Aberdeen moved the Bombay HC against retrospective MAT demands by the Indian IT department on May 2.
The Bombay High Court (HC) on Tuesday granted interim relief to Aberdeen Asset Management in the matter relating to minimum alternate tax (MAT), issuing a stay order on tax recoveries and notices issued by the Indian income tax (I-T) authorities. The court has directed the I-T department to file its reply by June 18 and will hear the matter on June 23.
The exact details of the court’s directive were not immediately available but legal and tax experts told FE the relief was given on a technical issue since the I-T department had not followed the correct procedure while issuing notices. Aberdeen’s fund Global Emerging Markets had apparently been issued a final order without having been issued a draft assessment order. This would give the department statutory powers to recover taxes demanded.
Senior advocate Porus Kaka argued that Aberdeen had been left with no alternative but to file a writ petition in the Bombay High Court after the I-T authorities issued the final order. The procedure followed by the I-T department, Kaka observed, was not in accordance with the provisions of Section 144(C) and that a final assessment order could not be passed without complying with the provisions relating to the disputes resolution panel (DRP).
The stay means the IT department cannot recovery tax liabilities from Aberdeen. The directive may come as a a relief for others against whom final orders have been issued ahead of a draft assessment order.
“We don’t think we should be paying it (MAT) and we’re appealing,” Hugh Young, MD, Aberdeen Asset Management Asia, told FE in an email response on Tuesday.
In addition to Aberdeen, five foreign portfolio investors (FPIs) including BNP Paribas and London-based National Westminster Bank in its own capacity as well as depository of funds of First State Investments UK filed their petitions against the I-T department on April 29. Their proceedings will begin on May 6, showed information in the court registry.
On Monday, The Financial Times had reported that tax authorities had demanded “less than $50,000” in MAT from one of Aberdeen’s funds. In addition to contesting final orders, several FPIs are in the process of filing writ petitions contesting the reassessment notices received for previous years (FY10 and FY11) under Section 148 as they do not want to be subject to proceedings of the tax demand, legal and tax experts told FE.
A foreign company that gets the draft order can either approach the DRP with its objections or file an appeal before the tax officials. In that case, the tax officer will pass the final order which than can be challenged with commissioner of income tax. The HC may then guide the tax officials to consider this final order as the draft order. It can also conclude that the tax department violated the provisions and altogether quash the final order also as the deadline to issue draft order for fiscal 2011-12 (March 31, 2014) has passed.
Aberdeen moved the Bombay HC against retrospective MAT demands by the Indian IT department on May 2. Aberdeen is being represented by law firm Nishith Desai Associates.
Harish Salve, one of India’s leading lawyers in the areas of constitutional, commercial and taxation laws, is representing the FPIs, as widely reported in the media.
The I-T department sent notices to over 68 FPIs claiming tax worth R602.83 crore for past capital gains. The notices mean that FPIs will have to pay tax at an effective rate of 20% on business income or ‘book profit’ with retrospective effect, replacing the capital gains tax framework.
Under the current norms, foreign institutions are not required to pay any tax on long-term capital gains (gains from investments exceeding one year). Institutions are liable to pay short-term capital gains tax (tax on investment less than one year) at 15%.
On April 23, the government had assured over 1,000 foreign institutions across the US, Hong Kong and Singapore they they could be allowed to avail of treaty benefits to ward off tax demands on capital gains booked over the years till March 31. About 41% of investment into the Indian capital market comes in via these countries, official data show.
While FPIs based in Singapore and Mauritius can avail of full treaty benefits to ward off tax demands, treaties with UK and Luxembourg do not completely exempt them from capital gains.
The Central Board of Direct Taxes then said it will settle all MAT-related matters coming under the ambit of double taxation avoidance agreements within a month of filing of claims. The move is aimed at quickly resolving the controversial tax issue facing FPIs. The retrospective tax issue escalated in the last fortnight with FPIs collectively pulling out $1.8 billion in the cash segment since April 15.
FPIs encompass all foreign institutional investors, their sub-accounts and qualified foreign investors under a new regime that came into force on June 1, 2014. Securities and Exchange Board of India data show that there are more than 8,200 FPIs registered in the Indian capital market.