MANU/AR/0025/2010

Equivalent Citation: [2010]326ITR193(AAR), [2010]193TAXMAN20(AAR)

BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)
NEW DELHI
Assessment Year: 2000-2001;2001-2002;2002-2003
Decided On: 23.07.2010
Appellants: The Timken Company
Vs.
Respondent: Director of Income Tax (International Taxation)
Hon'ble Judges/Coram:
P.V. Reddi, J. (Chairman), J. Khosla and V.K. Shridhar, Members
Subject: Direct Taxation
Cases Referred:
Commissioner of Income Tax, Bangalore vs. B.C. Srinivasa Setty MANU/SC/0285/1981; K.P.
Varghese vs. Income Tax Officer, Ernakulam and Anr. MANU/SC/0300/1981; ADVANCE RULING
P. NO. 14 OF 1997, IN RE MANU/DE/1362/1998; Kerala State Industrial Development Corpn.
Ltd. vs. Commissioner of Income Tax MANU/SC/1244/2002
Relevant Section:
Income Tax Act, 1961 - Section 115JB, Income Tax Act, 1961 - Section 115JB(2), Income Tax
Act, 1961 - Section 210, Income Tax Act, 1961 - Section 10(38)
Disposition:
In Favour of Assessee
Citing Reference:
Distinguished

Case Note:
Direct Taxation - Applicability of provision - Whether provisions of Section 115JB
Income Tax Act, 1961 (the Act) relating to payment of Minimum Alternative Tax
('MAT') were applicable only to domestic Indian companies - Held, income, which did
not have a source in India, cannot be made part of book profits - Annual accounts,
including the P&L Account, can not be prepared as per first proviso to Section 115JB
(2) in respect of world income and laid before company at its AGM in accordance with
provision of Section 210 of Companies Act - Section 115JB was not designed to be
applicable to case of applicant, a foreign company, who had no presence or PE in
India - In facts and circumstances of case as applicant did not have any physical
presence in India in form of an office or branch or a PE, provisions of Section 115JB of
the Act were not applicable on sale of shares of a listed company Timken India
Limited, by applicant, which suffered securities transaction tax and accordingly, tax
exempt under Section 10(38) of the Act - Question answered in negative.
Referred Notifications:
MANU/CBDT/0009/2000, MANU/CBDT/0001/1990
JUDGMENT

2015-12-25 (Page 1 of 12 )

www.manupatra.com

Nirma University

V.K. Shridhar, Member

1. The applicant is a Company formed under the laws of the State of Ohio, USA and is a global
manufacturer of engineered bearings, alloy and specialty steel related components. It was
initially a joint venture between Timken USA and Tata Iron and Steel Company Limited
('TISCO'), subsequent to which the Company undertook a maiden public issue in the year 1991,
and started commercial production one year later. Subsequently, Timken USA acquired the
equity shares of the Company from TISCO in compliance with the laws of India. The dates of
acquisition of shares of the Company by Timken USA are as below:

Date of acquisition

No. of
shares
24-07-1991 (Public issue)
6,000,000
22-11-1991 (Public issue)
11,000,000
13-04-1994 (Rights issue)
8,500,000
15-0301999 (Acquisition of shares 25,499,988
from TISCO)
50,999,988
Timken India Ltd is listed on the Bombay Stock Exchange. The applicant proposes to transfer
50,999,988 equity shares held by it in Timken India to Timken Mauritius Ltd as part of its global
restructuring exercise. For this purpose the approval of concerned statutory authorities
including RBI has been obtained. The applicant has held the said equity shares for more than 12
months and it is stated that transfer of such shares would be effected through the Bombay
Stock Exchange during the current financial year.
2. On the above facts stated by the applicant, the following questions are formulated by the
applicant for seeking advance ruling:
i). Whether the provisions of Section 115JB of the Act relating to payment of
Minimum Alternative Tax ('MAT') are applicable only to domestic Indian companies?
ii) If the answer to Question 1 is negative, whether the provisions of Section 115JB
of the Act relating to payment of MAT are applicable to only such foreign companies
that have a physical business presence in India?
iii) Based on the answer to Question (ii) since the Applicant, is a foreign company
who does not have any physical presence in India in the form of an office or branch
and also in the light of the declaration provided by the Applicant that it does not
have a permanent establishment in India in terms of Article 5 of India-USA Double
Taxation Avoidance Agreement [Attachment VIII], whether the provisions of Section
115JB of the Act are applicable on the sale of shares of a listed company viz Timken
India Limited, by the applicant, which has suffered securities transaction tax and
accordingly, tax exempt under Section 10(38) of the Act?
iv) If the provisions of Section 115JB of the Act are applicable to the Applicant,
whether the payments made to the Applicant on sale of the shares would suffer any
withholding tax under Section 195 of the Act and if yes, whether tax at 15% of the
net capital gains would be required to be withheld?
3. The applicant is of the view that the capital gains, if any, arising from the above transaction
would be exempt from tax under Section 10(38) of the Income Tax Act, 1961 (herein after
referred to as Act) and therefore no tax is deductible under Section 195. The applicant submits
that the provisions of MAT contained in Section 115JB cannot be made applicable to foreign
companies who do not have any presence or PE in India.

2015-12-25 (Page 2 of 12 )

www.manupatra.com

Nirma University

4. The relevant provision of Section 10(38) is extracted as under:

10. In computing the total income of a previous year of any person, any income
falling within any of the following clauses shall not be included (38) any income arising from the transfer of a long-term capital asset,
being an equity share in a company or a unit of an equity oriented fund
where (a) the transaction of sale of such equity share or unit is entered into on
or after the date on which Chapter VII of the Finance (No. 2) Act, 2004
comes into force; and
(b) such transaction is chargeable to securities transaction tax under
that Chapter:
[Provided that the income by way of long-term capital gain
of a company shall be taken into account in computing the
book profit and income-tax payable under Section 115JB.]
As per this section, the income arising on transfer of long term equity share in a company
fulfilling the requirements in Clauses (a) and (b) would not be included in the total income of a
person. However, in the case of a company, it would be taken into account in computing the
book-profit and income tax payable under Section 115JB. Therefore, in a case where the
income arising on transfer of long term equity share in a company is taken into account in
computing the book-profit, the book profit so determined should be such on which income tax
should be payable under Section 115JB. Thus, if no income tax is payable under Section 115JB
even after including the income arising on transfer of long term equity share in a company, the
applicant would be eligible to exclude such income from the total income as envisaged under
Section 10(38) of the Act. There is no doubt that the proviso under a particular section controls
the operation of that section but its application cannot make the operative part of the section
redundant. In other words, Section 10(38) cannot be construed to rule out its applicability to a
'company' to which Section 115JB does not apply. We are of the view that the exemption
provided by Section 10(38) of the Act is not taken away in the case of every company. The
context in which a company is defined needs to be taken into account.
5. The contentious issue involved in the case is: whether the provisions of MAT contained in
Section 115JB can be made applicable to foreign companies who do not have any presence or
PE in India, in view of the Proviso to Section 10(38). For an answer, we have to refer to the
provisions of Section 115JB of the Act.
The relevant portion of Section 115JB of the Act is reproduced below:
(1) Notwithstanding anything contained in any other provision of this Act, where in
the case of an assessee, being a company, the income-tax, payable on 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, 2007, is less than
fifteen per cent of its book profit, such book profit shall be deemed to be total
income of the assessee and the tax payable by the assessee on such total income
shall be the amount of income-tax @ of fifteen per cent.
(2) Every assessee, being a company, shall, for the purposes of this section,
prepare its profit and loss account 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 the annual accounts including profit and loss
account,(i) the accounting policies;

2015-12-25 (Page 3 of 12 )

www.manupatra.com

Nirma University

(ii) the accounting standards adopted for preparing such accounts

including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation, shall
be the same as have been adopted for the purpose of preparing such
accounts including profit and loss account and laid before the company
at its annual general meeting in accordance with the provisions of
Section 210 of the Companies Act, 1956 (1 of 1956);
Provided further that where the company has adopted or adopts the financial year
under the Companies Act, 1956 (1 of 1956), which is different from the previous
year under this Act, (i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts
including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation,
shall correspond to the accounting policies, accounting standards and the method
and rates for calculating the depreciation which have been adopted for preparing
such accounts including profit and loss account for such financial year or part of
such financial year falling within the relevant previous year.
Explanation 1 - For the purposes of this section, 'book profit' means the net profit
as shown in the profit and loss account for the relevant previous year prepared
under Sub-section (2), as increased by a) to (h) ....
If any amount referred to in Clauses (a) to (h) is debited to the profit and loss
account, and as reduced by (i) to (viii) ....
Explanation 2 (4) xxx
(5) 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.
6. Section 115JB of the Act applies notwithstanding anything contained in any other provision of
the Act. It is attracted when the income-tax payable on the total income as computed under the
Act is less than 15% of its book profit. In case the section applies, tax payable shall be 15% of
book profit. The section requires every company assessee to prepare its profits and account (P
& L account) for the relevant previous year in accordance with the provisions of Parts II and III
of Schedule VI of the Companies Act. While preparing such annual accounts, the accounting
policies, etc. should be the same as have been adopted for the purpose of preparing such
accounts, which are laid before the company's annual general meeting. Where the company has
adopted or adopts a financial year under the Companies Act, 1956, which is different from the
previous year under the Act, the accounting policies adopted for preparing such accounts and
calculating the book profit should correspond to the accounting policies adopted for preparing
accounts for such financial year or part of such financial year falling within the relevant previous
year. All other provisions of the Act continue to apply to such company covered by Section

2015-12-25 (Page 4 of 12 )

www.manupatra.com

Nirma University

115JB.
6.1 The applicant submits that for the purposes of Section 115JB while interpreting the meaning
of the word 'Company' as appearing therein, it would be inappropriate to read only Clause (ii) of
Section 2(17) without considering the opening line of Section 2. Under the Act the term
'Company' is defined as follows:
In this Act, unless the context otherwise requires.'
Company means
(i) any Indian company; or
(ii) any body corporate incorporated by or under the laws of a country
outside India; or....
The applicant contended that the definition of 'company' is qualified by the expression 'unless
the context otherwise requires'. In CIT v. B.C. Srinivasa Shetty MANU/SC/0285/1981 : (1981)
128 ITR 294 the Supreme Court held that the definitions in Section 2 are subject to an overall
restrictive clause that is expressed in the opening words of the section 'unless the context
otherwise requires'. Hence it would be necessary to enquire as to whether contextually the
expression capital asset as used in Section 45 would include goodwill. The apex Court in this
regard held that goodwill cannot be described as an asset within the meaning of Section 45 and
hence any capital gains arising on the transfer of such goodwill cannot be subject to income-tax
under the head capital gains. Thus, the definition of 'company' in the applicant's case requires
the evaluation of the circumstances in which the words as defined in the Sub-sections (of
Section 2) have been used and if the circumstances do require otherwise, then the meanings as
given to those words by the said Sub-sections are not to be resorted to.
6.2. In this regard, the applicant has drawn our attention to the notes on clauses explaining the
provisions of Finance Bill 2002, 254 ITR (St) 118, which provided for some amendments to
Section 115JB, which read as follows:
Clause 49 seeks to amend Section 115JB of the Income-tax Act relating to special
provision for payment of tax by certain companies. The existing provisions of the
said section provide for levy of a minimum tax on domestic companies of an
amount equal to seven and one-half per cent of the book profit, if the tax payable
on the total income chargeable to tax as per the provisions of the Income-tax Act,
1961, is less than seven and one-half per cent of the book profit...
(emphasis supplied)
The Notes explaining the provisions have accepted/clarified the law that Section 115JB is a levy
of minimum tax on domestic companies. Thus, Government has recognized that Section 115JB
is not applicable to foreign companies. CBDT Circular No. 794 dated 9th August 2000(supra)
explaining the newly introduced provisions of Section 115JB, reads as follows:
The new provisions provide that all companies having book profits under the
companies act, prepared in accordance with Part II and Part III of Schedule VI to
the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of
7.5 per cent as against the existing effective rate of 10.5 percent of the book
profits.
It can be observed from the above CBDT Circular that the 'existing effective rate' of 10.5% was
arrived at by multiplying '30% of the Book Profits' [as under Section 115JA] by the normal
corporate tax rate of 35% (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%.
Thus in the CBDT circular, the effective rate of MAT has been worked out with reference to

2015-12-25 (Page 5 of 12 )

www.manupatra.com

Nirma University

domestic companies only, and it is evident that it was understood by the CBDT that MAT applies
only to domestic companies.
6.3 The applicant contended that it is well established that CBDT 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 the
provisions. In this regard, reliance can be placed on K.P.Verghese v. ITO
MANU/SC/0300/1981 : 131 ITR 597 wherein the Supreme Court has held as follows:
These two circulars of the CBDT are, as we shall presently point out, binding on the
tax department in administering or executing the provision enacted in Sub-section
(2), but quite apart from their binding character, they are clearly in the nature of
contemporanea exposition furnishing legitimate aid in the construction of Subsection (2). The rule of construction by reference to contemporanea exposition is a
well-established rule for interpreting a statute by reference to the exposition it has
received from contemporary authority, though it must give way where the language
of the statute is plain and unambiguous.... It is clear from these two circulars that
the CBDT, which is the highest authority entrusted with the execution of the
provisions of the Act, understood sub-s (2) as limited to cases where the
consideration for the transfer has been understated by the assessee and this must
be regarded as strong circumstance supporting the construction which we are
placing on that Sub-section.
6.4 The applicant submits that by applying the rule of construction by reference to
contemporaneous exposition, it is clear from the Circular that the CBDT, which is the highest
authority entrusted with the execution of the provisions of the Act, understood that Section
115JB as applicable only to domestic companies. On various other occasions, the Hon'ble
Finance Minister in his speech had understood the MAT provisions to apply only to domestic
companies. This is evident from the following extracts of Finance Minister's speeches before the
Parliament while introducing/amending various MAT provisions and the Memorandum explaining
these provisions in which it is observed that the effective rates of MAT have been worked out
with reference to domestic companies only:
The various exemptions currently available while calculating Minimum Alternate Tax
(MAT) and the credit system has undermined the efficacy of the existing provision
and has also led to legal complications. To address these issues, I propose that the
Minimum Alternate Tax be now levied at the revised rate of 7.5% of the 'book
profits' as determined under the Companies Act instead of the existing effective rate
of 10.5%.
The Memorandum explaining the provisions of the Finance Bill 2000, 242 ITR (St) 117, provides
as follows:
In its place, it is proposed to insert a new provision which is simpler in application.
The new provisions provide that all companies having book profits under the
Companies Act, prepared in accordance with Part -II and Part-III of Schedule-VI to
the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of
7.5%, as against the existing effective rate of 10.5% of the book profits.' The 11
'existing effective rate' of 10.5% was arrived at by multiplying '30% of the Book
Profits' [as under Section 115JB] by the normal corporate tax rate of 35%
(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%. Thus it is
evident that it was understood by the Finance Minister / CBDT that MAT applies only
to domestic companies.
The relevant extracts of the Finance Minister's speech in the Parliament while placing the
Finance Bill 1996 are as follows:

2015-12-25 (Page 6 of 12 )

www.manupatra.com

Nirma University

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 Income-tax Act
after availing of all eligible deductions is less than 30 percent, of the book profit, the
total income of such a company shall be deemed to be 30 percent. Of the book
profit and shall be charged to tax accordingly. The effective rate works out to 12
percent of book profit calculated under the Companies Act.
Thus, while introducing Section 115JA, the Finance Minister stated that the effective rate of tax
was 12%. In the assessment year 1997-98, the tax rate applicable in case of domestic
company was 40%. Accordingly, the rate of tax was worked out at 12% of book profits (as 30%
of book profits was deemed to be the income). In case of a foreign company, in the assessment
year 1997-98, the rate of tax was 55%. Accordingly, if the provisions were applicable to a
foreign company, the rate of tax would be 16.5% and not 12%. It is evident from this
distinction that the provisions of MAT, was not intended to be applicable to a foreign company,
going by the Explanatory Memorandum to the bill and the speeches of Finance Minister.
6.5 The applicant submits that for the purposes of determining the meaning the word
'Company' as used in Section 115JB of the Act, it is necessary to ascertain the context in which
it has been used in the other subsections of the section. In Section 115JB(2) of the Act, it has
been provided that for the purposes of Section 115JB, every company has to prepare its profit
and loss account in accordance with the provisions of Part II and Part III of Schedule VI of the
Companies Act, 1956 for the relevant previous year. This literally means that every foreign
company is required to compile its entire global accounts in accordance with Part II and Part III
of Schedule VI of the Companies Act 1956, because under Section 2(17)(ii), company includes
a foreign company. Recasting the entire global accounts in this manner is itself a massive
exercise. Secondly, for the purpose of adjustments as provided in the Explanation below Subsection (2), as the net profits disclosed by the global profit & loss account would be the starting
point, a foreign company may end up paying income-tax on its entire global income which may
not have accrued/arisen or received in India. In the absence of any specific guidance provided
for computation of book profits in the case of foreign companies in the statue, it is difficult to
accept that the Legislature had intended to make the foreign companies chargeable to MAT.
6.6 The applicant took us to the provisions of Section 115J (1A), inserted by Finance Act 1989,
which were identical to Section 115JB(2). Section 115J(1A) reads as follows:
Every assessee, being a company shall, for the purpose of this section, prepare its
profit and loss account for the relevant previous year in accordance with the 13
provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of
1956).
In this regard, reference to the CBDT's Circular No. 50 dated 1 January 1990 182 ITR (St) 14
has been made, which reads as follows:
Under the existing provisions, where the total income of a company is less than 30
percent, of its book profits, the income chargeable to tax is deemed to be 30
percent of such book profits (Section 115J). For the purposes of the aforesaid
provision, 'book profits' means the net profit as shown in the profit and loss account
in the relevant previous year prepared in accordance with the provisions of Parts II
and III of the Sixth? Schedule to the Companies Act, 1956, subject to certain
adjustments, which increase or decrease the book profits. A large number of
companies interpreted the provisions to mean that in case they were following an
accounting year (under the Companies Act, 1956), which is different from the
previous year under the Income-tax Act (i.e. period ending on 31st March) then the
provisions of Section 115J do not apply to them. This interpretation was based on
the understanding that Section 115J does not make it mandatory for a company to
prepare its profit and loss account on 31st March of any year in case it is following
an accounting year which ends on a different date. As this was against the
legislative intent, the Amending Act has made it mandatory for all companies to
prepare their profits and loss account for the previous year ending 31st March to

2015-12-25 (Page 7 of 12 )

www.manupatra.com

Nirma University

determine 'book profits' for the purposes of this section even if it is having a
different accounting year for the requirements under the Companies Act.
This amendment will come into force with effect from 1st April 1989, and will,
accordingly, apply in relation to the assessment year 1989-90 and subsequent
years.
Thus, where the accounts are to be prepared in accordance with the special requirements of
other Acts and Part II and III of Schedule VI to Companies Act are not applicable (as in the case
of electricity, insurance and banking companies), Section 115JB cannot apply to such
companies. Now, even in the case of foreign companies, accounts are not required to be
prepared as per Part II and III of Schedule VI to Companies Act. Hence, the applicant's counsel
contends that MAT provisions should also not apply to foreign companies.
6.7 Then, it is submitted that many foreign companies claim treaty protection under Section 90
of the Act and offer their different streams of income such as royalty, fees for technical
services, dividend, interest etc. for tax at concessional rates (as compared to rates under the
Act). In some cases, the foreign companies also claim complete exemption from tax in India on
the basis of DTAA. Thus, if the proposition that MAT applies to foreign companies is accepted,
then in every case, despite treaty protection, tax under MAT will be payable @ 15%. It is
argued by the Learned Counsel for the applicant that simply because the opening sentence of
Section 115JB begins with 'notwithstanding anything contained in any other provisions of this
Act', it cannot be interpreted to override Section 90. In such event it leads to absurdity.
6.8 Then, it is pointed out that the two provisos to Sub-section (1) provide that depreciation
shall be calculated using the same method and rates that have been adopted for the purposes
of preparing the profit and loss account for the purposes of laying down the same before the
Annual General Meeting of the company. A foreign company does not hold an annual general
meeting in India and consequently the question of laying down a Balance Sheet and Profit &
Loss Account by the assessee in accordance with the provisions of Section 210 of the
Companies Act, 1956 does not arise. The first and the second proviso to Section 115JB, are
meant for the purposes of compiling the profit and loss account. In case of a foreign company,
no profit and loss account is prepared in accordance with the provisions of Section 210 of the
Companies Act, 1956 that is laid before any annual general meeting. In other words, the first
proviso cannot apply in case of foreign company. If the first proviso does not apply, one cannot
compile profit and loss account for the purposes of the section.
6.9 Then, reference has been made to the Explanation below Sub-section (2) various
adjustments/deductions are to be carried out in the net profit as shown by the Profit and Loss
Account. The deductions under chapter VIA of the Act are applicable only to an Indian Company
and/or other resident non-corporate assesses. Similarly, Clause (vii) of the Explanation provides
that the profits of a sick industrial company under certain circumstances shall not be subject to
tax under Section 115JB. It may be noted that Section 3(d) of the Sick Industrial Companies
Act, 1985 defines a company as a company as defined in Section 3 of the Companies Act, 1956.
Section 3(1) of the Companies act, 1956 defines a, company as a company formed and
registered under the Companies Act, 1956 or an existing company as defined in Section 3(ii). A
foreign company is not a company formed and registered under the Companies Act, 1956.
Consequently, a foreign company can never be considered as a Sick Industrial Company. Thus
Clause (vii) to the Explanation 1 is also not applicable in the case of a foreign company. Many of
the adjustments would not be applicable to foreign companies. Thus, it is evident that the
Legislature did not contemplate a foreign company for the purpose of levy of MAT.
To sum up, the applicant's contention is that if due consideration is given to the context in
which the word 'Company' has been used, 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 would include a foreign company. Various reasons given above
are also supported by CBDT Circulars, Finance Minister's speeches, Notes to 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.

2015-12-25 (Page 8 of 12 )

www.manupatra.com

Nirma University

7. The contention of the deptt. is that the provisions of Section 115JB(1) are applicable in case
of 'any company' and there is no demarcation as such between a 'domestic company' and a
'foreign company'. Therefore, the provisions should apply to foreign companies as well. Its
contention is that Explanation 1 of Section 115JB(2) of the Act simply provides the mode of
computation of 'book profits' of a company. The 'book profit' as defined is nothing but the 'net
profit' of the company in the P/L account prepared as per Part II and III of Schedule VI of the
Companies Act after making adjustments of certain items as enumerated in Explanation 1 of
the said section. Even if it is assumed that it may not be obligatory on a particular Foreign
Company to prepare its accounts as per Part II and III of the Schedule VI of the Companies Act,
it cannot be the case that the particular foreign company cannot prepare its accounts for its
operations in India as per Part II and III of Schedule VI of the Companies Act. It is stated that
the applicant files its return of income in India regularly as a Non resident Foreign Company
(having PAN ; AABCT9658F) in the jurisdiction of ADIT (IT)-3(1), Kolkata. In the returns so
filed, it generally shows the income earned by it under the heads 'Royalty' and 'Fee for
Technical/Included Services' which is offered for taxation on gross basis at the rates applicable
as per Indo-USA DTAA. Though no statement of accounts as per Part II and III of the Schedule
VI of the Companies Act are filed by the applicant with the return, nothing prevents the
applicant from doing so for the heads of income shown in the return. The Department further
contends that at the end of the day, Net Profit as per Part II and III of the Schedule VI of the
Companies Act is nothing but excess of income over expenditure in the P/L account prepared in
accordance with Part II and III of the Schedule VI of the Companies Act. In the case of the
applicant, if items of income are credited in the P/L account without any corresponding debit of
the expenditure in the same then the whole of the income would qualify as 'Net Profit' in the P/L
account of the applicant as per Part II and III of the Schedule VI of the Companies Act. Now,
for computation of 'Book Profits', the Net Profit in the P/L account as per Part II and III of the
Schedule VI of the Companies Act has to be increased or reduced by certain items as
enumerated in Explanation 1 to Section 115JB(2) of the Act. If these enumerated items do not
exist in the case of the applicant, then the 'Net Profit' in the P/L account as per part II and III of
the Schedule VI of the Companies Act would itself become the 'Book Profit' of the applicant as
defined in Explanation 1 of Section 115JB(2) of the Act.
8. The issue of applicability of Minimum Alternate Tax as per the provision of Section 115JB of
the Act came up before this Authority in the case reported as P. No. 14 of 1997, in
MANU/DE/1362/1998 : 234 ITR 335. The Authority had the occasion to consider the issue
whether or not the Minimum Alternate Tax under Section 115JB is applicable to the foreign
companies. In the said ruling, the Authority came to the conclusion that Section 115JA (akin to
Section 115JB) applies to the foreign companies as well. We have perused the said ruling and
we find that the case is factually different from the present case due to the following reasons.
8.1. In that case, the applicant was a company incorporated in the Netherlands having a project
office in India. It executed several dredging contracts in India since 1985 and had a project
office for executing contracts in India. The applicant was filing its returns of income annually
and reported losses every year on the contracts executed in India. The losses were on account
of depreciation claimed by the applicant on the dredgers and equipment utilized in India for
executing the contracts. The applicant had unabsorbed losses, which were available for carry
forward and set-off against the profits, which may be earned by the applicant in its dredging
operations. The applicant was preparing and maintaining its accounts relating to the Indian
projects at its project office. The applicant was preparing its accounts in accordance with Part-II
and III of Schedule VI to the Companies Act, 1956, though it related only to the income and
expenditure incurred out of the Indian bank account. The depreciation was claimed at the rates
provided under the Income-tax Act. The applicant's argument was as there were so many
integral and important provisions of Section 115JA, which cannot apply to a foreign company,
foreign company would not be covered by the provision under. This did not find favour with this
Authority. By making reference to the Memorandum explaining the purpose behind introduction
of Section 115JA and the Budget speech, this Authority took the view that Section 115JA(4)
applies to every assessee company and there was no reason to presume that the legislature did
not intend the provision of Section 115JA to apply to an assessee which is a foreign company.
The Authority was not convinced that there was any difficulty to determine the profit and loss
made by a foreign company in its Indian business. Under the Companies Act, every foreign

2015-12-25 (Page 9 of 12 )

www.manupatra.com

Nirma University

company has to maintain its books of account relating to Indian business in the manner
provided under Section 209 and in each calendar year it has to file its world account. Three
copies of the world account are to be delivered under Section 594. Copies of balance sheet of
Indian business account duly audited have to be filed with the Registrar within 9 months of the
close of financial year. Even though Section 115JA contain drastic measures for taxing the
income of a company, this Authority held the view that provision will apply 'notwithstanding
anything contained in any other provision of this Act'. It applies to all companies, which will
include a foreign company according to the definition given by Section 2(17) of the Act. When
Section 115JA speaks of a company, there is no reason to restrict the meaning of a company to
a domestic company. The fact that applicant company is a tax resident of Netherlands and has
got only a Permanent Establishment in India does not make any difference to the position in
law.
9. The considerations that have weighed in the ruling of this Authority referred supra appears to
be as under:
- that there was no difficulty in preparing the accounts in accordance with Part-II
and III of Schedule VI to the Companies Act, 1956;
- that the budget speech and memorandum explain the purpose behind Section
115JA;
- that there is a non-obstante clause in Section 115JA;
- that there is no specific exclusion of 'foreign company' under Section 115JA;
- that the definition of 'company' given in Section 2(17) means a 'foreign company.
These considerations are based primarily on the peculiar facts of that case. In the abovereferred case the applicant was doing business and had a PE in India. Its income was being
assessed under the head 'income from business and profession. It was required to maintain
accounts under Section 44AA of the IT Act and prepare accounts under Section 594 of the
Companies Act, 1956. However, under Section 591 of the Companies Act, only such foreign
companies, who have established a place of business within India, are required to make out a
balance sheet and P&L Account as required under Section 594 of the Companies Act. In the
case referred supra, as it had a place of business by way of a PE in India, it was required to
comply with Section 594 as if it was a company within the meaning of Companies Act, 1956. In
order therefore to comply with the requirement under Section 115JA(2) to prepare P&L Account
in accordance with the provisions of Part II and III of Schedule VI of the companies Act, 1956,
it is essential that the foreign company should have a place of business within India. Therefore,
while giving ruling in the case referred supra, there was no reason to look into the applicability
of Section 594 read with Section 591. In the present case as the applicant does not have an
established place of business in India, its preparation of P&L Account in accordance with the
provisions of Part II & III of Schedule VI of the Companies Act cannot be complied. This is the
sine-qua-non to comply with the provision under Section 115JA.
9.1 Regarding the Budget Speech, memorandum explaining the purpose behind introduction of
Section 115JA and the legislative intent, our attention was drawn to the decision of the
Supreme Court in the case of K P Varghese in 131 ITR (597) (SC) wherein it was held that:
Now, it is true that the speeches made by the Members of the Legislature on the
floor of the House when a Bill for enacting a statutory provision is being debated are
inadmissible for the purpose of interpreting the statutory provision but the speech
made by the mover of the Bill explaining the reason for the introduction of the Bill
can certainly be referred to for the purpose of ascertaining the mischief sought to
be remedied by the legislation and the object and purpose for which the legislation
was enacted.' This has been reiterated in the case of Kerala State Industrial
Development Corporation Ltd. MANU/SC/1244/2002 : 259 ITR 51 as under:

2015-12-25 (Page 10 of 12 )

www.manupatra.com

Nirma University

That the Finance Minister's speech can be relied upon to throw light on
the object and purpose of the particular provisions introduction by the
Finance Bill has been recognized by this Court in K.P. Varghese v. ITO
MANU/SC/0300/1981 : (1981) 131 ITR 597 (SC) at 609.' Again in the
case of R&B Falcon (A) Pty Ltd 301 ITR (209) (SC) it was held that:
Rules of executive construction in a situation of this nature
may also be applied. Where a representation is made by the
maker of legislation at the time of introduction of Bill or
construction thereupon is put by the executive upon its
coming into force, the same carries great weight.
These aspects have not been taken into account by this Authority while deciding the above
case.
9.2 This brings us to the context in which company is defined under the Act. Under the Act the
term 'Company' is defined as follows:
In this Act, unless the context otherwise requires.'
'Company means(iii) any Indian company; or
(iv) any body corporate incorporated by or under the laws of a country
outside India; or....
For the purposes of Section 115JB, if we apply the definition of 'company' to a 'foreign
company' without enquiring into the opening words used in the section 'unless the context
otherwise requires', Section 115JB may become unworkable. The income, which does not have
a source in India, cannot be made part of the book profits. The annual accounts, including the
P&L Account, can not be prepared as per the first proviso to Section 115JB(2) in respect of the
world income and laid before the company at its AGM in accordance with the provision of
Section 210 of the Companies Act. The speech of Finance Minister and the memorandum
explaining the provision also become out of sync if the meaning of 'company' appearing in
Section 115JB is adopted as 'foreign company'. Any other meaning would take away force and
life from the true intent of the makers of the Act. It must be said that it is a trite law that
several provisions in the Act must be read together and as parts of one larger scheme. Every
clause of a statute is to be construed with reference to the context and other clauses of the Act
to make a consistent enactment of the whole statute. Therefore, a construction that would
render any part of the statute ineffective would normally be rejected, as held in the case of V.
Guruviah Naidu & Sons 216 ITR 156 (Mad.). The department's contention that there is no
demarcation between a 'domestic company' and a 'foreign company' while applying the
provisions of Section 115JB does not take into account the definition of a 'company' appearing
in Section 2(17) in the context of Section 115JB. It has also not drawn its attention to the fact
that as the applicant did not have a place of business in India it was not required to prepare its
accounts under Section 594 read with Section 591 of the Companies Act, 1956. That being so
the applicant could not have prepared its accounts in accordance with the provisions of Part II
and III of Schedule VI of the companies Act, 1956. We therefore do not find any force in the
contentions raised by the department.
We are therefore of the view that Section 115JB is not designed to be applicable to the case of
the applicant, a foreign company, who has no presence or PE in India.
10. In the light of the above discussion we answer Question No. (iii) in the negative. In the
facts and circumstances of the case as the applicant does not have any physical presence in
India in the form of an office or branch or a PE, the provisions of Section 115JB of the Act are
not applicable on the sale of shares of a listed company Timken India Limited, by the applicant,

2015-12-25 (Page 11 of 12 )

www.manupatra.com

Nirma University

which has suffered securities transaction tax and accordingly, tax exempt under Section 10(38)
of the Act.
In view of the above answer, the other questions need not be answered. It is unnecessary and
inappropriate to give a ruling thereon.
Pronounced by the Authority on this 23rd day of July 2010.

Manupatra Information Solutions Pvt. Ltd.

2015-12-25 (Page 12 of 12 )

www.manupatra.com

Nirma University