Authority For Advance Rulings
McLEOD Russel India Ltd., In Re
Section 112(1), proviso, 245N(b)
P.V. Reddi, J., Chairman; A. Sinha & Rao Ranvijay Singh, Members
AAR No. 763 of 2007
28th February, 2008
Counsel Appeared :
V.S. Wahi, for the Applicant : None, for the CIT concerned
Ruling
Rao Ranvijay Singh, member :
The applicant, a resident Indian company, is engaged in the business of plantation and manufacture of tea. The applicant submitted an application under s. 245Q(1) of the IT Act, 1961 (in short ‘the Act’) in the prescribed Form 34D for seeking advance ruling in relation to the determination of tax liability of a non-resident i.e. Moron Holdings, Plc, U.K. pertaining to a transaction undertaken by the applicant with such non-resident. As the facts stand out, the applicant purchased 15,20,000 (fifteen lakh twenty thousand) equity shares of Moran Tea Company (India) Ltd. from Moran Holdings, Plc, U.K. a non-resident company as per the sale and purchase agreement (in short SPA) executed between the purchaser (the applicant) and seller (Moran Holdings, Plc, U.K.) on 18th Jan., 2007, wherein the purchaser agreed to purchase the said shares of Moron Tea Company held by the seller @ Rs. 273 per share. Out of the said shares, the original 5,18,000 shares were acquired by the seller in lieu of all the assets of the Moron Tea Ltd. (a U.K. company that was previously trading directly in India) on 6th April, 1979, after obtaining permission from RBI. Subsequently, as the facts bear out, Moron Tea Company issued 10,28,000 fully paid up equity shares of Rs. 10 each as bonus shares during the years 1990 and 1998. Thus, 15,20,000 shares (listed securities) sold by Moron Holding Plc U.K. to the applicant consisted of original as well as bonus shares acquired from Moron Tea Company.
It is further stated that the effective date of agreement was extended till 7th Oct., 2007, and the sale consideration payable for the transfer of shares, was to the tune of Rs. 41,49,60,000. As stated, the transfer of aforesaid shares could not be effected through the stock exchange. As such, the applicant authorized ICICI Bank Ltd. for arranging and remitting the sale proceeds amounting to Rs. 33,24,06,160 after deducting tax @ 20 per cent, inclusive of the surcharge, on the long term capital gains. Accordingly, the sale proceeds were remitted to the seller on 1st Oct., 2007 through ‘Swift’ (inter bank transfer). The shares were then credited through off market transaction in the Demat account of the purchaser after the transaction of sale was completed. Placed in the above factual scenario, the applicant has sought ruling from this Authority on the following questions :
“1. Whether on the stated facts and in law, the tax payable on long term capital gain arisen to Moran Holdings, Plc on sale of originally acquired shares of Moran Tea Company (India) Ltd. will be 10 per cent of the amount of capital gain as per proviso to s. 112(1) of the IT Act, 1961 ?
Whether on the stated facts and in law, the tax payable on long term capital gain arisen to Moran Holdings, Plc on sale of bonus shares of Moran Tea Company (India) Ltd. will be 10 per cent of the amount of capital gain as per proviso to s. 112(1) of the IT Act ?
Whether on the stated facts and in law, the long term capital gain arisen to Moran Holdings, Plc on sale of originally acquired shares and bonus shares of Moran Tea Company (India) Ltd. are to be computed by applying s. 48 of the IT Act without having regard to either the first or the second proviso to the section ?”
The application filed by the applicant seeking ruling on the aforesaid questions was admitted by the Authority under s. 245R(2) of the Act as per an order dt. 4th Dec., 2007 and the case was posted for hearing on merits. Mr. V.S. Wahi, advocate, appeared on behalf of the applicant and was heard. Nobody appeared on behalf of the Revenue. However, comments on the application were furnished on behalf of the Revenue. Arguing the case, the learned counsel of the applicant has submitted that the Moran Holdings, Plc U.K. (seller), satisfies all the conditions requisite to attract the proviso to s. 112(1) of Act and therefore the tax on long-term capital gains arising on the sale of original shares as well as bonus shares should be computed @ 10 per cent, as prescribed in the said proviso. The learned counsel has further submitted that the decision of the Authority in the case of Timken France SAS, In re (2007) 212 CTR (AAR) 349 : (2007) 294 ITR 513 (AAR) fully governs the factual as well as legal aspect of the instant case. However, the learned counsel for the applicant has, in course of the hearing, not pressed for an answer to question No. 3. Accordingly no ruling is called for in respect thereof. In the written comments, the Revenue has submitted that s. 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 s. 112 inasmuch as the second proviso to s. 48 is not applicable to the non-resident company. Further, in terms of s. 48 of the Act r/w s. 112(1)(c), the non-resident will have to pay the tax @ 20 per cent in respect of both original shares as well as bonus shares and the proviso under s. 112(1) of the Act will not apply.
The learned counsel for 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. It has also been argued that the proviso to s. 112(1) applies to all the clauses of the sub- s. (1) of the s. 112 of the Act. It has also been submitted that the applicability of the second proviso to s. 48 is not a condition precedent for availing the benefit of lesser rate of taxation at 10 per cent under the proviso to s. 112(1). Further, the proviso to s. 112(1) is a special provision in respect of shares and can be applied in relation to the transaction with a non-resident company. The learned counsel for the applicant summed up by submitting that the ratio laid down by the Authority in the case of Timken France (supra) fully covers the instant case. As such, the question raised by the applicant merits to be answered in favour of the applicant. We have addressed ourselves carefully to the rival submissions made and are of the considered opinion that on almost similar facts, the case of Timken France (supra) was examined by this Authority at length. This Authority took the view that the benefit of the proviso to s. 112(1) of the Act could not be denied to non-residents/foreign companies even if they are entitled to another relief in terms of the proviso to s. 48 of the Act. The Authority also held that the proviso to s. 112(1) of the Act 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 assessees specified in cls. (a), (b) and (d). It may not be out of place to give the following extract from the headnote of the ruling in the case of Timken France (supra) which is as under :
In plain and peremptory words, the proviso to s. 112(1) limits the rate of tax on long-term capital gains from the transfer of listed securities to 10 per cent, but with an important rider that the quantum of capital gains should be arrived at without taking into account the formula laid down in the second proviso to s. 48 based on the indexed cost of acquisition. In other words, while computing the gains on listed securities held for more than 12 months, one should not give effect to the calculation spelt out in the second proviso to s. 48 wherever applicable. The indexation formula will not enter into the computation process—that is the mandate of the proviso to s. 112 (1). It does not say : deny the concessional rate of tax to the category of assessees who are not eligible to have the benefit of indexed cost of acquisition under the second proviso. In other words, the eligibility to avail of the benefit of the indexed cost of acquisition is not a sine qua non for applying the reduced rate of 10 per cent prescribed by the proviso to s. 112(1). The second proviso to s. 48 is only a mode of computation of capital gains : it cannot be construed as words of exclusion of a category of assessees, i.e., non-residents who cannot avail of indexation benefit. The protection in terms of the first proviso to s. 48 made available to a non-resident might be a justification to deny the benefit of cost of indexation but the same cannot be said of the application of a lesser rate.” The stand taken by the Revenue is patently contrary to the ruling in Timken France (supra) which considered the same questions and provisions. The only difference in facts between the case of Timken France (supra) and the present 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 s. 48. This distinguishing feature does not in any way support the contention of the Revenue. Before closing the case, we would like to advert to the fact that the CIT in his comments pointed out that the application under s. 245Q(1) should have been made by the non-resident namely, Moran Holdings, Plc, U.K. which sold the shares to the applicant. We find no force in this contention. Sub-cl. (ii) of cl. (b) of s. 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 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 TDS in respect of payments made to the non-resident, is specified as one of the eligible applicants. Ruling
Therefore, in view of the discussion hereinabove, we answer the questions raised in the following manner : Question No. 1 is answered by holding that the tax payable on a long-term capital gain arisen to Moran Holdings, Plc on the sale of originally acquired shares of Moran Tea Company (India) Ltd. will be @ 10 per cent in consonance with the proviso to s. 112(1) of the Act. In other words, the question is answered in favour of the applicant. Question No. 2 is also answered in favour of the applicant by holding that even in respect of sale consideration arising out of the bonus shares, the tax liability of the non-resident foreign company will be @ 10 per cent only as per the proviso to s. 112(1) of the Act.
[Citation : 299 ITR 79]
