1. Authority for Advance Ruling

1. Application for Advance Ruling – Authority for Advance Ruling (Procedure) Rules, 1996 R. 20

Game Plan Sports P. Ltd. In re – (2006) 285 ITR 111 (AAR)

Petition for Amendment of records can be filed only for correcting factual or material errors and not for substituting one company for another.

Facts

The applicant an Indian company sought an advance ruling of the Authority on certain questions on the basis that it had entered into an agreement with Taj Television Ltd. of Dubai. When during the course of the hearing, it became necessary to call for a copy of the UAE Tax Decree and certificate of incorporation of that company, the applicant presented a petition for amendment of the records under rule 20 of the Authority for Advance Rulings (Procedure) Rules, 1996, by substituting Taj TV Ltd., Mauritius for Taj Television Ltd., Dubai, stating that the registered office of Taj TV Ltd. was at Mauritius and that company was a resident of Mauritius.

Ruling

Dismissing the application, the Authority ruled that Taj Television Ltd. of Dubai and Taj TV Ltd., Mauritius were two different companies, and in the absence of any material on record, it could not be accepted that the Dubai company was only a branch of the Mauritius company. Even if the name of the Mauritius company were substituted, that company’s tax liability could not be determined as in the agreement the name of the Dubai company was entered.

2. Minimum Alternate Tax – Computation of Book Profits

Rashtriya Ispat Nigam Ltd – In Re – [2002] – 285 Itr 1 (Aar)

Assessee does not have discretion to reduce loss brought forward and unabsorbed depreciation of earlier years – nor can assessee reduce current year’s profits partly by business loss carried forward and partly by unabsorbed depreciation

Facts

The applicant, a public sector company, which has sustained losses during the earlier years had realized a profit of Rs. 1,547 crores for the financial year 2003-04 (assessment year 2004-05). In its profit and loss account the applicant disclosed only the aggregate of loss brought forward and unabsorbed depreciation. The brought forward loss of Rs 4,461 crores was comprised of business loss of Rs 1,755 crores and unabsorbed depreciation of Rs.2,706 crores. The Applicant claimed that in terms of section 115JB(2), the current year’s profit had to be reduced by the business loss or unabsorbed depreciation whichever was less and accordingly the book profit for the financial year 2003-04 (assessment year 2004-05) would be nil and therefore the applicant would not be liable to pay any advance tax. On the other hand, the Department was of the view that the applicant had to deposit some advance tax on the basis that on a proper working out of the amounts to be brought forward and adjusted for the earlier years and the current year, there would be a profit of Rs. 79.55 crores for the financial year (assessment year 2004-05).

Ruling

The Authority ruled:–

1. That, in computing the income for the purposes of section 115JB the applicant did not have the option of reducing the current year’s profit by the loss brought forward or unabsorbed depreciation for the purpose of carry forward under section 115JB in its accounts in a manner different from the manner adopted for determining the ‘book profit ‘ under section 115JB :
    

2. That the applicant did not have any discretion to reduce the current year’s profit either by the loss brought forward or unabsorbed depreciation. The lesser of the two was required to be reduced from the current year’s income. After making the reduction in one year, the applicant could not adopt a different method in the subsequent years.
    

3. That the applicant did not have any discretion to reduce the current year’s profit partly by the business loss brought forward and partly by unabsorbed depreciation.
    

4. That, since the applicant had disclosed the aggregate loss comprising loss brought forward and unabsorbed depreciation as a consolidated figure in its profit and loss account, the applicant was required to bifurcate such consolidated loss into loss brought forward and unabsorbed depreciation for the purpose of calculating the book profit under section 115JB. The applicant could not avail of the benefit of reduction envisaged under section 115JB in a manner different from the one prescribed under the Act so as to be more beneficial to the applicant.
    

5. That, therefore, the method adopted by the applicant for calculating book profits under section 115JB was not correct and the Department’s method was correct.
    

6. Proviso (b) of section 205(1) of the Companies Act, 1956, is for the purpose of distribution of dividend by a company which has earlier incurred losses. The company is required to reduce the current year’s profit by the amount of loss or an amount which is equal to the amount provided for depreciation for the year or for those years whichever is less. It is this very concept which was incorporated in section 115J of the Income-tax Act, 1961, which states that for the purpose of section 115J, ‘book profit’ means the net profit as shown in the profit and loss account for the relevant previous year and as reduced by the items specified in clauses (i) to (iv). Under section 205 of the Companies Act this methodology was prescribed so that dividend distribution did not erode the capital of the company and the concept was incorporated in section 115J of the Income-tax Act for the same purpose. i.e. the payment of minimum alternate tax would not adversely affect the capital under the deeming provision. Sub-clause (iii) of both section 115JA and section 115JB left no room for doubt that the expression ‘loss brought forward’ does not include depreciation and the net profit of the current year is to be reduced by the lesser of the two and the provisions of clause (iii) should not apply if the amount of loss brought forward or unabsorbed depreciation was reduced to nil.
    

7. Where the statutory provision is silent regarding carry forward of business loss and unabsorbed depreciation after reduction against the current year’s profit, the carry forward would be according to the general principles of law and accountancy as applicable for the purpose of carry forward of unabsorbed loss/depreciation under the other Acts. It is not open to the tax-payer to opt for an inconsistent method of accounting. A specific provision in a statute would override the general law.

Cases referred to

Baleshwar Bagarti vs. Bhagirathi Dass (1908) ILR 35 Cal 701.

CIT vs. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711(SC)

CIT vs. Sarathy Mudaliar (C.P) (1972) 83 ITR 170 (SC)

Desh Bandhu Gupta & Co. vs. Delhi Stock Exchange Association Ltd. (1979) 4 SCC 565; (1980) 50 Comp Cas 84 (SC).

National Thermal Power Corporation Ltd. vs. Union of India (1991) 192 ITR 187 (Delhi).

Surana Steels P. Ltd. vs. Deputy CIT (1992) 237 ITR 777 (SC).

Suryalatha Spinning Mills Ltd. vs. Union of India (1997) 223 ITR 713 (AP Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC); (2003) 1 RC 742.

Varghese (K.P.) vs. ITO (1981) 131 ITR 597 (SC)

2. Tribunal

3. Articles 7 and 12 of DTAA with Australia

Essar Oil Ltd. vs. Jt CIT – (2006) 102 TTJ (Mumbai) 270

The annual surveillance fee in respect of credit rating certificate falls within the category of ancillary services under sub-para (d) provided in connection with the supply of commercial information under sub-para (c) of para (3) of the Article 12 of DTAA and accordingly, the assessee-company was liable to deduct the tax
under s. 195.

Facts

1. The assessee applied for a permission of the AO to remit the annual surveillance fee of US$ 25,000 to M/s Standard & Poors (Australia) (P) Ltd. (hereinafter referred to S & P) without deduction of tax. The fee had to be paid to S & P in connection with the annual surveillance of credit rating certificate issued by them to the assessee.
    

2. The learned Asstt. CIT treated the annual surveillance fee payable to M/s. S & P as ‘fees for technical services’ under s.9(i)(vii) of the Act and also held that these services were covered under the term ‘royalty’ as per articles. 12(iii)(c) and 12(iii)(d) of the DTAA with Australia and accordingly applied for deduction of tax at source as per rate prescribed under the provision of said DTAA.
    

3. Aggrieved by this decision of Assessing Officer the assessee preferred an appeal before the learned CIT(A) and claimed before him that such services were in the nature of professional services rendered by S & P in the ordinary course of their business activities and were to be treated as business profits in their hands. Since
   S & P did not have any permanent establishment in India such profits were taxable only in Australia as per the provisions of article 7(1) of DTAA and, therefore, assessee was not required to deduct withholding tax. The CIT(A) after considering the case law cited by the assessee and provisions of Act and of DTAA held that such services were in the nature of services prescribed under article 12 of the DTAA and accordingly upheld the decision of the AO.

Decision

The Hon’ble Tribunal held :–

1. Under article 12(3)(c) of the DTAA, if payment is made for the supply of commercial knowledge or information, then such payment would fall within the meaning of term ‘royalty’ and taxable in India
    

2. Rendering of any technical consultancy services which are ancillary and subsidiary to the application or enjoy-ment of information as mentioned in sub-para (c) also falls within the category of ‘royalty’ as per article 12(3)(d).
    

3. One of the distinctions between professional services is that the scope of professional services is narrow in a sense that such services are confined between two or more entities while information generally effects large public directly or indirectly.
    

4. S & Ps rating is greatly recognized in the global financial markets and on the basis of rating category the company’s resource raising capacity is effected, on the one hand, and the cost of such resources is also affected, on the other hand. Credit rating certificate is a commercial information because the assessee wants to inform the prospective investors through such certificate its financial status, capability and other credentials so that they may make investment in the assessee company.
    

5. As the payment was made in respect of business carried in India, it squarely fell within the ambit of s. 9(1)(vii)(b). The annual surveillance fee in respect of credit rating certificate falls within the category of ancillary services under sub-para (d) provided in connection with the supply of commercial information under sub-para (c) of para (3) of the article 12 of DTAA and accordingly, the assessee-company was liable to deduct the tax under s.195.

Case referred to

NQA Quality System Registrar Ltd. vs. Dy C.I.T. (2005) 92 TTJ (Del) 946

4. Section 90, R.W.S. 4, and DTAA with Korea

Chohung Bank vs. Dy. Director of Income Tax (INT, Taxation) – 1(2) – (2006) 6 SOT 144 (Mum)

DTAA in general does not prevail over Finance Act and, hence, over tax rates but wherever DTAA has provided taxation of a particular category of income at certain rates then charging of that income at different rates as per Income-tax Act may come in conflict with DTAA and, hence, taxes over that category of income would be levied at rates so provided in DTAA.

Facts

1. A banking company based in Korea had a branch in India. The said branch (called assessee-company) was involved in normal banking activities including financing of foreign trade and foreign exchange transactions. The assessee claimed that the tax rate as applicable to Indian companies carrying on similar business should be applied in its case instead of the tax rate applicable to non-resident companies and in this regard relied upon Article 25 of the DTAA between India and Korea.
    

2. The Assessing Officer rejected the claim of the assessee holding that Article 25 provided protection against discrimination on the basis of nationality; that non-discrimination clause could be invoked only when the foreign entity and Indian entity were carrying on the same activities and not when they were carrying similar activities; that Indian banking company carried many other activities such as advances to agriculture and to weaker sections, which were not done by non-resident banking company; that Indian banking companies distributed dividend in India, whereas dividend was not payable by non-resident banking company in India; that OECD Model Convention also distinguished the words ‘same activities’, and ‘similar activities’.

Decision

While dismissing the assessee’s appeal the Hon’ ble Tribunal held :–

1. It is one thing to say that provisions of agreement will prevail over the provisions of the Income-tax Act in so far as assessability of an item is concerned and it is a different thing to say that the agreement (DTAA) will also control the applicability of the Finance Act which provides the rates for different assessable entities
    

2. The charging of the assessee at higher rate applicable to non-domestic companies was not hit by non-discrimination clause of Article 25 of the DTAA with Korea because clause (2) of Article 25 could not be construed to mean that no tax could be levied on a foreign company at a rate higher than the rate payable by Indian company. Further, the DTAA in general does not prevail over the Finance Act; hence, over the tax rates. Section 90 does not provide so. However, wherever DTAA has provided the taxation of a particular category of income at certain rates, then charging of that income at different rates as per the Income-tax Act may come in conflict with DTAA and, hence, the taxes over that category of income will be levied at the rates so provided in DTAA. But where no such rates on an income or a category of income on the status of an assessee have been prescribed in DTAA, then there cannot be any conflict with the Income-tax Act.
    

3. Article 25(1) provides that contracting States would not discriminate ‘nationals’ of other contracting State in the matter of taxation, and if that ‘national’ is working ‘under same circumstances’, then taxation on such enterprise would not be less favourable than the taxation on the enterprises of that other State. Based on Article 25(1) and Article 25(2), the assessee submitted that it was discrimination that domestic companies were subjected to lower rates whereas the non-resident company (PE) in India of foreign bank was subjected to higher rates and that it was discrimination to tax the PE of foreign bank at higher rates when the Indian bank and the branch of foreign bank acting as PE were engaged in same activities. However, Article 25(1) contains some important words/ phrases which testify as to when and under what circumstances this non-discrimination clause would be applicable. One is ‘nationals’ and the other is ‘in the same circumstances’. The Mumbai Bench of the Tribunal in the case of Credit Lloynnais vs. Dy. CIT [2005] 94 ITD 401 considered the concept of ‘national’ and ‘in the same circumstances’ and held that when different tax treatments are being given to the assessee on the basis of criterion connected with requirements regarding residence of the tax-payer, it would not be covered by the scope of non-discrimination clause.
    

4. Presuming that the assessee-company was a national of the Contracting State (i.e., Korea), it still could not be said that it was functioning in India under the same circumstances like a domestic company. Another distinction between domestic company and non-domestic company is the declaration of dividend or making arrangement therefor. Indian domestic company has to declare dividend or make prescribed arrangement therefor. But there is no such thing binding upon the non-domestic company, as they do not have the shareholders in India. Thirdly, the domestic banking company has to abide by the additional conditions imposed by Reserve Bank of India about advantages to agriculture or to weaker sections of society. The percentage of advantages to priority sector is more in case of domestic banking company as compared to non-domestic banking company. Hence, it could not be said that domestic banking company and non-domestic company are working under the same circumstances.
    

5. Section 2(22A) shows that not only Indian company but also any other company can be termed as domestic company, provided it has made prescribed arrangement for distribution of dividend (including dividend on preference shares) payable out of income-tax. Section 2(23A) defines a ‘foreign company’ as a company, which is not a domestic company. The non-discrimination clause can be invoked among the members of the ‘same set of person’. Those domestic companies, which belong to one set and those which are not domestic companies, fall into other set. A non-resident company who falls in the definition of ‘domestic company’ by virtue of its having made prescribed arrangement for distributing dividend cannot be discriminated. From this definition also, one does not find any case of discrimination as Indian domestic company and non-resident company fall in two different sets. Within the group (or set) there should not be any discrimination on the basis of nationality.
    

6. Explanation was inserted in section 90 with retrospective effect from 1-4-1962. It clearly provides that charging of a foreign company at a higher rate will not be regarded as less favourable as compared to domestic company. The department also issued a Circular No. 14 of 2001 to explain the effect of the Explanation. The Explanation introduced in 2001 by the Finance Act, 2001 with retrospective effect from 1-4-1962 is no way in conflict with the DTAA with Korea. Therefore, the amendment made in section 90 by way of insertion of Explanation is applicable insofar as it is not in conflict with the provisions of DTAA. Therefore, there is no conflict of the Explanation to section 90 with the DTAA with Korea, as the areas of operation of Explanation to section 90 and Article 25(1) are in different field. Explanation clarifies the position as it always stood; DTAA with Korea did not prescribe any separate or specific rate or any particular criteria to be applied on income of Korean companies assessed in India. The Explanation does not deal with assessability of any item of income, and even if any conflict is envisaged, still then the provision of DTAA with Korea would yield to law passed independently by the Parliament.
    

7. The words ‘less favourable’ have not been defined either in the DTAA with Korea or in the Income-tax Act. Therefore, it could not be construed to mean that levy of higher rate on the income of non-domestic company would be ‘less favourable’. Article 25(2), as per model convention, is designed to curb the discrimination in the treatment of PE as compared with resident enterprises belonging to the same sector of activities. Even though, broadly Indian domestic bank and PE of the assessee-bank were engaged in banking activities but the activities were not the same; they might only be similar.

Cases referred to

CIT vs. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.) (para 5), CIT vs. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP) (para 5), Credit Lloynnais vs. Dy. CIT [2005] 94 ITD 401 (Mum.) (para 6), ABN Amro Bank NV vs. Jt. CIT [2005] 4 SOT 643 (Kol.) (TM) (para 6), CIT vs. VR. S.R.M. Firm [1994] 208 ITR 400 (Mad.) (para 7), CIT vs. R.M. Muthaiah [1993] 202 ITR 508/67 Taxman 222 (Kar.) (para 7), Arabian Express Line Ltd. of UK vs. Union of India [1995] 212 ITR 31/82 Taxman 6 (Guj.) (para 7), CIT vs. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654/137 Taxman 460 (SC) (para 7) and Gramophone Co. of India Ltd. vs. Birendra Bahadur Pandey AIR 1984 SC 667 (para 11.2).