1998 (7) TMI 693 - AAR - Income Tax

Foreign companies must pay tax on book profits under Income-tax Act. DTAA with the Netherlands applies.

P. NO. 14 OF 1997, IN RE

P. NO. 14 OF 1997, IN RE - [1998] 234 ITR 335 (AAR) Issues Involved:1. Applicability of Section 115JA of the Income-tax Act, 1961, to a foreign company.2. Computation of profit attributable to the permanent establishment (PE) of a foreign company under the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands.Issue-wise Detailed Analysis:1. Applicability of Section 115JA to a Foreign Company:The applicant, a company incorporated in the Netherlands with a project office in India, argued that Section 115JA of the Income-tax Act, 1961, should not apply to it. The company maintained that its management and control were wholly outside India, making it a non-resident company under Section 6(3)(ii) of the Act. The applicant contended that Section 115JA, which requires companies to prepare financial statements according to Part II and Part III of Schedule VI to the Companies Act, 1956, to ascertain book profits, was not suitable for foreign companies.The applicant highlighted several provisions within Section 115JA that were not applicable to foreign companies, such as the requirement to declare dividends in India, the method of calculating depreciation, and the inclusion of profits eligible for deduction under sections like 80HHC and 80HHE, which pertain to Indian companies. The applicant argued that these provisions indicated that Section 115JA was intended for domestic companies only.However, the judgment clarified that Section 115JA applies to all companies, including foreign companies, as per the definition provided by Section 2(17) of the Income-tax Act. The purpose of Section 115JA was to tax 'zero-tax companies' that, despite earning substantial book profits, paid no tax due to various allowances and deductions. The judgment emphasized that the applicability of Section 115JA does not depend on whether a company declares dividends or avails of depreciation allowances. The section's objective is to ensure that companies, including foreign ones, pay tax on at least 30% of their book profits if their taxable income is less than this threshold.The judgment also noted that the provisions of Section 115JA would apply 'notwithstanding anything contained in any other provisions of this Act,' indicating its broad applicability to all companies. The judgment concluded that there was no reason to restrict the meaning of 'company' in Section 115JA to domestic companies alone.2. Computation of Profit Attributable to the Permanent Establishment (PE) under DTAA:The applicant questioned whether, under the DTAA between India and the Netherlands, the provisions of Section 115JA could be applied when computing the profit attributable to its permanent establishment (PE) in India. Article 7 of the DTAA specifies that the profits of an enterprise of one state shall be taxable only in that state unless the enterprise carries on business in the other state through a PE situated therein. The profits attributable to the PE may be taxed in the other state.The judgment clarified that the applicant company is liable to be taxed on the profits attributable to its PE in India. The DTAA limits the quantum of taxable income to the profits attributable to the PE but does not absolve the foreign company from paying taxes applicable to resident companies. The judgment emphasized that the applicant must prepare separate profit and loss accounts for its Indian business as required by Section 594 of the Companies Act. This requirement ensures that the profits or losses of the Indian business can be determined by the Assessing Officer in India.The judgment concluded that there was no practical difficulty in applying Section 115JA to the applicant's Indian business. The company must calculate its Indian profits separately, disclose the net profit arising in India, and remit it to the foreign country. The judgment affirmed that the provisions of Section 115JA apply to the applicant, and the two questions raised were answered in the affirmative and against the applicant.