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Business News/ Politics / Policy/  Bombay HC provides interim relief to Aberdeen in MAT case

Bombay HC provides interim relief to Aberdeen in MAT case

Interim stay would mean govt cannot initiate recovery proceedings against foreign entities till the matter is decided, say experts

The court will be hearing the petitions filed by five other entities on Wednesday. Photo: Hindustan TimesPremium
The court will be hearing the petitions filed by five other entities on Wednesday. Photo: Hindustan Times

The Bombay high court has given interim relief to Aberdeen Global Emerging Markets by staying the income tax department’s notice to the overseas investor for payment of minimum alternate tax (MAT).

On Tuesday, a division bench headed by chief justice Mohit Shah directed the tax department to file its reply by 18 June and posted the matter for hearing on 22 June.

The petition was filed by Aberdeen on 2 May, according to information available on the court’s website.

In comments to Reuters on Monday, Hugh Young, managing director of Aberdeen Asia, had said that they had decided to appeal the tax demand as it was a matter of principle.

“We’ll probably end up spending a lot more on the legal challenge than the tax demand, but the point being that if you receive these and don’t challenge you can end up receiving a lot more," Young told Reuters.

MAT is a tax paid on book profits.

The interim stay granted to Aberdeen may come as a relief to other foreign investors who have also challenged the tax demands. “The court could take a similar stand in other cases as well by telling the tax department to file their replies.

“The interim stay would mean that the tax department cannot initiate any recovery proceedings against the entities till the matter is decided," said H.P. Ranina, a senior lawyer in the Supreme Court.

According to Ranina, the Supreme Court could also ask all such cases to be transferred to it since a similar plea has been filed by Castleton Investment, which is scheduled to be heard in August.

Apart from Aberdeen, five other entities have also approached the Bombay high court against the tax department’s MAT notice. The entities include, National Westminster Bank Plc, First State Asia Pacific Sustainability Fund, First State Indian Subcontinent Fund, First State Global Emerging Market Sustainability and BNP Paribas L1. The court will be hearing the five entities’ petitions on Wednesday.

Sudhir Kapadia, national tax leader at EY, said the stay order will serve only a limited purpose. “The stay will mean that the income tax department cannot enforce the tax demand on the investor. But the court has not yet ruled on the merits of the case. If meanwhile, the Supreme Court rules on the applicability of MAT on FPIs (foreign portfolio investors) in a similar case pending before it, then that can be used as a precedent by the companies and the tax department," he said.

FPIs have been battling the income tax department over levy of MAT on capital gains made by them from share transactions. While the tax department has issued demands to 68 foreign institutional investors (FIIs) for payment of dues totalling 608.83 crore, the total amount is expected to cross 40,000 crore, Mint reported on 27 April.

Finance minister Arun Jaitley, in his 2015 budget speech, had provided that MAT will not be applicable on capital gains accruing to foreign investors from sale of shares. But this was made applicable only from 2015-16, though foreign investors were seeking a retrospective exemption.

Expressing its inability to provide relief for earlier years, the government had asked these investors to approach the higher courts to seek relief. It has also clarified that international tax treaties that India has with many countries cannot be overridden.

But this will only provide a relief to around one third of the FPIs investing in India who route their funds through countries such as Mauritius, Singapore and the Netherlands. India’s double taxation avoidance agreement with these countries does not allow India to levy tax on capital gains and consequently levy MAT.

According to a release issued on Tuesday by Prime Database, a primary market tracking firm, the US accounts for 27% of all registered foreign investors in India, followed by Mauritius (24%), the UK (13%), Singapore (8%) and Luxembourg (6%). Foreign investors from China, Australia, Canada, Switzerland and Ireland have also invested in the Indian capital market.

Justifying the income tax department’s actions to levy MAT on FPIs, revenue secretary, Shaktikanta Das had referred to a judgment by the Authority for Advance Rulings (AAR) in August 2012 that had said that MAT will be applicable on FPIs.

The AAR had ruled that section 115JB of the income tax Act regarding the levy of minimum alternate tax applies to every company and makes no distinction between a resident firm and a non-resident firm.

This brought even FPIs, who have argued that they do not even maintain books of accounts in India, into the ambit of MAT.

In a column in the Financial Times newspaper, Jaitley had said that the government was not in favour of undermining the AAR’s decision through retroactive exemption.

“The rule of law cuts both ways. We cannot say it is undermined when we take retroactive actions, and at the same time seek to override, retroactively, the decisions of our institutions. However, we have made clear that these rulings can be contested in higher courts, which will respect due process and have the power to quash faulty decisions," he had said.

The whole tax tangle has raised questions on the ability of the Narendra Modi led government’s ability to ensure that foreign investors get a stable and predictable tax regime. Though Jaitley moved to provide further relief on the MAT front by exempting interest income, royalty, technical fees and capital gains accruing to foreign companies from the MAT net by moving amendments to the finance bill, the prospective nature of the exemptions is likely to result in a prolonged legal battle.

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Published: 05 May 2015, 06:13 PM IST
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