India: Government Accepts Recommendation Of Justice A.P Shah Committee On Inapplicability Of MAT To FIIs/FPIS

On September 1, 2015, through a press release, Information Bureau of Ministry of Finance, Government of India had declared its acceptance to the recommendations of Justice A.P. Shah Committee on applicability of Minimum Alternate Tax (MAT) to Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs). The Committee had recommended that section 115JB of the Income Tax Act, 1961, will not be applicable to FIIs/FPIs not having place of business/permanent establishment in India, for the period prior to 01.04.2015.


The concept of MAT was introduced in India vide insertion of Section 115J in the Income Tax Act, 1961, in the year 1987 to facilitate the taxation of "zero tax companies". While introducing this concept, the lacuna which the government wanted to fill was the avoidance of tax by many companies who despite showing high profits in their books of accounts and paying substantial dividends, were paying marginal or no tax, by taking advantage of various tax concessions and other incentives. MAT was thus envisaged as levying a minimum tax on such companies deeming a certain percentage of their book profits computed under the Companies Act, as taxable income.

For few years, the MAT was made inoperative. In the year 1996 it was reintroduced and by Finance Act, 2000, it was replaced by Section 115JB.

A controversy, however, has recently arisen with respect to the applicability of MAT on FIIs due to the inconsistent rulings of the Authority for Advance Rulings (AAR) on the issue. Most pertinently, in 2012, in Castleton Investment Limited1 (hereinafter referred to as Castleton), the AAR departed from its previous ruling in The Timken Company2 and held that Section 115JB is applicable to foreign companies, even if they have no Permanent Establishment (PE) or place of business in India. The effect and implication of this ruling was that FIIs will be liable to pay MAT. The Supreme Court admitted a Special Leave Petition filed by Castleton Investment Limited in May 2013, where the company challenged the correctness of the AAR ruling. Based on the AAR ruling in Castleton, the Income-Tax Department, from December 2014 finalised assessments and raised MAT demand on various FIIs on capital gains made by them in the previous years. These notices raised an alarm amongst FIIs, some of which approached the courts.

For removal of such discrepancies, the Government of India had amended the MAT provisions, under Section 115JB vide the Finance Act of 2015, by 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 2015 amendments were only intended to apply prospectively from 1st April 2015 (the financial year 2015-16), which is the assessment year 2016-17. Therefore, vagueness as to the applicability of MAT provisions on such foreign companies prior to the period of amendment was still persisting, until now.


As the controversy, was exaggerating w.r.t. applicability of MAT to FIIs, the Finance Ministry announced the constitution of a committee to look into direct tax matters. The committee after discussing in detail with stakeholders, Industry representatives, various Association's representatives, Chartered Accountants and lawyers, and rounds of discussion with Central Board of Direct Taxes (CBDT), has finally submitted its Final report on 25th August 2015. Before discussing the recommendations and basis of those recommendations of Committee it would also be important to refer to various judicial decision on the issue of applicability of MAT on Foreign Companies including FII.


Many judicial decisions on MAT provisions have been construed through various AAR and Tribunal rulings. Few of them are P. No. 14, [1998] 234 ITR 335 (AAR) , Niko Resources Ltd. [1998] 234 ITR 828 (AAR) , Dresdner Bank AG v ACIT, [2006] 108 ITD 375 (Mumbai) , The Timken Company, [2010] 326 ITR 193 (AAR) , Praxair Pacific Limited, [2010] 326 ITR 276 (AAR) , ZD, [2012] 348 ITR 351 (AAR) , Castleton Investment Ltd, [2012] 348 ITR 537 (AAR) , etc. These cases have also been discussed by Committee in its final report.

After the Castleton Ruling, the Income Tax Department was constrained to issue MAT notices to FIIs/FPIs. The Castleton ruling and subsequent Department action has raised significant concerns in the foreign investment community. The Ruling in brief is as follows:

Castleton Investment Ltd, [2012] 348 ITR 537 (AAR)

1) The applicant (Castleton Investment Limited) was a company incorporated in, and a tax resident of, Mauritius, and was part of the Glaxo Smithkline group (GSK group). The applicant had held shares in GSK Pharma Ltd (GSKPL), a listed Indian company and a member of the GSK group, since 1993 as investment. This holding was shown as non-current assets in the books of accounts of the applicant and not as stock in trade. Thus, the shares were a capital asset of the company. Also, the applicant had no office, employees or agents in India and hence, no Permanent Establishment (PE) in India.

2) As part of the re-organization of the GSK group, GSK and the applicant (the Mauritius Company) proposed to transfer GSKPL shares (of the Indian company) to GSK Pte, a Singapore company and part of the same group. It thus sought an advance ruling on the taxability of the proposed transaction of sale of shares of GSKPL, the Indian company, to GSK Pte. Singapore and whether Section 115JB would be applicable to it.

3) On the relevant question of the applicability of Section 115JB, the single judge bench ruling of the AAR held that MAT would be "equally" applicable to foreign companies even without their physical or taxable presence in India. In reaching its conclusion, the AAR found it "difficult to agree" with the Timken approach and instead relied upon P. No. 14 of 1997. In reaching its conclusion, the AAR completely relied on its prior ruling in ZD, decided by the same judge just a few days prior to Castleton.

4) It adopted a strictly literal approach to Section 115JB, holding that the charging provision in sub-section (1) would also extend to foreign companies, since the IT Act did not distinguish between Indian and foreign companies.

5) Finally, the AAR emphasised the overriding nature of Section 115JB (referred to in ZD above) to reason that confining its scope to domestic companies alone may be "doing violence to the special scheme of taxation adopted for taxing certain companies", especially since no compelling reasons existed.

In 2013, Castleton filed a Special Leave Petition before the Supreme Court, challenging the AAR ruling, which was admitted in May 2013. The case is still pending. Meanwhile, as discussed, the requirement of MAT for FIIs was removed prospectively by the 2015 amendment, while tax recovery notices for MAT against FIIs for previous years continued.


The brief view of the committee and its recommendations is as follows:

1)A self-contained code for FIIs/FPIs

As per the Committee, Section 115AD of the Income Tax Act, introduced in 1993 (when FIIs entered the Indian market) provides for a separate scheme for taxing the income of FIIs/FPIs, arising from Indian securities at a concessional rate. A perusal of this scheme clearly indicates that applying the MAT provisions under Section 115JB would render this separate scheme under Section 115AD otiose in as much as FIIs/FPIs will be taxed at a higher rate under Section 115JB and will not be able to avail of the benefits of the set off provisions and MAT credit. This indicates that Section 115AD, not Section 115JB, would apply to FIIs/FPIs.

2) No business/permanent establishment in India

The Committee disagrees with the Revenue's argument that Section 115JB merely prescribes a general standard for preparation of accounts. In the absence of guidance on the segregation of domestic and global accounts, a foreign company having no established place of business or PE in India (i.e. an FII/FPI) cannot be taxed under Section 115JB.

3) Overriding effect of Double Taxation Avoidance Agreement (DTAA)

Section 90(2) of the IT Act provides that the DTAA provisions will override the provisions of the IT Act (including Section 115JB) if they contain more beneficial provisions for the assesseecompany. Thus, regardless of the interpretation given to Section 115JB, it will not be applicable where a beneficial DTAA exemption is available. Castleton's interpretation to the contrary, based on the non-obstante clause in Section 115JB, is incorrect.

4) Measure by Registrar of Companies

In 19 years since MAT was introduced (in 1996), it had never been levied on FIIs/FPIs, which were instead governed by the beneficial tax scheme under Section 115AD. Significantly, the Department also accepted the Timken ruling and did not file an appeal. Even after the 2012 ruling in Castleton, the Registrar of Companies, under the Companies Act, never called upon FIIs/FPIs to file their global accounts, evidencing that FIIs/FPIs were not intended to be taxed under the MAT provision. A change in this settled position in August 2014 is extremely late in the day. While this may be a consequence of the Castleton ruling, the Committee believes the ruling to be completely wrong.

Based on above views the committee recommended:

In view of the findings and upon a considered deliberation, the committee had made following recommendations to the Government:

(i) To bring an amendment to Section 115JB of the Income Tax Act, 1961 clarifying the complete inapplicability of the MAT provisions to FIIs/FPIs; or

(ii) Central Board of Direct Taxes (CBDT) may issue a circular clarifying the complete inapplicability of the MAT provisions to FIIs/FPIs.


As mentioned above, the Government vide Press Release dated 01.09.2015 has accepted the recommendations of the Committee to clarify the inapplicability of MAT to FIIs/FPIs and has decided that an appropriate amendment to the Income-tax Act will be carried out. Through the amendment in the Act, the Government propose to clarify that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to 01.04.2015.

Pending such amendment, CBDT has issued an Instruction Note (No. 9/2015) on September 2, 2015, advising the field authorities to take into consideration the above position and keep in abeyance, for the time being, the pending assessment proceedings in cases of FIIs/FPIs involving the above issue. They are also advised not to pursue the recovery of outstanding demands, if any, in such cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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