Bipluv Jhingan and Amitav Singh
Despite the upbeat promises made by the Hon’ble Finance Minister with regards to taxation of foreign investors, Foreign Institutional Investors (now rechristened as Foreign Portfolio Investors) still seem to be stuck in the Minimum Alternate Tax (MAT) conundrum. The new budget seeks to levy MAT on short term capital gains (on which securities transaction tax is not chargeable) earned by foreign institutional investors (FII) but has failed to clarify the manner in which the MAT provisions will be applicable to them. To add to their woes, just days after the budget was announced, the Income Tax Department has demanded MAT from around 90 FPI’s which could be extended to around 6000 FPI’s.This has reopened the Pandora’s Box i.e. whether MAT can be charged against foreign portfolio investors?
LEGISLATIVE INTENT BEHIND MAT
The answer to this question may be found in the intention of the legislature. The Hon’ble Supreme Court in a plethora of cases has asserted that the intent of the legislature or purpose or the object of a particular provision can be unearthed by considering the speech made by the minster or the mover of the bill in the parliament. Moreover, in cases of ambiguity or doubt, the Apex court permits the aid of notes on clauses of the Finance Bill to ascertain the intention of the legislature. Therefore it is pertinent to explore the backdrop of section 115JB in order to ascertain the intent of the legislature.
The MAT provisions were introduced to curb the problem of ‘Zero Tax’ companies. Though the first legislative step in this direction was taken in 1983 but MAT was only introduced in 1987 by insertion of section 115J. In 1996 when this provision was re-introduced in the form of section 115JA, the then finance minister Mr P. Chidambram in his budget speech explaining the rationale behind these provisions said that it was meant only for Companies preparing their profit and loss account under the Companies Act 1956.
Further in the year 2000 section 115JA was replaced by section 115JB, which is the provision of law, embodying the current MAT regime. Finance Bill, 2002 while amending section 115JB provided an insight into the minds of the legislature, with regards the introduction of MAT. The explanatory notes of the bill read as follows:
“Clause 49 seeks to amend section 115JB of the Income-tax Act relating to special provision for payment of tax by certain companies. The existing provisions of the said section provide for levy of a minimum tax on domestic companies of an amount equal to seven and one-half per cent of the book profit, if the tax payable on the total income chargeable to tax as per the provisions of the Income-tax Act, 1961, is less than seven and one-half per cent of the book profit …”
Thus it is submitted that the purpose of MAT provisions, having regard to the object behind the introduction of section 115J (including section 115JB) and the reference to the provisions of companies act 1956, the expression ‘company’ as defined u/s 2(17) of Income Tax Act should not include foreign companies (including FII/FPIs).
As per the Supreme Court the definition of the term ‘Company’ under the Income Tax Act is subject to a restrictive clause i.e. ‘unless the context otherwise requires’. Thus the broad interpretation of the term company, without taking into consideration the restrictive clause would make section 115JB unworkable. This argument has also been upheld by the Authority for Advanced Ruling in the case of In re the Timken Company.
The first proviso of section 115JB(2), imposes an obligation upon an assessee falling under this provision is to maintain Profit and Loss account as per the provisions of part II of Schedule VI of the Companies Act, 1956. Now if we construe the expression ‘company’ used in the said section in such a manner so as to envisage foreign companies (including FII/FPI) within its ambit, it would create a precarious situation because foreign companies would never be able to prepare profit and loss account as per companies act. This is because the annual accounts, including the P&L Account, cannot be prepared as per the first proviso to section 115JB(2) in respect of the world income and laid before the company at its AGM in accordance with the provision of Section 210 of the Companies Act.  Therefore such an interpretation would not only render the section inoperative but would be in sharp contrast to the well-established principle of ut re magis valet quam pereat.
FOREIGN COMPANIES HAVING PE
In issue with regard to the applicability of MAT on foreign companies, Authority for Advanced Ruling in Praxair Pacific Limited held that, generally MAT would not be applicable on foreign companies, however if it has a permanent establishment (PE) it can brought under the preview of the provisions of MAT. The authority relied on its previous decision of Timken Company and explained that under section 591 of Companies Act 1956 only such foreign companies having established place of business in India are required to make profit and loss account under the Companies Act. In the absence of same there exists no obligation upon the company to maintain any accounts. Therefore, even for the applicability (if applicable at all) of MAT on FIIs/FPIs, being a company, the existence of PE is necessary.
However, if courts give such an interpretation of section 115JB with regards to applicability of MAT on FII/FPI’s, it will only make these investors more reluctant and apprehensive in setting up branches or having fund managers in India. Such effects would be perverse to the expectation of the government which it had in its mind while proposing to add section 9A to the income tax Act, which provides that mere existence of a fund manager of off-shore funds in India would not constitute a PE.
It is also pertinent to note that those FII/FPIs which are the residents of countries that have a Double Tax Avoidance Agreement (DTAA) with India cannot be taxed by way of MAT as they can claim the benefit of the DTAA by virtue of section 90. In the case of Bank of Tokyo Mitsubishi UFJ Ltd. v. ADIT the ITAT held that “the provisions of section 115JB are subordinate to section 90(2) and have no overriding effect on the said section”.
Investments from FII’s started trickling into India in 1993. Since then it has become one of the most popular routes of investment in Indian securities so much so that foreign portfolio managers invested almost US$ 40 billion in Indian stocks in 2014, and have invested nearly US$ 24.7 billion in the Indian debt market this year. The lack of clarity in applicability of MAT provisions, would lead to proliferation of litigation which could have a detrimental effect on the flow of foreign investment into the country. Therefore to meet the goals of restoring investor confidence and growth, the government should not sit on the fence and rather provide more relaxation to the FII’s/FPI or at least a bit more clarity on the issue should be brought.
 Finance Bill 2015, w.e.f 2015-16, clause 29
 Sachin Dave, Income-Tax Department Tells Foreign Portfolio investors to pay Minimum Alternate Tax by 31st March, The Economic Times, Dated 04.03.2015, Available at: http://economictimes.indiatimes.com/news/economy/finance/income-tax-department-tells-foreign-portfolio-investors-to-pay-minimum-alternate-tax-by-march-31/articleshow/46449177.cms ( Last visited: 05.03.2015)
 CIT v. Achaldas 217 ITR7 99; Kerala SIDC v. CIT 259 ITR 51 (SC); Loka Srikrihna Trust v. CIT 101 ITR 234 (SC)
 Rangaswamy (M) v.CWT 221 ITR 39
 Section 80VVA, Finance Act, 1983, w.e.f. AY 1984-85.
 Para 90, Budget Speech 1996-97
 Finance Bill 2002, 254 ITR (St) 118
 CIT v. BC Srinivasa Shetty (1981) 128 ITR 294
 See CIT v. S. Teja Singh, AIR 1959 SC 352, p. 356; Saurabh Chaudhri v UOI AIR 2004 SC 361, p. 373
 Supra note 9
 Finance bill 2015 w.e.f 2015-2016, clause 6
  49 taxmann.com 441 (Delhi – Trib.), para 78
 Indian Brand Equity Foundation, Foreign Institutional Investors, Available at : http://www.ibef.org/economy/foreign-institutional-investors.aspx (Last visited: 05.03.2015)