AUTHORITY FOR ADVANCE RULINGS,
McLeod Russel Kolkata Ltd., In re
P. V. Reddi, Chairman
A.Sinha and Rao Ranvijay
Singh, Member
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 applicants 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
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.
In the case of Timken
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. [
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. [
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). [
Timken