Tax and Corporate News Bulletin - April-May 2011

Profession:Vaish Associates Advocates

Edited by Hitender Mehta

The Ministry of Corporate Affairs (MCA) has been in the news for flurry of welcome initiatives recently undertaken. A number of green initiatives have also been undertaken. What was long been awaited for, has become a reality now.

Noteworthy green initiative include allowing participation of shareholders and directors in the meetings through electronic mode, sending notices/ annual reports through email, issue of certificates in eform by ROCs, etc. Further, it is learnt that the efforts are underway to create a common repository, which will host the financial statements of the companies. Anyone interested to see the financial statement of a company, would be able to download from such common repository. Not only these initiatives would significantly reduce the cost and efforts, but the lesser use of papers would go a long way to contribute to a cleaner environment.

Series of initiatives have been undertaken towards better financial reporting and disclosures. Implementation of IFRS is underway and reporting in XBRL has been mandated.

There have been certain clarifications concerning the Limited Liability Partnerships (LLPs). A Committee of Group of Experts has been constituted by the MCA to examine the simplification of LLP Act, Rules and approach/ methodology for promoting LLPs and matters related thereto.

More importantly, MCA has, through constitution of a Committee, pro-actively undertaken an exercise to identify tax issues arising out of convergence of Companies Act, 1956, IFRS, Direct Taxes Code, and Goods and Services Tax.

The change of guards at the MCA has brought a refreshing change. Let's partner in making a better India!


Obligation of a non-resident company claiming exemption under the Treaty to file tax return in India

The Authority for Advance Rulings ("AAR"), in case of VNU International BV (AAR 871 of 2010) has ruled that non-resident companies, claiming exemption from tax in India applying tax treaty provisions, are required to file return of income in India.

In addition, the applicant also sought a ruling in respect of whether the applicant would be required to file a return of income in India if it was found that the capital gains were not taxable in India. The contention of the applicant was that such capital gains were not taxable in India by virtue of Article 13(5) of the India Netherlands Double Tax Avoidance Agreement ("the Treaty" or "India Netherlands DTAA"), which provided that in case, capital gains arising to a resident of Netherlands from sale of shares of an Indian company to a non-resident shall be taxable only in Netherlands. As regards the issue of filing of return of income in India, the applicant relied on the earlier rulings of the AAR in the cases of Venenburg Group B V (289 ITR 464), Dana Corporation (321 ITR 178) and Amiantit Intl Holding Ltd (322 ITR 678), wherein it was held that section 139(1) of the Income Tax Act, 1961 ("the Act"), which mandates the filing of return of income, is a machinery provision and would not apply in the absence of liability to tax in India.

The AAR accepted the contention of the applicant as regards the capital gains being not liable to tax in India. However, as regards the issue of filing return of income, the AAR ruled as follows:

As per the third proviso of Section 139(1) of the Act, every company is required to file its return of income, whether it has an income or a loss. The applicant, being a foreign company, is covered within the definition of a company under Section 2(17) of the Act. There is no dispute that the income arising from the sale of shares is liable to be tax in India by virtue of Section 5(2) of the Act, although the right to tax the same is vested with Netherlands by virtue of the Treaty. Therefore, once the income is taxable under the Act and is excluded only under the Treaty, it is difficult to accept the contention that no return is to be filed. Wherever it is not necessary to file a return of income, the legislature has expressly provided so, for example, Section 115AC of the Act. If power to tax is granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. Comments: There have been some rulings in the past wherein it has been held that if the assessee claims its income as exempt from tax, it cannot, on that ground, not file the return and that the return is required to be filed, so that the Revenue can examine whether the claim of exemption is valid or not. There are specific sections in the Act, e.g., Sections 115A, 115AB, 115AC, 115BBA etc., which provide that a non-resident is not required to file return of income in prescribed circumstances. However, recently, the AAR in case of Venenburg Group and Amiantit Intl Holding Ltd. (supra) had ruled that Section 139(1) of the Act is merely a machinery section and would apply only where the transaction entered into by the foreign taxpayer is liable to be tax in India.

The AAR has now ruled that where a foreign company claims Treaty exemption, it is required to file a return of income in India. Though the ruling is binding only on the applicant who sought the ruling, it has persuasive effect.

Foreign companies including liaison offices of foreign companies, claiming exemption from tax in India under the Treaty, would be well advised to take note of the aforesaid ruling and consider filing tax return in India.

Karnataka High Court relies on the Vodafone ruling to uphold the power of the Revenue to lift the corporate veil

In the case of Richter Holding Ltd. v DIT [WP 7716/2011], the Karnataka High Court has held that in appropriate cases, corporate veil may be lifted to look into the real nature of transaction for tax purposes.

Comments: The aforesaid decision follows the ruling of the Bombay High Court in the case of the Vodafone on the issue of jurisdiction of the Revenue to examine offshore transaction involving change of control of Indian business. While the Court has not expressed final opinion on the merits of the issue, it made an important observation that the Revenue could lift the corporate veil to examine the real transaction. The Supreme Court's verdict in the Vodafone's case would certainly be keenly awaited, considering that Revenue has issued notices in several similar cases, which are likely to come up before the Courts in the near future and the foreign investment community would want to have certainty in this regard. It may be noted that the Direct Tax Code Bill contains express provisions relating to taxation of such offshore transactions if certain conditions are fulfilled.

AAR rules on taxability and applicability of transfer pricing provisions to shares transferred for nil consideration

The AAR in A.A.R. Nos. 1006 & 1031 of 2010 has held that the transaction of transfer of shares by a foreign parent...

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