Before he decided to impose MAT on foreign institutional investors (FIIs) retrospectively, the finance minister might have done well to heed to March Hare’s sound advice to Alice in Alice in Wonderland: “…you should say what you mean.”
The FM’s defence for the tax was that the government had inherited a ticklish legacy issue which had to be tackled within the framework of the extant law. Initially, FIIs hailed his Budget for the current year for providing the much-awaited clarity on their liability to pay MAT. From the current year, he announced, the capital gains they made from transactions in securities, invested in accordance with Sebi regulations, would not be part of book profits for the purposes of MAT; and thus wouldn’t attract this levy. However, because the relevant provision, section 115-JB, was not happily worded and had given rise to conflicting interpretations, the revenue seized upon one of these and began issuing notices for the levy of MAT on incomes alleged to have escaped assessment for earlier years. The move, as we shall see, was ill-conceived and poorly thought through. If it had not been challenged, it would have resulted in raising retrospective tax demands of about R40,000 crore. How could the government raise taxes retrospectively, FIIs asked, when the FM had promised he would never resort to such measures?
The government was clearly on the back foot, even though one major judicial decision—the ruling of the Authority for Advance Rulings (AAR) in Castleton Investments, a company resident of and incorporated in Mauritius—had gone in its favour. In this case, AAR ruled, inter alia—perhaps somewhat perversely—that when the language of a provision of law is clear and unambiguous, it is irrelevant to turn to other extraneous documents such as the speech of the finance minister to find out the true intention of the legislature. Section 115-JB(1) uses the word “company” and section 2(17), the relevant definitional provision, clearly lays down that the term “company” includes within its ambit companies incorporated both inside as well as outside India. MAT is thus clearly attracted in the case of foreign companies, ruled AAR.
This ruling was erroneous on at least four counts. One, while it is true that in the absence of any ambiguity, a fiscal statute should be interpreted according to the plain meaning of the words it uses, there is another equally valid rule of interpretation which should not be lost sight of, particularly in conditions of complexity and ambiguity. This rule of contemporaneous exposition comprises ascertaining the true intention behind the statute by examining contemporary documents such as the FM’s speech, the relevant notes on clauses, etc. In this particular case, the FM’s Budget speech, the notes to the Finance Bill, 2002, and a subsequent circular issued by CBDT all seem to indicate that the tax was to be raised from domestic companies only. In fact, in the case of Timken, an earlier judgment of the same authority after referring to these documents held accordingly. Earlier contemporary documents, when this tax was imposed under other provisions, appear to support this view.
Two, the ruling in the Castleton case totally ignored the computational problems involved in extending the scheme of MAT to foreign companies not under any obligation to prepare their final accounts in accordance with the Companies Act. AAR thus cast an unreasonable burden on FIIs, compelling them to prepare two sets of accounts, one of which would be exclusively for determining their liability under MAT and one for other purposes. This is hardly a way to welcome foreign investment into the country. AAR should also have noticed an earlier Supreme Court ruling in CIT vs BC Srinivasa Setty to the effect that even when a receipt falls within the ambit of the charging section, it cannot be brought to tax if the machinery or computational provisions fail.
Three, while relying on the definitional section—section 2(17)—to hold that the term “company” included a company incorporated outside India, AAR should have, but did not, give enough weightage to the expression “unless repugnant to the context” which figures at the very outset of the provision. In the context of the very nature of the controversy relating to the imposition of MAT on FIIs, defining a company to include foreign companies is repugnant to the context for reasons more than one. The FM’s speech of 2002 appears to support this conclusion.
Four, there is a problem raised by the Delhi High Court in the case of Linde AG, Linde Engineering Division and Another vs Deputy Director of Income-tax. It seems AAR has been departing from its past rulings in other cases as well and this tendency has been frowned upon by the High Court. In the Castleton case, since there was already a well-considered ruling on the issue, AAR would ordinarily have been expected to follow the same in keeping with spirit of Article 14 of the Constitution. In fact, the Revenue had accepted this decision but given up its stand. By holding to the contrary in the Castleton case, AAR reignited a controversy which had almost died a natural death.
AAR’s approach is hardly conducive to judicial discipline which demands that judicial bodies should respect past rulings.
The story of the Castleton ruling is a classic case study of how not to impose a tax. However erroneous the ruling, the government cannot absolve itself of what happened subsequently. It is always better to follow a balanced well-argued ruling in line with the government’s own intention, rather than depend on one which does not appear to respect past precedents. When it comes to the crunch, the larger national interest must prevail: there is no point trying to collect R40,000 crore if the long-term losses in revenues resulting from the flight of FIIs are likely to cost the government far, far more.
The government would also have done well to heed the Latin maxim recently used by the Supreme Court in CIT vs Vatika Township—lex prospicit non respicit. A legal interpretation made today should not change the character of a past transaction. Nor should it modify an accrued right or impose an obligation or duty which did not exist earlier.
Finally, the entire controversy could have been avoided had the government not issued notices in the first instance and allowed the Supreme Court to sort out the matter. The controversy could also have been eschewed had the relevant provision been drafted more sharply. The draftsperson should not have used the word “company” when she actually meant a domestic company. She might reply along with Alice: “…at least I mean what I say.” In law as in life, this is often not good enough.
Hardayal Singh is former chief commissioner of income-tax and ombudsman to the income-tax department, Mumbai. Padmini Khare Kaicker is managing partner of BK Khare and Co
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