TaxTMI 
TaxTMI 
2019 (10) TMI 1437
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....ge shareholding (a) PQR Gmbh 1,21,66,570 99.99984% (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 Reserv....
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....pital, and (c) The transferee should be an Indian company. 7. As per section 45 of the Act : "Any profits or 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 transfe....
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....r the purpose of pre paring 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)." 10. From an analysis 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 la....
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.... 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 per cent. of the book profits." 18. It is emphasised that from the aforecited Central Board of Direct Taxes circular 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....
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....ted, then in every case, despite treaty protection, minimum alternate tax will be payable at 18 per cent., which leads to absurdity. 23. In view of the above discussions, the applicant states that if due consideration is given to the context in which the word "company" has been used in section 115JB of the Act, 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....
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....5-SC-IT] 29. In the present case, since the transfer of shares of PQR India is not taxable as per section 47(iv) of the Act, no tax would be deductible at source under section 195 of the Act. Submissions of Revenue 30. With regard to question No.1, the Department has averred that the applicant in its submission has stated that the proposed buy-back of shares by the Indian company 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 ot....
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....ue of securities within a period of 24 months from such buy-back. The above newly introduced provisions of buy-back of shares have thrown open certain issues in relation to the existing provisions of Income-tax Act. The two principal issues are whether it would give rise to deemed dividend under section 2(22) of the Income-tax Act and whether any capital gains would arise in the hands of the share holder. The legal position on both the issues 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....
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.... section 46A is an exclusive clause which includes the transfer of capital asset in the form of shares for capital gains tax liability. 39. 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 have any relevance in defining the term transfer, since 46A 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 ....
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....). It exhorts every company, for the purpose of sub-section (1) to prepare its profit and loss account as provided for therein. The operation of sub-section (1) does not depend on the applicability of sub-section (2). It is on the applicability of sub-section (1) that the obligation under sub-section (2) arises. It is a fallacy to think that unless sub-section (2) is independently attracted, sub-section (1) also cannot be operated. Sub-section (2) gets attracted when sub-section (1) operates propriovigore. It is for the purpose 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 (....
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.... out the procedure for calculating the taxable profit. In fact sub-section (2) casts an obligation on a company to which section 115JB(1) is attracted to prepare an account in terms of the Companies Act, 1956. It is not as if the liability to be taxed depends on the obligation to prepare an account in terms of the Companies Act, 1956. The liability to tax depends on the profit earned or deemed to be earned. The deemed profit is specified in sub-section (1) and the rate of tax is also specified. Only the mode of determining the book profit 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 t....
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.... reckoned with for calculating the book profit for taxation under section 115JB of the Act. Section 115JB of the Act overrides sections 45 to 48 of the Act as well. So, by reading section 115JB of the Act as confined in its operation to domestic companies alone, we would be doing violence to the special scheme of taxation adopted for taxing certain companies. Unless there are compelling reasons, no such interpretation is justified. As pointed out in the ruling in P. No. 14 of 1997, In re [1998] 234 ITR 335 (AAR), there is no compelling reason to jettison 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....
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....venue, that section 47(iv) of the Act which is beneficial/exemption section has to be strictly construed, is not tenable. 50. It is concluded by saying that thus, considering the aforesaid ; the purpose of the provisions of exemption in section 47(iv) of the Act, the transaction under consideration is squarely covered by the said section 47(iv) of the Act and thus, will not be taxable. Section 46A was introduced only to clarify and to avoid any further litigation that when there is buy-back of shares it should be deemed to be "Capital Gains" and should not be treated as "Dividend" which 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 se....
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...., in the case of CIT v. S. Teja Singh [1959] 35 ITR 408 (SC), a construction which results in rendering a provision redundant must be avoided. For this reason alone, the interpretation canvassed by the Revenue is to be rejected. Having seen the finding recorded by the Tribunal, no fault can be found with the view taken by the Tribunal. In this view of the matter, the appeal stands dis missed for want of substantial question of law with no order as to costs". 54. In addition, the learned authorised representative has also contended that concessional provisions must be construed liberally to provide benefit 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 explicitl....
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....tax Act. These amendments were brought to clarify the ambiguity in regard to the taxation of buy-back of shares. The speech of the hon'ble Finance Minister is quoted below for reference : "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 whether such trans actions would be treated as subject to dividend tax in addition to capital gains tax. In view of this, I propose to amend the law to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to dividend tax, and would only 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 reproduc....
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....tion. The transaction, i. e., transfer of capital asset by a holding company to subsidiary company is covered under section 47(iv). The reverse transaction, i. e., transfer of capital asset by a subsidiary to a holding company was brought in under section 47(v) with effect from April 1, 1965. From commentaries on the subject it is nowhere indicated that such share buy-back were ever contemplated to be covered under section 47. It is also not clear whether only certain type of capital assets were intended to be covered under section 47 or not. The only thing which is apparent from the Income-tax Act is that the buy-back of shares by means of a special provision, 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 : ....
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...., the holding company ceases or cease to hold the whole of the share capital of the subsidiary company, the amount of profits or gains arising from the transfer of such capital asset not charged under section 45 by virtue of the provisions contained in clause (iv) or, as the case may be, clause (v) of section 47 shall, notwithstanding anything contained in the said clauses, be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such transfer took place." 66. Further section 49 of the Act states : "With regard to the computation of the subsequent capital gains, sub-clause (e) of section 49(1)(iii) of the Act clearly provides that where the capital 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, th....
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....bought-back within seven days of the last date of completion of buy-back . . ." (emphasis provided) 70. From the above, it seen that section 77A(7) of the Companies Act, 1956 specifically provides that where company buys-back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back. So, when companies buy-back their own shares from the existing shareholders the rights that the shares represent are extinguished with the destruction of the shares. As the shares are destroyed after the buy-back, there is no capital asset remaining with the transferee company. Therefore there is no further capital gains tax that can be imposed as the capital asset itself ceases to exist after the buy-back, 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 Legislatu....
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....nd 81 of the Income-tax Act. Once the special provisions having the overriding effect do cover a criminal act and the offender, he gets out of the net of the Indian Penal Code and in this case, section 292. It is apt to note here that electronic forms of transmission is covered by the Income-tax Act, which is a special law. It is settled position in law that a special law shall prevail over the general and prior laws. When the Act in various provisions deals with obscenity in electronic form, it covers the offence under section 292 of the Indian Penal Code." 72. In the instant case, the special provision under section 46A would prevail over the general provision of section 45 read with section 47(iv) of the Income-tax Act. 73. We also draw support from the elaborate judgment of the hon'ble Authority for Advance 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 Incom....
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....ing about the same result. The company under the Companies Act, can look to and cater only to its shareholders. It cannot go in search of beneficiaries or alleged beneficiaries. We are satisfied that we would not be justified in reading the word 'or' in section 47(iv) of the Act, as 'and'. Section 45 of the Act makes any profits or gains arising from the transfer of a capital asset effected, chargeable to tax under the Act. Section 47 of the Act is an exemption provision. It exempts certain transfers from within the purview of section 45 of the Act. Being an exemption, it has to be strictly construed. If we accept the plea that the word 'or' must be read as 'and', we would be recognizing an entity that would be violative of section 49(3) of the Companies Act. Section 49(3) insists that a public company if it 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 w....
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....ransaction. Section 47 of the Income-tax Act contains a non obstante clause as it were only in respect of section 45 of the Act. It says 'nothing contained in section 45 shall apply to the following transfers'. That means two things. One, it does not override section 46A and two, by virtue of section 47, a transfer is not deemed to be not a transfer. It is only an exempted transfer. Therefore, in the context of section 77A of the Companies Act, it is a permissible trans fer attracting section 46A of the Income-tax Act. It may be noted that section 77A was introduced with effect from October 31, 1998, and section 46A was inserted with effect from April 1, 2000. Specific securities used in the section is explained as having the meaning assigned to it in section 77A of the Companies Act. It is, therefore, clear that section 46A was introduced in the context of permitting 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 ....
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.... Even if we accept the plea of the applicant to read 'or' as 'and' in section 47(iv) of the Act, it is of no avail to the applicant, in our view, that section 46A of the Act would be applicable in the case of a buyback of shares and section 46A is not subjected to section 47 which at best only overrides section 45. We are, therefore, of the view, that in the case of a buy-back of shares, section 46A of the Act will be attracted and resort to section 45 is not warranted." 74. In the case of CIT v. Papilion Investment Pvt. Ltd. relied on by the learned authorised representative, the assessee-company had transferred shares held in Morarjee Mills to Piramal Finance and Investments (P.) Ltd. ("PFIPL"). The assessee contended that PFIPL was its 100 per cent. subsidiary and claimed exemption under clause (v) of section 47 of the Act. Thus it was not a case of share buyback and not relatable 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 ....