1. The applicant, a resident Indian company, is engaged in the business of plantation and manufacture of tea. The applicant submitted an application under Section 245Q(1) of the Income-tax Act, 1961 (in short "the Act"), in the prescribed Form 34D seeking advance ruling in relation to the determination of tax liability of a non-resident i.e., Moran Holdings, Plc, U.K., pertaining to a transaction undertaken by the applicant with such non-resident.
2. As the facts stand out, the applicant purchased 15,20,000 (fifteen lakh twenty thousand) equity shares of Moran Tea Company (India) Ltd. from Moran Holdings Plc, U.K., a non-resident company, as per the sale and purchase agreement (in short SPA) executed between the purchaser (the applicant) and seller (Moran Holdings Plc, U.K.) on January 18, 2007, wherein the purchaser agreed to purchase the said shares of Moran Tea Company held by the seller at Rs. 273 per share. Out of the said shares, the original 5,18,000 shares were acquired by the seller in lieu of all the assets of the Moran Tea Ltd. (a U.K. company that was previously trading directly in India) on April 6, 1979, after obtaining permission from RBI. Subsequently, as the facts bear out, Moran Tea Company issued 10,28,000 fully paid up equity shares of Rs. 10 each as bonus shares during the year 1990 and 1998. Thus, 15,20,000 shares (listed securities) sold by Moran Holding Plc, U.K. to the applicant consisted of original as well as bonus shares acquired from Moran Tea Company. It is further stated that the effective date of agreement was extended till October 7, 2007, and the sale consideration payable for the transfer of shares, was to the tune of Rs. 41,49,60,000. As stated, the transfer of the aforesaid shares could not be effected through the stock exchange. As such, the applicant authorized ICICI Bank Ltd. for arranging and remitting the sale proceeds amounting to Rs. 33,24,06,160 after deducting tax at 20 per cent., inclusive of the surcharge, on the long-term capital gains. Accordingly, the sale proceeds were remitted to the seller on October 1, 2007, through "Swift" (inter-bank transfer). The shares were then credited through off market transaction in the demat account of the purchaser after the transaction of sale was completed.
3. Placed in the above factual scenario, the applicant has sought a ruling from this Authority on the following questions: 1. Whether, on the stated facts and in law, the tax payable on long-term capital again arisen to Moran Holdings Plc on sale of originally acquired shares of Moran Tea Company (India) Limited will be 10 per cent, of the amount of capital gain as per proviso to Section 112(1) of the Income-tax Act, 1961? 2. Whether, on the stated facts and in law, the tax payable on long-term capital gain arisen to Moran Holdings Plc on sale of bonus shares of Moran Tea Company (India) Limited will be 10 per cent, of the amount of capital gain as per proviso to Section 112(1) of the Income-tax Act, 1961? 3. Whether, on the stated facts and in law, the long-term capital gain arisen to Moran Holdings Plc on sale of originally acquired shares and bonus shares of Moran Tea Company (India) Limited are to be computed by applying Section 48 of the Income-tax Act without having regard to either the first or the second proviso to the section? 4. The application filed by the applicant seeking ruling on the aforesaid questions was admitted by the Authority under Section 245R(2) of the Act as per an order dated December 4, 2007, and the case was posted for hearing on the merits.
5. Mr. V.S. Wahi, advocate, appeared on behalf of the applicant and was heard. Nobody appeared on behalf of the Revenue. However, comments on the application were furnished on behalf of the Revenue.
6. Arguing the case, learned Counsel of the applicant has submitted that the Moran Holdings Plc, U.K. (seller), satisfies all the conditions requisite to attract the proviso to Section 112(1) of Act and, therefore, the tax on long-term capital gains arising on the sale of original shares as well as bonus shares should be computed at 10 per cent., as prescribed in the said proviso. Learned Counsel has further submitted that the decision of the Authority in the case of Timken France Sas In re [2007] 294 ITR 513 (AAR) fully governs the factual as well as legal aspect of the instant case.
7. However, learned Counsel for the applicant has, in the course of the hearing, not pressed for an answer to question No. 3. Accordingly, no ruling is called for in respect thereof.
8. In the written comments, the Revenue has submitted that Section 112(1) clearly distinguishes between domestic and foreign companies and defines the rates of taxation of long-term capital gains at 20 per cent, for foreign companies. As such, the resident Indian company cannot avail of lower rate of taxation envisaged by Section 112 inasmuch as the second proviso to Section 48 is not applicable to the non-resident company. Further, in terms of Section 48 of the Act read with Section 112(1)(c), the non-resident will have to pay the tax at 20 per cent, in respect of both original shares as well as bonus shares and the proviso under Section 112(1) of the Act will not apply.
9. Learned Counsel for the applicant has contended that the lesser rate of 10 per cent, is applicable to long-term capital gains derived by non-resident foreign companies as well, and the benefit of the reduced rate is not to be confined to residents only. It has also been argued that the proviso to Section 112(1) applies to all the Clauses of Sub-section (1) of Section 112 of the Act. It has also been submitted that the applicability of the second proviso to Section 48 is not a condition precedent for availing of the benefit of the lesser rate of taxation at 10 per cent, under the proviso to Section 112(1). Further, the proviso to Section 112(1) is a special provision in respect of shares and can be applied in relation to the transaction with a non-resident company. Learned Counsel for the applicant summed up by submitting that the ratio laid down by the Authority in the case of Timken France Sas In re [2007] 294 ITR 513 (AAR) fully covers the instant case. As such, the question raised by the applicant merits to be answered in favour of the applicant.
10. We have addressed ourselves carefully to the rival submissions made and are of the considered opinion that on almost similar facts, the case of Timken France Sas In re [2007] 294 ITR 513 (AAR) was examined by this Authority at length. This Authority took the view that the benefit of the proviso to Section 112(1) of the Act could not be denied to non-residents/foreign companies even if they are entitled to another relief in terms of the proviso to Section 48 of the Act. The Authority also held that the proviso to Section 112(1) of the Act was a special provision in relation to transfer of certain long-term capital assets, viz., listed securities, units, etc., and there was no warrant to limit the 10 per cent, effective rate provided therein as against the normal rate of 20 per cent, only to the three categories of resident assessees specified in Clauses (a), (b) and (d). It may not be out of place to give the following extract from the headnote of the ruling in the case of Timken France Sas In re [2007] 294 ITR 513 (AAR) which is as under: In plain and peremptory words, the proviso to Section 112(1) limits the rate of tax on long-term capital gains from the transfer of listed securities to 10 per cent., but with an important rider that the quantum of capital gains should be arrived at without taking into account the formula laid down in the second proviso to Section 48 based on the indexed cost of acquisition. In other words, while computing the gains on listed securities held for more than 12 months, one should not give effect to the calculation spelt out in the second proviso to Section 48 wherever applicable. The indexation formula will not enter into the computation process - that is the mandate of the proviso to Section 112(1). It does not say : deny the concessional rate of tax to the category of assessees who are not eligible to have the benefit of indexed cost of acquisition under the second proviso. In other words, the eligibility to avail of the benefit of the indexed cost of acquisition is not a sine qua non tor applying the reduced rate or 1U per cent, prescribed by the proviso to Section 112(1). The second proviso to Section 48 is only a mode of computation of capital gains: it cannot be construed as words of exclusion of a category of assessees, i.e., non-residents who cannot avail of indexation benefit.
The protection in terms of the first proviso to Section 48 made available to a non-resident might be a justification to deny the benefit of cost of indexation but the same cannot be said of the application of a lesser rate.
11. The stand taken by the Revenue is patently contrary to the ruling in Timken France Sas In re [2007] 294 ITR 513 (AAR) which considered the same questions and provisions. The only difference in facts between the case of Timken France Sas In re [2007] 294 ITR 513 (AAR) and the present case is that in the former case the non-resident company acquired the original shares by utilizing foreign currency, whereas in the case of the applicant, it does not appear that foreign currency was so utilized. That means, the applicant may not be able to avail of the benefit under the first proviso to Section 48. This distinguishing feature does not in any way support the contention of the Revenue.
Before closing the case, we would like to advert to the fact that the Commissioner in his comments pointed out that the application under Section 245Q(1) should have been made by the non-resident, namely, Moran Holdings Plc, U.K. which sold the shares to the applicant. We find no force in this contention. Sub-clause (ii) of Clause (b) of Section 245N refers to a resident applicant who has entered into a transaction with a non-resident. In relation to the tax liability of such non-resident arising out of such transaction, the resident applicant can very well file the application. It stands to reason that a resident applicant who is directly concerned with the issue of tax deduction at source in respect of payments made to the non-resident, is specified as one of the eligible applicants.
12. Therefore, in view of the discussion hereinabove, we answer the questions raised in the following manner: Question No. 1 is answered by holding that the tax payable on a long-term capital gains arisen to Moran Holdings Plc on the sale of originally acquired shares of Moran Tea Company (India) Ltd. will be at 10 per cent, in consonance with the proviso to Section 112(1) of the Act. In other words, the question is answered in favour of the applicant.
13. Question No. 2 is also answered in favour of the applicant by holding that even in respect of sale consideration arising out of the bonus shares, the tax liability of the non-resident foreign company will be at 10 per cent, only as per the proviso to Section 112(1) of the Act.
Signed on the 27th day of February, 2008, and pronounced the Ruling on 28th day of February, 2008.