Uncertainty over MAT on foreign firms without place of biz

Even as former law commission chairman Justice A P Shah has suggested his committee's recommendation of providing relief to foreign institutional investors (FIIs) from minimum alternate tax (MAT) will also apply to foreign companies without a permanent establishment (PE) or a place of business in India, experts are not fully convinced.

Tax experts believe that since the scope of the committee was only about FIIs and foreign portfolio investors (FPIs), clarity on whether the recommendations will also extend to foreign companies without a PE in India will depend on the fine print of the actual amendments of the income tax Act provisions, expected in the winter session of Parliament.

The finance ministry had on Tuesday formally accepted the recommendations of the Shah Committee to withdraw all cases of MAT on FIIs prior to April 1, 2015, and said it would move amendments in the contentious provision of the income tax Act Section 115JB.

On whether the panel's recommendations are applicable to foreign companies not having PE in India, Shah told Business Standard in an interview, "Naturally, as our reasoning is based on this reading of the law. Therefore, a foreign company which doesn't have a PE or a place of business in India will not be liable to pay MAT."

However, experts argue that the statement might not automatically apply to foreign companies with no PE in the country as this was not part of committee's terms of reference and, therefore, would have no legal backing.

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"The terms of reference of the committee were only FIIs and FPIs. So, there is no legal backing to apply it to non-FPIs with no PE. However, foreign companies may rely on the amendment to the Income Tax Act based on the report as a precedent," said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.

According to the terms of reference, the Shah committee will examine the matter relating to levy of MAT on FIIs for the period prior to April 1, 2015. The committee will also examine all the related legal provisions, judicial, quasi judicial pronouncements and such other relevant aspects as it may consider appropriate.

"I don't think the recommendations will apply to foreign companies with no PE. That aspect is not clear. However, it may depend on the language of the amendments to be made by the government, if it can cast net so wide to say it will cover foreign companies with no PE," said Ranjeet Mahtani, partner, Economic Laws Practice. The issue assumes importance since a case relating to Castleton, which is a foreign company with no PE in India, is coming up in the Supreme Court by the end of this month.

Shah said, "I am not sure how it will play out in the courts, but at least as per the committee's report, if Castleton has no PE or a place of business in India, it would be entitled to the same relief."

Manoj Purohit, partner, Walker Chandiok & Co LLP, pointed out that the report will only have a persuasive value as far as foreign companies with no PE are concerned. "The report has made some observations on past rulings, which will have a persuasive value. On that basis, the same logic should apply to companies as well," he said.

Purohit added that the matter for foreign companies will become clear only after reading the fine print of the amendments that governments makes in Section 115JB of the I-T Act. This section deals with MAT.

An instruction issued by the Central Board of Direct Taxes to field officers says it has been decided to carry out appropriate amendment in the I-T Act to prescribe that MAT provisions will not be applicable to FIIs and FPIs not having PE in India prior to April 1, 2015. So, companies did not figure in this instruction.

"Justice Shah's view may be correct on the Castleton case, but it was not the scope of the committee. Let the matter come up for hearing in the SC, that is when the government will put out its say on the matter," Mahtani added.

The income tax department had sent notices to 68 FIIs, demanding Rs 602 crore as MAT dues for earlier years.

Earlier, the Authority of Advance Rulings had ruled that MAT was applicable on Castleton. The Shah committee suggested that Castleton case was erroneously decided.

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