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MAT: Manufactured Controversy?

Published on Fri, Sep 04,2015 | 23:59, Updated at Mon, Sep 07 at 15:28Source : CNBC-TV18 |   Watch Video :

For the better part of this year and some part of 2014, foreign investors in India have been crying MAT! Well, now some of them can wipe their tears. Others are still at the CBDT’s mercy. The government has accepted the AP Shah Committee report finding that MAT cannot be levied on foreign portfolio investors. But, it has decided to ignore the report’s conclusion that MAT does not apply on foreign companies that have no place of business in India. Is that fair? Does this selective hearing speak of an obstinate tax department that has manufactured a tax controversy where there was none? To discuss that CNBC TV18’s Menaka Doshi is joined by 2 expert guests with insight into how the tax department works. Former Solicitor General of India and Senior Advocate, Mohan Parasaran and former Director General - International taxation and Advocate, GC Srivastava.


Justice A P Shah Committee Report

No MAT on FPIs                                     ACCEPTED      

No MAT on foreign companies                 IGNORED
with no place of business in India


Justice A P Shah Committee Report
‘It can be concluded that the Legislature could only have intended for MAT to apply to companies governed by the regulatory requirement of the Companies Act, 1956.’

Doshi: The good news is that Foreign Portfolio Investors (FPI) or institutional investors are in the clear, so they have reason to cheer but the bad news is that the tax department is cherry picking from the AP Shah Committee report. Yes, I admit that the committee's limited mandate was to offer a view on the levy of MAT on FPI but that is just a subset of foreign companies and the committee holds the view that MAT does not apply on foreign companies if they have no place of business in India. Can the tax department in a sense ignore the view on the set and only accept the view on the subset?

Parasaran: I personally feel the tax department has not been quite fair. As I was mentioning to many people, this all started with the decision of the Authority for Advance Rulings (AAR) in the Castleton's case where this point had not even arisen for the consideration, the AAR roped in foreign companies on the ground that the definition of the company in the Indian Income Tax Act section 2(17) also includes foreign company but on a careful reading of section 115JB it is quite clear that tax on book profit is to be levied only on domestic companies who follow the Indian Companies Act, the rigours of the Indian Companies Act. And this actually virtually came as a boon for the tax department and immediately based on Castleton they started issuing notices to various FIIs and foreign companies as well to levy MAT.

Doshi: Do you think you can ignore a view on the set and only pick the derivative of that view on the subset?

Parasaran: We have to naturally go to the substance of the report of the committee. The reference was quite wide enough and the committee has also taken into account the liability of foreign companies. Therefore in my view cherry picking will not work out.

Doshi: You worked with the tax department, you often represent them in very big cases as well. Can you give us some sense on what grounds the tax department would move ahead on an AAR decision that is binding on nobody except for the parties involved in that particular case and then now cherry pick from a committee report that very clearly says MAT does not apply on foreign company that have no place of business in India?


AAR Rulings

Praxair 2010
MAT is not applicable to foreign companies which do not have any presence in India

Timken 2010
MAT is not applicable to foreign companies which do not have any presence in India

Castleton 2012
MAT applies to foreign companies as well
That the foreign company has no PE in India makes no difference to applicability of MAT

Srivastava: The first aspect is whether they could have acted on the decision of the AAR. Yes, the ruling applies only to the particular applicant and the department in that case but once a legal interpretation of a certain provision is given department did nothing till Timken's ruling prevailed in the field. Then suddenly tax payer goes and obtains a ruling despite Timken being there and then the AAR disagrees with the Timken view and then holds another view.

Now the question was if a legal interpretation of the provision is given, it would have been very difficult for the revenue officers to really ignore that and I don't blame them for that. Yes, really the answer to that was that a view could have been taken at the policy level immediately following that ruling whether we really want to levy MAT on foreign companies, FIIs, on other kinds of subsets as you are pointing out. It is all a matter of why do we leave these things to an ambiguous state of law.

Doshi: In fact, even though this was not addressed in the policy domain it was allowed to become a controversy for no reason. Even now that we have an AP Shah Committee report and it is very clear that a committee cannot assess the applicability of MAT on FPIs without looking at the applicability of MAT on foreign companies. You have a clear view from the AP Shah Committee report and yet we are told that the government is only going to accept the view that applies on FPIs because that was the mandate of the committee because it is going to ignore the view on foreign companies and allow for that to be litigated in the Supreme Court when the Castleton case is heard. Would you agree with that position of the government or the tax department?

Srivastava: No, the AP Shah Committee is why they call correctly - even they have said that as far as the foreign companies which are having physical presence in India we do not make any comments.


Justice A P Shah Committee Report
‘The Committee is not expressing any view on whether a foreign company having a PE/place of place of business in India is covered by Section 115JB. This issue is squarely covered by the decisions of the AAR in The Timken Company and Praxair Pacific Ltd.’

Doshi: No, they have said we do not make any comments. They said we are going to leave it up to that issue is squarely covered by the decisions of the AAR in Timken and Praxair. They have left it up to that because their mandate was restricted so to speak, but you can't arrive at a decision on MAT on FPI without looking on MAT on foreign companies. Again I put the same question to you as I put to Mr Parasaran. This is cherry picking, wouldn't you say?

Srivastava: No, cherry picking not as far as the committee report. Cherry picking in the sense that the CBDT instructions which have come. You say that they have picked up here to address the immediate issue and then they are awaiting the amendments in the act in the law.

Doshi: Yes, but the law will only be amended to give relief to FPIs.

Srivastava: How do you address the issue by simply asking the revenue officials that please don't take actions? I mean the law has to be laid down to provide for that this will not apply to foreign companies, if that be the issue.

Doshi: The Finance Minister said in the press conference that he held before accepting the committee report or at the time of accepting the committee report, he said that the Castleton matter would now be decided in Supreme Court. That seems to imply that the government will continue to take the view it had so far, that is MAT will apply on foreign companies. How do you expect this to move in the Supreme Court? What do you expect the Supreme Court will look at when it makes up its mind on whether MAT applies on a foreign company like Castleton or not?

Parasaran: See, this appears to be not a very logical reasoning or thinking on the part of the government or the bureaucrats. When the Finance Act was amended in the year 2015, amendments were specifically made that capital gains arising on transactions in securities, interest, royalty or fees or technical services, concerning foreign companies will be exempt, will not impact. Therefore, at the point of time, the legislature did not seek to make this fine distinction between a foreign company and a foreign institutional investor (FII) or a foreign portfolio investor (FPI), therefore, now, they cannot actually come out with a new part that where we can still seek to make a distinction between a foreign company and an FII.


Justice A P Shah Committee Report
‘In the 19 years since MAT was introduced (in 1996), it had never been levied on FIIs/FPIs…’

‘Significantly, the Department also accepted the Timken ruling and did not file an appeal…’


Justice A P Shah Committee Report
‘None of the other BRICS countries, namely Brazil, Russia, China and South Africa, levy MAT. Some of the OECD countries, such as Austria, Belgium, Hungary, Republic of Korea, Luxembourg, Slovak Republic/Slovakia and USA, levy MAT, but do not levy the same on foreign companies / persons unless they have a physical presence in such countries. India is therefore perceived as an exception in terms of its tax treatment of FIIs/FPIs.’

Doshi: Given the fact that this is the position of just one Authority for Advance Rulings (AAR) ruling in the Castleton matter, Praxair and Timken were different, given the fact that for 19 years since MAT has come onto the statute books, there has been no attempt by the tax department to levy it on either foreign companies or FPIs till the Castleton decision in 2012, given the fact that so many other countries in the world – and I know this does not have legal bearing, but it does have atmospheric bearing – so many other countries in the world do not levy MAT and if they do levy MAT, definitely do not levy it on foreign companies that have no place of business in that country. How do you think the Supreme Court will view this?

Parasaran: I will answer only from a very legal perspective. Pre-2015, the Shah Committee’s recommendations have taken care of the situation.

Doshi: But, that is only for FPIs or FIIs.

Parasaran: But that is what the government says, but if you read the entire committee’s report and also what the government has recently been stating in the last few days. And post 2015 also, as I said, the amendment was quite clear. The government itself did not seek to make a distinction between a foreign company and a FII. Therefore in my view, the revenue has a very uphill task before the Supreme Court and the most fairest way to everybody including the Supreme Court would be to tell the Supreme Court forthright that the issue has become virtually infectious and the request the Supreme Court to dispose of the matter in the light of the statement which can be made by the government that they are henceforth not going to tax FIIs or foreign companies and MAT will not be applicable to them.

Doshi: Would you agree with Mr Parasaran’s point of view?

Srivastava: It could be. That position can be taken. Other than those which are having business operations in India, that position can be taken. It depends on what the government really finally decides.

Doshi: Can be taken or should be taken?

Srivastava: Should be taken.

Doshi: So, given that both of you agree that the what the position that the tax department ought to take here on, I am then going to ask you whether this entire controversy regarding MAT on foreign companies that have no place of business in India especially FPIs, is a manufactured controversy? Your closing comments on this debate. Do you think this sort of reeked of tax adventurism, tax terrorism, whatever adjective you want to apply, this was a manufactured controversy?

Srivastava: The controversy was not manufactured by the revenue department. In fact, for the Castleton also, it was no need to go to AAR when already a ruling was holding the field. Anyway that question could not, should have been there in the first place. Now, I would not call it adventurism or terrorism. The dilemma of these revenue authorities, we all know that. I mean if they do not take action on a given set of legal precedence, then also they are called upon to question to why they do not take action.

So, it was a role that they assumed based on a ruling which took some time to get resolved. It is unfortunate but then, we cannot blame the revenue officials, because they are working under the pressure that if there is legal view which favours the revenue, that view should be taken and why was it not taken they could be open to question on that. And I think that that was what played in their minds.

Doshi: Last word to you. I do not like the phrase tax terrorism, so I will use the phrase tax adventurism. Would you say that is what this episode reeks of?


AAR in Castleton Case (2012)
‘Castleton has argued that section 115JB (MAT section) applies only to domestic companies. The Revenue presumably in the light of an earlier Ruling by this Authority has not specifically disputed the claim of the applicant. But, when the question of construction of a statute is involved, it cannot depend on the stand of the parties. The statute has to be construed by this Authority.’

Parasaran: Yes, certainly. It was a tax adventurism because actually the AAR did even have occasion to actually decide this issue. It itself posts this question as a question on the rate in Castleton and proceeds to actually ignore all past precedence. In fact the AAR was bound by the president in Timken and gives this sort of a ruling which came in very handy for some person ingeniously thinking in income tax department and all this has resulted in unnecessary controversies, waste of public time, waste of public money and also public interest – damage to public interest.


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