2007 (11) TMI 14 - AAR - Income Tax

Foreign tax provision counts for MAT calculation under Income-tax Act

The Authority for Advance Rulings held that the provision for foreign taxes made by the applicant's foreign branches should be added to the book profit ... MAT - Computation of book profit Income tax whether paid on India or outside India to be added in the book profit Section 115JA Issues Involved:1. Whether the provision for taxation made by foreign branches should be added back to book profit for arriving at book profit under section 115JA (MAT provisions).Issue-wise Detailed Analysis:1. Provision for Taxation by Foreign Branches:The applicant, a public sector undertaking, filed a return showing 'nil' income for the assessment year 1997-98 but computed a book profit of Rs. 1,41,15,55,631 under section 115JA of the Income-tax Act, 1961, and paid applicable taxes. The Assessing Officer disallowed several claims, including the provision for taxes made by foreign branches, treating it as a provision for unascertained liabilities. The Commissioner of Income-tax (Appeals) confirmed this disallowance, stating that under clause (a) of the Explanation to sub-section (2) of section 115JA, any amount laid out as income-tax paid or payable has to be added to the book profit, without distinguishing between tax payable by foreign branches and tax payable in India.The applicant argued that the provision for taxes payable abroad by foreign branches should not be added to the book profit as it was an ascertainable liability under the respective foreign tax laws. They contended that the provision under section 115JA only contemplates income-tax under the Act, not foreign tax liabilities. The jurisdictional Commissioner countered that section 115JA makes no distinction between Indian and foreign income-tax, and the provision for foreign taxes was rightly added to the book profit.Interpretation of Section 115JA:Section 115JA is a self-contained code for determining book profits and deemed income, prevailing over other provisions of the Act. It levies tax on companies by deeming a certain percentage of their book profit as taxable income if it is less than 30% of the book profit. The Explanation to sub-section (2) defines 'book profit' as the net profit increased by, among other things, the amount of income-tax paid or payable and the provision made for the same.Arguments and Counterarguments:The applicant's counsel cited Central Board of Direct Taxes Circular No. 495, emphasizing the rationale of the company's ability to pay taxes. They argued that the provision for foreign tax reduces the applicant's ability to pay tax in India, thus should be excluded from MAT calculations. The Revenue's counsel maintained that section 115JA applies uniformly to all companies, and allowing exclusions for foreign tax would create inequities between companies with and without foreign branches.Supreme Court's Observation:The Supreme Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 supported the view that section 115J (similar to 115JA) was introduced to ensure that profit-making companies pay a minimum tax, addressing the issue of zero-tax companies.Contextual Interpretation:The expression 'income-tax' in section 115JA is used in a general sense and includes both Indian and foreign income-tax. The context of clause (a) of the Explanation does not justify restricting 'income-tax' to only Indian taxes. The profit and loss account, prepared as per the Companies Act, includes profits from foreign branches, thus the provision for foreign taxes should be added to the book profit.Conclusion:The provision of Rs. 4,57,57,000 made by the foreign branches for payment of income-tax in those countries is required to be added to the book profit under section 115JA. The Authority ruled that the provision for foreign taxes must be included in the book profit for MAT purposes, aligning with the intent of section 115JA to levy a minimum tax on companies' book profits.Final Ruling:The Authority for Advance Rulings concluded that the provision for foreign taxes should be added to the book profit in terms of section 115JA of the Act. This ruling was pronounced in the open court on November 29, 2007.