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TMI Blog2019 (10) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... 99984% (b) PQR International Gmbh 20 0.00016% Total 1,21,66,590 100% 2. The company mentioned in Sl. No. (b), PQR International Gmbh holds the shares in PQR India in the capacity of a nominee of the applicant. Accordingly, the applicant along with its nominees holds the whole of the share capital of PQR India. The applicant holds the shares of PQR India as an investment. PQR India is proposing to buy-back its shares from the applicant in accordance with the provisions of section 77A of the Companies Act, 1956. PQR India is in possession of surplus funds and does not have any immediate expansion plans. Accordingly, PQR India is not in need of these surplus funds and the surplus funds are idle. Therefore, PQR India is proposing to buy-back its shares from the applicant in compliance with the provisions of section 77A of the Companies Act, 1956. The proposed buy-back would result in transfer of shares of PQR India from the applicant to its wholly owned subsidiary, PQR India. The consideration for the proposed buy-back is to be determined on the basis of pricing guidelines prescribed by the Reserve Bank of India, as applicable for the transfer of shares by a non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections. . ., be chargeable to Income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place." Further, section 47 of the Act provides as follows : "Nothing contained in section 45 shall apply to the following transfers- . . . (iv) any transfer of a capital asset by a company to its subsidiary company, if- (a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and (b) the subsidiary company is an Indian company." In the present case, PQR India proposes to buy-back the equity shares held by the applicant, a company. The applicant and its nominees hold the whole of the share capital of PQR India. The proposed buy-back of equity shares would result in the transfer of a capital asset (the equity shareholding of the applicant in PQR India) to PQR India, the transferee, which is the wholly owned subsidiary of the applicant and an Indian company. 8. Thus, the applicant submits that it has fulfilled all the conditions under section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the above, it emerges that section 115JB of the Act is applicable to a company if the Income-tax payable on total income is less than 18.50 per cent. of the book profits. This section further requires that every company is required to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. 11. Further section 2(17) of the Income-tax Act, 1961, which defines the term "company", is reproduced as under : "'company' means- (i) Any Indian company, or (ii) Any body corporate incorporated by or under the laws of a country outside India, or . . ." In view of clause (ii) of section 2(17) of the Income-tax Act, 1961, a body corporate incorporated by or under the laws of a country outside India will also fall within the ambit of "company". In the instant case, the applicant is a body corporate incorporated under the laws of Germany. 12. In this regard, the applicant contends that for the purposes of analysing the term "company" for the purposes of section 115JB of the Act, it will be inappropriate to read only clause (ii) of section 2(17) of the Income-tax Act, 1961, without considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the "existing effective rate" of 10.5 per cent. was arrived at by multiplying "30 per cent. of book profits" [as under section 115JA of the Act] by the normal corporate tax rate of 35 per cent. (excluding surcharge), which was the rate of tax applicable to domestic companies. In those years, the rate of tax applicable to foreign companies was 48 per cent. Thus, in the Central Board of Direct Taxes Circular, the effective rate of minimum alternate tax has been worked out with reference to domestic companies only, and it is evident that it was understood by the Central Board of Direct Taxes that minimum alternate tax applies only to domestic companies. 19. The applicant submits that it is well established law that the Central Board of Direct Taxes circulars are not only binding on the Tax Department, but quite apart from their binding character, they are clearly in the nature of contemporaneous exposition, furnishing legitimate aid in the construction of a provision of law. 20. The applicant submits that by applying the rule of construction by reference to contemporaneous exposition, it is clear from the circular that the Central Board of Direct Taxes, which is the highest a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it can be seen that what is meant is an Indian company. At no place, does the context in which the word "company" has been used in the section give an indication that it should include a foreign company. Various reasons given above are also supported by the Central Board of Direct Taxes circulars, Finance Ministers Speeches, Notes on Clauses and Memorandum attached to the Finance Bill. Hence the definition of "company" in section 2(17) in the context of section 115JB should be read to exclude foreign company. 24. In this regard, reliance is also placed on the ruling in the case of Timken Company, In re [2010] 326 ITR 193 (AAR) (AAR No. 836 of 2009) and Praxair Pacific Ltd., In re [2010] 326 ITR 276 (AAR) (AAR No. 855 of 2009), wherein the honourable Authority for Advance Ruling has held that the minimum alternate tax regime is not designed to be applicable to a foreign company that does not have a physical presence in India, either in the form of an office or branch or a permanent establishment (PE). 25. With regard to question No. 3, the applicant has submitted that per section 195 of the Act, any person responsible for paying any sum chargeable to tax in India to a non-reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany from the applicant is in accordance with the provisions of section 77A of the Companies Act, 1956, which reads as under : "77A. Power of company to purchase its own securities.-(1) Not withstanding anything contained in this Act, but subject to the pro visions of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to as 'buyback') out of- (i) its free reserve ; or (ii) the securities premium account ; or (iii) the proceeds of any shares or other specified securities : Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares of same kind of other specified securities." 31. From the submission made, it has been observed that PQR India is in possession of surplus funds and does not have any immediate expansion plans and hence it has proposed to buy-back its shares from the applicant. But the assessee failed to appreciate that a new provision has been brought in the Income-tax Act, under section 46A of the Act with regard to the capital gain arising out of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are far from clear and settled and there is apprehension that there will be unnecessary litigation unless the issues are clarified with finality. It is, therefore, proposed to amend clause (22) of section 2 of the Income-tax Act by inserting a new clause to provide that dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77 of the Companies Act, 1956. It is also proposed to insert a new section, namely, section 46A to provide that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities to the extent of the difference between the cost of acquisition and value of consideration so received, subject to provisions of section 48, shall be deemed to be the capital gains." 34. The proposed amendment was with effect from April 1, 2000 and would, accordingly, apply in relation to the assessment year 2000-01 and subsequent years. 35. It is argued that the references made above in relation to the new section introduced in the Income-tax Act, 1961 through Finance Act, 1999 clearly elucidates that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... includes the transfer of shares of capital asset. 40. Reliance is placed on the decision of the hon'ble Authority for Advance Ruling in the case of RST, In re [2012] 348 ITR 368 (AAR) (AAR 1067 of 2011) which held that in the case of buy-back of shares, section 46A of the Act would alone be attracted and resort to section 45 is not warranted. 41. With regard to question No. 2, the Department has submitted that there is no ambiguity in understanding the definition of "company" referred in the above mentioned section as the section is clean and clear in defining the term "company". It refers to company as defined in section 2(17) of the Act which includes a company or a corporate entity incorporated outside India. 42. The references made by the applicant to distinguish and exclude foreign companies from the meaning of "companies" referred in section 115JB of the Act do not have reliability as those references were made to explain the necessity of introduction of new section and amendments made in the section to clarify and explain the necessity. The reference to domestic companies that have been made does not in any way mean that this new provision and amendments are made onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of the section that the account has to be prepared as detailed therein. The liability to tax under sub-section (1) does not depend on the accounting. It arises from chargeability to tax under the Act. Section 115JB of the Act on its wording makes no distinction between a resident company and a non-resident company. Prima facie, it applies to all companies. The definition of a company in section 2(17) of the Act means an Indian company or any company incorporated by or under the laws of a country outside India. In other words, by definition, a company means a non-resident company as well. In an earlier ruling in Timken Co., In re [2010] 326 ITR 193 (AAR), this authority essentially relied on the requirements prescribed by sub-section (2) of section 115JB, the Notes on Clauses Explaining the Provisions of the Finance Bill, 2002, a circular issued by the Central Board of Direct Taxes and a statement in the speech of the Finance Minister that it is intended to cover domestic companies, to come to the conclusion that the operation of section 115JB is limited to resident companies and, consequently, the expression "company" as defined in the Act cannot be adopted in construing se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is left to sub-section (2) and a duty is cast on the assessee to deter mine the book profit as set out in sub-section (2). Taking note of the inconvenience that may be caused by this mandate to some of the companies coming under the proviso to section 211(2) of the Companies Act, the requirement to comply with the mandate has been done away with by the Finance Act, 2012, leaving untouched the liability under sub-section (1) of that section. This also would support the soundness of the reasoning in P. No. 14 of 1997, In re [1998] 234 ITR 335 (AAR) and would indicate that section 115JB(1) of the Act always subjected even the companies coming under the proviso to section 211(2) of the Companies Act. Section 10(38) of the Act, through its proviso, brings into play, section 115JB. Section 115JB is the overriding provision. It overrides all the other provisions in the Act. It is the overriding charging provision. It is clear. It provides for payment of Income-tax by an assessee, which is a company. That company normally, is a company of what soever hue, or in the alternative, a company as defined in the Income-tax Act. There is no warrant for borrowing the definition of a company fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ison the scheme of taxation adopted by the Act by reading section 115JB of the Act or section 10(38) of the Act as confined to domestic companies." 46. With regard to question No. 3, the Department has submitted that the capital gains arising to the applicant due to the transfer of shares in the proposed buy-back of its shares by PQR India is chargeable to tax in India according to section 47A of the Income-tax Act, 1961 and in accordance with article 13 of the India-Germany DTA Agreement. Hence, the Revenue contends that tax has to be deducted at source on the payment made to the non-resident, under section 195 of the Income-tax Act, 1961. 47. In its rejoinder, the applicant has submitted that the case of the applicant falls under the provisions of section 47(iv) of the Act, and therefore the capital gains, if any, arising on the transfer of equity shares by the applicant to its wholly owned subsidiary in the course of buy-back of shares would not be taxable in India. Section 115JB would not be applicable to capital gains arising to the applicant in the course of buy-back of shares. Given that capital gains arising to the applicant as a result of the transfer of shares to its wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been clarified by the Central Board of Direct Taxes vide Circular No. 779, dated September 14, 1999 ([1999] 240 ITR (St.) 3 ) as reiterated by Circular No. 3 of 2016, dated February 26, 2016 ([2016] 382 ITR (St.) 9 ). Therefore, the argument of the Revenue that it should be treated as "charging section" and should be considered on stand-alone basis without reference to section 45 or section 47(iv) is factually and legally not correct. This has been clarified by the Supreme Court in the case of PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC). 51. In view of the above, it is canvassed that section 46A has to be treated as part of capital gains section starting with charging section 45(1) of the Act and has to be read along with section 47(iv) of the Act. Hence buy-back of shares by the applicant's wholly owned subsidiary "PQR India" would be eligible for exemption under section 47(iv) of the Act. 52. We have carefully considered the facts of the case, rival contentions and perused the relevant sections of the Income-tax Act and Companies Act and the relevant citations. 53. The main thrust of the argument of the learned authorised representative is that section 46A of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit to the applicant. 55. The Department on the other hand has posited that section 46A is a specific provision brought in along with section 77A in the Companies Act. Though clause (iv) of section 47 of the Act mentions that transfer of a capital asset by a company to its subsidiary company where the parent company or its nominees hold the whole of the share capital of the subsidiary company and the subsidiary company is an Indian company, cannot be regarded as a transfer for the purpose of section 45 of the Act, the new section introduced under section 46A of the Act explicitly includes the purchase by the company of its own shares or other specific securities held by the shareholders. Hence section 47 has to be treated as the general clause whereas section 46A is a special provision which includes the transfer of capital asset in the form of shares for capital gains tax liability. Hence the Revenue contends that the transfer of shares by the applicant to PQR India in the course of buy-back would give rise to capital gains which is chargeable to tax under section 45 of the Act read with section 46A of the Income-tax Act, 1961. Further, it is submitted that section 47 does not h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly be liable to capital gains tax." 59. The considerations received on buy-back of shares are clearly taxable under section 46A of the Act. The Central Board of Direct Taxes Circular No. 779 of 1999 and Circular No. 3 of 2016 have made it abundantly clear that the purpose of inserting section 46A in the Act and amending clause (22) of section 2 of the Act is to avoid unnecessary litigation and to bring clarity on the matter. The relevant part of Circular No. 779 of 1999 mentioning the reasons for introducing these sections in the statute is reproduced as under (page 24 of 240 ITR (St.)) : "28.1 The Companies (Amendment) Ordinance, 1998 (subsequently enacted as the Companies (Amendment) Act, 1999), inserted section 77A in the Companies Act, 1956, which allows a company to purchase its own shares subject to certain conditions. The shares bought back have to be extinguished and physically destroyed and the company is precluded from making any further issue of securities within a period of 24 months from such buy-back. 28.2 The above newly introduced provisions of buy-back of shares threw up certain issues in relation to the existing provisions of the Income-tax Act. The two princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. e., section 46A is taxable in the hands of shareholder. 62. Section 46A was inserted by the Finance Act 1999, with effect from April 1, 2000. It specially covers by a deeming fiction the purchase of its own share by the company. Since it is covered under capital gain by deeming fiction, it is brought in to achieve some specified objective. 63. In Hill v. East and West India Dock Co. [1884] 9 App Cas 448 (HL), State of Travancore, Cochin v. Shanmugha Vilas Cashewnut Factory [1953] AIR 1953 SC 333, it was held that : "when a statute enacts that something shall be deemed to have been done, which in fact and in truth was not done, the court is entitled and bound to ascertain for what purposes and between what per sons the statutory fiction is to be resorted to. After ascertaining the purpose full effect must be given to the statutory fiction and it should be carried to its logical conclusion and to that end it would be proper and even necessary to assume all those facts on which alone the fiction can operate." 64. The Legislature intended to tax share buy-back transaction as capital gains in the hands of the shareholder and not as deemed dividend under section 2(22). With that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset becomes the property of the assessee under the transfer referred to in clause (iv) of section 47, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be". 67. Furthermore, section 155(7B) of the Act stipulates : "Where in the assessment for any year, the capital gain arising from the transfer of a capital asset is not charged under section 45 by virtue of the provisions of clause (iv) or, as the case may be, clause (v) of section 47, but is deemed under section 47A to be income charge able under the head "Capital gains" of the previous year in which the transfer took place by reason of- (i) such capital asset being converted by the transferee company into, or being treated by it, as stock-in-trade of its business ; or (ii) the parent company or its nominees or, as the case may be, the holding company ceasing to hold the whole of the share capital of the subsidiary company, at any time before the expiry of the period of eight years from the date of such transfer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k, thus making sections 47A, 49 and 155(7B) redundant. This being so, the taxation of the shares subjected to a buy-back as per section 77A of the Companies Act, 1956 can never be covered as per section 47A as the shares cease to exist after the buy-back. Such impossibility of application of section 47A, section 49 and section 155 could never be the intention of Legislature. The intention of the Legislature can never be to render any provision of the Act otiose. 71. Further more, it is trite law that special provision prevails over the prior general provisions. In the case of Sharat Babu Digumarti v. Govt. of NCT Delhi [2016] SCC OnLine 1464 ; MANU/SC/1592/2016, the hon'ble apex court has observed as under : "30. In Ram Narain v. Simla Banking & Industrial Co. Ltd., AIR 1956 SC 614 ; [1956] SCR 603, the court faced a situation where both the statutes, namely, Banking Companies Act, 1949 and the Displaced Persons (Debts Adjustment) Act, 1951 contained non obstante clause. The court gave primacy to the Banking Companies Act. To arrive at the said conclusion, the court evolved the following principle : "7... It is, therefore, desirable to determine the overriding effect of on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ruling in the case of RST, In re [2012] 348 ITR 368 (AAR), AAR 1067 of 2011,where an identical issue was before the Authority and after exhaustively discussing the provisions of section 47(iv), 46A, and the relevant provisions of the Companies Act, 1956 and 2013. It was held there (page 374 of 348 ITR) : "The applicant relies on section 47(iv) of the Income-tax Act to contend that it is enough if the applicant and its nominees together hold 100 per cent. shares in the subsidiary for claiming the benefit of that provision. Section 77B of the Companies Act introduced along with section 77A prohibits a buy-back through any subsidiary company including its own subsidiary. The applicant wants the words 'the parent company or its nominees' read as the parent company and its nominees. A transfer of a capital asset by a company to its subsidiary would not be hit by section 45 of the Act, if 'the parent company or its nominees, hold the whole of the share capital of the subsidiary company' (emphasis supplied) and the holding company is an Indian company. Such a reading, it is urged, will alone make section 47(iv) of the Act workable. In the context of section 49(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wants to hold shares in its subsidiary which is a public company, that subsidiary should have seven members and the numbers shall not be reduced. If we treat the other six members as not having independent existence, it would mean that the subsidiary would become an illegal entity in the face of section 49(3) of the Companies Act. That would mean that the applicant would be founding its cause of action on an illegality. Section 46A of the Act is plain and clear. It provides that if a share holder receives any consideration from any company for purchase of its own shares, then subject to section 48 of the Act, the difference between the cost of acquisition and the value of consideration received by the shareholder shall be deemed to be the capital gains arising to such shareholder. Thus, in the case of a company buying back its shares, a fiction or yardstick for computing the capital gains has been enacted. Section 45 of the Act similarly says, in cases of transfer of capital assets, the profits arising therefrom would be the capital gains arising out of that transaction. Section 45 is a general provision dealing with transfer of all capital assets. Section 46A in that context can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itting such transfers in the teeth of section 77 of the Companies Act. The words of section 46A are plain and clear. It is only subjected to section 48 of the Act. It has application when the event referred to therein occurs. It says that the difference between the cost of acquisition and the value of con sideration received shall be deemed to be the capital gains arising to the seller. There appears to be no reason to go into an enquiry as to whether it is a charging section or not and whether we can only understand section 45 as the charging section. The section says what the capital gains is, arising out of such a transaction and mandates resort to section 48. Section 48 only deals with the mode of computation and section 46A having determined the capital gains, the tax needs alone to be computed as provided for therein. The applicant has relied on the speech of the Finance Minister, while introducing section 46A of the Act. The hon'ble Finance Minister stated ([1999] 236 ITR (St.) 1, 24) : 'Very recently, the Companies Act, 1956, has been amended to permit transactions relating to buy-back of shares. There is some ambiguity in the interpretation of the law as to whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 47(iv). Even otherwise, without going into the controversy whether "or" is to be read as "and" in section 47(iv), it is seen that the non obstante clause in section 47 covers only section 45 and not section 46A. Section 46A is a special provision brought in with a specific objective to tax share buy-back transactions. Therefore, the discussion whether the buy-back transaction is a transfer and is covered under section 47 is not relevant. 75. The last plea of the learned authorised representative is that beneficial provisions be liberally construed is appreciated, provided the facts of the case fall under the beneficial clause. Statute should be interpreted having regard to intendment of purpose behind the statute. Liberal or beneficial construction means the interpretation should be made liberally with intention to advance the purpose or object of the statute. Here the purpose behind section 46A is to tax share buy-back transaction and the statute should be so read to advance that purpose. The facts in the instant case are squarely covered under the special provision of section 46A and not under section 47(iv) and the plea of the applicant is thus not tenable. 76. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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