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AAR + MAT = Confusion!

Published on Mon, Aug 27,2012 | 11:52, Updated at Mon, Aug 27 at 12:08Source : CNBC-TV18 |   Watch Video :

2 judgments, one question, several answers and one brand new problem. Forget capital gains, MAT is the new problem for Mauritius based investors! Payaswini Upadhyay summarises the AAR decisions in the Castleton & Smithkline cases.

Both Glaxo Smithkline group companies approached the Authority for Advance Rulings with 2 same questions. 

Question number 1: Will a transfer of Indian shares by a Mauritian company to a group company in Singapore attract capital gains tax in India?
The AAR said no, allowing them the exemption under the India – Mauritius Tax  Treaty.

Question number 2: Would the Mauritius company be liable to pay Minimum Alternate Tax in India post the transaction? Now before I tell you what the AAR said – here’s the history. The same question, when asked twice before got mixed responses. In Timken, the AAR had ruled that MAT is not applicable as the company did not have a PE in India.  But Niko did and the AAR ruled that MAT would apply. Castleton and Smithkline do not have permanent establishments in India yet wanted clarity on whether MAT would apply.

The AAR said yes MAT provisions apply both to foreign and domestic companies…leaving tax experts confused

TP Ostwal
Managing Partner, TP Ostwal & Associates
“The foreign companies are liable to tax in India only in respect of income accruing or arising or received in India for the purpose of normal income tax provisions. For the purpose of MAT, they are liable to tax in India if they prepare profit and loss account in India. Now profit and loss account they will prepare only in case where they have a branch office or project office. If the company has made merely an investment from Mauritius or any other country, nobody will make a profit and loss account for India operations. Now how do you find out book profit without giving deduction of expenses? Without there being a book profit, how do you tax that book profit? So the interpretation is not a correct interpretation.”

HP Ranina
Senior Advocate, Supreme Court
“On the one hand, the AAR has held that under Article 13.4 of the Indo-Mauritian Tax Treaty, the capital gains are taxable in Mauritius. If you read Article 13.4, it very clearly says that they are taxable in the contracting State in which the party is a resident. Now there is no dispute on the point that applicant is a resident of Mauritius. Then obviously, it is logical that this company will have to file a tax return in Mauritius; how can it file a tax return in India.”

But the AAR in its order says practical difficulties that foreign companies may face in preparing accounts as per Indian law cannot be the reason to whittle down the scope of the MAT provisions. Experts fear this interpretation may extend to FIIs as well.

TP Ostwal
Managing Partner, TP Ostwal & Associates
“Consider the situation that instead of a company, an FII is set up in Mauritius which is also a company because they make an investment via company route in India. The FII in Mauritius makes an investment in India, they also seek exemption under the treaty, the income is exempted and so they will also now be subjected to MAT.”

HP Ranina
Senior Advocate, Supreme Court
“In my opinion, this judgment has a prima facie error of law because when the Treaty says that prevailing laws of each country will apply, then you cannot- if you’re taxable in Mauritius- bring in the provisions of the Income Tax Act in taxing the capital gains. And therefore I think this is a fit case for going to the High Court on a writ.”

Interestingly even though the AAR had in a previous similar case not imposed MAT, AAR Chairman PK Balasubramanyam was not deterred. He said earlier AAR and High court rulings only have persuasive value. And that the AAR is bound only by Supreme Court decisions. So out goes the theory of precedents and in comes a brand new problem for Mauritius based investors – MAT!


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