With the CBDT circular clarifying the Income tax Act will be amended to state that FIIs and FPIs not having a place of business in India will not be subject to MAT, foreign portfolio investors can now breathe easy.

But this is one of those episodes that paints the Indian tax department in very poor light. The Indian revenue departments raised demands for payment of MAT from foreign investors towards the end of 2014, based on the ruling by the Authority for Advance Taxation in the Castleton case. But whether the case was strong enough to raise these demands is debatable.

Case in point A closer look at the Castleton case reveals that Castleton Investments Ltd was a Mauritius-based company that was a part of the GlaxoSmithKline group. It was not a Foreign Institutional Investor registered with SEBI and investing in to Indian equity or debt. It held the shares in GSK Pharma Ltd – a company listed in India – from 1993.

As part of a group re-organisation, Castleton wanted to transfer shares in GSKPL to GSK Pte, a Singapore-based company of the same group in an off-market transaction. The company sought clarification of the AAR on whether MAT would be applicable to it. The AAR held that MAT would be equally applicable to foreign companies even if they did not have a physical presence in India. Now, this transaction is unlike that through which FIIs make money; through investment or trading in equity and debt. This was a foreign company that held a stake in a group company that was being divested to another company in a group. Interpreting the ruling to make it applicable to all FPIs was a stretch.

While the petition of Castleton is pending before the Supreme Court, can the I-T Act be changed?

“The government could make the changes if it so chooses to do, even if the case is pending before the Supreme Court,” says Bobby Parikh, Chief Mentor & Partner, BMR & Associates LLP. “That is because the government seems to be limiting the discussions for now to FPIs, while the case before the Supreme Court is for Castleton, a foreign company which is not an FPI.” Rakesh Nangia, Managing Partner, Nangia & Co, concurs saying that the government can give effect to the AP Shah Committee Report by directing the CBDT to issue a circular, followed by an amendment to the Income-Tax Act, 1961.

“Though the Act can be amended only by Parliament, a CBDT circular in this regard for the time being shall serve as an instruction to the tax officers not to initiate any action  where notices have already been issued.” He believes that the proceedings before the Supreme Court are independent, but  a favourable judgment will vindicate the stand of the government.

Inconsistent AAR rulings The AP Shah committee report has highlighted that the decisions of the AAR and the I-T appellate tribunal have been quite inconsistent in the past while deciding on the applicability of MAT on foreign investors. In the case involving Bank of Toyko-Mitsubishi UFJ Ltd, the ITAT decided that MAT does not apply to foreign companies.

In the cases involving Timken and Praxair Pacific Ltd, AAR had ruled that that only foreign companies with place of business within India could be slapped with MAT.

The AAR however took a different view in ZD case. ZD, a Panama based company, held shares in two Indian public limited companies that it wished to sell through stock exchanges. The company held that since the shares were long-term capital assets, there would be no capital gains tax on the transaction. It however wanted clarification on whether MAT would be applicable on the transaction.

The AAR had then held that section 115JB of the IT Act did not distinguish between a resident and a non-resident company. A few weeks later, the ruling in ZD was used to give the judgment in the Castleton case. Given the manner in which the rulings have vacillated, latching on to just one case to send tax demands was not just.

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