Direct Taxes

Advance Ruling

1. AAR No. 763 of 2007 dt. 28th February, 2008 in case of applicant, M/s McLeod Russel Kolkata Ltd.

  1. The applicant a resident Indian company, engaged in the business of plantation and manufacture of tea, purchased 15,20,000 equity shares of Moron Tea Company (India) Ltd. from Moron Holdings PLC, U.K. (seller), a non resident company at a value of Rs. 273 per share. Out of the said shares, 5,18,000 shares were acquired by the seller in lieu of the assets of the Moron Tea Ltd. (a U.K. company) and balance 10,28,000 shares were acquired as bonus shares.

  2. Questions posed before the authority were

  1. whether tax payable on long term capital gain (LTCG) arisen to the seller on sale of originally acquired shares will be 10% of the amount of capital gain as per proviso to section 112(1) of the Income-tax Act, 1961 (ITA)?

  2. whether tax payable on LTCG arisen to the seller on sale of bonus shares will be 10% of the amount of capital gain as per proviso to section 112(1) of the Income-tax Act, 1961 (ITA)?

  3. whether LTCG arisen to the seller on sale of originally acquired shares and bonus share are to be computed applying section 48 of the ITA without having regard to either the first or the second proviso to the section?

  1. Revenue submitted that section 112(1) clearly distinguishes and defines the rate of taxation of LTCG @ 20% for foreign companies. Therefore in terms of section 48 read with section 112(1)(c) of ITA the non resident will have to pay tax @ 20% in respect of both the transfers

  2. Counsel of the applicant contended that a lower rate of 10% is applicable to LTCG derived by non resident foreign companies as well and the benefit is not to be confined to residents only. Proviso to section 112(1) applies to all the clauses of section 112(1) and second proviso to section 48 is not a condition precedent for availing the benefit under proviso to section 112(1). The seller satisfies all the conditions requisite to attract the proviso to section 112(1) of ITA and also the decision in case of TIMKEN FRANCE SAS fully governs the factual as well as legal aspects of the instant case, therefore the tax on LTCG on the sale of original as well as bonus shares should be computed @ 10%

  3. Authority stated that on almost similar case the Timken’s case was examined at length by the authority. Section 112(1) of ITA is a special provision and the benefit to non residents/ foreign companies cannot be denied even if they are entitled to another relief in terms of the proviso to section 48 of ITA. Therefore it was ruled that

  1. tax payable on LTCG by the seller will be @ 10% in consonance with the proviso to section 112(1) of ITA

  2. tax liability of non resident foreign company on sale of bonus shares will be @ 10% as per the proviso to section 112(1) of ITA

No ruling was called for in respect of Question No. (iii)

2. AAR No. 762 of 2007 dt. 3rd March, 2008 in case of applicant Shri V. Ravi Narayanan

  1. Shri V. Ravi Narayanan (the applicant) is a non resident Indian (NRI). He proposes to open a Non resident Ordinary (NRO) deposit with banks in India with the help of remittances from Saudi Arabia.

  2. Questions arises as under

  1. whether the NRO deposit acquired with convertible foreign exchange can be treated as a ‘foreign exchange asset’ under section 115C of the Income-tax Act, 1961 (ITA)?

  2. Whether the interest on such NRO deposits can be treated as ‘investment income’ under section 115C of the ITA and liable to be taxed as 20% only under section 115E?

  3. At what rate tax is required to be deducted at source by the person responsible for paying such interest?

  4. Whether Form 15G can be accepted by the banks?

  1. Commissioner of Income Tax stated that though NRO deposit is acquired with convertible foreign exchange, its maturity proceeds are not repatriable. Hence such a deposit does not constitute a ‘foreign exchange asset’ under section 115C of the Act. As such, interest earned on it does not qualify as ‘investment income’ under section 115C of the Act, and it has to be treated as other income on which the banks are right in deducing tax @ 30%.

  2. Authority stated that benefit u/s 115E shall be available to NRI as defined in section 115C. The applicant is covered by this definition. ‘Investment income’ has been defined as income derived from a ‘foreign exchange asset’ and ‘foreign exchange asset’ means any ‘specified asset’ acquired or purchased or subscribed to in ‘convertible foreign exchange’. 

‘Convertible foreign exchange’ means a foreign exchange which is treated as convertible foreign exchange by the Reserve Bank of India for the purposes of Foreign Exchange Regulation Act, 1973 (now Foreign Exchange Management Act, 1999) and rules made thereunder. The applicant has stated that he will open a bank account with convertible foreign exchange.  He has not mentioned the name of any currency, like Riyal or Dollar, in which the account shall be opened.  In the absence of the name of the specific currency, it is not possible to ascertain whether it is convertible foreign exchange. We proceed on the premise that the applicant will be opening a bank account with the help of convertible foreign exchange in terms of section 115C(a) of ITA.

The next question that arises is whether the said bank deposit will constitute a ‘specified asset’ within the meaning of section 115C(f) of the Act.  Under para (iii) of this provision, deposits with an Indian company which is not a private company as defined in the Companies Act, 1956, constitute a ‘specified asset’. A banking company, though established by a special statute, namely, the Banking Regulation Act, 1949, is, nevertheless, a company within the meaning of the Companies Act. Since the applicant has not specified the name of the bank in which he will be making deposit, it is not possible to ascertain whether that bank will be a private company or a public company.  We proceed on the basis that the applicant will be opening the account in question in a bank, which would not be a private company as per the Companies Act.

Provisions of Foreign Exchange Management Act states that the balance in NRO account is not eligible for remittance outside India without the approval of the RBI. However RBI press release No. 387 dt. 18-9-2003 states that current income (i.e., interest) is freely repatriable from NRO account but principal amount is repatriable only up to US$ 1 million per financial year. So it would not be correct to say that the moneys lying in the NRO account cannot be repatriated at all. But the question here is not whether such repatriation is permitted or not, but whether repatriation is a requirement of sections 115C, 115D and 115E of the Act.  In other words, can only a repatriable bank deposit be regarded a foreign exchange asset?  Section 115C nowhere says that asset acquired should be repatriable; the only condition attached is that the asset should have been acquired with the help of convertible foreign exchange.  Thus the NRO deposit would be a foreign exchange asset and the interest income arising from it would be investment income.

  1. Accordingly authority ruled that

  1. the NRO deposit to be made by the applicant with convertible foreign exchange in a banking company which is not a private company, shall be treated as ‘foreign exchange asset’ under clause (b) of section 115C of the Act;

  2. income by way of interest earned from the said  NRO deposit shall be treated as ‘investment income’ under clause (c) of section 115C and shall be liable to be taxed at the rate of twenty per cent under section 115E; and

  3. the banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of twenty per cent.

3. AAR Nos. 753 & 754 of 2007 dt. 10th March, 2008 in case of applicant, Airports Authority of India

  1. Applicant, Authority set up under the Airport Authority of India Act, 1994 had entered into a contracts in 2003 with Raytheon Company, USA for Hardware Repair Support and Software Maintenance Support. The applicant renewed the contract on 26th April, 2006 on substantially similar terms and conditions

  2. Questions posed before the authority are

In relation to Hardware Repair Support Contract

  1. Whether payment received by M/s. Raytheon Company under the transaction mentioned in Annexure-I is liable to tax in India in the hands of the recipient non-resident US company?

  2. Whether any tax is required to be deducted at source by the applicant on payments to be made to M/s. Raytheon Company?

In relation to Software Maintenance Support Contract

  1. Whether, under the facts and circumstances of the case, deputation of an engineer by M/s. Raytheon Company to India for the purpose of installation and testing of the repaired software will constitute Raytheon‘s permanent establishment in India,

  2. Whether payment received by M/s. Raytheon Company under the transaction mentioned in Annexure-I is liable to tax in India in the hands of the recipient non-resident US company?

  3. Whether any tax is required to be deducted at source by the applicant on payments to be made to M/s. Raytheon Company? If yes, then what is the rate of withholding tax applicable?

  1. Applicant had obtained advance ruling on similar questions as above in respect of contract entered in 2003. In respect of Hardware Repair Contract authority had ruled that the transaction is not liable to tax in India in the hands of recipient. The assessing officer decided the income tax liability in India of Raytheon, u/s 147 r.w. sec 143(3) discarding the ruling, appeal against which is now pending.

Revenue counsel has questioned the maintainability of the application by contending that the application cannot be made in view of the embargo in clause (i) of the proviso to sec. 245R(2) as the identical question is pending before the appellant authority. The authority held that the embargo under the proviso to sec. 245R(2) should be strictly construed so that an eligible applicant is not denied the remedy to have an early ruling in the matter. The applicant need not be called upon to go on deducting and paying income tax until and unless the appeal of Raytheon is decided. Assuming that the applicant has the alternative remedy of filing an application before the Income-tax Officer under sec. 195(2), it does not operate as a legal bar to the maintainability of the application before this Authority. The concept of tax deduction at source under the Income-tax Act has its own scheme and nuances. It stands as a separate issue although aligned with the substantive tax liability of the recipient of income. The application is not hit by the embargo laid down in the first part of clause (i) to the 2nd proviso to section 245R(2).

The counsel for the applicant has stated that the real question to be decided is regarding the applicants obligation to deduct tax at source and once that is answered, the applicant is not desirous of getting an answer to the first question originally framed. The AAR therefore, treated the first question as withdrawn by the applicant.

  1. In AAR/753/2007, the authority ruled that the applicant is not legally required to deduct tax on the payments made to Raytheon Company, USA.

  2. In AAR/754/2007, only the second part of third question; i.e., as referred at b(iii) above, needs to be answered. The authority ruled that the rate at which the tax has to be withheld in relation to the payments made to Raytheon Company on the Software Maintenance Contract should be 10% (ten per cent), apart from the applicable surcharge.