In Re The Timken Company (AAR)

S. 115JB (MAT) not applicable to foreign company without presence in India

The assessee, a foreign company, without a presence or PE in India, earned long-term capital gains which were exempt u/s 10(38). The assessee applied for a ruling on whether it was liable to pay Minimum Alternate Tax (MAT) u/s 115JB on the said gains. HELD ruling in favour of the assessee:

(i) In P.No. 14 of 1997 (234 ITR 335) the AAR held that s. 115JA (akin to s. 115JB) applied to every “company” and as the term “company” was defined in s. 2(17) to include a “foreign company”, there was no reason to presume that the legislature did not intend s. 115JA to apply to a foreign company. This ruling is not applicable because:

(a) It was rendered in the case of an assessee who was doing business and had a PE in India. Its income was being assessed under the head “income from business and profession”. It was required to maintain accounts under section 44AA of the IT Act and prepare accounts under ss. 591 & 594 of the Companies Act;

(b) S. 591 of the Companies Act applies only to foreign companies who have established a place of business within India and requires the preparation of a balance sheet and P&L A/c as per s. 594. The obligation in s. 115JA(2) to prepare P&L Account in accordance with Parts II and III of Schedule VI can apply only to a foreign company which has a place of business within India. As the applicant does not have a place of business in India, its preparation of P&L Account in accordance with Parts II & III of Schedule VI cannot be complied;

(c) In the ruling, the AAR has not taken into account the Budget Speech, Memorandum & Notes on Clauses explaining the purpose behind introduction of s. 115JA which makes the legislative intent clear that MAT was not intended to apply to foreign companies;

(d) Though s. 2(17) defines a “company” to include a “foreign company”, the context of the definition has to be seen. Income, which does not have a source in India, cannot be made part of the book profits. The annual accounts, including the P&L Account, cannot be prepared as per s.115JB(2) in respect of the world income and laid before the company at its AGM in accordance with s. 210 of the Companies Act. The speech of the Finance Minister and the Memorandum explaining the provision also become out of sync if the meaning of “company” appearing in s. 115JB is adopted as ‘foreign company”. Any other meaning would take away force and life from the true intent of the makers of the Act. The contention of the department that there is no demarcation between a ‘domestic company’ and a ‘foreign company’ while applying s. 115JB is not acceptable. As the applicant did not have a place of business in India and was not required to prepare its accounts under s. 594 r.w.s. 591 of the Companies Act, it could not have prepared its accounts in accordance with the provisions of Part II and III of Schedule VI of the companies Act, 1956.

(ii) Accordingly, s. 115JB is not designed to apply to a foreign company which has no presence or PE in India.