Case of Authority for Advance Rulings, October 01, 2007 (case Timken France SAS Vs Director of Income Tax (International Taxation))
| President | P.V. Reddi, J. (Chairman) and A. Sinha, Member |
| Resolution Date | October 01, 2007 |
Order:
P.V. Reddi, J. (Chairman), (Income Tax, New Delhi)
Facts
1. The applicant, Timken France, SAS, is a non-resident company incorporated under the laws of France. The company is engaged, inter alia, in the business of manufacturing anti-friction bearings and allied products and providing services relating thereto. The applicant submits that during the financial year 1986-87, it acquired the shares in NRB Bearings Limited, an Indian company, by making payment in foreign currency i.e. French Francs. Subsequently, over the years, the applicant also received bonus shares from the said Indian company. Thus, the shares held by the applicant - original as well as bonus - constitute 26 per cent of the share capital of NRB Bearings Limited (hereafter referred to as 'NRB'). Both the original and bonus shares have been held by the applicant for more than 12 months. The shares of NRB are listed on the Bombay Stock Exchange and the National Stock Exchange. While so, on 14th November, 2005 the applicant sold its entire share-holding consisting of original and bonus shares to the Indian promoters of NRB for a consideration Rs. 57.96 crores. The applicant seeks advance ruling of this Authority as regards the manner of computation of capital gains and the rate of tax to be applied. The following are the questions of law that are framed by the applicant:
Questions
1. Whether on the stated facts and in law the tax payable on the long-term capital gains arising on sale of originally purchased shares of NRB Bearing Ltd will be 10% of the amount of capital gains as per proviso to Section 112(1) of the Act?
2. Whether on the stated facts and in law the tax payable on long-term capital gains arising on sale of bonus shares of NRB Bearing Ltd will be 10% of the amount of capital gains as per proviso to Section 112(1) of the Act?
3.* Whether on the stated facts and in law long-term capital gains arising on the sale of bonus shares of NRB Bearing Ltd are to be computed by applying substantive Section 48 of the Act without resort to either the first or the second proviso to the said Section?
The learned Counsel for the applicant stated that ruling on question No. 3 (question no. 2 as per the application) is unnecessary and therefore the applicant does not wish to press the same. Accordingly, no answer is called for to question no. 3
Contentions broadly
2. The applicant clarifies that under the agreement entered into between India and France for the avoidance of double taxation, the applicant is chargeable to tax in India in respect of capital gains arising on the sale of shares of NRB Limited. It is not in dispute that the original shares held by the applicant constitute a long-term capital asset. The stand of the applicant is that it satisfies all the conditions requisite to attract the proviso to Section 112(1) of the Income-tax Act, 1961( for short "the Act") and therefore, the tax on long-term capital gains arising on the sale of original shares should be computed at 10 per cent as prescribed in the said proviso. For the same reasons, it is submitted that the transfer of bonus shares will attract tax at 10 per cent. As regards the mode of computation of capital gains arising on the sale of bonus shares, the applicant submits that it must be computed as per the main provision of Section 48 by deducting from the full value of consideration the cost of acquisition of the shares, treating the same as nil, as enjoined by Section 55(2). These are broadly the contentions of the applicant.
3. The contention of the Director of Income-tax (Intl. Taxation) broadly is that the applicant cannot avail of the lower rate of 10 per cent envisaged by Section 112 inasmuch as the 2nd proviso to Section 48 is not applicable to the non-resident like the applicant. The DIT in his comments submits: Thus, the intent of the legislature in inserting the proviso to Section 112 was to give an option to resident investors towards rate of taxation (i.e. at 10%), if they choose to compute their long-term capital gains without taking the benefit of second proviso to Section 48 (i.e. without indexation). If they choose to take benefit of indexation, then the rate of 20% will apply. By no stretch of imagination, this amendment can mean that the non-resident investors to whom benefit of indexation is not available (in view of explicit benefit through appreciation of foreign exchange) can also compute their income at the rate of 10%.
4. The first and foremost question is whether in terms of the proviso to Section 112(1) of the Act, the income from capital gains arising from the transfer of shares answering the description of "listed securities" held for more than 12 months, is liable to be taxed at 10 per cent only. Section 112 sets out the rates at which tax is payable on long-term capital gains. The relevant portion of Section 112 is extracted hereunder:
Section 112(1)
(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head 'Capital gains' the tax payable by the assessee on the total income shall be the aggregate of -
1. in the case of an individual or a Hindu undivided family, being a resident -
1. the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and
1. the amount of income-tax calculated on such long term capital gains at the rate of twenty per cent;
Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent;
1. In the case of a domestic company
1. the amount of income-tax payable on the total income as reduced by the amount of such long term capital gains; had the total income as so reduced been its total income; and
1. the amount of income-tax calculated on such long term capital gains at the rate of [twenty] per cent;
1. in the case of a non-resident (not being a company) or a foreign company,
1. the amount of income-tax payable on the total income as reduced by the amount of such long term capital gains, had the total income as so reduced been its total income; and
1. the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent;
1. in any other case of a resident
(i) the amount of income-tax payable on the total income as reduced by the amount of long term capital gains, had the total income as so reduced been its total income; and
1. the amount of income-tax calculated on such long term capital gains at the rate of twenty per cent.
Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities or unit, or zero coupon bond exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to Section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.
(emphasis supplied)
The Explanation defines "listed securities" for the purposes of Sub-section (1) of Section 112. Listed securities means, according to the Explanation, the securities as defined in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956. Under Section 2(h) of the said Act, securities include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of like nature in or of any incorporated company or other body corporate and it also includes Government securities. The other requirement is that it should be listed in recognized stock exchanges in India.
Specific contentions
5. It is the contention of the applicant 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. The learned Senior Counsel for the applicant submits that the proviso to Section 112(1) applies to all the clauses of Sub-section (1) and argues that a non-resident foreign company is not disentitled to invoke the proviso to Section 112(1) on the ground that it is not eligible to get the benefit of the 2nd proviso to Section 48. In other words, the contention on behalf of the applicant is that the applicability of the 2nd proviso to Section 48 is not a condition precedent for availing the benefit of lesser rate of tax of 10 per cent under the proviso to Section 112(1). The learned Counsel for the applicant submits that the proviso to Section 112(1) is a special provision in respect of shares and a non-resident foreign company can avail of the reduced rate under the said proviso at par with the residents in addition to the benefit of protection afforded by the first proviso to Section 48. The learned Counsel makes out the point that the phrase in Section 112(1) - "before...
To continue reading
Request your trial