Authority for Advance Ruling (AAR)-
Self-contradicting Rulings (A Critique)
Historically, in the Indian income tax regime, by and large, there has always been more than a justifiable cause for taxpayers, in general, and foreign taxpayer-companies in particular, in clamoring for, besides ‘simplification’ of the law, a hassle- free implementation and administration. So much so, they are obliged to feel frustrated but keep on persisting, hoping on hopes, in efforts for a non-adversarial treatment from the Revenue. In the recent years, no marked improvement has, however, come to be noted. Instead, if at all, any steps taken and worth a mention, -including so-claimed rationalization measures attempted through annual fiscal budgets, with the aim of reformism, - has failed to bring about the most desired outcome. And those have come to be widely regarded and criticized as retrograde, rather regressive, rendering the scenario, of course from the taxpayers’ angle, tending to change from bad to worse. The root causes have come to stay and continue as an obsession, stubbornly, over the decades. An attempt has been made herein, to touch upon the most outstanding and long enduring root causes.
1. Recently, an instance of a very recent origin has come to be reported and given publicity of its kind in the media. The reference is to the report (s) under sensational headlines:
1.1. A random selected portion of the first mentioned report reads:
“When contacted by TOI, senior officials said that the Authority for Advance Rulings had ruled in tax department's favour, which allows it to levy MAT on capital gains. But the government has proposed to amend the law after FIIs cited concerns. The offshore funds, however, said these "amendments will take effect from April, 1, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years".
Such an official explanation may serve the purpose of a backdrop, for a broad understanding of what that is all about. Nonetheless, it is prima facie too confusing to be readily understood by anyone wishing to know more; hence calls for a further probe.
1.2. A quick search goes to reveal that, contrary to the offhand impression, the confusing piquant situation has arisen because of mutually contradicting AAR Rulings; more so, because of the latest, which contradicts an earlier Ruling and proves to be adverse to foreign companies.
2. AAR’s Advance Rulings:
The Rulings need to be mainly looked through are available in public domain @
(For discussion herein, the two Rulings are referred to, in short, as in ,- Timken and Castleton case.)
The common question / proposition so covered on which the Rulings are contradictory to each other, selected for an independent analytical study herein, in pith and substance is this:
Whether or not MAT (section 115 JB) applies to a foreign company, whose status for taxation in India is that of a non-resident; more so, if it has the only income by way of ‘capital gains’ but not chargeable to tax in India by virtue of the applicable ‘tax treaty’?
2.1. In Timken case the Ruling is in its favour; holding that, - a foreign company, which has no ‘physical’ presence (or ‘PE’) (within its tax treaty meaning) in India, having only ‘long-term capital gains’ (within its statutory meaning), is not liable to MAT.
The grounds/reasoning as stated in the Ruling may be summed up as under:
(a) In terms of the relevant sec. 591 of the Companies Act, only foreign companies who have established a place of business within India have to comply with the requirement of preparation of a balance sheet and profit and loss account as per s. 594. As such, the obligation as envisaged in sec. 115JA(2), to “prepare a profit and loss account in accordance with Parts II and III of Schedule VI” is of no relevance and cannot apply to a foreign company to which the sec 591 requirement does not apply.
(b) The relevant Budget Speech, so also the Memorandum & Notes on Clauses explaining the purpose of introduction of s. 115JA, make the legislative intent and the legal position clear- that is, to the effect as mentioned in (a) above;
(c) The contention of the Revenue that Sec 115 JB requires no distinction to be made between a ‘domestic company’ and a ‘foreign company’ is not acceptable.
As Timkon 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 (in the normal course) prepared its accounts in accordance with the provisions of Parts II and III of Schedule VI to the companies Act, 1956.
In essence, the Ruling is to the effect that it is NOT THE LAW that, regardless of other material and vital aspects or considerations, every foreign company is under an obligation to prepare accounts; so as to attract MAT.
NOTE: It calls for a pointed mention that, while in the Explanation under sec. 115 JB, the host of items requiring adjustments for reckoning the “book profit” for its purposes, include also items NOT debited or credited to the ‘profit and loss account’, the requirement in sub-section (2) is to prepare “its profit and loss account”; albeit succeeded by the phrase “in accordance with...”. As viewed, there is an element of incompatibility; which, perhaps, calls for a separate study, for ascertaining the legal implications and special significance, if any. For the nonce, the gut feeling is, that could be taken to provide a clue to support the viewpoints set out and urged in the succeeding sub-paragraphs (i.e. 2.2., 2.3. and 2.5.)
2.2. In Castleton case, the AAR is seen to have chosen not to follow its ‘own’ earlier Ruling (in Timken case). The grounds /reasons stated for doing so, however, with due respect, but honestly speaking, are not at all clearly understood. In any case, if were to be independently perceived, in one’s conviction, the Ruling in Timken case bears out a much better view, the logic behind being apparently quite sound; and not amenable to be rightly faulted for any reason.
2.3. For a better appreciation in proper light as to why one could say so, the following added points may help:
In Castleton case, the observations seeking to explain, - to the effect as to why, in preference to the Ruling in Timken case, - an earlier Ruling (citation 234 ITR 335) is followed, are set out in concluding paragraphs 37 and 38; selected portions thereof read:
Surely, there is no need to restrict or warrant for restricting the operation of these two sections in the Act in the absence of any compelling circumstance. In this context, with great respect, it appears to me that the reasoning in the Ruling in 234 ITR 335 is impressive. I am respectfully inclined to follow that reasoning. The circumstances highlighted in Timken Ruling have been dealt with and explained in 234 ITR 335, followed in Niko Resources Ruling (234 ITR 828).
On a reading of the Section 115JB it can be seen that sub-section (1) thereof imposes the liability to be taxed and sub-section (2) only charts out the procedure for calculating the taxable profit. In fact sub-section (2) casts an obligation on a company to which section 115JB (1) is attracted to prepare an account in terms of the Companies Act, 1956. It is not as if the liability to be taxed depends on the obligation to prepare an account in terms of the Companies Act, 1956. The liability to tax depends on the profit earned or deemed to be earned. The deemed profit is specified in sub-section (1) and the rate of tax is also specified. Only the mode of determining the book profit is left to sub-section (2) and a duty is cast on the assessee to determine the book profit as set out in sub-section (2). Taking note of the inconvenience that may be caused by this mandate to some of the companies coming under the proviso to section 211(2) of the Companies Act, the requirement to comply with the mandate has been done away with by the Finance Act, 2012, leaving untouched the liability under sub-section (1) of that section. This also would support the soundness of the reasoning in 234 ITR 335 and would indicate that section 115JB (1) of the Act always subjected even the companies coming under the proviso to section 211(2) of the Companies Act. Section 115JB is the overriding provision. It overrides all the other provisions in the Act. It is the overriding charging provision. It is clear. It provides for payment of income-tax by an assessee, which is a company. That company normally, is a company of whatsoever hue, or in the alternative, a company as defined in the Income-tax Act. There is no warrant for borrowing the definition of a company from section 3 of the companies Act, 1956. Merely because sub-section (2) of section115JB refers to the Companies Act, it does not mean that the definition from therein has to be borrowed. There may be practical difficulties for foreign companies to prepare an account in terms of Schedule VI of the Companies Act, but that is no reason to whittle down the scope of section 115JB of the Act. The difficulties are for the legislature to consider and remove and not for this Authority. In fact, the difficulties in respect of some of them are now sought to be removed by the amendment made by the Finance Act, 2012.” Section 115JB of the Act overrides section 34 to 48 of the Act. So by reading section 115JB as confined in its operation to domestic companies alone, one may be doing violence to the special scheme of taxation adopted for taxing certain companies. Unless there are compelling reasons no such interpretation is justified. There is no compelling reason to jettison the scheme of taxation adopted by the Act by reading down section 115JB as confined in its application to domestic companies alone.
2.4. The two Rulings of AAR on the issue of MAT are mutually contradicting; in that, in Castleton case the Ruling has turned out to be adverse to the Petitioner, whereas in the previous Timken case it is in its favour. The matrix of facts, of relevance, on comparison, indisputably, is no different but is on all fours. As might be perceived, if at all, the cause for the contradictory Rulings seems to lie in having read and understood the implications of the cinching sub-section (2) of section 115JB differently.
Said sub-section (2) of relevance (without its later amendments) reads:
“(2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):“
In Castleton case, the provision, as stands to be inferred, has been read and understood, in a truncated fashion - if so wrongly, - as if, it reads:
“(2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year, AND in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):“(FONT supplied; if read with the added imaginary conjunction AND, will mean’and which shall be’)
As per the Ruling in Castleton case, the justification given by the AAR to depart from that in Timken case has been stated thus:
“... This section does not need any aid from tools of interpretation for its understanding. It is plain and clear. Sub-section (2) of section 115JB which is sought to be shoved in to deprive sub-section (1) of its width actually reaffirms the independent operation of sub-section (1). It exhorts every company, for the purpose of sub-section (1) to prepare its profit and loss account as provided for therein. The operation of sub-section (1) does not depend on the applicability of sub-section (2). It is on the applicability of sub-section (1) that the obligation under sub-section (2) arises. It is a fallacy to think that unless sub-section (2) is independently attracted, sub-section (1) also cannot be operated. Sub-section (2) gets attracted when sub-section (1) operates proprio vigorie. It is for the purpose of the section that the account has to be prepared as detailed therein.”
2.5. To critically consider and incisively form an independent opinion as to which of the two Rulings is founded on sound reasoning and logic, the following well known principles of ‘Interpretation ‘,- besides certain others such as, ‘Mischief Rule’, ‘Harmonious Construction’, and ‘Punctuation’ - may have to be usefully summoned for aid:
(a) ‘Causas Omissus’; and
(b) ‘Principle of Beneficial Interpretation’.
For knowing more as to why, as implied, the underlying scheme of sub-sections (1) and (2) of sec. 115 JB cannot be clearly and rightly understood, without seeking guidance from the aforementioned rules and principles, it is recommended to go through the expert commentary and cited case law < in the leading Palkhivala’s Text Book (Tenth Edition, Volume I, page 16).
Aside: On the principle of ‘Punctuation’, and its importance or otherwise as an aid for appropriate and proper guidance, according to a school of thought, punctuation need not be given so much importance, as a puritan may nonetheless wish and hope for.
That could not have been normally expected to be otherwise; more so, in the commonly given context of our modern times, in which clumsy drafting, framing and structuring of any enactment on one hand, and confused understanding and inevitable messing up of the legal regime on the other, have come to be growingly recognised but yet come to stay as the hallmark of today’s legislation and/or judicial interpretation.
Should care to and scout around (say, through Google search), anyone should be able to locate a plethora of interesting material , holding out a different school of thought founded on a varying stroke of reasoning. For instance, look up the random chosen bizarre century old episode, but in criminal law regime, – HERE >
(THE CASEMENT CASE)
Even so, the point of grave doubt and real concern herein really is, whether at all a punctuation (or a conjunction such as ‘AND’) is permissible to be supplied for the purpose of construing an enactment.
3. Other Aspects
Urging the need to specially focus on:
(A) The concept of (Tax) ‘Treaty Override’ is well settled and long accepted; and there is no reason why it could be taken to be otherwise. In the Ruling in Castleton case itself, the admitted position is that the only income of the foreign company by way of capital gains is not chargeable to income tax in India. That is equally so / explicit in AAR holding that Sec 195 requirement of TDS has no application. Still to say that it could be taxed (via backdoor) by invoking section 115 JB , one strongly feels, goes to offend , besides legal sense, so called ‘common sense’ as well. Also flies in the face of the time honoured concept of ‘Treaty Override’, apart from the practical wisdom underlying the doctrine, - Stare Decis; last but not the least, the wisdom behind the Ruling in Timken case
(B) Reverting to the media report mentioned at the outset, that it does make a mention of the Act being amended but prospectively. On a plain reading and understanding, also reading in between lines, the indelible impression one left with is that, seeing the hazardous potentials the Ruling in Castleton case has, the law is, as indicated by the FM repeatedly since on several occasions, proposed to be amended. The reasonable expectation is that, the intention is to clarify inter alia that MAT is not to apply to foreign companies; with the only exception being those required to comply with the company law provisions even in the normal course. Ostensibly, that should ward off or obviate the otherwise inevitable unintended and unpalatable consequences. On that premise, there appears to be no reason why for a change, contrary to the indication, the proposed amendment ought not to be made retrospective; thereby save from and avoid, - for the common benefit of one and all truly concerned,- inconclusive litigation , entailing in- fructuous waste of valuable time and energy for both taxpayers and the Revenue .
One of the great Jurist of yesteryears, Will Durant, when asked, though in a different context, what he thought of the world situation, is quoted to have said, -"The world situation is fouled up. It has always been fouled up. I see no reason for change".
Perhaps, what he meant to say was that there could be no change for any better. However, there could imaginably be nothing coming in the way of any Government and/or its authorities, given the necessary will and initiative, to stop the world from being fouled up any more. The discomfortingly nagging question in anyone’s mind, lastingly for decades, is this: Why cannot the two essential functionaries duly empowered under the Indian Constitution namely, the Executive and the Judiciary, the nation being globally the richest of all in cultural heritage and spiritual values, decide to make a concerted effort and give it a try for the benefit of its own people?
Quoting late Nani A. Palkhivala, a tax expert in its true sense, and a distinguished humane counsellor:
"The bewildering complexity of tax laws is coupled with the hyper-technical spirit in which the laws are being administered. The words, ‘The Letter Killeth’ should be inscribed over the portals of every income-tax officer."
Yielding to an irresistible temptation, to add: Should that, perhaps, not be so inscribed, also over the portals of the draftsmen of our laws; and in the portals of courts as well?!
The discussion herein above may not really be complete without the following quotes, rich in wisdom, which seem to aptly fit into the context:
“At least… million of our citizens are contributors to the national product... To every economic policy and legislation we must apply the acid test – how far will it bend the talent, energy and time of our people to fruitful ends and how far will it dissipate them in coping with legal inanities and a bumbling bureaucracy.”
“The lawyer has to act as a catalyst. The responsibilities, which today lie on the shoulders of the lawyers, are far greater than at any earlier time in world history.”
(Source: Books – “We the Nation” and “WE THE PEOPLE” < Inside, late N A Palkhivala’s articles and speeches)
B.Sc., B.L., FCA
Disclaimer: The foregoing discussion, in brief, is intended to convey and share one’s own independent thoughts and viewpoints, based on a study of the covered limited aspects. Welcome to share, should anyone, especially competent law experts at large, active in field practice, entertain any doubt or happen to entertain a better view to offer after an in-depth study, so as to serve the objective of common good.