The CBDT has clarified that MAT provisions will not
be applicable to those FIIs /FPIs which do not have a permanent
establishment in India, for the period prior to 1 April 2015. An
amendment to the IT Act will be made in the winter session of
Parliament and directions have been given to Income Tax Authorities
to keep the pending assessment proceedings on the said issue in
On 2 September 2015, the Central Board of Direct Taxes
(CBDT) issued instructions clarifying that Minimum
Alternate Tax (MAT) provisions will not be
applicable to those foreign institutional investors
(FIIs) / foreign portfolio investors
(FPIs) which do not have a permanent establishment
in India, for the period prior to 1 April 2015. Accordingly,
appropriate amendments will be made in the Income Tax Act, 1961
(IT Act) and directions have been given to Income
Tax Authorities to keep the pending assessment proceedings on the
said issue in abeyance. These actions have been taken based on the
recommendations made by a committee, chaired by Justice A.P. Shah
(Committee), constituted to examine the
applicability of MAT on FIIs/ FPIs.
The vexed issue of MAT on FIIs/ FPIs first came up for
consideration before the Authority for Advance Rulings
(AAR) in the case of Castleton Investment Limited
(AAR 999 of 2012) in August 2012, which held that MAT is applicable
to both domestic and foreign companies. As a result, the Income Tax
Authorities started demanding MAT from foreign investors on capital
gains accruing to FIIs/ FPIs from the sale of shares. The notices
issued by the Income Tax Department were heavily opposed by the
foreign investors and it was argued that MAT can only be levied on
book profits, which they do not maintain in India.
MAT is the minimum amount of income tax that a profitable
company is required to pay under the IT Act. Under Section 115JB of
the IT Act, 'book profit' is defined as the net profit as
shown in the company's profit and loss account prepared:
(a) in accordance with the provisions of the Indian Companies
Act, for ordinary companies; or
(b) in the manner prescribed by the special legislation for
regulated companies (e.g., banking, insurance, power).
The above accounting requirements apply to Indian companies and
foreign companies with a 'branch office' in India. The
general view until 2012 was that, since, neither of the above apply
to foreign companies, which do not have a branch in India (on the
basis that such foreign companies are not required to prepare their
accounts in accordance with the Indian Companies Act or other
special legislation), MAT is not intended to apply to such
companies. Accordingly, FIIs/ FPIs had also taken the view that MAT
did not apply to them.
To appease the sentiments of foreign investors post their
opposition of the department's claims in 2012, the Government
amended the MAT provisions through the Finance Act 2015. The
amendment expressly provided that capital gains from the sale of
Indian securities, interest, royalty or fee for technical services
will be excluded from 'book profits' of a foreign company
effective from 1 April 2015. However, there was no clarity on the
applicability of MAT for the period prior to 1 April 2015. In order
to seek clarity on this aspect, the Government appointed the
Committee to examine all facets of the issue involved.
The Committee submitted its report on 25 August 2015, which
included a detailed legislative history of MAT and the contextual
interpretation of the term 'company' under Section 115JB of
the IT Act. The Committee reached a conclusion that Section 115JB
was inapplicable since FIIs/ FPIs are not governed by the
regulatory regime of the Companies Act and, therefore, the
obligations under Section 115JB cannot be applied independently of
it. Section 115JB is an integrated code and the charging provision
contained in sub-section (1) cannot be read in isolation of the
computation mechanism under sub-section (2).
Furthermore, a comparison with international practices was also
made and examples of some Organization for Economic Co-operation
and Development (OECD) countries, such as Austria,
Belgium, Hungary, Republic of Korea, Luxembourg, Slovak
Republic/Slovakia and USA were looked at. The Committee found that
these jurisdictions levy MAT, but do not impose this levy on
foreign companies / persons unless they have a physical presence in
The Committee accordingly recommended that MAT should not be
imposed on FIIs/ FPIs retrospectively. The Government accepted this
recommendation and an amendment to the IT Act will be made in the
winter session of Parliament. This development will go a long way
in reposing faith in the fairness of tax administration of the
Indian Government and provide relief to the FIIs/ FPIs.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).