9911796707
TMI Blog2005 (2) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... l Investor (FII) with the Securities and Exchange Board of India (SEBI) on March 3, 1998 and accordingly it has been investing in securities in India. The Universities of the UK, for the purpose of providing pension and other superannuation benefits to academic and senior administrative staff in the universities and other higher education and research institutions, founded Universities Superannuation Scheme (USS). The applicant, the Universities Superannuation Scheme Limited (USSL), was established to undertake and discharge the office of the trustee of USS. The applicant is thus the legal owner of the assets of USS and operates to meet the existing and prospective entitlement of the beneficiaries of USS. The applicant was incorporated in the UK as a company limited not by shares but by guarantee. For the assessment years 1999-2000 to 2003-2004, the applicant filed returns of its income from investment in India as a FII by applying provisions of section 115AD of the Act. In the accounting year relevant to the assessment year 2003-2004, the applicant incurred long-term capital losses of INR 12,94,46,340/-. The case of the applicant is that had it the option of computation under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special provision will override the general provisions. There are several decisions of the Hon'ble Supreme Court laying down the law on this aspect. The applicant has not shown that section 115AD is ambiguous and not clear. On the alleged ground that it no longer provides any preferential treatment to the FIIs, it cannot be ignored. The judgement of the Hon'ble Supreme Court of India in A. Sanayasi Rao's case would not apply since the constitutional validity of that provision is neither in issue nor can it be questioned before the Authority. Section 115AD applies to all FIIs and there is no cogent reason as to why the applicant should be treated differently in the assessment year in question. Where the Parliament so intended it provided, as in section 115-I, an option to be exercised by the assessee. Absence of such a provision in the scheme of 115AD indicates that no option is available to FIIs. For the reason that the applicant suffered capital loss in an assessment year, it cannot claim the option to opt out of section 115AD of the Act. If an option as in section 115-I, is read into section 115AD, it would result in applying such provisions of the Act which the Parliament did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated. In as much as the discussion in respect of questions (1) and (3) is common and question no. (2) is consequential, we shall proceed to discuss them together. The general provisions dealing with capital gains, relevant to the present discussion, may be noticed here. They are sections 45, 48 and 112 of the Act. Section 45(1) declares that any profits and gains arising from the transfer of a capital asset shall be (i) deemed to be the income of the previous year in which the transfer took place and (ii) chargeable to income-tax under the head 'capital gains'. Section 48 outlines the mode of computation of capital gains and is germane to the issue. It is in the following terms: • The income chargeable under the head "capital gains" shall be computed , by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amount namely:- • expenditure incurred wholly and exclusively in connection with such transfer; • the cost of acquisition of the asset and the cost of any improvement thereto: Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares or debentures and then the capital gains so computed in such foreign currency shall be re-converted into Indian currency. It also provides that the same method would apply for every re-investment thereafter in any sale of shares or debentures of an Indian company. The second proviso is pertinent to the point. It ordains that long term capital gains arising from the transfer of a long term capital asset (not being the capital asset referred to in the first proviso) shall be computed by substituting "indexed cost of acquisition" for the expression "cost of acquisition" and "indexed cost of any improvement" for the expression "cost of improvement" in clause (ii) of the main section. It will be apposite to highlight here that having regard to sub-section (3) of section 115AD, in respect of a FII, while computing capital gains arising from the transfer of short-term or long term capital assets, being securities other than unit referred to in section 115AB of the Act, the operation of the first and the second proviso, referred to above, has to be excluded. We shall delve into this aspect presently. Now, we may advert to section 112 of the Act which incorporates the method of compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the amount of income-tax calculated on the income by way of short-term capital gains referred to in section 111A shall be at the rate of ten per cent; • the amount of income-tax calculated on the income by way of long term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and • the amount of income-tax with which the Foreign Institutional Investor would have been chargeable had its total income been reduced by the amount of income referred to in clause (a) and clause (b). (2) Where the gross total income of the Foreign Institutional Investor - (a) consists only of income in respect of securities referred to in clause (a) of sub-section (1), no deduction shall be allowed to it under sections 28 to 44C or clause (i) or clause (iii) of section 57 or under Chapter VI-A; (b) includes any income referred to in clause (a) or clause (b) of sub-section (1), the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced, were the gross total income of the Foreign Institutional Investor. (3) Nothing contained in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term - 10% (i) 20% for individuals and HUF (ii) 40% for Company (Domestic or Foreign (iii) 30% for cases other than (i) and (ii) above, i.e. firm, AOP/BOI, etc. Short term - 30% (i) 40% for individuals, HUF, AOP /BOI (ii) 40% for Firms (iii) 45% for Domestic company (iv) 65% for Foreign Company Interest and dividend - 20% (i) 40% for individuals, HUF, AOP/BOI (ii) 40% for Firms (iii) 45% for Domestic company (iv) 65% for Foreign company From this table the concessional rates of tax applicable to FIIs under section 115AD in comparison with the rates of tax applicable under section 112, are evident. The position which emerges on the basis of the proviso to sub-section (1) of section 112, is not indicated in this table. Sub-section (2) thereof provides that where gross total income of a FII consists only of income falling under clause (a) of sub-section (1) no deduction shall be allowed under sections 28 to 44C or clause (i) or clause (iii) of section 57 or under Chapter VIA and where such total income includes income referred to in clause (a) or (b) of sub-section(1), then it (such gross total income) shall be reduced by the amount of such in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a special method of computation (discussed above) and special rate of tax. There can be no doubt that the legislative intent in inserting section 115AD in Chapter XII of the Act, is an important guiding factor in interpreting the said provision. We proceed on the common ground that section 115AD which is meant for FII is a beneficial provision and indeed in assessment years 1999-2000 to 2002-2003, the applicant derived benefit of the same. Merely because in the assessment year 2003-2004, the applicant suffered capital losses and in view of non application of indexation provision under section 115AD(3), it cannot boost up the loss it will be pointless to contend that the object of legislature is getting defeated or an inequitable situation is being created. There is no merit in the contention of the applicant that section 115AD is applicable when computation results in capital gain and not when it results in capital loss to a FII on transfer of securities. Section 115AD is an inclusive provision containing, inter alia, mode of computation of tax and concessional rate of tax. Its application does not depend upon the result of computation. Gain and loss are but two sides of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I in Chapter XII to opt out of it as it provided for non-resident Indian in section 115-I of Chapter XII A or to resident assessees including domestic companies, is discriminative and violative article 26 of the Treaty. Article 26 (1) of the DTAA on which the applicant bases its case, reads as follows: Article 26: Non-discrimination • The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. Para 1 of article 26 of the treaty provides discrimination of nationals of a Contracting State either in regard to taxation or any requirement connected therewith. The aforementioned para provides that nationals of a Contracting State cannot be subjected to any taxation or any requirement connected therewith in the other Contracting States, which are different or more burdensome than the taxation and connected requirements to which nationals of that other State are subjected to, in the same circumstances. It is important to note her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same circumstances inasmuch as FIIs can undertake only delivery based transactions, they are not subjected to margin requirement; they have no restrictions on repatriation of profit out of the country and they have overall cap in taking equity possession. It may be pointed out that as defined in section 2 (22A) domestic companies are not necessarily Indian companies. Admittedly, FIIs are non-resident and domestic companies and other resident-assessee are Indian residents. The different treatment, if any, is based not on the nationality but on the status as resident, which does not amount to discrimination under article 26 of the Treaty. For the above mentioned reasons, we rule as follows on :- question No.1 that on the facts and in the circumstances of the case, the applicant, i.e. the Universities Superannuation Scheme Limited as Trustee of Universities Superannuation Scheme, a Foreign Institutional Investor (hereinbefore referred to as "the FII") will not be entitled to opt out of the provisions of section 115AD of the Act which deal with the taxability of the income earned by a FII, and cannot claim to be covered by section 48 read with section 112 of the Act together wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
