Applicability of amended MAT provisions by the Finance Act 2015 to Foreign Companies on Capital Gains exempt under Section 10(38)

1. 482 July 16 To 31, 2015 u Taxmann’s Corporate Professionals Today u Vol. 33 u 16
Bhadresh Doshi
CA
DirectTaxLaws
MAT on exempt Capital Gains –
Foreign Cos. may get immunity
Introduction
1. Over last few months, a subject of applicability of MAT
to Foreign Portfolio Investors (earlier known as FIIs) in
India has become a matter of concern and has been closely
monitored by all the stakeholders. Much water has flown
under the bridge, as far as this subject is concerned. The
controversy started with the recent issuance of show-cause
notices to FPIs by the Income-tax Department on the levy
of MAT under section 115JB. Thereafter, the amendments
were made by the Finance Act, 2015 to exempt the FPIs
from MAT on their capital gains but only with prospective
effect. Therefore, the Income-tax Department continued with
the assessments of FPIs and levied MAT for the earlier
assessment years.
In the past a similar controversy had arisen in the case of
Castleton Investment Ltd., a Mauritius based entity wherein
the AAR took a view that MAT provisions are applicable
to foreign companies as well even if they do not have any
permanent establishment in India. The matter is now sub-
judice and is pending before the Supreme Court which is
likely to be heard in the month of August, 2015.
Several FPIs have approached the Bombay High Court
against the recent levy of MAT in their cases. Meanwhile
the CBDT has come out with an instruction to the field
officers to expeditiously decide cases where treaty benefit is
available. Though the instruction doesn’t provide explicitly
that treaty benefits should be provided even in case of levy
Whether foreign co. liable to pay MAT on
Sec. 10(38) Capital Gains after Finance
Act, 2015?

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of MAT, the Revenue Secretary has made
a statement that where treaty benefits are
available on capital gains, such benefit will
continue to apply.
Owing to criticism, the Ministry of Finance
has constituted a High Level Committee
headed by Justice A. P. Shah to examine the
issue relating to levy of MAT on FPIs for the
period prior to 1-4-2015. The likely impact
on account of levy of MAT upon FPIs is
expected to cross ` 40,000 crores as per the
news reports. The recommendations of the
Committee are expected by 31st July, 2015.
Without going into the controversy whether
the MAT provisions as contained in section
115JB are applicable to the foreign companies
or not, an attempt has been made in this
article to examine whether the amended
provisions are effective enough to grant the
full exemption from MAT to the capital gains
earned by foreign companies (including FPIs).
Amendment to section 115JB
2. When the Finance Bill, 2015 was introduced,
the exemption from MAT in respect of
capital gains earned by FIIs was proposed by
providing for clause (iid) in the Explanation
1 to sub-section (2) of section 115JB. So,
apart from various deductions from the net
profits as per profit and loss account, one
more deduction was proposed in this clause
(iid) which was as under:
“(iid) the amount of income from capital
gains arising on transactions in securities
(other than short term capital gains
arising on transactions on which securities
transaction tax is not chargeable), accruing
or arising to an assessee being a Foreign
Institutional Investor which has invested
in such securities in accordance with the
regulations made under the Securities
and Exchange Board of India Act, 1992,
if any such amount is credited to the
profit and loss account; or”
The rationale given in the Explanatory
Memorandum to the Finance Bill, 2015 for
exclusion of income from transactions in
securities for FIIs was that such income
is in the nature of capital gains because
such securities are considered to be capital
assets under section 2(14) as amended by
the Finance (No.2) Act, 2014. In the Budget
Speech, it was mentioned that in order to
rationalise the MAT provisions for FIIs, profits
corresponding to their income from capital
gains on transactions in securities which are
liable to tax at a lower rate, shall not be
subject to MAT.
However, at the time of passing of the
Bill, the above provisions were modified to
extend the benefits to all foreign companies
and not only to FIIs and further, to expand
the scope of exemption to include few other
incomes which are taxable on a gross basis.
The objective of altering the amendments was
explained by the Finance Minister as follows:
“The Finance Bill, 2015 proposes to provide
that in case of FIIs profits corresponding to
their income or capital gains on transactions
in securities which are liable to tax at a lower
rate shall not be subject to MAT. There is,
however, an old dispute which is pending in
the Supreme Court. Considering the various
representations received subsequently and
the fact that certain incomes are taxed on
gross basis in case of foreign companies,
I now propose to provide that the amount
of income accruing or arising to a foreign
company from: (1) capital gains arising on
transactions in securities, (2) interest, royalty
or fees for technical services chargeable to
tax at a rate lower than 18 per cent shall
not be liable to MAT.”
The final provisions of clause (iid), as discussed
above, as per the Finance Act, 2015 now
read as under:
“(iid) the amount of income accruing or
arising to an assessee, being a foreign
company, from,—

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(A) the capital gains arising on transac-
tions in securities; or
(B) the interest, royalty or fees for techni-
cal services chargeable to tax at the
rate or rates specified in Chapter
XII,
if such income is credited to the profit
and loss account and the income-tax
payable thereon in accordance with
the provisions of this Act, other than
the provisions of this Chapter, is at
a rate less than the rate specified in
sub-section (1); or”
Is exempt long-term capital gain still out
of the ambit of MAT?
3. An issue which arises here is whether a
long-term capital gain which is exempt by
virtue of provisions of section 10(38) can be
reduced from the book profit by the foreign
companies under the newly inserted clause
(iid)?
If the amended clause (iid) is technically
interpreted, the capital gains arising on
transactions in securities can be excluded from
the “book profit” by foreign companies only
if following two conditions are satisfied –
(i) Such capital gains are credited to the
profit and loss account; and
(ii) The income-tax payable on such capital
gains otherwise is at a rate which is
less than 18.5%.
Therefore, such capital gains can be excluded
from the book profits for the purpose of
levy of MAT only if firstly, they are taxable
under the provisions of the Act other than
provisions of Chapter XII-B (dealing with
MAT) and secondly, they are taxable at a
rate which is lower than MAT rate of 18.5%.
Any income which is exempt under the
provisions of section 10 is not includible in
the total income of the assessee. Therefore,
such exempt income is not chargeable to
tax at all under section 4 of the Act. If any
such income is not chargeable to tax then
income-tax is not payable at all on such
income. Therefore, if a foreign company has
earned a long-term capital gain which is
exempt under section 10(38) then it cannot be
said that the income-tax is payable on such
capital gains but at 0% rate and, hence, less
than 18.5%. Since income-tax is not payable
on such long-term capital gain, technically
the condition mentioned in the later part of
clause (iid) is not satisfied.
Further, the existing clause (ii) in the Explanation
1 allows any income which is exempt from
tax under section 10 to be reduced from the
book profit but excluding long-term capital
gain which is exempt under section 10(38).
Also, proviso to section 10(38) specifically
provides that the income by way of long-
term capital gain of a company shall be
taken into account in computing the book
profit and income-tax payable under section
115JB. In the absence of any amendments to
both these provisions to specifically exclude
foreign company, a view expressed in the
preceding paragraph gets further support.
In fact, if the new clause (iid) is interpreted
to exclude the long-term capital gain which
is exempt under section 10(38) then it will
contradict the provisions of clause (ii) and
proviso to section 10(38).
However, a foreign company can still contend
that it is not liable to MAT on such exempt
long-term capital gain. One of the reasons
for such a view could be that the second
condition regarding the income-tax being
payable on such gain would be relevant
only when it is chargeable to tax. If long-
term capital gain is not chargeable to tax
due to provisions of section 10(38) then the
condition regarding income-tax payable at
a rate lower than the MAT rate of 18.5%
would become irrelevant. In clause (iid), the
words “chargeable to tax” have been used
specifically but only with respect to interest,
royalty, fees for technical services and not
for capital gains. Further, if the benefit of
Direct Tax Laws

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exemption from MAT is denied on account
of such technical interpretation then it will
result into an absurdity whereby long-term
capital gain which is taxable @10% will be
out of MAT but not the long-term capital
gain which is exempt.
One may also rely on the purposive interpretation
to argue that any capital gain which is either
exempt or taxable at a lower rate should be
excluded from the book profit of a foreign
company. However, if the legislative intent, as
brought out in the FM’s speech on both the
occasions, is considered then such purposive
interpretation may go against the foreign
company. This is because there it was clearly
mentioned that the capital gains which are
liable to tax at a lower rate shall not be
subject to MAT. It has never been mentioned
that all the capital gains including exempt
capital gains shall not be subject to MAT.
Hence, a foreign company (including FPI)
may be taxed effectively @ 20% (including
surcharge and cess) under section 115JB on
its long-term capital gain arising out of STT
paid transaction, which is otherwise exempt
under section 10(38). A similar difficulty may
also arise in a case where the taxable capital
gains of the current year have been set-off
against the brought forward capital losses
and, therefore, effectively no tax is payable
on them in the current year. This is assuming
that the Supreme Court would uphold the
applicability of MAT in the hands of foreign
companies and relief under the applicable
DTAA is not available.
Conclusion
4. For providing the benefits of exemption
from MAT to foreign companies with respect
to their capital gains, interest, royalty or fees
for technical services, there was no need of
providing a condition that tax should be
payable on them at a rate lower than the
rate of MAT. This is because if the tax is
payable on them at a rate higher than the
rate of MAT, then the company would never
fall into the provisions of section 115JB.
Though the entire focus at present is on
the levy of MAT for the period prior to 1st
April, 2015 in the cases of FPIs, yet there is
an urgent need to address the issue raised in
this article to ensure that foreign companies
are not deprived of the exemption from
MAT on exempt long-term capital gains of
current period.
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