By Ashley Coutinho
A ruling by the Mumbai Income Tax Appellate Tribunal this week has held that the provisions of the Minimum Alternate Tax, or MAT, do not apply to foreign companies, including foreign portfolio investors (FPIs).
Tax experts reckon this is a welcome judgment for FPIs which are foreign banks or reinsurance companies also having an Indian branch. It affirms the view that income of overseas branches of foreign banks, registered as FPIs, will not be automatically subject to MAT provisions, and that treaty provisions override the provisions of the IT Act, which include MAT provisions.
“Foreign companies in general will fund this ruling to be a reaffirmation of the principle that MAT does not apply to them. In any case, the decision that MAT does not apply to income that does not get recorded in the books of account will be useful to all taxpayers,” Anish Thacker, partner at EY India, said.
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The case is for AY2015-16 and pertains to the Singapore branch of Credit Suisse, a Swiss bank, which is registered with Sebi as an FPI. It earned an income of about Rs 703 crore from transactions in Indian securities along with an interest income of Rs 24 crore and fees for technical services amounting to Rs 1 crore.
Credit Suisse also had a banking branch in Mumbai, which prepared accounts in India and constituted a permanent establishment (PE). The income earned as an FPI was not attributable to this branch and was therefore not included in the books of account of the branch. The said income was, however, offered to tax in the return of income filed by the taxpayer.
The assessing officer (AO) held that the taxpayer was liable to MAT and sought to add the income of over Rs 700 crore to the booked profit of the taxpayer, which the latter objected to.
MAT provisions are not applicable to FPIs not having PE in India. The assessing officer, however, had sought to apply the provisions of MAT to the taxpayer based on the premise that it has a PE in India. The AO relied on certain judicial precedents to contest that provisions of MAT should apply to foreign companies.
FPIs typically operate through a banker, broker, custodian or tax advisor in India who are independent service providers and their activities do not constitute a PE in India, according to experts.
The tribunal said accounts of a foreign company are not prepared in accordance with Part II and Part III of Schedule-VI of the Companies Act, 1956 and their accounts are not laid in an annual general meeting before shareholders of a company for approval, which are the requirements for applicability of MAT provisions. It further noted that MAT provisions cannot be applied in cases where the tax treaty is invoked as these provisions are subordinate to Section 90(2) of the IT Act.
“As per the provisions of the India-Switzerland DTAA, whatever profit or income that was generated from the investment activity as an FPI could not be attributed to the PE which Credit Suisse had in India in the form of Mumbai branch which was carrying out banking activity, as these are two independent businesses, and hence, MAT provisions cannot be applied to such profit or income,” said Dhaval Jariwala, partner, PNDJ & Associates.
Separately, the tribunal concluded that the income on which the AO sought to levy MAT, were not included in the books of accounts drawn by the Mumbai bank branch as per the Banking Regulations Act, 1949 and the question of levying MAT on these amounts did not arise.
“The non-applicability of MAT provisions to income earned by FPIs is a settled issue post the amendment brought in by Finance Act 2016 which clarifies that provisions of MAT should not be applicable to foreign companies not having PE in India. With the decision of the Mumbai Tribunal, it has become clear that any foreign company having a PE in India and earning income from investments (as an FPI) would not alter the position that MAT is not applicable to such income,” said Suresh Swamy, partner, Price Waterhouse & Co.