MAT not for foreign firms having no permanent office

The purpose behind the introduction of provisions relating to MAT (Minimum Alternate Tax; Section 115JB) was to levy some tax on the “Zero Tax Companies“. The government felt a number of companies with huge profits were avoiding payment of income tax by adjusting their profits against allowances permitted under the Income-tax Act. To circumvent this strategy, MAT was introduced.

The MAT is charged on the book profits. It started with 7.5% on book profits, and has increased to 18% on book profits w.e.f. fiscal 2010-11. The provisions relating to MAT are proposed to be carried through in the New Direct Taxes Code.

The issue for consideration is if the provisions of MAT would apply to a foreign company. The Authority for Advance Ruling in an earlier case (234 ITR 335) held MAT is applicable to a foreign company. The argument was there were so many integral and important provisions in Section 115JA (relating to MAT), which cannot apply. This contention did not find favour with the authority. The authority said, MAT applies to every company and there was no reason to presume the Legislature did not intend the provisions to apply to a foreign company.

The considerations weighing for the ruling are as under: 

 

 

there was no difficulty in preparing accounts in accordance with the Companies Act, 1956; 
 

that the budget speech explains the purpose behind MAT (section 115JA); 
 

that there is a non-obstante clause in section 115JA; 
 

that there is no specific exclusion of ‘foreign company’ under section 115JA; 
 

that the definition of ‘company’ given in section 2(17) of IT Act means a ‘foreign company’.

However, in a recent case of Timken Company, USA, in the judgment on July 23, the authority has taken a different view. It has been held the provisions of MAT are not designed to be applicable to a foreign company with no physical presence in India.

It was argued on behalf of the foreign company that many foreign companies claim treaty protection under section 90 of the Act and offer their different streams of income like royalty, fees for technical services, dividend, interest etc. for tax at concessional rates (compared to rules under the Act). In some cases, foreign companies also claim exemption from tax in India on the basis of DTAA. Thus, if the proposition that MAT applies to foreign companies is accepted, then in every case, despite treaty protection, tax under MAT will be payable. Section 90 of the Income-tax Act which gives treaty protection to foreign companies cannot be interpreted to be overridden by MAT provisions. If that is not accepted then the treaty protection will be an absurdity.

The Authority concluded that provisions of MAT will not apply to foreign companies by observing as under:

“The applicant’s contention is that if due consideration is given to the context in which the word ‘company’ has been used, it can be seen that what is meant is an Indian company. At no place, does the context in which the word ‘Company’ has been used in the section give an indication it would include a foreign company. Various reasons given above are supported by CBDT circulars, Finance Minister’s speeches, notes to clause and memorandum attached to the Finance Bill. Hence the definition of ‘Company’ in section 2(17) in the context of section 115JB should be read to exclude foreign company.”

The Timken Company’s case (supra) is a landmark judgement setting at rest the controversy MAT is not applicable to a foreign company with no presence or PE in India.

The author is a Sr. Partner in S.S. Kothari Mehta & Co.E-mail: hp.agrawal@sskmin.com