The provision pertaining to minimum alternate tax or MAT under section 115JB of the Income Tax Act, 1961 (‘the Act’) provides that in case the tax payable on the total income of a company in respect of any previous year, computed under the Act, is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of such company.
A controversy, however, had arisen on the applicability of MAT on Foreign Institutional Investors (‘FIIs’) due to inconsistent rulings of the Authority for Advance Rulings (‘AAR’) on the issue. Based on the rulings in favor of the revenue which held that MAT was applicable to foreign companies even though they had no permanent establishment in India, the income tax department started issuing notices and finalized assessments while raising MAT demand on various FIIs on capital gains made by them.
In order to rationalize the MAT provisions, an amendment was made vide Finance Act of 2015 under section 115JB of the Act excluding the income of foreign companies earned in relation to capital gains arising on transactions in securities, interest, royalty or fees for technical services, etc. from the chargeability of MAT. However, the amendment was intended to only apply prospectively from April 1, 2015, i.e. assessment year 2016-17 and therefore there was no clarity on whether MAT provisions apply to FIIs for the preceding years.
The aforesaid controversy prompted the Government to constitute a committee to examine the matter relating to levy of MAT on FIIs for the period prior to 01.04.2015 and give its recommendation on the said issue. Thus, a high level committee was set up under the chairmanship of Justice (Retd.) A.P. Shah, popularly known as the A P Shah Committee to investigate the applicability of MAT on FIIs. In its report, the Committee recommended that MAT cannot be applied to FIIs and foreign companies not having a permanent establishment in India or a place of business in India and recommended that an amendment be made to Section 115JB of Act or that the CBDT issue a circular clarifying the complete inapplicability of the MAT to FIIs/ FPIs.
The Report states that Section 115JB of the Act is not applicable to FIIs/ FPIs because the term “Company” means only companies covered by the Companies Act. Foreign companies are not required to prepare profit and loss account under the Companies Act. They are also not required to present the profit and loss account before an annual general meeting, as has been provided for under the MAT provisions of the Act.. If the applicability of MAT is extended to FIIs, it would require them to prepare their global accounts and lay them before an annual general meeting. Furthermore, under the SEBI (Foreign Portfolio Investor) Regulations, 2014, FIIs are not mandated to maintain books of accounts as provided under the Companies Act.
The Committee has also noted that “place of business” means a permanent and specific location in that country from where a company habitually and regularly carries on its business. Since, FIIs do not have any physical presence in India, Section 115JB does not apply to FIIs.
The Government has accepted the recommendation and accordingly issued an instruction stating that necessary amendments would be brought into the Act to clarify the inapplicability of MAT provisions to FIIs/ FPIs not having a place of business/permanent establishment in India for the period prior to April, 2015. The CBDT has also directed the field officers to keep the pending assessment proceedings in case of FIIs/ FPIs in abeyance and to not pursue recovery of outstanding demands.
The CBDT on September 24, 2015 has further issued a press release clarifying that with effect from April 1, 2001, the provisions of section 115JB of the Act shall not be applicable to a foreign company, if :
- the foreign company is a resident of a country having DTAA with India and such foreign company does not have a permanent establishment within the definition of the term in the relevant DTAA, or
- the foreign company is a resident of a country which does not have a DTAA with India and such foreign company is not required to seek registration under Section 592 of the Companies Act, 1956 or Section 380 of the Companies Act, 2013.
An appropriate amendment to the Act in this regard will also be carried out.
Most pertinently, the AAR in 2012, in Castleton Investment Limited:  348 ITR 537 had held that section 115JB of the Act was applicable to foreign companies. It was the effect of this very ruling that the income tax department started raising MAT demands on various FIIs. The company challenged the correctness of the AAR ruling before Supreme Court through a Special Leave Petition. Very recently, the Supreme Court was prompted to dismiss the said petition after the Government agreed to abide by its own circular of exempting foreign companies from paying MAT if they didn’t have a permanent place of business in India.
This clarification will end the confusion over the applicability of MAT on foreign companies that invest in India through the foreign direct investment or venture capital route, without creating a presence here. As in the words of Justice A. P. Shah, “the government has avoided huge litigation with 68 notices and the right signal has gone to the investors.” the Government’s approach in conclusively resolving the MAT issue is a step in the right direction which would instill confidence in foreign investors by providing predictability and tax certainty to them.