AAR : Whether the provisions of s. 115JA of the Act would be applicable in computing the total income of a foreign company like the applicant

Authority For Advance rulings

XYZ, IN RE

Section 115JA

Suhas C. Sen., J; Chairman ; Mohini Bhussry, Member

P. No. 14 of 1997

20th July, 1998

RULING

BY THE AUTHORITY :

The applicant herein has made this application raising following questions before this Authority: Whether the provisions of s. 115JA of the Act would be applicable in computing the total income of a foreign company like the applicant.

In any event, having regard to the provisions of the convention for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital entered into by India with the Netherlands (“the treaty”), whether in computing the profit attributable to the Permanent Establishment (“PE”) of the applicant which is a tax resident of Netherlands, recourse can be had to provisions of s. 115JA.

In brief, the case of the applicant is that it is a company incorporated in the Netherlands having a project office in India. The management and the control of the company vests in its board of directors which is located wholly outside India and meets outside India, i.e., in the Netherlands. Since the control and management of the applicant is situated wholly outside India, it does not qualify as a resident under s. 6(3)(ii) of the IT Act 1961 and therefore, is a non-resident company for Indian tax purposes. The company has executed several dredging contracts in India since 1985 and has a project office for executing the contracts in India. The applicant has been filing its returns of income annually and reported losses every year on the contracts executed in India. The losses are on account of depreciation claimed by the applicant on the dredgers and equipments utilised in India for executing the contracts. The applicant has unabsorbed losses which are available for carry forward and set off against the profits which may be earned by the applicant in its dredging operation.

The difficulty faced by the applicant is from the asst. yr. 1997-98 when s. 115JA of the IT Act was introduced. As a result of this new section, every company is required to prepare its financial statements according to Part II and Part III of Schedule VI of the Companies Act, 1956 to ascertain its book profits. The book profits thus ascertained after adjustments will have to be compared with the taxable income as computed under the IT Act. If the taxable income is less than 30 per cent of the book profits, the company will be deemed to have a taxable income amounting to 30 per cent of the book profits and taxed accordingly.

The case of the applicant is that the provisions of s. 115JA cannot be applied to a foreign company like the applicant of which the headquarters are in the Netherlands. The control and management over the Indian business of the company is also exercised from there. All its financial records and books of accounts are maintained in Netherlands. The company, however, in order to comply with their requirements under the Exchange Control Regulations, Companies Act, 1956 and the IT Act, 1961, prepares and maintains its accounts relating to the Indian

Projects at its Project Office. The applicant prepares its financial statements in the form of statement of assets and liabilities and statement of revenue and expenses, which it files with its tax return. However, for the purpose of filing the financial statements with the Exchange Control Authorities and the Registrar of Companies, the applicant prepares its accounts in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. It must be noted that the accounts prepared in accordance with Part II and III of Schedule VI relate only to the income and expenditure incurred out of the Indian bank accounts. Expenditure incurred directly by the head office is not included. Further, in the financial statements filed with the Registrar of Companies, the applicant claims depreciation allowance at the rates provided in the IT Act.

It is argued that if s. 115JA is closely examined, it will be found that the provisions of that section are not strictly applicable to a foreign company which is carrying on business in India. Our attention was drawn to the wording of s. 115JA which according to the counsel were not appropriate for a foreign company. It has been contended that a foreign company does not declare dividend in India, control and management of the applicant company is in Netherlands. Profit and loss accounts for the relevant year in accordance with the provisions of Part II & III of Schedule VI to the Companies Act can only be made up after taking into account the depreciation and other allowance. These P&L a/cs will have to be placed at the annual general meeting of the company since the applicant maintains its books of accounts in Netherlands and the annual general meeting is held there.

The applicant’s business in India is confined to a limited field and for that purpose, it maintains a Project Office in India. Therefore, it is under an obligation to file a return confined to its Indian business only. It has further been stated on behalf of the company that the first proviso to s. 115JA (2) requires that depreciation is to be provided in the same method which has been adopted for calculating depreciation for the purpose of preparing the P&L a/c laid “before the company at its annual general meeting in accordance with the provisions of s. 210 of the Companies Act”. Sec. 210 of the Companies Act does not apply to a company like the applicant nor would the applicant hold an annual general meeting as set out in s. 166 of the Companies Act. The Explanation below s. 115JA(2) sets out how the ‘book profits’ are to be computed. The amount of dividend paid or proposed is to be added back. A foreign company’s accounts prepared pursuant to s. 594 of the Companies Act will never have a provision for dividend and accordingly cl. (e) of the Explanation will not apply to the case of a company like the applicant.

The net profit as shown in the P&L a/c is to be reduced, inter alia, by profits derived from operating an infrastructure facility provided the conditions laid down in s. 80-IA(4A) are fulfilled. Sec. 80-IA(4A) applies to enterprises engaged in developing, maintaining and operating an infrastructure facility provided the enterprise is owned by a company registered in India. Accordingly, cl. (vi) of the Explanation would not apply in the case of a foreign company like the applicant. Clause (vii) refers to the profits of a sick industrial company. A foreign company would not come within the definition of a sick industrial company under the Sick Industrial Companies (Special Provisions) Act, 1985.

In arriving at the book profits, one has to reduce the net profit as per the P&L a/cs by the profits eligible for deduction under s. 80HHC and s. 80HHE [cls. (viii) and (ix) of the Explanation]. The said two provisions would not apply to the profits derived by a foreign company.

The fact that there are so many integral and important provisions of s. 115JA which cannot apply to a foreign company would go to show that a foreign company is not covered by the provisions of s. 115JA. We are unable to uphold these contentions for a number of reasons. Sec. 115JA is as under: “115JA. Deemed income relating to certain companies.—(1) Notwithstanding anything contained in any other provisions, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (2) Every assessee, being a company, shall, for the purposes of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956): Provided that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of s. 210 of the Companies Act, 1956 (1 of 1956): Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. Explanation.—For the purposes of this section, “book profit” means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-s. (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves by whatever name called; or (c) the amount or amounts set aside to provisions made for meeting liabilities; other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; if any amount referred to in cls. (a) to (f) is debited to the P&L a/c, as reduced by,— (i) the amount withdrawn from any reserves or provisions if any such amount is credited to the P&L a/c: Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or (ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the P&L a/c; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation.—For the purposes of this clause, the loss shall not include depreciation; or (iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or (v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-cl. (b) or sub-cl. (c) of cl. (iv) of sub-s. (2) of s. 80-IA, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-s. (5) of s. 80-IA; or (vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined under sub-s. (12) of s. 80-IA, and subject to fulfilling the conditions laid down in sub-s. (4A) of s. 80-IA; or (vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-s. (1) of s. 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.—For the purposes of this clause, “net worth” shall have the meaning assigned to it in cl. (ga) of such s. (1) of s. 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of profits eligible for deduction under s. 80HHC, computed under cls. (a), (b) or (c) of sub-s. (3) or sub-s. (3A), as the case may be, of that section, and subject to the conditions specified in sub-ss. (4) and (4A) of that section; (ix) the amount of profits eligible for deduction under s. 80HHE, computed under sub-s. (3) of that section. (3) Nothing contained in sub-s. (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-s. (2) of s. 32 or sub-s. (3) of s. 32A or cl. (ii) of sub-s. (1) of s. 72 or s. 73 or s. 74 or subs. (3) of s. 74A. (4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section”.

The purpose behind the introduction of this section was to tax “zero tax companies”. In the memorandum explaining the purpose behind the introduction of s. 115JA, it was noted that in recent times, the number of zero tax companies and companies paying marginal tax had grown. Studies had shown that inspite of the fact that companies earned substantial book profits and paid handsome dividends, no tax was being paid by them to the exchequer. The new proposal provided for those companies to pay tax on 30 per cent of the book profits, if the total income of the company as computed under the IT Act was less than 30 per cent of the book profits as per the books of account prepared in accordance with parts II and III of Schedule VI to the Companies Act, 1956. Applicability of s. 115JA will not depend on whether a company, Indian or foreign, has been given depreciation allowance or not, nor will non-payment of dividend make any difference. For the purpose of application of this section, it is not necessary that each and every provision for calculation of book profit as given in the Expln. to s. 115JA must apply. Some of the provisions may not apply even to an Indian company. Book profit will have to be calculated by adding back all or any of the amounts referred to in cls. (a) to (f) provided that such amounts were deducted in the P&L a/c. Explaining the necessity for this legislation, it was stated by the Finance Minister in his Budget speech that corporate tax rates have been reduced and simplified over the past few years and the results have been very encouraging with a significant increase in corporate taxes as a percentage of GDP. However, there were two issues which needed to be addressed. The first was the promise made in the past that the corporate surcharge will be temporary. The other was the phenomenon of zero tax companies which, according to many observers, reflects an excessive degree of laxity in the tax regime. It was further stated in the Budget speech as follows: “I propose to introduce a “Minimum Alternate Tax’ (MAT) on companies. In a case where the total income of the company, as computed under the IT Act after availing of all eligible deductions, is less than 30 per cent of the book profit, the total income of such a company shall be deemed to be 30 per cent of the book profit and shall be charged to tax accordingly. The effective rate works out to 12 per cent of book profit calculated under the Companies Act. Companies engaged in the power and infrastructure sectors will, however, be exempted from the levy of MAT.

As a step towards achieving a level playing field for Indian companies vis-a-vis the foreign companies, I propose to reduce the tax on long-term capital gains in the case of domestic companies from 30 per cent to 20 per cent”.

16. This was reiterated in the Memo explaining the Finance Bill, 1997, in the following manner : “Minimum Alternative Tax on Companies : Minimum Alternative Tax (MAT) on companies was introduced by the Finance (No. 2) Act, 1996, w.e.f. 1st April, 1997, with a view to ensure that companies with business profits do not regularly avoid paying tax. This was necessary due to rise in the number of zero tax companies in view of tax preferences granted in the form of exemptions, deductions and high rate of depreciation. The rate of minimum tax was kept at a modest figure by deeming 30 per cent of book profits as total income. This modest amount is likely to go down further with the downward revision of corporate tax rate and abolition of surcharge”. A large number of decisions were cited, relating to well-known rules of construction of a taxing statute. What is important to bear in mind is the object of introduction of s. 115JA. A number of companies with huge profits were avoiding payment of tax by adjusting their profits against various allowances which are permitted under the IT Act. To circumvent this strategy, s. 115JA was inserted. The simple method adopted by s. 115JA is to find out whether the total income of a company after all the deductions and allowances was less than 30 per cent of its book profit. In such a situation, total income chargeable to tax is deemed to be 30 per cent of such book profit. There is no reason to confine this section to Indian companies alone. If a foreign company is avoiding tax lawfully by similar devices, this section will be applicable also to such companies. This section has been made applicable to companies generally and not to Indian companies or domestic companies only. Moreover, sub-s. (4) of s. 115JA implies that all other provisions of the Act will continue to apply to every assessee-company. That means every assessee company will come within the scope of s. 115JA, and, save as specifically provided therein, will continue to be governed by other provision of the Act. There are many provisions in the IT Act specially applicable to foreign companies. Likewise, there are very many provisions which apply to Indian companies or domestic companies only. We shall refer to some of these provisions. Sec. 44D contains provisions for computing income by way of royalties etc. in the case of foreign companies. Sec. 44B provides provision for computation of profits in the case of non-residents engaged in the business of supplying plants and machinery etc. for extraction/production of mineral oils. Likewise, there are special provisions for computation of profits from operation of aircraft (s. 44BBA), profits from shipping business (s. 44B), computation of profits from turnkey power projects (s. 44BBB), deduction of head office expenditure (s. 44C). There are also special exemptions available to a foreign company under s. 10(6A) and 10(6B). Sec. 115JA contains special provisions for tax on dividends, interest and royalty in case of foreign companies. Sub-s. (4) of s. 115JA does not make any mention of foreign companies. It speaks only of “every assessee, being a company”. There is no reason to presume that the legislature did not intend the provision of s. 115JA to apply to an assessee which is a foreign company.

The main argument of the counsel is that the applicant in this case is not supposed to offer its entire book profit for taxation in India. He has only to show the profit of the Indian part of its business and offer for taxation in India. This argument is also without any substance. Sec. 594 of the Companies Act provides : “Sec. 594. Accounts of foreign company.—(1) Every foreign company shall in every calendar year,— (a) make out a balance sheet and P&L a/c in such form, containing such particulars and including or having annexed or attached thereto such documents (including, in particular, documents relating to every subsidiary of the foreign company) as under the provisions of this Act, have been required to make out and lay before the company in general meeting; and (b) deliver three copies of those documents to the Registrar; Provided that the Central Government may, of cl. (a) shall not apply, or shall apply subject to such a exceptions and modifications as may be specified in the notification. (2) If any such document as is mentioned in sub-s. (1) is not in the English language, there shall be annexed to it a certified translation thereof. (3) Every foreign company shall send to the Registrar with the documents required to be delivered to him under sub-s. (1), three copies of a list in the prescribed form of all places of business established by the company in India as at the date with reference to which the balance sheet referred to in sub-s. (1) is made out.”

The position emerging from the provisions of this section and the notifications issued by the Government of India is stated in the Guide to the Companies Act by A. Ramaiyya, 13th Edn. as under: (1) World Accounts.—Three copies of balance sheet and P&L a/c, including documents relating to every subsidiary of the foreign company, as submitted by it to the prescribed authority in the country of its incorporation under the provisions of the law in that country, shall be filed with the Registrars.

The world accounts shall be delivered to the Registrars within a period of 9 months from the close of the financial year of the foreign company. The Registrar at New Delhi may extend the said period by 3 months, vide r. 18A of Companies (Central Government’s) General Rules and Forms, 1956 (Appendix 1). (2) Indian business accounts.—Three copies of balance sheet and P&L a/c of Indian business accounts of foreign company duly audited by a practising chartered accountant in India, in the form prescribed in Schedule VI (as modified in terms of Notifications dt. 4th Oct., 1957, and 6th Jan., 1959), shall be filed with the Registrars within 9 months of the close of the financial year. The Registrar at New Delhi may extend this period by 3 months, vide r. 18(A) (ibid) in Appendix 1. The accounts shall be audited by such person and in such manner as provided in s. 226 and 227 (as modified in terms of the notifications cited above).

The aforesaid accounts have to be filed with the Principal Registrar (i.e., Registrar of Companies, New Delhi) and the concerned Registrar having jurisdiction over the principal place of business of the foreign company. (s. 597).

It may be pointed out that the Indian accounts have to be drawn upon Indian rupees as per the requirements of Schedule VI. Income-tax assessments in India is made on the basis of such balance sheets and P&L a/cs” Under the provisions of the Companies Act, every foreign company has to maintain its books of accounts relating to Indian business in the manner provided in s. 209 and in each calendar year it has to file its world account. It has also to file a list of places of business establishments in India. The foreign company is also under obligation under s. 594 of the Act to deliver 3 copies of its world accounts. Three copies of balance sheets of Indian business accounts of a foreign company duly audited have also to be filed with the Registrars within nine months of the close of the financial year. The Indian account has to be drawn up in Indian rupees according to the requirements of the Sch. VI. Therefore, we see no difficulty why the profits or loss made by a foreign company in its Indian business cannot be found out or determined by the AO in India. It may be that some of the provisions of s. 115JA will not apply in toto to a foreign company but that is not the reason why the foreign companies will be exempted altogether from the purview of s. 115JA. There is no doubt that s. 115JA contains drastic measures for taxing the income of a company. These provisions will apply “notwithstanding anything contained in any other provisions of this Act”. It applies to all companies which will include a foreign company according to the definition given by s. 2(17) of the IT Act. So long as the section is in force, it will have to be applied. In the case of IRC vs. Rossminster Ltd. 52 Tax Cases 160, 209, it was observed that however the Court may deprecate an Act, it must apply it. It cannot be torturing its language or by any other means construe it so as to give a meaning which the Parliament did not clearly intend it to bear. When s. 115JA speaks of a company, there is no reason to restrict the meaning of a company to a domestic company. Moreover, there are several provisions of the IT Act which have been made applicable to Indian companies alone. Sec. 80HHB deals with Indian companies or a person (other than a company). Deductions are allowable under s. 80HHC in respect of profits of exporting business in certain circumstances for an assessee who is an Indian company or a person (other than a company) resident in India, who is engaged in an export business. Sec. 80HHD also applies to Indian companies. Deductions under s. 80HHE can be allowed from profits from export of computer software by an Indian company or a person (other than a company). All these provisions go to show that if any provision was meant for Indian companies only, the legislature specifically provided that in this Act. Chapter XII-D (ss. 115-O to 115Q) contains special provisions relating to tax on distribution of profits of domestic companies. There are many other sections which are specifically applicable to Indian companies or domestic companies. For example, s. 80M deals with the situationwhere income by way of dividends from a domestic company is received by another domestic company. Sec. 80- O deals with Indian company whose income includes any income by way of royalty, commission, fees or any similar payments from foreign Government or enterprise. Sec. 80AA deals with the computation of deduction under s. 80M in respect of the income by way of dividends from a domestic company. Sec. 80HHB allows deduction “in respect of profits and gains from projects outside India” to an Indian company or a person (other than a company) who is resident in India. Unlike all these sections, there is no indication in s. 115JA that its application should be confined to domestic companies or Indian companies only. In the context of the various other provisions of the IT Act, the only inference that can be drawn from the absence of any words of limitation is that, provisions of s. 115JA will apply to any company which comes within the definition of a company as provided by sub-s. (17) of s. 2 of the IT Act. In other words, “company” in s. 115JA will include not only an Indian company but also a body like the applicant which has been incorporated under the laws of the country outside India.

The next argument is on the basis of the DTAA between India and the Netherlands. The question that has been raised is whether in computing the profit attributable to the Permanent Establishment (PE) of the applicant which is a tax resident of Netherlands, recourse can be had to provisions of s. 115JA. The answer to this question is provided by art. 7 itself: Article 7: Business Profits

The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situate therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. Subject to the provisions of paragraph 3, where an enterprise of one of the States carries on business in the other State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article. 3(a) In determining the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. Provided that where the law of the State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention between that State and a third State which enters into force after the date of entry into force of this Convention, the competent authority of that state shall notify the competent authority of the other State of the terms of the corresponding paragraph in the Convention with that third State immediately after the entry into force of that Convention and, if the competent authority of the other State so requests, the provisions of this sub- paragraph shall be amended by protocol to reflect such terms. (b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other office, by way of royalties, fees or other similar payments, in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of royalties, fees, or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise by way of interest on monies lent to the permanent establishment. Likewise no account shall be taken in their determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices by way of royalties, fees, or other similar payments in return for the use of patents or other rights, by way of commission for specific services performed or for management, or, except in the case of a banking enterprise by way of interest of monies lent to the head office of the enterprise or any of its other offices. Therefore, the applicant company is liable to be taxed on so much of its business profits as is attributable to its permanent establishment (PE) in India. If that be so, then

whatever tax has to be paid by any other company in India has to be paid by the applicant company. But the applicant company does not have to pay tax on its entire world income but its liability is “limited to so much as is attributable in that permanent establishment”. The effect of art. 7 is to limit the quantum of the taxable income of the applicant company but it does not absolve the applicant company from paying any tax which is payable by a resident company. Some practical difficulties have been pointed out for imposition of the tax levied by s. 115JA. But the well settled principle is that once the charge is clearly established, the machinery sections should be construed in a way to effectuate the charge and not to nullify the charge. Moreover, we find that there is hardly any practical difficulty in the instant case. The P&L a/c of the Indian business has to be prepared separately by the foreign company as required by s. 594 of the Companies Act. Moreover, in exercise of the powers conferred by the proviso to sub-s. (1) of s. 594 of the Companies Act, 1956, Central Government has directed that the requirements of cl. (a) of sub-s. (1) shall apply to a foreign company having a share capital subject to the exceptions and modifications specified below, namely: (i) A foreign company shall, in respect of its Indian business, submit to the appropriate Registrar in triplicate its balance sheet and P&L a/c in such form containing such particulars and including or having annexed or attached thereto such documents as under the provisions of the Act it would, if it had been a company within the meaning of the Act, have been required to make out and lay before the company in general meeting. (ii) The working capital earmarked for its branch, if any, shall be shown in the balance sheet. (iii) The P&L a/c in respect of its Indian business shall disclose the net profit or loss for the year transferred to its principal office in the country of incorporation. ***** ***** ***** (vii) The Government shall have authority, when there is difficulty in reconciling the balance sheet and P&L a/c of a foreign company submitted in accordance with cl. (i) with the balance sheet and P&L a/c filed by that company in the country of its incorporation, to seek clarification or demand the making of the balance sheet and P&L a/c filed in that country, as far as practicable, in such form as it would, if it had been a company within the meaning of the Act, have been required to make out and lay before the company in a general meeting, and the foreign company shall be bound to make such clarification or comply with such demand as the case may be.

33. The company has to disclose in its P&L a/c the amount payable as income tax in India. After arriving at the gross profit of the company net profit has to be calculated after deductions of various items of expenditure as well as allowances. There should not be any difficulty in calculating the book profit and tax payable under s. 115JA in finding out the due profit of the company. Moreover, it is well settled that ab inconvenienti is not a ground for not applying a taxing provision.

The fact that the applicant company is tax resident of the Netherlands and has got only a permanent establishment in India does not make any difference to the position in law. It has to make the calculation of profit attributable to its Indian business separately and independently. It has to furnish a balance sheet and P&L a/c in respect of its Indian business to the appropriate authority. In order to do that it has to calculate its Indian profits separately and disclose the net profit arising in India which has to be remitted to the foreign country. There cannot be any special difficulty about finding out the book profit of the Indian business of the foreign company for paying the tax levied by s. 115JA.

Therefore, the two questions raised are answered in the affirmative and against the applicant.

[Citation : 234 ITR 335]

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