Decided on July 23,2010

The Timken Company Appellant
Director of Income Tax (International Taxation) Respondents


V.K. Shridhar, Member - (1.) THE applicant is a Company formed under the laws of the State of Ohio, USA and is a global manufacturer of engineered bearings, alloy and specialty steel related components. It was initially a joint venture between Timken USA and Tata Iron and Steel Company Limited ('TISCO'), subsequent to which the Company undertook a maiden public issue in the year 1991, and started commercial production one year later. Subsequently, Timken USA acquired the equity shares of the Company from TISCO in compliance with the laws of India. The dates of acquisition of shares of the Company by Timken USA are as below: width="0pt" border="1" cellspacing="0" cellpadding="0"> 24 -07 -1991 (Public issue) 6,000,000 22 -11 -1991 (Public issue) 11,000,000 13 -04 -1994 (Rights issue) 8,500,000 15 -0301999 (Acquisition of shares from TISCO) 25,499,988   50,999,988 Timken India Ltd is listed on the Bombay Stock Exchange. The applicant proposes to transfer 50,999,988 equity shares held by it in Timken India to Timken Mauritius Ltd as part of its global restructuring exercise. For this purpose the approval of concerned statutory authorities including RBI has been obtained. The applicant has held the said equity shares for more than 12 months and it is stated that transfer of such shares would be effected through the Bombay Stock Exchange during the current financial year.
(2.) ON the above facts stated by the applicant, the following questions are formulated by the applicant for seeking advance ruling: i). Whether the provisions of Section 115JB of the Act relating to payment of Minimum Alternative Tax ('MAT') are applicable only to domestic Indian companies? ii) If the answer to Question 1 is negative, whether the provisions of Section 115JB of the Act relating to payment of MAT are applicable to only such foreign companies that have a physical business presence in India? iii) Based on the answer to Question (ii) since the Applicant, is a foreign company who does not have any physical presence in India in the form of an office or branch and also in the light of the declaration provided by the Applicant that it does not have a permanent establishment in India in terms of Article 5 of India -USA Double Taxation Avoidance Agreement [Attachment VIII], whether the provisions of Section 115JB of the Act are applicable on the sale of shares of a listed company viz Timken India Limited, by the applicant, which has suffered securities transaction tax and accordingly, tax exempt under Section 10(38) of the Act? iv) If the provisions of Section 115JB of the Act are applicable to the Applicant, whether the payments made to the Applicant on sale of the shares would suffer any withholding tax under Section 195 of the Act and if yes, whether tax at 15% of the net capital gains would be required to be withheld? The applicant is of the view that the capital gains, if any, arising from the above transaction would be exempt from tax under Section 10(38) of the Income Tax Act, 1961 (herein after referred to as Act) and therefore no tax is deductible under Section 195. The applicant submits that the provisions of MAT contained in Section 115JB cannot be made applicable to foreign companies who do not have any presence or PE in India.
(3.) THE relevant provision of Section 10(38) is extracted as under: 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - (38) any income arising from the transfer of a long -term capital asset, being an equity share in a company or a unit of an equity oriented fund where - (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter: [Provided that the income by way of long -term capital gain of a company shall be taken into account in computing the book profit and income -tax payable under Section 115JB.] As per this section, the income arising on transfer of long term equity share in a company fulfilling the requirements in Clauses (a) and (b) would not be included in the total income of a person. However, in the case of a company, it would be taken into account in computing the book -profit and income tax payable under Section 115JB. Therefore, in a case where the income arising on transfer of long term equity share in a company is taken into account in computing the book -profit, the book profit so determined should be such on which income tax should be payable under Section 115JB. Thus, if no income tax is payable under Section 115JB even after including the income arising on transfer of long term equity share in a company, the applicant would be eligible to exclude such income from the total income as envisaged under Section 10(38) of the Act. There is no doubt that the proviso under a particular section controls the operation of that section but its application cannot make the operative part of the section redundant. In other words, Section 10(38) cannot be construed to rule out its applicability to a 'company' to which Section 115JB does not apply. We are of the view that the exemption provided by Section 10(38) of the Act is not taken away in the case of every company. The context in which a company is defined needs to be taken into account.;

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