CIT(A).

Conclusion-

It is pertinent to note that the provisions of Section 115JB(2) of the Act postulates laying of annual accounts in Annual General Meeting before the shareholders of the company. A foreign company will never lay its accounts before the Annual General Meeting in accordance with Companies Act, 1956. It is significant to note that the profit and loss account is to be prepared in terms of Part-II and Part-III of Schedule-VI of the Companies Act, 1956 for determination of book profits u/s.115JB of the Act. In respect of a foreign company, the profit and loss account need not be prepared in terms of Part-II and Part-III of Schedule VI of the Companies Act. By this, it could be safely construed that provisions of Section 115JB of the Act were always intended to be made applicable only to domestic companies and not to foreign companies.

Hon’ble Delhi Tribunal in the case of Bank of Tokyo Mitsubishi UFJ has held that provisions of section 115JB of the Act applies to domestic companies only and not to foreign companies.

From the conjoint reading of the explanatory memorandum and giving purposive interpretation to the provisions of Section 115JB of the Act and intent behind introducing the same and also considering the fact that the accounts of foreign company are not prepared in accordance with Part II and Part III of Schedule-VI of companies Act 1956 and their accounts not being laid in Annual General Meeting before the shareholders of the company for approval, we hold that provisions of Section 115JB of the Act cannot be made applicable to a foreign company.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal in ITA No.14/Mum/2019 & CO No.272/Mum/2019 for A.Y.2015-16 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-56, Mumbai in appeal No.CIT(A)-56, Mumbai/11785/2017-18 dated 18/10/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/12/2017 by the ld. Joint Commissioner of Income Tax (OSD) (International Taxation)-2(1)(1), Mumbai (hereinafter referred to as ld. AO).

Let us take up the Revenue appeal first.

2. The ground Nos. 1 & 2 raised by the Revenue are challenging the action of the ld. CIT(A) in holding that the referral fees earned by Singapore Branch Office of Credit Suisse (CSSB) from Credit Suisse Securities (India) Pvt. Ltd., (CSSIPL) and Credit Suisse Finance (India) Pvt. Ltd., (CSFIPL) is not taxable in India u/s.5(2) r.w.s. 9(1)(i) of the Act. The interconnected issue involved therein is as to whether the said fee is taxable in India as fee for technical services u/s.9(1)(vii) of the Act.

3. We have heard rival submissions and perused the materials available on record. The assessee is a company incorporated in Switzerland and is a tax resident of Switzerland. The Singapore branch office of the assessee (CSSB) is registered with Securities and Exchange Board of India (SEBI) as a Foreign Institutional Investor (FII) and conducts portfolio investments in Indian securities in its capacity as a SEBI registered FII.

The assessee has a bank branch office in Mumbai (CSMB) which is registered with the Reserve Bank of India and undertaking banking operations in India. Since CSAG (i.e. assessee) is a tax resident of Switzerland, the assessee has opted for benefit of Indo-Swiss DTAA in respect of income earned by CSSB and CSMB. The CSMB constitutes a fixed place Permanent Establishment (PE) of CSAG (i.e. assessee) in India as provided in Article 5 of the DTAA and it has offered its income under Article 7 of the treaty. During the year under consideration, the assessee has invested in shares / securities of Indian companies and has earned its income from business, short term capital gains, long term capital gains and income from other sources. Additionally, during F.Y.2014-15, the assessee’s Dubai Branch (CSDB) received referral fees of Rs.61,71,760/- from CSSIPL and CSFIPL. In the return filed by the assessee for A.Y.2015- 16, the assessee has treated referral fees received as “business income” of CSDB and claimed that the same is not liable to tax in India as the CSDB does not have a PE in India as defined in Article 5 of Indo-Swiss DTAA. The ld. AO show-caused as to why the receipt of referral fees by CSDB should not be brought to tax in India. In response thereto, assessee made detailed submissions explaining its contentions with specific reference to legal provisions of the Act and submitted that the referral fees received by the CSDB does not become taxable in India even as fee for technical services (FTS) u/s.9(1)(vii) of the Act or under the respective treaty provisions. The assessee also placed reliance on various decisions in support of its contentions. The ld. AO however, disregarded the contentions and proceeded to bring to tax the referral fee of Rs.61,71,760/- treating it as FTS taxable at 10% as per Article 12 of DTAA between India and Switzerland. This was deleted by the ld. CIT(A) by placing reliance on the order of this Tribunal in the case of assessee for A.Y.2011-12 in ITA No.1247/Mum/2016 dated 09/02/2018. The relevant operative portion of the said Tribunal order is reproduced hereunder for the sake of convenience.

7. “We have carefully considered the rival submissions. As the aforesaid discussion shows, the short controversy before us relates to the nature and chargeability to tax of referral fee of Rs.18,27,90,578/- received by assessee‟s Dubai Branch (CSDB) from the Indian Company. The charge of the Assessing Officer is that having regard to Section 5(2)(b) read with section 9(1)(i) of the Act, the said income is includible in the scope of total income chargeable to tax in India. To put it differently, as per the Assessing Officer, ^„referral fee‟ is deemed to accrue or arise in India and therefore, the same is taxable in India. This has been inferred on the strength of the fact that the fee has been paid by the Indian Company after execution of the work of the referred client based in India and therefore, the source of the fee is located in India. Allied to the aforesaid stand, the perception of the Assessing Officer is that said referral fee is in the nature of ^„fee for technical services‟. The expression ^„fees for technical services‟ finds meaning in Explanation(2) below Section 9(1)(vii) of the Act; broadly speaking, the Explanation prescribes that ^„fees for technical services, means any consideration for rendering of any managerial, technical or other consultancy services, including the provision of services of technical or other personnel, but does not include consideration for any construction, assembling, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ^„salaries‟. At this stage, we may briefly touch upon the nature of the impugned referral fee earned by the assessee. The relevant discussion in the orders of the authorities below reveal that CSDB referred an India resident client to the investment banking division of the Indian company; Indian company worked on the assignment of the issue of Convertible Bonds for the referred client, and 50% of the fee earned by the Indian Company was paid to CSDB in terms of global policy of the group, which is the amount of Rs.18,27,90,578/- in question. In the face of such fact situation, we are unable to appreciate the stand of the Assessing Officer as to why the ^„referral fee‟ is to be construed as ^„fees for technical services‟ as understood for the purposes of the Act. As per the Assessing Officer, the ^„referral fee‟ has been paid by the Indian Company after the execution of the work of the referred client. Merely because the fee was payable by the Indian Company to CSDB after execution of the work of the referred client is no ground to determine the nature of the payment. In this context, the Authority for Advance Rulings in the case of Cushman & Wakefield(S) Pte. Ltd., (supra) has dealt with a somewhat similar situation, wherein the applicant was a resident of Singapore, who had earned commission from an India based entity for having referred customers. As per the Authority for Advance Rulings, such ^„referral fee‟, being in the nature of ^„commission‟ was to be treated as being in the nature of ^„business income‟; both, under the Act as well as under the Indo-Singapore Double Taxation Avoidance Agreement (DTAA), and not as ^„fees for technical services‟. To the similar effect is the decision of the Mumbai Tribunal in the case of CLSA Ltd., (supra) wherein also referral fee earned by a non-resident assessee from an India based entity for referring certain international clients was held not to be in the nature of ^„fees for technical services‟ within the meaning of Section 9(1)(vii) of the Act. Notably, the aforesaid decisions have also been referred and relied upon by the DRP in concluding that the ^„referral fee‟ is in the nature of ^„commission‟ to be taxed as ^„business income‟ and not as ^„fees for technical services‟. In the course of hearing before us, no decision to the contrary has been brought out by the Revenue. For all the said reasons, we are unable to uphold the stand of the Assessing Officer that the impugned ^„referral fee‟ was a consideration in the nature of ^„fees for technical services‟.

8. Another factual aspect which is not in dispute is that CSDB has no PE in India and also the fact that assessee‟s PE in India i.e., Mumbai bank branch had no role to play in the performance of the referral activity in question. Neither the discussion in the draft assessment order and nor in the course of hearing before us any credible assertions to the contrary has been brought out by the Revenue. Thus, considering that the referral activity was undertaken outside India and assessee‟s Mumbai branch (PE) had no role to play in the performance of the referral activity, the referral fee of Rs.18,27,90,578/- earned by CSDB could not be construed to be attributable to assessee‟s PE in India and thus, the DRP rightly applied Article 7 of Indo-Swiss Double Taxation Avoidance Agreement (DTAA) and held the same to be non-taxable in India. The aforesaid conclusion of the DRP is hereby affirmed. Therefore, considering the short point on the basis of which the DRP has allowed the plea of the assessee, we dispose of the aforesaid appeal by affirming the ultimate direction of the DRP. Thus, Revenue fails in its appeal.”

3.1. Respectfully following the same, the ground Nos. 1 & 2 raised by the Revenue are dismissed.

4. The ground No.3 raised by the Revenue is challenging the deletion of addition made on account of taxability of interest income in respect of transaction between two branches of the same legal entity.

4.1. We have heard rival submissions and perused the materials available on record. We find that Mumbai branch of the assessee paid interest of Rs.2,787/-, Rs.7,831/- and Rs.5,18,534/- to head office at Zurich, London branch and Singapore branch respectively. At the outset, the ld. AR pointed out that this issue is squarely covered in favour of the assessee by the decision of the Special Bench of Mumbai Tribunal in Sumitomo Mitsui Banking Corporation vs. DDIT reported in 19 taxmann.com 364. The ld. AR also stated that the issue is squarely covered by the decision of this Tribunal in the case of assessee for A.Yrs.2013-14and 2014-15 in ITA Nos.6372 & 6373/Mum/2017 dated 05/03/2019. We find that the ld. DR vehemently argued that the Special Bench decision in the case of Sumitomo Mitsui Banking Corporation cannot be relied upon in the instant case by the assessee as it it actually in favour of the revenue on non-allowability of interest. He relied on para 88 of the said decision. For the sake of convenience, the relevant para 88 of the Special Bench decision is reproduced hereunder:-

“88. Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise. Accordingly we answer question No.1 referred to this Special Bench in the negative i.e. in favour of the assessee and question No.2 in affirmative i.e. again in favour of the assessee.”

4.2. The ld. DR vehemently argued that the wordings of Double Taxation Avoidance Agreement between India and Japan which was considered in Sumitomo ruling is different from that of DTAA between India and Switzerland which is applicable to the assessee in the instant case, in so far as there is no provision analogous to paragraph 8(c) of the protocol to the India Japan treaty in the India Switzerland treaty. The ld. DR argued that interest is specifically allowed as a deduction as per the protocol of India Japan tax treaty whereas the same is not the case with India Switzerland tax treaty. Thus, he argued that in assessee’s case, either the interest paid by CSMB and debited to CSMB’s profit and loss account should be disallowed or interest received by the overseas profits should be taxed in the hands of the recipient overseas branches.

4.3. Per contra, the ld. AR argued that the issue involved in this appeal is only whether interest received by the overseas branch is taxable in India under the provisions of the Act read with Article 11 of India Switzerland tax treaty. There is no dispute at all in the present appeal regarding the deductibility of interest in the hands of CSMB. The ld.AR drew the attention of the Bench to page 29 of the final assessment order containing the computation of income where the ld. AO had only proposed to add the interest received by the overseas branches as the income from other sources. Accordingly, he argued that it is a case of positive addition made by the ld. AO and not a case of disallowance of expenditure.

4.4. The ld. AR further argued that the ruling in Sumitomo contained two distinct issues (i) whether the interest paid by the PE was deductible for computing the PE’s taxable income. (ii) whether the interest received by the head office was taxable in India. To drive home this point, the ld. AR referred to para 1 of the Sumitomo ruling wherein the questions raised before the Special Bench are set out. The ld. AR specifically drew our attention to the relevant portion of the decision of Special Bench in the case of Sumitomo where the second issue mentioned hereinabove i.e. taxability of interest received in India was decided in favour of the assessee. The ld. AR also relied on paragraphs 60-65, 67-71 and para 84 of the ruling of Sumitomo Special Bench decision. On the basis that the assessee’s case is of payment to self i.e. a transaction between two branches of the same legal entity, the ld. AR submitted that it does not give rise to income chargeable to tax in India under the provisions of the Act, based on principles laid down in the Act. He further argued that neither the DTAA between India and Switzerland nor the DTAA between India and Japan would be relevant for determining the taxability of the interest to self. He vehemently argued that the ld. DR was trying to make out a new case before this Tribunal which is not even the case of the ld. AO.

4.5. None of the submissions pointed out hereinabove by the ld. AR were controverted by the ld. DR before us. We find that the issue in dispute has already been the subject matter of adjudication by this Tribunal in assessee’s own case for A.Yrs. 2013-14 and 2014-15 vide order dated 05/03/2019 referred to supra wherein it has been held as under:-

“6. As regards the argument of the assessee that payment of interest being a payment to self does not give rise to any income, the AO held that the same is not tenable because of the deeming provisions contained in article 7 of the treaty providing that the income of the branch should be computed as if it is a separate and distinct entity from the non resident. He held that the branch in India thus has to be treated as if it is an entity separate from the main entity for the purpose of computation of income and the provisions of domestic law including section 40(a)(i) will apply accordingly. He held that although the entity is one for the purpose of assessment, these are two separate entities for the purpose of computation of income. He thus held that even though the interest was allowable as deduction in the computation of income of the PE in India, the same was liable to be disallowed as per the provisions of section 40(a)(i) because of the failure to deduct tax on payment of such interest. Accordingly, the claim of the assessee for deduction of the said interest was disallowed by the AO by invoking the provisions of section 40(a)(i) in the assessment completed vide an order passed u/s 143(3).

7. Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the learned CIT(Appeals). As regards the deductibility of interest payable by the Indian branches to the Head Office of the assessee bank, it was submitted on behalf of the assessee before the learned CIT(Appeals) that the interest so payable was allowable as deduction in view of Article 7(3) of the Indo-Japanese DTAA. As regards the action of the AO in disallowing the said deduction by invoking the provisions of section 40(a)(i), it was contended that the Indian branch and head office of the assessee bank being one and the same entity, there was no liability to deduct tax from the interest u/s 195. It was contended that two different persons should be involved for application of section 195 viz. payer and payee and in the case of the assessee, both the payer and payee being one and the same person, there was no liability to deduct tax u/s 195. It was contended that the provisions of section 40(a)(i) thus had no application and the AO was not justified in invoking the said provisions for disallowing the deduction claimed by the assessee on account of interest payable by Indian branches of the assessee bank to its head office.

8. After considering the submissions made on behalf of the assessee and the material available on record, the learned CIT(Appeals) was of the opinion that the issue relating to assessee’s claim for deduction on account of interest payable by its Indian branches to the head office was squarely covered against the assessee by the decision of Kolkatta Special Bench of ITAT in the case of ABN Amro Bank NV v. Asstt. DIT [2005] 98 TTJ 295/97 ITD 89 wherein it was held that identity of head office and the branch being same, there cannot be any expenditure in case of Indian branches for the interest payable to the head office. Following the said decision of the Tribunal in the case of ABN Amro Bank NV (supra), he held that interest payable by the Indian branches of the assessee bank to its head office could not be allowed as deduction while computing the income of the Indian branches. Accordingly the addition made by the AO on account of disallowance of interest payable by the Indian branches to the head office while computing the profit attributable to the said branches constituting PE of the assessee bank in India was confirmed by the learned CIT(Appeals). He also held, following the decision of the Tribunal in the case of ABN Amro Bank NV (supra), that such interest not being allowable as deduction while computing the income of the Indian branches which constituted permanent establishment of the assessee bank, could not be brought to tax in India as income of the head office of the assessee bank. The addition made by the AO on account of such interest receivable by the head office of the assessee bank while computing its total income chargeable to tax in India therefore was deleted by him. Aggrieved by the order of the learned CIT(Appeals), the assessee and Revenue both have raised their grievance in the respective appeals filed before the Tribunal, which has been projected in the questions referred to this Special Bench for consideration and decision.

9. Shri Percy Pardiwala, learned Senior Advocate, appearing on behalf of M/s Sumitomo Mitsui Banking Corporation, appellant and M/s Bank of Tokyo Mitubhushi UFJ Ltd., intervener opened the arguments. He submitted that the issue arising from the appeal of the assessee, which has been referred to this Special Bench, relates to the deductibility of interest payable by the Indian branches of a foreign bank to its head office while computing the income of the said branches which constitute PE of the foreign bank in India. He submitted that such interest was held to be allowable expenditure by the AO accepting the stand of the assessee based on article 7(2) and 7(3) of the Indo-Japanese treaty. He submitted that deduction for the said interest representing expenditure of the PE of the assessee bank in India, however, was disallowed by the AO by invoking the provisions of section 40(a)(i) since no tax at source was deducted by the PE of the assessee bank in India from the said interest payable to the head office. He submitted that the learned CIT(Appeals), however, has taken a different stand and held following the decision of Kolkatta Special Bench of ITAT in the case of ABN Amro Bank NV (supra) that interest payable by the PE of the assessee bank to its head office was not an expenditure since it constituted a payment to self. He then took us through the order of the Special Bench passed in the case of ABN Amro Bank NV (supra) to point out that branch in India of a foreign bank and its overseas head office were treated as two parts of the same entity and it was held that payment of interest by the branch to head office being a payment to self was not allowable as expenditure as per the domestic law. He submitted that the said decision of Kolkatta Special Bench of ITAT in the case of ABN Amro Bank NV (supra) has since been reversed by the Hon’ble Calcutta High Court holding that the PE in India is to be treated as independent entity for determining the profit attributable to it in India and the interest payable to head office has to be allowed as expenditure. He submitted that it was also held by the Hon’ble Calcutta High Court that tax is not deductible from such interest payable by the PE in India to the overseas head office of a foreign bank and there is no question of making disallowance of such interest expenditure by invoking the provisions of section 40(a)(i).

10. Shri Pardiwala took us through the provisions of article 7(2) and 7(3) of the Indo-Japanese DTAA placed at page No. 133 of the Revenue’s paper book II. He also took us through para 7 and 8(1) of the protocol placed at page No. 148 of the Revenue’s paper book II. He submitted that this portion of the protocol makes it clear that as per article 7(2) read with article 7(3) of the Indo-Japanese treaty, interest payable by PE in India to the overseas head office is an allowable expenditure while computing the profit attributable to the PE only in case of banking institution. He contended that such interest under the domestic law no doubt cannot be claimed as deduction by the assessee being payment to self but under the relevant treaty, the assessee is entitled to claim deduction as per article 7(2) and 7(3) on account of interest payable by its PE to head office while computing the profit attributable to the PE. As regards the applicability of the provisions of section 40(a)(i) which were invoked by the AO to make a disallowance on account of such interest paid by PE to GE, Shri Pardiwala submitted that the said provisions are attracted only when interest payable by PE in India to the overseas head office of the assessee bank is chargeable to tax in India. He submitted that the issue relating to chargeability of the said interest to tax in the hands of the assessee in India is involved in the appeal of the Revenue and since the said issue is also referred to this Special Bench, arguments on this aspect of the matter will be advanced by him in more details while replying to the arguments of the Revenue thereon.

11. Shri Girish Dave, Special Counsel of the Revenue, in reply, did not raise any material contention to dispute the claim of the assessee that interest payable by PE of the assessee bank in India to its HO abroad is allowable as deduction while computing the profits of the PE chargeable to tax in India in terms of article 7(2) & 7(3) of the Indo-Japanese treaty. He, however, strongly supported the action of the AO in disallowing the deduction claimed by the assessee for the said interest by invoking the provisions of section 40(a)(i) of the Act as a result of the assessee’s failure to deduct tax at source from the payment of the said interest as required by the provisions of section 195 of he Act. He contended that the said interest is chargeable to tax in India in the hands of GE and assessee therefore was liable to deduct tax at source from the same. In support of this contention, he relied heavily on the decision of Hon’ble Supreme Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482/161 Taxman 191. He submitted that permanent establishment in India has been treated by the Hon’ble Supreme Court in the said decision as a separate profit centre and although the observation of the Hon’ble Supreme Court in this context has come as obiter dicta, the same is binding on this Special Bench. He submitted that legal jurisdiction and fiscal jurisdiction are two different concepts and contended that when a foreign enterprise carries on business through a permanent establishment in India, it brings itself within the fiscal jurisdiction of India. He invited our attention to the observation recorded by the Hon’ble Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. (supra) at page No. 492 of the report treating the permanent establishment as a distinct and separate entity. He also invited our attention to the observations recorded by the Hon’ble Supreme Court at page 493 of the report to the effect that when GE sets up a PE in another country, it brings itself within the fiscal jurisdiction of that country to such a degree that such other country can tax all profits that the GE derives from the source country, whether through a PE or not. It was held that it is the act of setting up a PE which triggers the taxability of transactions in the source state.

4.6. Respectfully following the same, the ground No.3 raised by the Revenue is dismissed.

5. The ground No.4 raised by the Revenue is challenging the action of the ld. CIT(A) wherein the ld. CIT(A) had directed the ld. AO to delete five items while calculating book profits u/s.115JB of the Act. The interconnected issue involved therein is whether the provisions of Section 115 JB of the Act per se would be made applicable to a foreign company, for which the assessee has raised the grounds in its cross objections.

5.1. We have heard rival submissions and perused the materials available on record. The ld. AO sought to invoke the provisions of Section 115JB of the Act as the assessee being a foreign company during the course of assessment proceedings. The assessee vide letter dated 06/11/2017 stated that CSSB and CSMB are both branch offices of CSAG (assessee herein) as such they form part of the same legal entity i.e. CSAG (within the meaning of Section 2(31) of the Act. It was submitted that the Indian sourced income earned by all branches of CSAG have been reported in consolidated income tax returns filed by CSAG for A.Y.2015-16. The assessee submitted that the provisions of Section 115JB were never intended to apply the foreign companies in support of which the assessee placed reliance on the speech of Hon’ble Finance Minister while introducing the relevant provisions in Parliament. The ld. AO however, disregarded the contentions of the assessee and proceeded to invoke the provisions of Section 115JB of the Act to the foreign company. This action of the ld. AO was upheld by the ld. CIT(A).

5.2. Before us, the ld. DR argued that Section 115JB of the Act applies to foreign companies including (FPIs and FIIs) having a permanent establishment in India, given that Article 7 of the applicable treaty requires for income attributable to PE should be taxed as per domestic law which includes Section 115JB of the Act. The ld. DR placed reliance on the decision of Authority of Advance Ruling, New Delhi reported in 234 ITR 335. The ld. DR placed reliance on this decision vehemently to support his contention that provisions of Section 115JB of the Act shall be applicable to a foreign company. The ld. DR further placed reliance on yet another decision of Authority of Advance Ruling, New Delhi in the case of Castleton Investment Ltd., in re*- reported in 348 ITR 537 which also held that provisions of Section 115JB of the Act would apply to foreign company.

5.3. Per contra, the ld. AR placed reliance on the decision of the Delhi Tribunal in the case of Bank of Tokyo Mitsubishi UFJ Ltd., vs. ADIT reported in 49 taxmann.com 441 wherein it was held that MAT provisions cannot be made applicable to foreign companies. The ld. AR further pointed out that the reliance placed by the ld. DR on the decision of the Authority of Advance Ruling, New Delhi reported in 234 ITR 335 (AAR) has been considered by the Delhi Tribunal in para 62 of the decision. The ld. AR also argued that this decision of Delhi Tribunal has been upheld by the Hon’ble Delhi High Court in ITA No.604 & 605 of 2015 dated 08/04/2016.

5.4. Further the ld. DR also placed reliance on the decision of Authority of Advance Rulling, New Delhi in the case of Castleton Investment Ltd., in re*- reported in 348 ITR 537. The ld. DR also submitted that this decision of Authority of Advance Rulling, New Delhi was approved by the Hon’ble Supreme Court in the case of Castleton Investment Ltd., vs. Director of Income Tax (International) Taxation, Mumbai reported in 379 ITR 363. We have perused the decision of the Hon’ble Supreme Court in 379 ITR 363. For the sake of convenience, the said order is reproduced below:-

1. Interlocutory application for intervention is allowed.

2. In these appeals order of the Authority for Advance Rulings (Income Tax), New Delhi, (hereinafter referred to as ‘AAR’) passed on 14.08.2012 is questioned. The basic issue, which is raised, pertains to the applicability of Section 115JB of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’) in respect of foreign company which does not have any Permanent Establishment (PE) in India.

3. Harish Salve, learned senior counsel appearing for the appellants, has brought to our notice a circular dated 02.09.2015 issued by the Central Board of Direct Taxes, Ministry of Finance, Government of India. It states that Minimum Alternate Tax (MAT) provisions will not be available to FIIs and FPIs not having the business/Permanent Establishment in India for the period prior to 01.04.2015.

We reproduce hereinbelow the said circular in entirety:—

“Subject: Report on applicability of Minimum Alternate Tax (MAT) on FIIs/FPIs for the period prior to 01.04.2015 and acceptance of the Government thereof-reg.—

A Committee on Direct Tax Matters chaired by Justice A. P. Shah, was constituted to examine the issue of applicability of Minimum Alternate Tax (‘MAT’) on FIIs/FPIs for the period prior to 01.04.2015. The Committee has submitted its final report to the Government on 25.08.2015. The Committee has recommended that section 115JB of the Income Tax Act, 1961 (‘Act’) may be amended to clarify the inapplicability of the provisions of section 115JB to FIIs/FPIs having no permanent establishment (PE)/place of business in India. The Government has accepted the said recommendation and it has been decided to carry out appropriate amendment in the Act so as to prescribe that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to 01.04.2015.

The field authorities are accordingly advised to take into consideration the above position and keep in abeyance, for the time being, the pending assessment proceedings in cases of FIIs/FPIs involving the above issue. They are further advised not to pursue the recovery of outstanding demands, if any, in such cases.”

4. This is followed by Press Release dated 24.09.2015 in which two alternatives are mentioned when provisions of Section 115JB of the Act shall not be applicable to a foreign company under certain circumstances. It reads as under: —

“Sub: Applicability of Minimum Alternate Tax (MAT) on foreign companies having no PE in India -regarding —

Issues relating to taxation of foreign companies, having no permanent establishment in India, have been under consideration of the Government. In this regard, the Government has already clarified the inapplicability of MAT provisions to FIIs/FPIs.

The Government has now considered the issue of applicability of MAT under section 115JB of the Income Tax Act to foreign companies having no place of business/permanent establishment in India.

After due consideration of the various aspects of the matter, the Government has decided that with effect from 01.04.2001 the provisions of section 115JB shall not be applicable to a foreign company if—

the foreign company is a resident of a country having DTAA with India and such foreign company does not have a permanent establishment within the definition of the term in the relevant DTAA, or the foreign company is a resident of a country which does not have a DTAA with India and such foreign company is not required to seek registration under section 592 of the Companies Act 1956 or section 380 of the Companies Act 2013.

An appropriate amendment to the Income Tax Act in this regard will be carried out.”

5. Learned Attorney General has made a statement at the Bar that the Government would abide by the decision which has been taken in the aforesaid Circular dated 02.09.2015 and Press Release dated 24.09.2015.

6. Learned counsel for the parties agree that in view of this submission, the present appeals can be disposed of in terms thereof.

7. Ordered accordingly.

8. We may place on record that one more issue has been decided in the impugned opinion of the AAR which relates to the applicability of the transfer pricing provisions, i.e., Sections 90-95 to the foreign companies. However, Mr. Salve submits that since there is another Press Release on 28.01.2015, the appellants are not pressing that issue.

ORDER

The appeals are disposed of in terms of the signed order.”

(emphasis supplied by us)

5.5. From the above, it could be seen that the Hon’ble Apex Court had not affirmed the ruling of AAR New Delhi in the case of Castleton Investment Ltd., in view of the fact that the Learned Attorney General had agreed before the Hon’ble Apex Court to abide by the Circular issued by the CBDT withdrawing the applicability of MAT to FPIs not having PE in India. In our considered opinion, this would still not mean that all other cases of foreign companies would fall within the purview of MAT.

5.6. It is pertinent to note that the provisions of Section 115JB(2) of the Act postulates laying of annual accounts in Annual General Meeting before the shareholders of the company. A foreign company will never lay its accounts before the Annual General Meeting in accordance with Companies Act, 1956. It is significant to note that the profit and loss account is to be prepared in terms of Part-II and Part-III of Schedule-VI of the Companies Act, 1956 for determination of book profits u/s.115JB of the Act. In respect of a foreign company, the profit and loss account need not be prepared in terms of Part-II and Part-III of Schedule VI of the Companies Act. By this, it could be safely construed that provisions of Section 115JB of the Act were always intended to be made applicable only to domestic companies and not to foreign companies.

5.7. We find that the Co-ordinate Bench of Delhi Tribunal in the case of Bank of Tokyo Mitsubishi UFJ Ltd reported in 49 taxmann.com 441 referred to supra had addressed the legislative intent behind the introduction of Section 115JB of the Act and had held that Section 115JB of the Act applies to domestic companies only. In fact Clause-49 of the Finance Bill 2002 which sought to amend Section 115JB of the Act provided as under:-

“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….

Sub-clause (a) seeks to provide that where the tax payable on the total income chargeable to tax is less than seven and one-half per cent. of 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 seven and one-half per cent.”

This amendment will take effect retrospectively from 1st April, 2001, and will, accordingly, apply in relation to the assessment years 2001-2002 and subsequent years.”

5.8. This makes the intention of the legislature very clear that MAT provisions are applicable only to domestic companies and not to foreign companies.

5.9. We are conscious of the fact that an amendment has been brought in Section 115JB vide insertion of Explanation- 4 by Finance Act, 2016 with retrospective effect from 01/04/2001. The said Explanation-4 is reproduced below:-

“Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—

(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub­section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or

(ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.”

5.9.1. We find that the ld. CIT(A) had applied the aforesaid Explanation-4 and held that the provisions of Section 115JB would be applicable to foreign company. Admittedly the decision of Delhi Tribunal in the case of Bank of Tokyo was rendered prior to the introduction of Explanation-4 in Section 115JB of the Act. It is pertinent to note the explanatory memorandum issued by CBDT while bringing any amendment in Section 115JB of the Act, noted that a Committee on Direct Tax matters headed by Justice A.P. Shah set up by the Government to look into the matter recommended for an amendment of Section 115JB to clarify the applicability MAT provisions to FIIs/FPIs, in view of the fact that FIIs and FPIs normally do not have a place of business in India. In view of the recommendations of the committee and with a view to provide certainty in taxation of foreign companies, it was proposed to amend the Income Tax Act so as to provide that w.e.f. 01/04/2001, the provisions of Section 115JB of the Act shall not be applicable to a foreign company if (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.

5.10. From the conjoint reading of the explanatory memorandum and giving purposive interpretation to the provisions of Section 115JB of the Act and intent behind introducing the same and also considering the fact that the accounts of foreign company are not prepared in accordance with Part II and Part III of Schedule-VI of companies Act 1956 and their accounts not being laid in Annual General Meeting before the shareholders of the company for approval, we hold that provisions of Section 115JB of the Act cannot be made applicable to a foreign company.

5.11. The Explanation-4 to Section 115JB of the Act could be viewed from another perspective also. This Explanation-4 has been introduced with retrospective effect from 01/04/2001 in the Act, meaning thereby that the retrospective amendment is clarificatory in nature which seeks to address series of orders issued by Authority of Advance Rulling which had held that FPIs are required to pay MAT. Since FPIs do not have PE in India, the retrospective clarification was inserted in the Act to address their concerns and allay their apprehensions that MAT provisions would be applied to them. The amendment does not impose a charge of MAT on foreign companies having PE in India, as the amendment merely provides an exemption for a certain class, it does not imply that everyone outside that class becomes liable to MAT, especially when they were not originally covered within the ambit of MAT provisions which is amply clear from the intention behind introduction of Section 115JB of the Act, the Hon’ble Finance Minister’s speech thereon and explanatory memorandum issued by CBDT while introducing those provisions.

5.12. Moreover, it is not in dispute that there is a tax treaty existing between India and Switzerland which is governed by Section 90(2) of the Act. The MAT provisions cannot apply where tax treaty is invoked as the provisions of Section 115JB of the Act are only subordinate to Section 90(2) of the Act and Section 90(2) overrides Section 115JB of the Act.

5.13. We find that the ld. AO in the instant case had sought to add the following five items while computing book profits u/s.115JB of the Act.

5.14. We have gone through the treaty between India and Switzerland wherein, vide Article 7, it is stated that what can be charged to tax is only profits attributable to permanent establishment, after allowing deduction for expenses, wherever incurred, pursuant to Article 7(3). In the assessee’s case, if Article 7(1) of the India Switzerland treaty is applied, then only income that is attributable to the PE i.e. CSMB, could be brought to tax. We find that none of the aforesaid five items which are added by the ld. AO are attributable to the PE. Once it is so, then the specific articles provided in the treaty vide Article 11,12 & 13 and the rates specified therein would apply. Consequently, the provisions of Section 115JB of the Act could not be invoked to bring to tax the income at 18.5% which would have the effect of not applying the treaty provisions. Hence, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee by directing the ld. AO to delete the aforesaid five items while computing book profits u/s.115JB of the Act. Accordingly, it is also clear that MAT could not be applied even to foreign companies which have PE in India as it would be contrary to the basic foundation of the applicable treaty.

5.15. Moreover, we also find that different tax treatment has been prescribed in India-Switzerland treaty for each of the aforesaid five items of income. For example, Article 11 / Article 12 of the treaty prescribes a tax rate of 10% for interest income and IT support charges earned by the assessee. Similarly, capital gains earned by the assessee are not liable to tax in India by virtue of Article 13(6) of the treaty. Hence, applying the MAT provisions to these items of income would result in assessee being denied the benefits of the treaty. We have already stated that the provisions of Section 90(2) would override provisions of Section 115JB of the Act despite the fact that Section 115JB of the Act is a special section and a complete code by itself. This short aspect is also addressed by Delhi Tribunal in the case of Bank of Tokyo Mitsubishi UFJ Ltd reported in 49 taxmann.com 441 which has been approved by the Hon’ble Delhi High Court in ITA No.604 & 605/Mum/2015 dated 08/04/2016.

5.16. We find that Article 7(1) of the treaty prescribes that profits that were attributable to the PE would be taxable in India. The manner in which the ld. AO had applied the provisions has the effect of not only bringing to tax the profits that are not attributable to the PE but also has the effect of taxing the other items not in accordance with the provisions of other Articles of the treaty.

5.17. In any case, we find that the aforesaid five items of income earned by CSSB which was sought to be covered by the ld. AO within the ambit of MAT are not included in the books of accounts drawn up by CSMB in India. Once a particular item is not at all included in the books of accounts which are drawn up in India, how can the same be subject matter of applicability of provisions of Section 115JB of the Act. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd., vs. CIT reported in 255 ITR 273. When the accounts of CSMB do not incorporate the aforesaid five items of income earned by CSSB, the department cannot impose MAT provisions by using the fiction which is contrary to the Banking Regulation Act, 1949. The provisions of Income Tax Act cannot require CSMB to re-write the accounts in a manner different than what is stipulated in the Banking Regulation Act, 1949. Hence, even on merits, the question of applying the MAT to CSSB’s income does not arise. Accordingly, the ground No.4 raised by the Revenue is dismissed.

6. In the result, appeal of the Revenue is dismissed and Cross Objection of the assessee is allowed.

Order pronounced on 03/08/2022 by way of proper mentioning in the notice board.