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Report on Applicability of Minimum Alternate Tax (MAT)on FIIs / FPIs for the period prior to 01.04.2015

Dated:- 2-9-2015 - CHAPTER I BACKGROUND TO THE REPORT A. Minimum Alternate Tax in India 1.1.1 Minimum Alternate Tax ( MAT ) was effectively introduced in India by the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961 ( IT Act ), to facilitate the taxation of zero tax companies . It had been observed that many companies, despite showing high profits in their books of accounts and paying substantial dividends, were paying marginal or no tax, by taking advantage of various tax conc .....

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n 115JA with Section 115JB. Section 115JB, which was recently amended by the Finance Act of 2015, provides that in case the tax payable on the total income of a company in respect of any previous year, computed under the Act, is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of such company. The tax payable for the relevant year for such company shall then be 18.5% of its book profit. 1.1.3 A controversy, however, has recently arisen with respect to t .....

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able to pay MAT. The Supreme Court admitted a Special Leave Petition filed by Castleton Investment Limited in May 2013,5 where the company challenged the correctness of the AAR ruling. Based on the AAR ruling in Castleton, the income-tax department, from December 2014 finalised assessments and raised MAT demand on various FIIs on capital gains made by them in previous years. These notices raised an alarm amongst FIIs, some of which approached the courts.6 B. The 2015 Amendment 1.2.1 In light of .....

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e to the earnings of capital gains from transactions in securities to the net profit of the foreign company, as per their profit and loss account. 1.2.2 However, the 2015 amendments are only intended to apply prospectively from 1st April 2015 (the financial year 2015-16), which is the assessment year 2016-17; and therefore, do not provide clarity on whether MAT provisions apply to foreign companies. This is clear from the Memorandum to the Finance Bill of 2015, which under the heading Rationalis .....

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y, debited to the profit loss (sic) account, corresponding to such income (which is being proposed to be excluded from the MAT liability) are also proposed to be added back to the book profit for the purpose of computation of MAT. ….These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years. 1.2.3 Consequently, FIIs/FPIs may still remain liable for MAT for previous years and tax notices and .....

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, comprising Justice (retd.) A.P. Shah as Chairman and Dr Girish Ahuja and Dr Ashok Lahiri as Members as per Office Memorandum, F.No.133/27/2015-TPL. 1.3.2 The Terms of Reference of the Committee are as follows:8 (i) The Committee, to begin with, will examine the matter relating to levy of MAT on FIIs for the period prior to 01.04.2015. The Committee will examine all the related legal provisions, judicial / quasi judicial pronouncements and such other relevant aspects as it may consider appropri .....

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logistic and other assistance to the Committee will be provided by the CBDT. (viii) The Chairman and two Members of the Committee will function on part time basis and will be paid ₹ 5000/- each per sitting. (ix) The term of the Committee will be for one year or such period as may be notified by the Government from time to time. D. The Present Report 1.4.1 The Committee met for the first time on 25th May 2015, and decided to call for responses from stakeholders by 22nd June 2015. In all, it .....

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, Deloitte, Ernst & Young and PwC; officials from the Central Board of Direct Taxes ( CBDT ); and leading eminent Advocates, being Mr. Arvind Datar, Mr. S. Ganesh, Mr. Porus Kaka, Mr. Dinesh Kanabar, Mr. Padam Khincha, Mr. K.K. Chaithanya, Mr. Ajay Vohra, Mr. Pranav Sayta, Mr. Mukesh Butani. Mr. Sohrab E. Dastur, also an eminent Advocate, could not personally appear before the Committee. However, Mr. Dastur filed a detailed written submission. 1.4.2 The Committee would like to place on recor .....

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nistry of Finance on 24 July 2015. 1.4.4 Thereafter, the CBDT sought certain clarifications as to the impact of the Committee s Report on foreign companies with a permanent establishment (PE) or place of business in India. In connection with the same, a meeting was held on 20th August 2015 in the Finance Minister s chambers at the Finance Ministry, New Delhi. The meeting was attended by the three members of the Committee, the Finance Minister, the Revenue Secretary, the chairperson of the CBDT a .....

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avoid any ambiguity on the issue, the Committee decided to make slight modifications to the Report to make its position amply clear. Accordingly, this amended Report is being submitted to the Finance Ministry on 25 August 2015. CHAPTER II LEGISLATIVE HISTORY OF MAT IN INDIA A. Section 80VVA, IT Act 2.1.1 MAT was first introduced in India vide Section 80VVA of the IT Act through the Finance Act of 1983. The United States of America was the first to introduce such a tax as an Alternate Minimum Tax .....

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reasonable that these profitable and prosperous companies should contribute at least a small portion of their profits to the national exchequer at a time when others and less better off sections of society are bearing a burden. 9 2.1.3 Section 80VVA thus placed a restriction on certain deductions in the case of companies, or in other words, placed a ceiling on allowances and required companies to pay a minimum tax on at least 30% of their profits. The allowances that were unabsorbed in a partic .....

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taxable profits. Various concessions are also allowed under Chapter VIA in computing the total income. 50.2 With a view to securing that the aggregate deduction in respect of tax concessions admissible under the Income-tax Act does not result in reducing the total income of companies to nil or a negligible part of the income before the grant of these tax concessions, the Finance Act has inserted a new Chapter VIB, containing section 80VVA, for placing a restriction on certain deductions in the .....

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had the ability to pay . These companies, which were otherwise making substantial profits and declaring high dividends, were taking advantage of various tax concessions and other incentives in a manner as to avoid paying tax. Section 115J was thus introduced as a measure of equity .11 2.2.2 The then Finance Minister, in his budget speech in 1987-88, said:12 80. It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called zero tax highly profitable com .....

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f its book profit. This measure will yield a revenue gain of approximately ₹ 75 crores. 2.2.3 This legislative intent for introducing Section 115J was reiterated by the Supreme Court in M/s Surana Steels Pvt Ltd v DCIT.13 2.2.4 Section 115J, as drafted in 1987, introduced a two-step process. First, the assessing authority had to calculate the income of the company. Second, the book profit had to be determined. If the income of the assessee company was less than 30% of its book profit, the .....

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ection 115J was amended thrice in 1989, introducing certain exclusions and exemptions,14 correcting the reference to the accounting year for the purpose of calculating book profits,15 and making certain changes to the calculation of book profits.16 2.2.6 In 1990, the government rationalised the tax structure, and widened the taxable income base. As a result, it was felt that there was no longer any need for section 115J to remain, and it was made inoperative from assessment year 1991-92.17 C. Se .....

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JA in the lT Act by way of a levy of a minimum tax on companies that had book profits and paid dividends, but did not pay any taxes. Under this provision, substantially similar to the previously abandoned Section 115J, companies whose total income (under the IT Act) was less than 30% of their book profits (under the Companies Act) would have to pay tax on 30% of their book profits. Therefore, 30% of the book profits would be deemed as taxable income. In case the total income was more than 30% of .....

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Act of 2000, made Section 115JA inoperative with effect from 1st April, 2001 and inserted a new provision, the currently applicable Section 115JB, in its place. As the Explanatory Memorandum for the Finance Bill of 2000 noted, a sunset clause was introduced in respect of Section 115JA because the efficacy of the existing provision ha[d] declined in view of the exclusions of various sectors from the operation of MAT and the credit system.21 There was also concern that the existing provision had l .....

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t MAT shall be levied at 18.5% of the book profits in case the tax as per the normal provisions in the Act is less than 18.5% of the book profits. 2.5.2 Section 115JB, as drafted in 2000, was applicable to all corporate entities, and there was to be no credit for MAT paid. The remaining scheme of Section 115JB, particularly regarding the definition and method of calculation of book profits, was substantially similar to its earlier versions; although it was amended from time to time.25 The tax cr .....

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capital gains of a company (otherwise excluded from total income) would be taken into account for computing book profits under section 115JB and for tax payment under that section.27 2.5.4 The MAT rates over the last seven years have been increasing, as can be gleaned from the table below: Table 2.1: Increase in the MAT rate from the Assessment Year 2009-10 to 2015-16 Assessment Year MAT Rate 2009-10 10% 2010-11 15% 2011-12 18% 2012-13 18.5% 2013-14 18.5% 2014-15 18.5% 2015-16 18.5% 2.5.5 The sc .....

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the same accounting policies and standards will be adopted, as are used for preparing accounts laid before a company at its Annual General Meeting ( AGM ) under Section 210 of the Companies Act, 1956. 2.5.6 Section 115JB, as it currently stands after the 2015 amendment, reads as follows: Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, pay .....

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any referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with t .....

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meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to .....

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amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any .....

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(A) the capital gains arising on transactions in securities; or (B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a bu .....

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valuation reserve relating to revalued asset on the retirement or disposal of such asset, (k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be; if any amount referred to in clauses (a) t .....

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withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or (ii) the amount of income to which any of the provisions of section 1 .....

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erred to in clause (iia); or (iic) the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the profit and loss account; or (iid) the amount of income accruing or arising to an assessee, being a foreign company, from,- (A) the capital gains arising on transactions in securities; or (B) the interest, royalty or fees f .....

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llotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the profit and loss account; or (iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of th .....

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(vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.-For the purposes of th .....

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erest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time. Explanation 3.-For the removal of doubts, it is hereby clarified that for the purposes of this section, the assessee, being a company to which the proviso to sub-section (2) of section 211 .....

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s assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A. (4) Every company to w .....

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on, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section. (5A) The provisions of this section shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B. (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special .....

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rect and of the portfolio variety - to augment growth through higher investments. Following the Report of the High Powered Committee on Balance of Payments, from September 14, 1992, with suitable restrictions, FIIs or Foreign Institutional Investors, and Overseas Corporate Bodies were permitted to invest in financial instruments. The policy framework for permitting such investments was provided in the Government of India s Press Note dated September 14, 1992. FIIs seeking to invest in India are .....

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e listed or were to be listed on the Stock Exchanges in India and in the schemes floated by domestic mutual funds. But, the holding of a single FII and of all FIIs, Non-resident Indians (NRIs) and OCBs in any company were subject to the limit of 5 per cent and 24 per cent of the company s total issued capital, respectively. Furthermore, funds invested by FIIs had to have at least 50 participants with no one holding more than 5 per cent to ensure a broad base and preventing such investment acting .....

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or portfolios established or incorporated outside India, after due registration with SEBI, and make investments on their behalf. Qualified Financial Investors (QFIs) were also allowed to come in. The liberalisation has involved the streamlining of SEBI registration procedures, allowing FIIs to invest in debt securities and relaxation of ceilings on FII investment, together with implementation of Know Your Client (KYC) guidelines. To harmonize the various available routes for foreign portfolio in .....

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Debt Total 1992-93 13 0 13 1993-94 5,127 0 5,127 1994-95 4,796 0 4,796 1995-96 6.942 0 6,942 1996-97 8,546 29 8,575 1997-98 5,267 691 5,958 1998-99 -717 -867 -1,584 1999-00 9,670 453 10,122 2000-01 10,207 -273 9,933 2001-02 8,072 690 8,763 2002-03 2,527 162 2,689 2003-04 39,960 5,805 45,765 2004-05 44,123 1,759 45,881 2005-06 48,801 -7,344 41,467 2006-07 25,236 5,605 30,840 2007-08 53,404 12,775 66,179 2008-09 -4,77,606 1,895 -45,811 2009-10 1,10,221 32,438 1,42,658 2010-11 1,10,221 36,317 1,46, .....

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s ( SEBI ) eligibility criteria and registering under the SEBI (Foreign Portfolio Investors) Regulations, 2014, which repealed SEBI s (Foreign Institutional Investor) Regulations, 1995. 3.1.6 Since FIIs do not have any physical presence in India - either by way of an office or fixed place, whether rented or owned, or by way of employees or dependent agents - they open cash and custody accounts with their bankers and custodians in India. To do this, FIIs engage the services of Indian stockbrokers .....

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ns 3.2.1 Regulation 2(g) of the SEBI (FPI) Regulations, 2014 defines an FII as institutions registered under the SEBI (FII) Regulations, 1995, where they have been defined as an institution established or incorporated outside India that proposes to make investment in Indian securities. Regulation 2(h) defines an FPI as a person satisfying the eligibility criteria under Regulation 4 and registered under Chapter II of the Regulations, deemed as an intermediary.30 3.2.2 The 2014 Regulations were in .....

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SEBI (FPI) Regulations of 2014 introduces three categories of FPIs. Category I FPIs include Government and Government related investors such as Central Banks, Governmental agencies, sovereign wealth funds and international or multilateral organisations or agencies. Category II includes: - (i) Appropriately regulated broad based funds such as Mutual Funds, Investment trusts, Insurance/ Reinsurance Companies; (ii) Appropriately regulated entities such as Banks, Asset Management Companies, investme .....

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.2.5 Chapter V of the Regulations further stipulates the general obligations and responsibilities of an FPI. These include certain general obligations such as the need to obtain a PAN number or submitting certain information etc. (Regulation 23), the appointment of a custodian of securities (Regulation 26), appointment of designated bank (Regulation 27), appointment of compliance officer (Regulation 28), investment advice in publicly accessible media (Regulation 29), and maintenance and preserva .....

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vation of proper books of accounts, records etc. (Regulations 18 and 19), the appointment of a compliance officer (Regulation 19A) and information to the Board or RBI as required (Regulation 20). C. FIIs/FPIs and the IT Act 3.3.1 Before proceeding to explain the taxation regime, as applicable to FIIs/FPIs, it is useful to provide a snapshot of this regime in a tabular form (Table 3). Table 3.2: Snapshot summary of taxability of FIIs/FPIs under Section 115AD of the IT Act Source of Income of FIIs .....

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erm Capital Gains ( STCG ) 15% where STCG arises from transfer of securities subject to securities transaction tax (listed equity shares) 30% on other STCG Section 115AD r/w Section 111A Section 115AD (i) Section 115AD of the IT Act 3.3.2 Section 115AD of the Act provides for a special regime to specifically deal with the tax on income of FIIs from securities or capital gains arising from their transfer. The section was brought in vide the Finance Act of 1993 (when FIIs were first permitted to i .....

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dian capital markets at concessional tax rates.32 Its legislative basis, however, is best explained by Circular No. 657 the Memorandum to the Finance Act, 1993:33 38. While presenting the Budget for 1992-93, the Finance Minister had stated that ways would be considered of allowing reputable foreign investors to invest in the country s capital markets. In pursuance of this announcement, guidelines had been issued through a Press Note, dated 14th September, 1992 for such investment by Foreign Inst .....

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he provisions of Section 115AD in favour of general provisions for computing capital gains. Thus, the assessee was not entitled to the benefit of indexation available to other assessees whose income is taxed under Sections 45 and 48 of the Act as capital gains. The idea of the special provisions of Section 115AD overriding the general provisions of the IT Act have also been followed in Platinum Asset Management Ltd and Ors v Assessee,35 which held that if a particular item of income was covered .....

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pter V. 3.3.6 However, while Section 115AD prescribes a 15% tax rate for short-term capital gains and exempts tax for long-term capital gains in cases of FIIs/FPIs investing in listed equity shares, Section 115JB of the IT Act imposes a higher tax rate of 18.5%. In practice, this means that the MAT credit can never be effectively utilised and the benefits of the special concessional tax regime under Section 115AD lose relevance. 3.3.7 Sub-clause (iid) of sub-section (2) of Section 115JB, introdu .....

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s position has been confirmed by the 2014 amendment to Section 2(14) of the Act. The Finance Act of 2014 amended the definition of capital asset in Section 2(14) of the Act and inserted sub-clause (b) to include any securities held by an FII, which has invested in such securities in accordance with the SEBI Regulations. Accordingly, the gains arising to the FIIs/FPIs from the disposal of such capital assets are required to be considered capital gains and subject to the tax regime under Section 1 .....

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incorporated outside India which establish a place of business within India; or have already established a place of business within India and continue to have an established place of business within India. This difference in the treatment of foreign companies under both the laws has led to the recent controversy of the applicability of Section 115JB of the IT Act to foreign companies and will be dealt with in the Chapter V of this Report. (i) Section 591 read with Section 594 of the Companies A .....

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s purview and impose no requirement of preparing accounts. Notably, the new Companies Act 2013 incorporates the same scheme under Section 2(42) (on the definition of foreign company ) read with Sections 381 (on accounts of foreign company) read with the Companies (Registration of Foreign Companies) Rules 2014. Under this, foreign companies are defined as companies with a place of business and conducting business activity in India and are required to make out a balance sheet and profit and loss a .....

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ompany have to be the same, as have been adopted for the purpose of preparing such accounts and laid before the company at its AGM under Section 210 of the Companies Act, 1956. Notably, Section 210 (on annual accounts and balance sheet) read with Section 166 (on AGMs) of the Companies Act requires every company as defined under the Companies Act to lay its balance sheet and profit and loss account at every AGM held annually. This thus excludes foreign companies. E. FIIs/FPIs and Double Taxation .....

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on capital gains earned by an FII/FPI, even when it is exempt from such tax under the applicable tax treaty, denies the assessee treaty benefits and is incorrect. 3.5.2 In most DTAAs, capital gains are taxable in India or in both countries. However, in countries such as Mauritius, Singapore, Netherlands, Korea and Cyprus, capital gains are taxed in the country of residence. These countries do not have any capital gains tax; therefore, effectively, capital gains may be zero for a company residin .....

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provisions of the entire IT Act (including Section 115JB) or only those specifically relating to capital gains (such as Section 115AD) as mentioned in the treaty. 3.5.4 The inter-relation between Section 115JB and Section 90 in the context of DTAAs and non-exempt jurisdictions will be discussed in Chapter V later. CHAPTER IV ANALYSIS OF THE RELEVANT JUDICIAL DECISIONS 4.1 Before analysing the relevant rulings of the AAR on the applicability of MAT to foreign companies, it is important to refer .....

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ified that the advance ruling of the Authority is only binding on the particular transaction before it, although it can have persuasive value in respect of other parties. However, it stated that this did not mean that a principle of law laid down in particular case would not be followed in the future. A. AAR and ITAT Rulings on MAT (i) P. No. 14, [1998] 234 ITR 335 (AAR) 4.2.1 This was the first case to discuss the issue of MAT and held that MAT was applicable to a foreign company, incorporated .....

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cant sought to determine whether, as a foreign company, the profits attributable to its PE in India were liable to be taxed under Section 115JA of the IT Act. 4.2.3 In effect, the question before the AAR was whether Section 115JA would apply to any company under Section 2(17) of the Act, including a foreign company. 4.2.4 Expounding on the rationale for introducing MAT as being to tax zero tax companies , the AAR ruled that the MAT provisions were applicable to all companies defined under Sectio .....

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only to the extent applicable and there was no reason to presume that Parliament did not intend Section 115JA to apply to foreign assessees. 4.2.5 The argument that a foreign company did not have to show its entire book profits for taxation in India and had to show only the profits of only the Indian part of its business was also rejected. A foreign company with an established place of business in India was required to prepare accounts in accordance with provisions of Section 594 read with Sect .....

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a foreign company from falling outside the purview of Section 115JA. (ii) Niko Resources Ltd. [1998] 234 ITR 828 (AAR) 4.2.7 The applicant was a foreign company incorporated in Canada, engaged in the business of exploration and development of oil and gas fields. It had entered into a production-sharing contract with the government. It was claiming entitlement to the special deduction benefits under Section 42 of the IT Act40 before calculating book profits as per Section 115JA; and that Section .....

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nd effect could not be cut down by Section 293A. Thus, no allowance or deduction was permissible under any other section of the Act. 4.2.9 The AAR further observed that Section 115JA did not contain a machinery for the computation of business income or total income of an assessee and only provided a rough and ready formula . It also relied on the non-obstante clause in Section 115JA to reach its conclusion. (iii) Dresdner Bank AG v ACIT, [2006] 108 ITD 375 (Mumbai) 4.2.10 The assessee-appellant .....

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he applicability of Section 115JA of the IT Act, given that it was a foreign company and argued legislative omission in failing to specifically clarify that Section 115JA excluded foreign companies. 4.2.12 The Mumbai Bench of the ITAT rejected the assessee s contentions based on its reliance on P. No. 14 of 1997 to hold that Section 115JA in principle applied to foreign companies as well. It further dismissed the arguments regarding legislative intent on the basis that it could not supply the ca .....

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ok a maiden public issue in 1991. In 1992, it started commercial production. Subsequently, Timken USA acquired equity shares of the company from TISCO under Indian law. Timken India was listed on the Bombay Stock Exchange. The Applicant wanted to transfer its holdings in Timken India (which had been held for more than 12 months) through the BSE to Timken Mauritius as part of its global re-structuring. Notably, it did not have a place of business or PE in India. 4.2.14 It therefore sought an adva .....

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had suffered securities transaction tax and was accordingly, tax exempt under Section 10(38)? Finally, if Section 115JB was applicable, whether the payments made by it on the sale of shares would suffer any withholding tax under Section 195 of the Act, and if so, how much? 4.2.15 The applicant attempted to rely on the context in which the word company was used in Section 115JB, in light of the opening paragraph in Section 2 ( unless the context otherwise so requires ) to argue that the reference .....

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regarding the requirement/difficulty of computation of book profits under Section 115JB(2), the different adjustments and deductions made in pursuance of the same, and the requirement for a foreign company to hold an AGM. 4.2.16 This three judge bench of the AAR distinguished its previous ruling in P. No. 14 of 1997 and clearly held that MAT provisions would not be applicable on a foreign company that had no physical presence, in the form of an office or branch, or a PE in India. Thus, the provi .....

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nts under section 44AA of the IT Act and prepare accounts under section 594 of the Companies Act, 1956. However, under section 591 of the Companies Act, only such foreign companies, who have established a place of business within India, are required to make out a balance sheet and P&L Account as required under section 594 of the Companies Act. In the case referred supra, as it had a place of business by way of a PE in India, it was required to comply with Section 594 as if it was a company w .....

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applicant does not have an established place of business in India, its preparation of P&L Account in accordance with the provisions of Part II & III of Schedule VI of the Companies Act cannot be complied. This is the sine-qua non to comply with the provision under section 115JA. 4.2.18 In reaching its decision, the AAR adopted a contextual interpretation of Section 115JB of company as excluding foreign company, based on the history of MAT provisions and the unworkability of Section 115JB .....

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ion 210 of the Companies Act. The speech of Finance Minister and the memorandum explaining the provision also become out of sync if the meaning of company appearing in section 115JB is adopted as foreign company ….. ……It has also not drawn its attention to the fact that as the applicant did not have a place of business in India it was not required to prepare its accounts under section 594 read with section 591 of the Companies Act, 1956. That being so the applicant could not .....

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sed to transfer its 74% share holding in Jindal Praxair Oxygen P. Ltd. to its wholly owned subsidiary, Praxair India P. Ltd. Notably, it did not have any PE or place of business in India. 4.2.20 On the basis of this proposed transfer, the applicant sought to determine, inter alia, whether the equity shares of Jindal Praxair would be considered as capital asset , whose transfer to Praxair India would be liable to tax in view of the exemption from capital gains and subject to the conditions under .....

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ther submissions with respect to the gains arising out of transfer not being liable to tax in India under Article 13 of the India-Mauritius DTAA. The Department had left the questions raised to be answered on merits. 4.2.22 The AAR decided to address a larger question based on the facts on whether Section 115JB would apply to a foreign company, which had no place of business or PE in India. The AAR referred to its previous ruling in Timken to hold that Section 115JB was not attracted to the appl .....

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ccounts did not appeal to any logic. It also held that the transfer of shares was not liable to tax in India in view of the India-Mauritius DTAA. 4.2.23 It is relevant to note that the AAR rulings in both Timken and Praxair attained finality, and no appeal against the ruling was preferred. It appears that the Department accepted the rulings. A different view was, however, taken by the AAR in ZD, In re and Castleton, which are both discussed below. (vi) ZD, [2012] 348 ITR 351 (AAR) 4.2.24 The App .....

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licant sought a ruling as to whether the tax computed under Section 115JB would be applicable. It emphasised that it was not seeking a ruling on the question whether the transaction would be exempt from taxation under section 10(38), but was seeking a ruling only on the applicability of Section 115JB to the proposed transaction. 4.2.25 The applicant argued that Section 115JB had no application to foreign companies without any presence in India. However, the Revenue countered this by arguing that .....

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orrowing the definition of a company from section 3 of the companies Act, 1956. Merely because sub-section (2) of section115JB refers to the Companies Act, it does not mean that the definition from therein has to be borrowed. There may be practical difficulties for foreign companies to prepare an account in terms of Schedule VI of the Companies Act, but that is no reason to whittle down the scope of section 115JB of the Act. The difficulties are for the legislature to consider and remove and not .....

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act, it ruled that there was no lack of clarity in Section 115JB to warrant an interpretative exercise, by referring to extraneous material to understand its meaning (as had been done in Timken). 4.2.28 The AAR s interpretation was bolstered by reading the term company in Sections 10(38) and 115JB together. The proviso to Section 10(38) states that income by way of long-term capital gain shall be taken into account in computing the book profit and income-tax payable under Section 115JB. However, .....

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of the Act. 4.2.29 It is pertinent to note that in paragraph 37 of the ruling, the AAR stated that the applicant had insisted that it did not seek or want a ruling on all the aspects arising out of the questions posed for ruling, including the applicability of Section 10(38) of the Act. The AAR noted that since it would have to interpret Section 10(38) with Section 115JB together to answer the question of taxability of the relevant transaction, it would be proper to decline a Ruling on the quest .....

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e 1993 as investment. This holding was shown as non-current assets in the books of accounts of the applicant and not as stock in trade. Thus, the applicant submitted (as was accepted) that the shares were a capital asset of the company. 4.2.31 Pertinently, the applicant had no office, employees or agents in India and hence, no PE in India. Further, being a foreign company, it was admittedly not obliged to maintain books of accounts in India, as prescribed by the Companies Act, 1956. For the pres .....

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n advance ruling on the taxability of the proposed transaction of sale of shares of GSKPL, the Indian company, to GSK Pte. Singapore and whether Section 115JB would be applicable to it. 4.2.33 Notably, the Revenue did not join issue on the question of applicability of Section 115JB, although the AAR brushed that aside in paragraph 37 of the order by simply stating: The Revenue presumably in the light of an earlier Ruling by this Authority has not specifically disputed the claim of the applicant. .....

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lied upon P. No. 14 of 1997. In reaching its conclusion, the AAR completely relied on its prior ruling in ZD, decided by the same judge just a few days prior to Castleton. 4.2.35 It adopted a strictly literal approach to Section 115JB, holding that the charging provision in sub-section (1) would also extend to foreign companies, since the IT Act did not distinguish between Indian and foreign companies, unlike the Companies Act, 1956. More importantly, even though Section 115JB constitutes an int .....

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not depend on the applicability of sub-section (2). It is on the applicability of sub-section (1) that the obligation under sub-section (2) arises. It is a fallacy to think that unless sub-section (2) is independently attracted, sub-section (1) also cannot be operated. Sub-section (2) gets attracted when sub-section (1) operates proprio vigorie. It is for the purpose of the section that the account has to be prepared as detailed therein. The liability to tax under sub-section (1) does not depen .....

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ecisions in Timken and Praxair, which thus attained finality. Conversely, in 2013, Castleton filed a Special Leave Petition before the Supreme Court, challenging the AAR ruling, which was admitted in May 2013.43 The case is still pending. Meanwhile, as discussed, the requirement of MAT for FIIs was removed prospectively vide the 2015 amendment, while tax recovery notices for MAT against FIIs for previous years continued. B. Judicial Decisions on the applicability of MAT to banking, electricity, .....

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o include such companies within the ambit of MAT by clarifying that book profits could be computed on the basis of accounts prepared under the governing acts of such companies. Further, sub-section (5A) was also inserted with retrospective effect (from AY 2001-02) to provide that MAT would not be applicable to life insurance companies. The decisions here deal with the pre-2012 amendment situation. (i) Maharashtra State Electricity Board v. JCIT, [2002] 82 ITD 422 (Mum) 4.3.2 The question before .....

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pany as one established by or under a Central, State or Provincial Act) to deem the appellant a company for the IT Act. However, it termed the definition of company under Section 2 as nomen generalissimum (term of the most general meaning), whose meaning in the context of Section 115JA was to be gathered from the connection in which it is used and subject matter applied. 4.3.4 Based on this, the ITAT concluded that although Section 115JA used the word company and began with a non-obstante clause .....

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company. It is not required to distribute any dividend. As such it does not come within the mischief of this section. 4.3.5 Thus, the ITAT ruled that the appellant corporation could not be construed as a company for the purpose of charging MAT and was outside the scope of Section 115JA of the IT Act. (ii) Kerala State Electricity Board v. Deputy, CIT, [2010] 329 ITR 91 (Ker) 4.3.6 The case concerned the appeals filed by the Kerala State Electricity Board, a statutory corporation constituted und .....

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that a contextual meaning should be given to the word company in Section 115JB of the Act, the High Court held that Section 115JB would not apply to a body corporate such as a State Electricity Board in light of the first proviso to sub-section (2) of Section 115JB and the requirements under the Companies Act, 1956. 4.3.8 The High Court took note of the history, scope and ambit of Sections 115J, 115JA and 115JB of the Act to state that Section 115JB stipulated that the accounting policies and st .....

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of Companies Act. Therefore, the appellant is not obliged to either to convene an annual general meeting or place its profit and loss account in such general meeting. As a matter of fact, a general meeting contemplated under Section 166 of the Companies Act is not possible in the case of the appellant as there are no share holders for the appellant Board. On the other hand, under Section 69 of the Electricity Supply Act, the appellant is obliged to keep proper accounts….. 4.3.9 The High .....

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is substantially similar to section 115JA, in our opinion, cannot have a different purpose and need not be interpreted in a manner different from the understanding of the Central Board of Direct Taxes of section 115JA. [This was stated with reference to Circular No. 762, dated 18th February 1998, [1998] 230 ITR (St.) 12] 4.3.10 It thus concluded that Section 115JB was not applicable against the Appellant, being a statutory corporation under the Electricity (Supply) Act. (iii) Krung Thai Bank PCL .....

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id not apply to banking companies, including the assessee. 4.3.12 The ITAT agreed with the assessee s contentions that Section 115JB of the Act can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. It held that the starting point of computation of MAT under Section 115JB is the result shown by such a profit and loss account. Nevertheless, in the case of banking compan .....

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not be applied to a banking company, including the assessee and hence, the initiation of re-assessment proceedings was bad in law. (iv) Bank of Tokyo-Mitsubishi UFJ Ltd v. ADIT, ITA Nos. 5364/Del/2010 and ITA Nos. 5104/Del/2011 decided on 19th September 2014 4.3.14 The assessee was a foreign bank, incorporated in Japan and a resident of Japan within the meaning of Article 4 of the Indo-Japan DTAA. It was engaged in banking operations in India during the relevant assessment year of 2007-08, and i .....

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as per Section 115JB of the Act because the (beneficial provisions of the) Treaty overrode the IT Act. 4.3.16 The Assessing Officer and the Dispute Resolution Panel relied on the assessee having a PE in India to hold Section 115JB to be applicable. The assessee sought to rely on the decisions in Maharashtra State Electricity Board (supra), Kerala State Electricity Board (supra), Krung Thai Bank PCL supra), which held that since the assessee-company was not preparing its accounts as per Part II .....

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that the companies engaged in the power and infrastructure sector would remain exempt from the MAT levy. It then cited the amendments brought in by Clause 49 of the Finance Bill of 2002,45 which amended Section 115JB, noting that: 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- .....

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2 and subsequent years. 4.3.18 The ITAT held that coordinate benches of the AAR had consistently held that Section 115JB was not applicable to banking companies. Further, it accepted the assessee s contention that the 2012 amendment to the Finance Act, which had inserted Explanation 3 on computing book profits on the basis of accounts prepared under the governing Act of a company, was not retrospective. Given the substantial change Explanation 3 brought in the taxability of companies governed by .....

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the basis of book profits and total income under Section 115J of the Act. Although considered in a different context (under Section 115J), the decision of the three-judge bench brings out the inseparable link between the IT Act and the Companies Act and the assessee company s obligations under both. In paragraph 7 of the judgment, it observes that: For the said purpose, Section 115-J makes the income reflected in the companies books of accounts as the deemed income for the purpose of assessing .....

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the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these proced .....

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not empower the assessing officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of incom .....

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of accounts under the regulatory provisions of the Companies Act. CHAPTER V THE APPLICABILITY OF SECTION 115JB TO FIIS/FPIS: AN ANALYSIS A. Legislative History of the MAT Provisions in the IT Act 5.1.1 A quick perusal of the previous chapter reveals the evident inconsistency in the judgments and rulings of the ITAT and the AAR on the applicability of MAT provisions (whether Sections 115J, 115JA or 115JB) to foreign companies, including FIIs/FPIs. While the Delhi Bench of the ITAT in Bank of Toy .....

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ty of provisions of the Companies Act, 1956. 5.1.2 In view of such inconsistent rulings, there is an even greater need to put matters in perspective by considering the various circulars, Explanatory Memoranda, Finance Acts and Notes on Clauses. (i) Principles of statutory interpretation 5.1.3 Before proceeding, it is important to take note that the legislative history of a fiscal statute is a valid interpretive aid for construing an enacted provision, especially for ascertaining the evil sought .....

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particular provision, a speech made by a Minister or by a member of the legislature moving a bill can be taken into consideration in case there is ambiguity.54 In addition, the Notes on Clauses of the Finance Bill, and the Memorandum explaining its provisions may be relied upon in ascertaining the legislative intent in case of interpretive doubts or difficulties.55 It has been held by the Supreme Court in the case of K.P. Varghese v. ITO56 that the speech made by the mover of the Bill can certai .....

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9 5.1.5 In Sole Trustee, Lok Shikshana Trust v. CIT,60 the Supreme Court observed: - It is true that it is dangerous and may be misleading to gather the meaning of the words used in an enactment merely from what was said by any speaker in the course of a debate in Parliament on the subject. Such a speech cannot be used to defeat or detract from a meaning which clearly emerges from a consideration of the enacting words actually used. But, in the case before us, the real meaning and purpose of the .....

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him only elucidates what is also deducible from the words used in the amended provision, we do not see why we should refuse to take it into consideration as an aid to a correct interpretation. It harmonises with and clarifies the real intent of the words used. Must we, in such circumstances, ignore it? (ii) Legislative history of Section 115JB 5.1.6 In this context, it would be appropriate to begin with the legislative history of the erstwhile Section 115J, the scheme of which was similar to the .....

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x. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a minimum corporate tax on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30% of its book profit. In other words, a domestic widely held company will pay tax of at least 15% of its book profit. This measure still yields a revenue gain of approximately ₹ 75 crores. [Emphasis supplied] 5.1.8 Th .....

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tial dividends, have been managing their affairs in such a way as to avoid payment of income-tax. 36.2 Accordingly, as a measure of equity, section 115J has been introduced by the Finance Act. By virtue of the new provisions, in the case of a company whose total income as computed under the provisions of the Income-tax Act is less than 30 per cent of the book profit computed under the section, the total income chargeable to tax will be 30 percent of the book profit as computed. [Emphasis supplie .....

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s every company desirous of declaring dividend to provide for depreciation for the relevant accounting year. Further, the company is required under section 205 to set off against the profit of the relevant accounting year, the depreciation debited to the profit and loss account of any earlier year(s) or loss whichever is less. 63 [Emphasis supplied] 5.1.11 Section 205 of the Companies Act refers to the declaration and payment of dividends by an Indian company and does not apply to foreign compan .....

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Speech, stated:- 90 … (ii). I propose to introduce a Minimum Alternate Tax (MAT) on companies. In a case where the total income of the company, as computed under the Income Tax Act after availing of all eligible deductions, is less than 30 per cent of the book profit, the total income of such a company shall be deemed to be 30 per cent of the book profit and shall be chargeable to tax accordingly. The effective rate works out to 12% of book profit calculated under the Companies Act. Compa .....

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bove speech), the figure of 12% was arrived at by applying the tax rate on domestic companies to the aforementioned percentage of book profits (i.e. 40% of 30%). In case of a foreign company, in the assessment year 1997-98, the rate of tax was 55%. At that time, the rate of tax applicable to a foreign company would be 16.5% (applying the 55% rate to 30% of book profits) and not 12%. 5.1.14 Similarly, the Explanatory Memorandum to the Finance (No.2) Bill, 1996 states:-65 Minimum Alternative Tax o .....

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in accordance with Parts II & III of Schedule VI to the Companies Act, 1956. Book Profit is defined and certain adjustments are provided in the proposed section. The proposed amendment will take effect from 1st April, 1997 and, will accordingly, apply in relation to assessment year 1997-98 and subsequent years. [Clause 37] [Emphasis supplied] 5.1.15 The Notes on Clauses in respect of the Finance Bill, 1996 state that:-66 Clause 37 seeks to insert a new section 115JA of the Income-tax Act con .....

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rofit shall mean the net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 as increased or reduced by certain adjustments. It is also proposed to provide that in respect of the relevant previous year, the amounts determined under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-sec .....

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e fact that companies have earned substantial book profits and have paid handsome dividends, no tax has been paid by them to the Exchequer. 46.2 The Finance Act has inserted a new section 115JA of (sic) the Income-tax Act, so as to levy a minimum tax on companies who are having book profits and paying dividends but are not paying any taxes….. [Emphasis supplied] 5.1.17 The Finance Act, 2000 rendered Section 115JA inoperative from 1st April, 2001, inserting in its place a new provision, na .....

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Tax be now levied at the revised rate of 7.5% of the book profits as determined under the Companies Act instead of the existing effective rate of 10.5%. However, this will now be uniformly applied - barring one exception that I will mention later. There will also be no credit for Minimum Alternate Tax paid. This should bring all zero tax companies within the tax-net, which is also the basic purpose of this tax. The new system has the virtue of a lowered rate of tax, a simple method of computatio .....

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unset clause in the existing provision, so that, it is not applicable after assessment year 2000-2001. In its place, it is proposed to insert a new provision which is simpler in application. The new provisions provide that all companies having book profits under the Companies Act, prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of 7.5%, as against the existing effective rate of 10.5% of the book .....

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AT. No credit of MAT under the new provision will be available. However, the credit for the brought forward MAT paid under the existing provisions will be allowed against the regular tax payable but not against the tax payable under the new provision. [Emphasis supplied] 5.1.19 The CBDT Circular No. 794, dated 9th August, 2000,70 while explaining the provisions of the new Section 115JB of the Act states the following:- 43. Minimum Alternate Tax on companies: 43.1. In recent years, as the number .....

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provision, section 115JB of the Income-tax Act. 43.2. The new provisions provide that all companies having book profits under the Companies Act, prepared in accordance with Part-II and Part-III of Schedule-VI of the Companies Act, shall be liable to pay a minimum alternate tax at a lower rate of 7.5% as against the existing effective rate of 10.5% of the book profits. These provisions will be applicable to all corporate entities without any exception. 43.3. The new provisions further provide th .....

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mpt companies registered under section 25 of the Companies Act. 43.6 Certificate from an auditor has also been prescribed with a view to ascertaining the extent of book profits. [Emphasis supplied] 5.1.20 The Memorandum to the Finance Bill, 2000 and the CBDT Circular No.794 dated 9th August, 2000, refer to the effective rate of MAT as being 10.5% of Book Profits. This effective MAT rate was determined by multiplying 30% of the Book Profits (as was provided in the erstwhile section 115JA of the A .....

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Section 115JB of the Act, 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 th .....

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tion 3 had to be inserted to Section 115JB(2) by the Finance Act of 2012 to bring such companies within the ambit of Section 115JB. The Memorandum to the Finance Bill of 2012 read as under:72 As per section 115JB, every company is required to prepare its accounts as per Schedule VI of the Companies Act, 1956. However, as per the provisions of the Companies Act, 1956, certain companies, e.g. insurance, banking or electricity company, are allowed to prepare their profit and loss account in accorda .....

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puting the book profit under section 115JB. [Emphasis supplied] 5.1.24 This made it clear that the obligation under Section 115JB exists because of the regulatory requirements of the Companies Act and not independent of it. Thus, the Legislature could only have intended for MAT to apply to companies governed by the regulatory requirement of the Companies Act, 1956, else it would have clarified the manner of computation of book profits for FIIs/FPIs as well (as it did for electricity, banking and .....

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companies. Third, the 2012 amendment inserting Explanation 3 in light of decisions such as Krung Thai Bank and Kerala State Electricity Board (which had held MAT to be inapplicable in view of the Companies Act) reveals the government s intent to align Section 115JB(2) with the Companies Act and that the obligation under Section 115JB(2) does not exist de hors the Companies Act. 5.1.26 Having considered the legislative history of Section 115JB, it is important to analyse it in the context of the .....

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the AAR was of the view that since company is defined under the IT Act, therefore there is no need to borrow the definition of company from Section 3 of the Companies Act, 1956. 5.2.2 The AAR thus held that the charging provision contained in Sub-Section (1) of Section 115JB of the IT Act would also extend to a foreign company since the definition of Company under the Act makes no distinction between domestic and foreign companies. Therefore, the mechanism for computation given under Sub-Sectio .....

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govern the definition of the term only if the context permits the same. As soon as the context limits or otherwise requires an alternate meaning to such a term, then Section 2 cannot be given a strict application. 5.2.4 In Knightsbridge Estates Trust Ltd. vs. Byrne,75 the House of Lords held that where the context makes the definition given in the interpretation clause inapplicable, a defined word when used in the body of the statute may have to be given a meaning which is different from what is .....

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and Ross77 and State of Madhya Pradesh vs. Saith Skelton (P) Ltd.78 5.2.5 In our view, the MAT provision becomes unworkable if the decision of the AAR in Castleton79 is to be accepted. On a careful analysis, the Committee finds that the very structure of Section 115JB makes it non-applicable to FIIs/FPIs. The provisions of Section 115JB clearly suggest that the context of Section 115JB requires that the word company be restricted to include only companies covered by the regulatory regime of the .....

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o FIIs/FPIs, then, as a necessary corollary, every FII/FPI would be required to compile its global accounts (which are adopted by shareholders in the annual general meeting) in accordance with Part II of Schedule VI of the Companies Act, which is not discernible from the legislative intent. The inclusion of such foreign income in the book profit would also be contrary to the principle of territorial nexus which has been laid down by the Supreme Court as the basic principle for chargeability of i .....

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ies). It is evident, therefore, that the intention of the Legislature was not to cover all kinds of companies, as has been the view taken in Castleton.81 Otherwise, the Legislature would have brought about an amendment for FIIs/FPIs also to clarify the manner in which their book profits are required to be calculated. 5.2.9 In this regard, it is important to refer to the decision of the Kerala High Court in Kerala State Electricity Board vs. CIT82where it was held that Section 115JB of the Act st .....

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ity Board. 5.2.10 The ITAT applied these principles to an Electricity Corporation - Maharashtra State Electricity Board vs. JCIT83, a foreign bank in Krung Thai Bank PCL vs. JDIT84and statutory corporations in Union Bank of India vs. ACIT85and Dena Bank vs. DCIT.86 5.2.11 The above decisions clearly go on to show that the word Company in Section 115JB would not have the same meaning as in Section 2(17) of the IT Act but would have a narrower scope so as not to include every company as defined un .....

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94 of the Companies Act, 1956 and Section 115BJ of the Income Tax Act would be applicable to FPIs. 5.3.2 However, in the opinion of this Committee, the view of the Revenue appears to be incorrect. Upon a reading of the SEBI Regulations (both the 1995 Regulations as also the 2014 Regulations), it can be seen that the books of accounts required to be maintained by the FPIs are different from books of accounts specified under Schedule VI of the Companies Act. Schedule VI prescribes the instructions .....

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the compliance officer appointed by an FPI is usually situated outside India. 5.3.4 We now turn to Sections 591 to 594 of the Companies Act. Section 591 makes Sections 592 to 602 applicable to all foreign companies which have an established place of business within India. Section 594 provides that the foreign company shall, in every calendar year, make out a balance sheet and profit and loss account as per the Companies Act, a copy of which is to be delivered to the ROC. The term place of busine .....

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ies on business, such as an office, storehouse, godown or other premises, having some concrete connection between the locality and its business. 5.3.6 In Lord Advocate vs. Huron and Erie Loan and Saving Co.88, it was held that if a foreign company has an agent within the UK but has no office there, then it does not establish a place of business within UK. In Rakusens Ltd. vs. Baser Ambalaj Plastik Sanayi Ticaret89, the agent of an overseas company authorised to find customers on behalf of the co .....

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ld be deduced that some substantial business activity was being carried on. 5.3.8 It is important to have a look at the decision of the Delhi High Court in Tumlare Software Services (P) Ltd. vs. Magic Software Services91 where the Court, while deciding whether a foreign company had established a place of business in India in terms of Section 591, held that mere appointment of a constituted attorney by a foreign company for the purposes of signing a contract did not result in establishing a place .....

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ompany for the purpose of signing the contract does not mean that the said company has an established place of business in that country. Sole requirement for complying with the provisions of Part II of the Companies Act by a foreign company is that such a company must have an 'established place of business' at the time of signing the contract. Thus unless a foreign company has an established place of business at the time of signing of the contract the said company cannot be governed by t .....

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place of business in India since the latter requires some degree of performance which is not so in the case of the former. 5.3.10 FPIs do not normally have an office or employees of their own in India and they carry on their decision making activities outside India. The purchase and sale of securities in India can only be carried out by a SEBI registered stock broker. The local custodian only provides settlement services to FPIs and do not make any investment decisions on behalf of the FPIs. The .....

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sion contained in Sub-Section (1) of Section 115JB cannot be read in isolation of the computation mechanism given under Sub-Section (2). Therefore, where the computation of a tax against such income levied under the Act is impossible to conduct, the charge of tax against such income too would resultantly fail. This is a well established principle under tax jurisprudence as seen from the decision of the Supreme Court in CIT, Ernakulam, Kerala vs. Official Liquidator, Palai Central Bank Ltd. (In L .....

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ns in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legi .....

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t is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head. 5.4.3 The Revenue submitted before us that Section 115JB merely gives a general standard for preparation of accounts. Therefore, the same should be followed irrespective of whether the company is governed by the Companies Act or not. However, this view of the Revenue seems quite unten .....

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been maintaining accounts under both the Acts. There would not have been any need to bring in a specific amendment in 2012 to make the Electricity companies liable under Section 115JB. Thirdly, there is no guidance under Section 115JB as to which portion of the income of a foreign company, having no established place of business in India, is to be taken into consideration for the purpose of Section 115JB. There is also no guidance on how such foreign companies segregate their domestic accounts .....

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by way of the amendment in 2006, the first Proviso has been added to Section 10(38) to provide that the income by way of long term capital gains of a company, though exempt under Section 10(38), shall be taken into account in computing the book profit and income tax payable under Section 115JB. Therefore, the argument of the Revenue is that since the term company is mentioned in both Sections 10(38) and 115JB, then by necessary implication, Section 115JB must also be applicable to domestic as we .....

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tion 10(38), which makes a reference to Section 115JB would also not be applicable to FIIs/FPIs. 5.5.3 Therefore, we find that the ratio in Castleton95 that even foreign companies having no place of business or permanent establishment are also covered by Section 115JB, is not the correct position of law. We therefore are of the view that MAT provisions cannot be applicable to FIIs/FPIs. F. Section 115AD of the IT Act - A self-contained code for FIIs/FPIs 5.6.1 Part C of Chapter III dealt with th .....

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ble to tax at 18.5% of their book profits, thus effectively losing their concessional tax basis, specifically provided in Section 115AD of the IT Act. This would have the following consequences for FIIs/FPIs: a) First, long-term capital gains realised on the sale of Indian equities on the floor of a recognised Indian stock exchange, on which Securities Transaction Tax has been paid, would be taxed at 18.5% instead of 0% under Section 10(38) of the IT Act. b) Second, long-term capital gains reali .....

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pee-denominated bonds and government securities covered under Section 194LD read with Section 115A would become taxable in the hands of the FII/FPI at 18.5% instead of 5% as per Section 194LD. 5.6.2 The above four points clearly indicate that applying the MAT provisions under Section 115JB would render the separate scheme under Section 115AD otiose. Such an interpretation is further bolstered by the fact that the set off provisions and MAT credit, which can currently be carried forward for up to .....

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is thus clear that the Legislature could not have intended one part of the IT Act to render another part irrelevant and otiose. Given that the provisions of a statute have to be read harmoniously, we do not believe that Section 115JB would apply to FIIs/FPIs and they would instead, continue to be governed under the separate code under Section 115AD. G. Interpretation of Section 115JB in light of the 2015 amendment 5.7.1 Subsequent to the 2015 amendment inserting clause (iid) and (fb) to Explana .....

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premise that the insertion of an exclusion implies that in its absence, tax was payable in the past on what has now been excluded. Such an argument is not tethered to the text and context of the introduction of MAT and Section 115JB, as already discussed above. 5.7.3 It is pertinent to refer to the judgment of the Supreme Court in CIT v. Madurai Mills,96 where the three-judge bench had to interpret the impact of an exemption provision under Section 12B of the Income Tax Act of 1922, which was e .....

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ation of persons or liquidation of a company were mentioned in the third proviso under the earlier Act, as a matter of clarification to allay fears even though the language of Sub-section (1) of Section 12B was not intended to apply to such cases. Provisos, as mentioned on page 221 of Craies on Statute Laws, Sixth Edition, are often inserted to allay fears. A proviso is inserted to guard against the particular case of which a particular person is apprehensive, although the enactment was never in .....

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ection (1) of Section 12B of the Act, even though such a clarification was there in the third proviso of the section inserted by the earlier Act (Act 22 of 1947). It is well settled that considerations stemming from legislative history must not be allowed to override the plain words of a statute (see Maxwell on the Interpretation of Statutes, Twelfth Edition, page 65). A proviso cannot be construed as enlarging the scope of an enactment when it can be fairly and properly construed without attrib .....

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not actually required to exempt them from MAT liability and can only be said to be clarificatory in nature. 5.7.5 Thus, merely because the Legislature grants an exemption out of anxiety or caution, it should not be presumed that, but for such specific exemption, the charge would otherwise have been attracted.97 This is because the beliefs or assumptions of those who draft laws cannot actually make law.98 5.7.6 To conclude, merely because clauses (iid) and (fb) have been introduced in Explanatio .....

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we recommend that the government may consider the concerns raised in respect of the amendment brought out by the Finance Act of 2015. H. Interpretation of Section 115JB in light of Section 90 of the IT Act and the existing DTAAs 5.8.1 Although this Report is limited to the consideration of the applicability of Section 115JB to FIIs/FPIs, regardless of the applicability of any treaty, it is important to consider DTAAs, under which many foreign companies are exempt from tax or are taxed at a redu .....

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cle 51(c) of the Constitution.100 5.8.3 At this stage, it is relevant to briefly point out certain other problems in including FIIs/FPIs within the purview of MAT. For instance, various items of income under a DTAA cannot be taxed in India at all, although they constitute a part of the book profit of the FII/FPI. Alternately, certain items can be taxed in India - such as income attributable to a foreign company s PE in India - but these are entirely different and lower than the company s global .....

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ntained in Section 115JB, is incorrect. I. Tax certainty as a desirable goal 5.9.1 Apart from the legal arguments elaborated above, it is also significant to consider certain other commercial and policy arguments, particularly the importance of tax certainty to foreign investors. 5.9.2 Most FIIs/FPIs are well-regulated investment funds or pooling vehicles, being collective investment vehicles , that pool investments from different investors to access diverse Indian securities in a cost-effective .....

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an unanticipated tax liability, even without it actually being imposed, may be a sufficient trigger for investors to exit such open-ended investment funds based on a possible erosion in the NAV of the fund. Many such arguments were brought to the notice of the Committee. 5.9.3 It is in this context, therefore, that the sudden change in the interpretation of Section 115JB to apply to FIIs/FPIs has to be viewed. In the 19 years since MAT was introduced in the IT Act (in 1996), it had never been l .....

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their global accounts the RoC; evidencing that despite the Castleton ruling, FIIs/FPIs were not intended to be liable under the MAT provision. The situation, however, changed in August 2014, when notices began being issued to FIIs/FPIs calling upon them to pay MAT. A change in this settled position so late in the day is unfortunately perceived as a retrospective amendment to the law. 5.9.4 While we acknowledge that the Department has been constrained to issue MAT notices to FIIs/FPIs as a conse .....

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mum tax or minimum tax , since it does not directly affect our interpretation of Section 115JB. Nevertheless, we find it fit to consider the same at the end of our analysis to provide a better context to our recommendations. 5.10.2 In this regard, it is instructive to note that none of the other BRICS countries, namely Brazil, Russia, China and South Africa, levy MAT. Some of the OECD, such as Austria, Belgium, Hungary, Republic of Korea, Luxembourg, Slovak Republic/Slovakia and USA, levy MAT, b .....

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trading in stocks, securities, or commodities (including hedging transactions) through a resident broker or other agent, then a foreign person is not considered to be engaged in a trade or business in the USA. Hence, such income of the foreign person is not taxable in the USA. 5.10.3 India thus seems to be an outlier in its tax treatment of FIIs/FPIs. Significantly, the position has changed after the recent amendment brought in by the Finance Act of 2015 (as discussed above). 5.10.4 Having anal .....

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onstruction of such a provision. Having examined the various circulars and directions issued by the CBDT, including Circular Nos. 495, 762, and 794; and the legislative history, including the Finance Acts of 1987, 2002, and 2012, 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. This is further bolstered by the fact that the Legislature expressly failed to specify any method for the c .....

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with the phrase, In this Act, unless the context otherwise requires…. . 6.2.2 If Section 115JB is held applicable to FIIs/FPIs, they would be required to compile their global accounts in accordance with the Companies Act. However, such an obligation is absent in the legislative intent, as is evident from the insertion of Explanation 3 by the 2012 amendment, which failed to provide any computation mechanism for foreign companies book profits. Rather, the consideration of such foreign inco .....

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ection 115JB clearly does not cover an FII/FPI, and any other interpretation would render the computation mechanism in the Section unworkable. 6.2.3 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 Company105and Praxair Pacific Ltd.106 6.3 Whether FIIs/FPIs ordinarily have an established place of business in India under Section .....

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ion-making activities outside India. All their dealings are through independent agents in India. Additionally, the SEBI Regulations do not mandate their maintenance of books of accounts under Schedule VI of the Companies Act. Thus, FIIs/FPIs are, ordinarily, not covered under Sections 591 to 594 of the Companies Act, 1956. 6.4 Non-applicability of the charging provision in light of the computational failure under Section 115JB(2) of the IT Act Section 115JB of the IT Act is an integrated code an .....

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e to the computational failure in light of Section 591 read with Section 594, Companies Act and the absence of guidance on the segregation of domestic and global accounts, a foreign company having no established place of business or PE in India (i.e. an FII/FPI) cannot be taxed under Section 115JB. 6.5 Interplay between Section 115JB and Section 10(38) of the IT Act The Revenue argued that Section 10(38) is applicable to both domestic as also foreign companies and since company was used in both .....

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Is/FPIs. 6.6 Section 115AD of the IT Act - A self-contained code for FIIs/FPIs Section 115AD of the IT Act, introduced in 1993 (when FIIs entered the Indian market) provides for a separate scheme for taxing the income of FIIs/FPIs, arising from Indian securities at a concessional rate. A perusal of this scheme clearly indicates that applying the MAT provisions under Section 115JB would render this separate scheme under Section 115AD otiose inasmuch as FIIs/FPIs will be taxed at a higher rate und .....

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t them from MAT liability. Therefore, its prospective nature cannot be used to apply a different interpretation pre-2015. 6.8 Interpreting Section 115JB in light of Section 90 and the DTAAs Section 90(2) of the IT Act provides that the DTAA provisions will override the provisions of the IT Act (including Section 115JB) if they contain more beneficial provisions for the assessee-company. Thus, regardless of the interpretation given to Section 115JB, it will not be applicable where a beneficial DT .....

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e sudden change in the interpretation of the applicability of Section 115JB to FIIs/FPIs thus contextualises the need for tax certainty. In the 19 years since MAT was introduced (in 1996), it had never been levied on FIIs/FPIs, which were instead governed by the beneficial tax scheme under Section 115AD. Significantly, the Department also accepted the Timken ruling and did not file an appeal. Even after the 2012 ruling in Castleton, the Registrar of Companies, under the Companies Act, never call .....

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ustria, 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. The position however has significantly changed after the recent amendment brought in by the Finance Act of 2015, which is discussed in detail in the Report. B. Recommendations 6.11 In view of the fi .....

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o. 495, dated 22 September, 1987: [1987] 168 ITR (St.) 87. 2Circular No. 572 dated 3 August, 1990: [1990] 186 ITR (St.) 89. 3 [2012] 348 ITR 537 (AAR). 4 [2010] 326 ITR 193 (AAR). Here, the AAR ruled that since the Applicant in question (Timken) did not have any physical presence in India in the form of an office or branch or a permanent establishment, section 115JB would not apply on the sale of shares of a listed company, on which securities transaction tax has already been paid, and which was .....

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, according to Economic Times (2015), FM Arun Jaitley provides some relief to foreign investors from MAT, 1 May, Available: http://articles.economictimes.indiatimes.com/2015-05-01/news/61723858_1_fm-arun-jaitley-capital-gains-mat-relief (last accessed: 6 June 2015) 7[2015] 371 ITR 292, 334-335. 8 Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, Office Memorandum: Constitution of a Committee on direct tax matters - regarding, F.No.133/27/2015-TPL, 20 .....

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St.) 13, 14. 13(1999) 4 SCC 306. 14 Circular No. 559, dated 4 May 1990: [1990] l84 ITR St 106: The Direct Tax Laws (Amendment) Act, 1989, which amended section 115J to exclude certain types of profits (export profits, tourism-related profits earned in foreign exchange) and income of certain types of companies (engaged in electricity generation and distribution) 15 Circular No. 550, dated 1 January 1990: [1990] 183 ITR St 129: The Finance Act, 1989, made it mandatory for all companies to prepare .....

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115J would not apply to them. The Finance Act, 1989, also made other changes to the calculation of book profits, to counter certain tax avoidance practices being followed by companies (pertaining to book profits being reduced by the amount withdrawn from reserves or provisions) 16 The Direct Tax Laws (Second Amendment) Act, 1989. 17 Circular No. 572, dated 3 August 1990: [1990] 186 ITR (St) 89. 18 Circular No. 762, dated 18 February 1998: [1998] 230 ITR (St.) 12. 19 Circular No. 762, dated 18 Se .....

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mpanies. This is because the prevailing rate of tax applicable to foreign companies was 48% (in which case, the effective rate would have been 14.4%, and not 10.5%). 25 See Circular No. 8/2002, dated 21 August 2002: [2002] 258 ITR (St.) 131; Circular No. 1, dated 27 March 2009: [2009] 310 ITR (St.) 42; and Circular No. 5, dated 3 June 2010: [2010] 324 ITR (St.) 293 26 Circular No. 5, dated 3 June 2010: [2010] 324 ITR (St.) 293 27 Circular No. 14, dated 28 December 2006: [2007] 288 ITR (St.) 9 28 .....

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ebi.gov.in/cms/sebi_data/attachdocs/1389173830887.pdf 32 Press Note dated 4th September 1992; [1992] 197 ITR (St.) 173. Under these Old Government Guidelines, FIIs investing under the scheme would benefit from a concessional flat tax rate of 20% on dividend and interest income, 10% tax rate on long term capital gains and a 30% tax rate on short term capital gains. 33 Circular No. 657, Finance Act, 1993 , (1993) 114 CTR (St) 1, 30th August 1993,

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ction 2(42) of the Companies Act, 2013 defines a foreign company as any company or body corporate incorporated outside India, which has a place of business in India and conducts any business activity in India in any other manner. 38Section 602(c) of the Companies Act, 1956 defines place of business as including a share transfer or a share registration office. 39[2012] 34 ITR 161 (SC). 40Section 42 provides for special provision for deductions in the case of business for prospecting, etc., for mi .....

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9 SCC 1. 47 ITA Nos. 5364/Del/2010 and ITA Nos. 5104/Del/2011 decided on 19th September 2014. 48 [2010] 326 ITR 193 (AAR). 49 [2010] 326 ITR 276 (AAR). 50 [2012] 348 ITR 537 (AAR). 51 [2012] 348 ITR 351 (AAR). 52 S.C. Prashar v. Vasantsen Dwarkadas, [1963] 49 ITR 1 (SC). 53 K.P. Varghese v. ITO, [1981] 131 ITR 597 (SC). 54 Kerala SIDC v. CIT, [2003] 259 ITR 51 (SC). 55 Rangaswamy (M) v. CWT, 221 ITR 39 . 56 [1981] 131 ITR 597 (SC). 57 [2003] 259 ITR 51 (SC). 58 [2008] 301 ITR 309 (SC). 59 (1996 .....

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for 2000-01 - Part B, [2000] 242 ITR (St.) 18, 29. 69[2000] 242 ITR (St) 117, 138. 70 [2000] 245 ITR (St.) 21. 71 Notes on Clauses, Finance Bill 2002, [2002] 254 ITR (St) 118, 151. 72 [2012] 342 ITR (St.) 234, 238-240. 73[2012] 348 ITR 351 (AAR). 74[2012] 348 ITR 537 (AAR). 75[1940]2 All ER 401 (HL). 76[1981] 128 ITR 294 (SC) - The Court in that case held that goodwill cannot be described as an asset within the meaning of Section 45 and hence, any capital gain arising on the transfer of such goo .....

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