Controversy on the applicability of MAT to foreign companies and FIIs - K. R. Girish - Article published in Business Advisor, dated April 25, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XI Part 2 April 25, 2015 16 Business Advisor
Controversy on the applicability of MAT
to foreign companies and FIIs
K. R. Girish
The proposal to amend section 115JB through the
Finance Bill of 2015 while seeking to put to rest the
controversy brewing in the taxation of foreign
institutional investors (FII), may be the starting of a
larger controversy in applying minimum alternate tax
(MAT) on income of other foreign companies/ investors.
Are FIIs getting preferential treatment?
It is true that FIIs have emerged as a mainstay of the
domestic markets over the years. But that does not mean that other foreign
investors -- especially foreign direct investors -- get subjected to a MAT on
sale of their investments or other incomes despite considering double tax
avoidance agreements that India has with other countries.
To understand the controversy and the storm that it may lead to, let us step
back to understand the proposed amendment in the Finance Bill of 2015.
The Finance Bill of 2015 seeks to insert a new clause (iid) in Explanation 1
so as to provide that the amount of income from the transactions in
securities accrued or arising to an assessee being an FII, if any such
amount is credited to the profit and loss account, shall be reduced from the
book profits. A corresponding provision is sought to be inserted as a new
clause (fb) in Explanation 1 that increases the book profit by the amount of
expenditure relatable to the income from transaction is securities accrued or
arising to the FII.
It is interesting to note that the explanation being inserted by the Finance
Bill, 2015, only seeks to cover ―income from the transactions in securities‖
and ―assessees being FIIs‖ thereby keeping other classes of foreign investors
in the dark on applicability of MAT on various income streams they may be
earning from India. It is increasingly clear, based on the latest flurry of
Advance Rulings1, that the provisions of section 115JB relating to MAT
apply equally to a foreign company whether having a presence in India or
otherwise.
1
Castleton Investment Limited AAR No. 999 of 2010 dated August 14, 2012 and ZD, in re* AAR no. 1098 of
2011 dated June 8, 2012

2. Volume XI Part 2 April 25, 2015 17 Business Advisor
In brief, the rulings in question held that MAT provisions apply to all
companies including foreign companies. Referring to the language of section
115JB(1) of the Act, the AAR held that there was nothing in the language
which suggested that foreign companies were kept outside the purview of
the charging section 115JB(1).
It also ruled to the effect that any difficulty in computation of book profits
for MAT purposes for foreign companies cannot be a reason to say that the
provisions of MAT do not apply to such companies. In coming to this
conclusions, the AAR also noted the amendment made by the Finance Act,
2012, spelt out specifically that certain companies (banking, insurance and
electricity companies) could be governed by their respective statutes in
preparation of accounts but would still be required to pay MAT as computed
under section 115JB(2).
The point made by the AAR in the Timken ruling2 that the meaning of the
word ‗company‘ as used in section 115JB, is to be ascertained in the context
in which it has been used [as also used in the definition of the word
―company‖ in section 2(17)] in sub-section (2) of the section is therefore
important and has to be argued before tax authorities.
Section 115JB(2) requires every company to prepare its profit and loss
account in accordance with the provisions of Schedule VI of the Companies
Act, 1956, for the relevant previous year. The section requires every
company assessee to prepare its profits and loss account (P&L account) for
the relevant previous year in accordance with the provisions of Schedule VI
of the Companies Act. While preparing such annual accounts, the
accounting policies, etc., should be the same as have been adopted for the
purpose of preparing such accounts, which are laid before the company‘s
annual general meeting. Where the company has adopted or adopts a
financial year under the Companies Act, 1956, which is different from the
previous year under the Act, the accounting policies adopted for preparing
such accounts and calculating the book profit should correspond to the
accounting policies adopted for preparing accounts for such financial year
or part of such financial year falling within the relevant previous year.
This could literally mean that every foreign company will be required to
compile its entire global accounts in accordance with Schedule VI of the
Companies Act, 1956, because under section 2(17)(ii), company includes a
foreign company. Recasting the entire global accounts in this manner is
itself a massive exercise. Secondly, for the purpose of adjustments as
provided in the Explanation in sub-section (2), as the net profits disclosed
2
The Timken Company AAR no. 836 of 2009 dated July 23, 2010

3. Volume XI Part 2 April 25, 2015 18 Business Advisor
by the global profit and loss account would be the starting point, a foreign
company may end up paying income-tax on its entire global income which
may not have accrued/ arisen or received in India. In the absence of any
specific guidance provided for computation of book profits in the case of
foreign companies in the statute, it is difficult to accept that the Legislature
had intended to make the foreign companies chargeable to MAT.
It is, therefore, equally important for the tax department to answer as to
when there would be a need to compare book profits with the income
computed according to the normal provisions of the Act.
If such a computation is not required at all, and there is no need for a
foreign company to maintain its books of accounts as per Schedule VI of the
Companies Act, 1956, the provisions of section 115JB cannot be invoked.
This becomes very relevant where a protection under a particular double tax
avoidance agreement is sought to be invoked.
Many foreign companies claim treaty protection under section 90 of the Act
and offer different streams of income such as royalty, fees for technical
services, dividend, interest, etc., for tax at concessional rates (as compared
to rates under the Act). In some cases, the foreign companies also claim
complete exemption from tax in India on the basis of DTAA. Thus, if the
proposition that MAT applies to foreign companies is accepted, then in every
case, despite treaty protection, tax under MAT could be payable. Simply
because the opening sentence of section 115JB begins with
‗notwithstanding anything contained in any other provisions of this Act,‘ it
cannot be interpreted to override section 90. In such event, it leads to
absurdity.
In the absence of guidance, the tax department can interpret that the
provisions of 115JB would seem to apply to all foreign companies (other
than capital gains of FIIs) irrespective of whether income is chargeable to
tax in India or otherwise, and this anomaly would need to be put to rest.
Prospective or retrospective?
Another controversy that stems from the proposed amendment of section
115JB is that the government seems to be proposing to amend the law to
take effect from April, 1, 2016. There is thus this controversy that the
amendment to exclude FIIs from the ambit of MAT will apply in relation to
the assessment year 2016-17 and subsequent assessment years.
So, even the FIIs do not seem to be spared from the capital gains earned in
the past.

4. Volume XI Part 2 April 25, 2015 19 Business Advisor
This is also clear from the behaviour of the tax department who have, till
March 31, issued notices for collecting this MAT. It is likely that these
notices will be followed up with Assessment Orders.
We also need to bear in mind that section 115AD, relating to tax on income
of FIIs from securities or capital gains arising from their transfer, taxed
long-term capital gains at the rate of 10% and short-term capital gains tax
at the rate of 30%. This specific provision was introduced by the Finance
Act, 1993, and it continues to be applicable to FIIs.
This provision was watered down with the introduction of the exemption
under section 10(38) with effect from AY 2005-06. Section 10(38) exempted
income of all kinds of assessees that was earned from the transfer in the
nature of long-term capital gain. There is however, the specific proviso that
long-term capital gain income of the company shall be taken into account in
computing the book profit and income-tax payable under section 115JB. So,
a position, that if a foreign company were to claim exemption under section
10(38) then it may be exposing itself to MAT, may be a reality.
Conclusion
To conclude, the provisions of section 115JB have transgressed into what
was not at all contemplated as per the original mandate when the provisions
were introduced, simply to bring into tax companies which were paying zero
tax due to depreciation and other capital incentive claims. Now, the
amendment, in fact, has created a fresh set of controversy, and with
staggering tax demands, i.e., over Rs 40,000 crore, for the past years, the
same has assumed major proportions.The recent press statement by the
Revenue Secretary makes it all the more clear that the Government is in no
mood to come out with any clarifications but may be inclined to go by the
judicial ruling of the Court whether same needs to apply retrospectively as
well overrule the Castleton advance ruling.
In a very recent interaction to the press, the Revenue Secretary and the
CBDT Chairman have clarified that where an FII or foreign investor is
entitled to treaty benefits being investment from Mauritius and Singapore
where the capital gain is exempt from Indian tax, there would not be any
MAT liability on such income. A welcome move to reduce the tax
uncertainty, nevertheless FIIs would need to satisfy the tax authorities that
they are entitled to treaty benefits?
So, one can see a bout of litigation on this front for finality in this matter.
(K. R. Girish is Senior Partner, LeapRidge Advisors LLP. He acknowledges
inputs from his colleague, R Sridhar.)