Applicability of MAT to foreign investors

by Siddhartha Iyer

Minimum Alternate Tax, or MAT was introduced in the year 1996, with the intention of taxing zero tax companies, and has been the subject of debate ever since. It has recently caught the attention of the media, once the matter had reached the Supreme Court. It was introduced in the year 1996, at a low rate of 7.5% of an entities “book profits” and has slowly and steadily risen to 18% of the book profits of an entity, as the minimum tax they are obliged to pay.

The Question of law that is the centre of heavy debate today, is whether MAT is applicable to foreign companies, including those without a physical presence in India.

MAT is levied on companies under section 115JB of the Income Tax Act:

(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012 is less than eighteen and one-half per cent of its book profit, 6[such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.

(2) Every assessee,–

(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956(1 of 1956); or

(b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956(1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company:]

The First case dealing with this matter was The Timken Case.[i] In this case the Applicant wanted to know the applicability of the MAT provisions, on a transaction of sale of shares of an Indian Company. The applicant was a foreign company with no physical presence in India, and therefore was not statutorily required to comply with the provisions of the Companies Act, 1956. The wording of MAT provisions is such that they suggest that the “book profit” on which MAT would be charged may be calculated on the basis of the returns filed by the Company, with the Registrar of Companies. The Authority, took this is in a literal sense, and opined that since the Applicant, Timken were not obliged to file a statement of Profit and Loss, the provisions of MAT could not be applied to them.

This issue was up for contention again, in the Castleton Case[ii]

This time around, the authority took a different view. In this case, much like the Timken Case, a foreign entity with no physical presence in India, transferred shares of an Indian Company for Consideration. The question of law once again, was whether the provisions of MAT could be applied to the applicant. The Authority this time had a different opinion. They interpreted wordings of section 115JB with regard to “book profit” in a general sense, as opposed to the strict sense that was followed in Timken. They also viewed clause (2) of the Section as suggestive and not strict and opined that the reason that they were not statutorily required to submit accounts, does not exempt them from attracting the provisions of MAT. The applicant was therefore made to pay MAT in the case.

This decision lead to the over-zealous revenue service opening up the accounts of several other investment portfolios, which has created the need for the Supreme Court to intervene. Castleton has appealed the decision of the AAR, and both the Government and Castleton Investment Portfolio have agreed to expedite the case, only after which the true nature of MAT and its applicability shall be revealed.

On a concluding note, it seems apparent that foreign entities attract the provisions of MAT, after the Authorities ruling, as things stand. It is important to note that the AAR themselves have announced that their decisions are subjective, and do not have objective law points per se. They have also admitted that their decisions have a mere persuasive value, and can never be construed to be binding, thus this ruling at the end of the day may hold no water, and it is only the Supreme Court that can clarify this position of law, and it has to tread carefully. On one side, there are a money-hungry institutional investors, taking advantage of the Mauritius Treaty, and not paying tax, and on the other there is the risk of driving away foreign investors, and the inability to create the image of an investment friendly country which is a part of the BJP’s manifesto.

I personally feel that foreign entities who make a sizeable profit, by the sale of an Indian Company’s shares, or any other activity that accrues in India, ought to be taxed in India. That is to say, that the Authority, in my opinion was right in their interpretation of section 115JB in the Castleton case. One thing that can be certain is that our parliament has once again, in its hurry to increase its net revenue, not paid great attention to detail, and as always left a lot to be interpreted in the drafting of this section.


Siddhartha Iyer is a fourth year student at HNLU


end notes 

[i] Timken Company v. Director of Income Tax (International Taxation) [2010] 193 TAXMAN 20 (AAR)

[ii] Castleton Investment Limited v Director of Income-tax A.A.R. No. 999 of 2010.

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