Wednesday, June 10, 2015

The Applicability of Minimum Alternate Tax to Foreign Investors

[The following guest post is contributed by Abhik Chakraborty, who is a 4th year student at NUJS, Kolkata]

The Supreme Court in Ajanta Pharma Ltd. V. Commissioner of Income Tax-9, Mumbai [1] has clarified that the intent with which the provision related to minimum alternate tax (MAT)[2] was inserted in 1996 was to ensure that zero tax companies[3] pay at least a minimum amount of tax on their book profits.[4] The Finance Bill, 2015 has brought about an amendment to Section 115JB of the Income Tax Act, 1961 which has caused a lot of furore in the recent months. The amendment gives powers to the government to levy MAT on the capital gains accruing to the foreign institutional investors (FIIs) and foreign portfolio investors (FPI) prior to April 1, 2016.[5] This has led to a slew of tax notices being issued to FIIs/FPIs based on their past activity. This post aims to trace the jurisprudence available on section 115JB with respect to its applicability to foreign companies in order to understand this issue comprehensively.

The essential question to be examined is whether MAT applied only to domestic companies. In 1998, an advance ruling strictly interpreted section 115JA to state that MAT will be applicable to foreign companies as well.[6] The advance ruling authority (AAR)[7] subsequently held that this advance ruling was unique to the facts of the case wherein the company in question had a physical presence in India. According to the tribunal, if a company does not have any physical establishment, then, it would not be possible for it to comply with the other provisions of S. 115JB. For instance, then, this company would be required to compute its entire global accounts which in itself is a massive exercise. Further, the net profits calculated would not be restricted to profits merely arising out of India. Moreover, under section 591 of the Companies Act, 2013, only those companies which have a physical presence need to maintain a profit and loss account. The tribunal also relied on the Finance Minister’s Speech while placing the budget in 1996 as well as the Memorandum to Finance Bill, 2001 to hold that for foreign companies without any physical presence in India, MAT would not be applicable.

On the contrary, the AAR ruling in Castleton Investment Limited v Director of Income-tax [8] has held that even foreign companies without physical establishments would attract MAT. The 2015 Amendment has been brought about primarily because of this ruling of the AAR. The AAR adopted a literal approach to section 115JB and held that sub-section 1 was the charging provision and sub-section 2 was the computing provision. Sub-section 1 was not dependent on sub-section 2, and as per sub-section 1 companies under section 2(17) of the Companies Act, 2013 included foreign companies. Therefore, there was no reason for the AAR to exclude the application of MAT on such companies irrespective of the practical difficulties which a foreign company has to overcome in order to comply with the computation provisions.

I would like to point out a Supreme Court decision[9] in this regard where it has been held that that the character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging provisions and the computation provisions together constitute an integrated code. Further, it was held,

When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it.

Therefore, the view taken by the AAR in the Castleton case may be questionable in light of the above decisions of the Supreme Court. It is an established fact that foreign companies without any physical presence in India do not need to maintain a profit and loss account as per Schedule VI of the Companies Act. Without such an account, accurate computation would become extremely problematic as pointed out in the Timken Company case. As the charging provision has to be read in light of the computation provision, one may contend that the interpretation of section 115JB would lead us to the conclusion that foreign companies without physical establishments need not pay MAT.

As far as FPIs/FIIs are concerned, every such investor has to appoint a custodian in India.[10] Further, in the case of Fidelity Management & Research Co. v. Department Of Income Tax,[11] it was held that the mere fact that an FII has a custodian does not mean that it has a physical establishment. Therefore, one can contend that FIIs, before the amendment, were not liable to pay MAT if they did not have a physical establishment.

With respect to Double Tax Avoidance Agreements (DTAAs) with other countries, the legal position is that those companies which are incorporated in countries with which India has a DTAA are not liable to pay MAT in pursuance of section 90 of Income Tax Act. The ITAT has held that S. 115JB is subordinate to section 90(2).[12]

This amendment has again demonstrated to the world the unpredictable nature of the Indian government with respect to taxing provisions. Two decades after the introduction of MAT, if the FIIs and FPIs are unexpectedly forced to pay MAT on capital gains, it is bound to affect investor confidence. Due to the heavy discontent expressed by investors, the government has taken steps to ameliorate the situation. Recently, a committee has been appointed under the chairmanship of Justice AP Shah to examine this issue of applicability of MAT on FPIs. The CBDT has also issued a circular instructing its field officers not to file further notices and to not aggressively pursue cases where notices have already been filed. One can only hope that this MAT exemption to FIIs is extended retrospectively. The Supreme Court verdict in the Castleton case is also eagerly anticipated.

- Abhik Chakraborty




[1] (2010) 9 SCC 455.
[2] In the same case, court acknowledged that Section 115JB is a successor to S. 115JA and is the same in essence.
[3] Companies which make profits but do not have a taxable income due to various tax exemptions and deductions under the Income Tax Act.
[4] The term book profit has been defined in 115JA(2) thereto to mean the net profit as shown in the Profit and Loss Account, as increased by the amount(s) mentioned in Clauses (a) to (f), and as reduced by amount(s) covered by Clauses (i) to (ix) of the Explanation.
[5] Clause 29, Finance Bill, 2015.
[6] Advance Ruling P. No. 14 of 1997, In Re, [1998] 100 TAXMAN 1 (Delhi).
[7] The Timken Company v. Director of Income Tax (International Taxation) [2010] 193 TAXMAN 20 (AAR). See also Praxair Pacific Limited v. Director of Income Tax (International Taxation) [2010] 193 TAXMAN 1 (AAR), The Bank of Tokyo-Mitsubishi UFJ Ltd. v.. ADIT ITA Nos. 5364/Del/2010 and 5104/Del/2011, ITAT, Delhi.
[8] A.A.R. No. 999 of 2010.
[9] Commissioner of Income Tax, Ernakulam, Kerala v. Official Liquidator, Palai Central Bank Ltd., (In Liquidation) (1985) 1 SCC 45. See also Commissioner of Income Tax, Bangalore
v.
 B.C. Srinivasa Setty (1981) 2 SCC 460.
[10] Regulation 26, SEBI (Foreign Portfolio Investors) Regulations, 2014; Regulation 10, SEBI
(Foreign Institutional Investors) Regulations, 1995.
[11] ITA No.6648/MUM/2009, ITAT, Mumbai.
[12] Bank of Tokyo-Mitsubishi UFJ Ltd. v. ADIT, ITA Nos. 5364/Del/2010 and 5104/Del/2011, ITAT, Delhi.

4 comments:

Anonymous said...

Just a limited point - It seems that the fact that a foreign co without a presence in India is not REQUIRED to maintain a P/L account does not mean that it falls outside the scope of the computing provision which proceeds on the basis of a P/L account. Presumably the same would only relate to Indian assets.
That said, it also seems like the DTAA bar seems like a sound one which should conclusively determine that MAT isnt applicable to such foreign cos.

Abhik said...

Hi!

As foreign companies do not have a physical establishment in India, its preparation of P/L account in accordance with the provisions of Part II and III of Schedule VI of Comapanies Act cannot be complied. While it is true, that such a foreign company will have a global profit/loss account but the net profits calculated from it would not be restricted to profits arising out of India. Therefore, the computation of the tax as per S. 115JB becomes very difficult.

This difficulty of computing profits just from Indian assets was even recognized by the Castleton case but discarded as a legislative issue. The AAR, in essence, in the Castleton case, stated that the charging and computing provisions in S. 115JB are not dependent on each other. This goes against the Supreme Court judgments on this issue.

Therefore, there is ambiguity with respect to the mode of computation of profits. As the charging provision always has to be read with the computation provisions, my argument is that the the legislature's intention was not to tax such foreign companies. In case of ambiguity with respect to taxing provisions, the benefit of doubt always goes to the assessee.

Ananth said...

A very informative post, Mr. Abhik Chakraborty.

Anonymous said...

Very nice and concise and informative. Good work.