Case Law Details
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
- The AAR distinguished its earlier ruling in the case of P.NO 14 of 1997 (234 ITR 335) wherein it had held that a foreign company would be subject to MAT provisions. The critical factor for distinguishing was on the basis that in the earlier ruling the applicant had a project office in India, which constituted a Permanent Establishment and was preparing its financial statements as required under Indian Companies Act.
- In order to comply with the requirement of MAT provisions regarding preparing Profit & Loss Account in accordance with the provisions of the Indian Companies Act, it is essential that the foreign company should have a place of business within India.
- In the present case, the applicant does not have a place of business in India; hence compliance of preparation of Profit & Loss Account as per the Indian Companies Act could not be possible.
- The MAT provisions are applicable to a company. Under the ITA, Company has inter-alia been defined to include a body corporate incorporated outside India ie foreign company. As per the AAR, the context in which Company is used for MAT provisions should not include a foreign company for the following reasons:
– 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
