authority for advance rulings, new delhi

McLeod Russel Kolkata Ltd., In re

P. V. Reddi, Chairman

A.Sinha and Rao Ranvijay Singh, Member

aar no.763 of 2007

February 28, 2008

Section 112, read with section 48 of the Income-tax Act, 1961 – Capitals gains – Tax on long term capital gains – Applicant, a resident company, purchased equity shares of ‘M Tea Co.’ from ‘M’, a non-resident company – Shares sold by ‘M’ consisted of original as well as bonus shares – Applicant has sought advance ruling in relation to determination of tax liability of ‘M’ on sale of such shares – Applicant submitted that tax payable on long-term capital gains arisen to ‘M’ on sale of original as well as bonus shares of ‘M’ Tea Co., will be at rate of 10 per cent in consonance with proviso to section 112(1) – In written comments, revenue has submitted that ‘M’ will have to pay tax at rate of 20 per cent in respect of both original shares as well as bonus shares and proviso under section 112(1) will not apply – Whether applicant’s claim is to be accepted - Held, yes

Section 245N(b) of the Income-tax Act, 1961 – Applicant -Whether a resident applicant who has entered into a transaction with a non-resident can file an application under section 245Q(1) in relation to tax liability of such non-resident arising out of such transaction - Held, yes

FACTS

The applicant, a resident Indian Co. is engaged in the business of plantation and manufacture of tea. The applicant purchased equity shares of ‘M Tea Co.’ from ‘M’, a non-resident company. The shares sold by ‘M’ to the applicant consisted of original as well as bonus shares of ‘M Tea Co.’ The applicant authorized bank for arranging and remitting the sale proceeds after deducting tax at the rate 20 per cent, inclusive of the surcharge, on long term capital gains and, accordingly, the sale proceeds were remitted to the non-resident company and the shares were credited in the Demat account of the applicant. The assessee has sought advance ruling on the question as to whether tax payable on long term capital gain arisen to ‘M’ on sale of original as well as bonus shares of ‘M Tea Co.’ will be 10 per cent of amount of capital gain as per proviso to section 112(1). In the written comments, the revenue has submitted that section 112(1) clearly distinguishes between domestic and foreign companies and defines the rates of taxation of long-term capital gains at 20 per cent for foreign companies.  As such, the resident Indian company cannot avail of lower rate of taxation envisaged by section 112 inasmuch as the second proviso to section 48 is not applicable to the non-resident company.  Further, in terms of section 48 read with section 112(1)(c), ‘M’ will have to pay the tax at the rate of 20 per cent in respect of both original shares as well as bonus shares and the proviso under section 112(1) will not apply. The applicant has contended that the lesser rate of 10 per cent is applicable to long-term capital gains derived by non-resident foreign companies as well, and the benefit of reduced rate is not to be confined to residents only.

HELD

In the case of Timken France SAS., In re, [2007] 294 ITR 513/164 Taxman 354 (AAR-New Delhi). On almost similar facts, the Authority took the view that the benefit of the proviso to section 112(1) could not be denied to non-residents/foreign companies even if they are entitled to another relief in terms of the proviso to section 48. The Authority also held that the proviso to section 112(1) was a special provision in relation to transfer of certain long-term capital assets viz., listed securities, units etc. and there was no warrant to limit the 10 per cent effective rate provided therein as against the normal rate of 20 per cent only to the three categories of resident assesses specified in clause (a), (b) and (d). [Para 10]

The stand taken by the revenue is patently contrary to the ruling in the case of Timken France (supra) which considered the same questions and provisions. The only difference in facts between the case of Timken France and the instant case is that in the former case the non-resident company acquired the original shares by utilizing foreign currency, whereas in the case of applicant, it does not appear that foreign currency was so utilized. That means, the applicant may not be able to avail of the benefit under the first proviso to section 48. This distinguishing feature does not in any way support the contention of the revenue. [Para 11]

The Commissioner in his comments pointed out that the application under section 245Q(1) should have been made by the non-resident namely, ‘M’ which sold the shares to the applicant. There is no force in this contention. Sub-clause(ii) of clause (b) of section 245N refers to a resident applicant who has entered into a transaction with a non-resident.  In relation to the tax liability of such non-resident arising out of the such transaction, the resident applicant can very well file the application.  It stands to reason that a resident applicant who is directly concerned with the issue of tax deduction at source in respect of payments made to the non-resident, is specified as one of the eligible applicants. [Para 12]

Therefore, the tax payable on a long-term capital gains arisen to ‘M’, on sale of originally acquired shares of ‘M’ Tea Co. will be at the rate of 10 per cent in consonance with the proviso to section 112(1). Even in respect of sale consideration arising out of the bonus shares, the tax liability of the ‘M’ will be at the rate of 10 per cent only as per the proviso to section 112(1). [Para 13]

Case Review:

Timken France SAS., In re, [2007] 294 ITR 513/164 Taxman 354 (AAR) – Followed [Para 10]