The applicant is a company incorporated in the United States and is a leading manufacturer of engineered bearings, alloys etc. The applicant has a significant shareholding in an Indian listed company, which was initially set up as joint venture with Tata Iron and Steel Company.
As part of a global restructuring exercise, the applicant proposes to transfer its shareholding in the Indian company to a company incorporated in Mauritius. The proposed transfer would be undertaken on the Bombay Stock Exchange and subject to Security Transaction tax (STT). The shares are held by the applicant for more than 12 months.
Capital gain on transfer of long term equity shares is exempt from tax in India under the Income Tax Act, 1961 (ITA) if STT is paid on the same.
Issue before Authority for Advance Ruling (AAR)
The issue before the AAR is whether MAT provisions are applicable to a foreign company having no physical business presence in India?
Ruling of the AAR
– Income which does not have a source in India cannot be made part of the book profit
– The annual accounts including Profit & Loss Account cannot be prepared in the prescribed manner for the worldwide income and presented before the company in its General Meeting.
– The Finance Minister’s speech and the memorandum explaining the introduction of MAT provisions would become out of sync if the meaning of company for MAT provisions would include a foreign company.
Conclusion:- As per the provisions of the ITA, rulings pronounced by the AAR are applicable only with respect to the applicant. However, there are certain judicial precedents which have held that ruling pronounced by the AAR do have a persuasive value. Accordingly, the aforesaid ruling could potentially come as an aid for foreign companies having no presence in India and are earning passive income from India to argue that MAT provisions are not applicable. For example, this ruling could be beneficial for capital gains made by Foreign Institutional Investors or Private Equity Funds investing in the Indian stock markets or unlisted Indian companies.
Source: The Timken Company, AAR No. 836 of 2009 dated 23 July 2010