MAT relief to Castleton

Government abides by circular in Supreme Court

In a major relief to Mauritius-based company Castleton Investment, the government on Wednesday told the Supreme Court that minimum alternate tax (MAT) would not be applicable to foreign companies that do not have a permanent establishment (PE) or a place of business in India.

Bringing closure to the controversy, the apex court dismissed the case filed by Castleton challenging the government's tax demand.

Attorney General Mukul Rohatgi told the court that the tax office will abide by the MAT circular of the government on the issue.

The Central Board of Direct Taxes (CBDT) had in a circular issued last week clarified the provisions of Section 115JB in the Income Tax pertaining to MAT would not apply to foreign companies with no PE in India with effect from the 2001-02 assessment year.

Those companies based out of a country having a double tax avoidance agreement with India and not having a PE would also be exempt from the tax. The government will suitably amend Section 115JB in the next session of Parliament.

In 2012, the Authority for Advance Rulings (AAR), Delhi, had directed Castleton to pay MAT in India on its book profits, when the company transferred shares from a Mauritius entity to one in Singapore. On the other hand, earlier AAR rulings in similar cases of Timken and Praxair had said there was no case for MAT on foreign institutional investors (FIIs).

Among other legal issues, the case pertains to applicability of MAT on Castleton, as it transferred its 3.77 per cent of GSK India to Singapore GSK Pte, which is also part of the GlaxoSmithKline group, but incorporated in Singapore.

The Mauritius-based firm had filed a special leave petition (SLP) against AAR in the Supreme Court in May 2013. After a two-year gap, Castleton Investment Ltd pursued this case.

Swept under the MAT

• The dismissal comes after the government this month said it would revise its tax rules to exempt foreign companies from having to pay MAT
• This had made it virtually certain the court would dismiss Castleton’s legal challenge, which had questioned whether MAT could be imposed on foreign companies
• The imposition of MAT on foreign institutional investors since late last year had sparked an outcry against the government, given the tax had previously never been imposed on overseas companies

The tax authority was of the view that institutions such as Castleton Investment have to pay at least MAT. AAR had ruled that while Castleton is exempted from capital gains under Article 13(4) of India-Mauritius tax treaty, it has to pay MAT on these transfer gains.

The finance ministry asked former law commission chairman A P Shah to look into the applicability of MAT on FIIs. Finance Minister Arun Jaitley accepted the Shah Committee report in August, which suggested the past cases of MAT on foreign investors be withdrawn and that MAT should not apply to foreign companies without PE in India.

The CBDT has already issued instructions to field officers not to pursue past notices slapped on foreign investors. This year's Union Budget had announced there would not be any MAT on FIIs from the current financial year.

This means there won't be any follow-up action on the 68 notices that have been sent to FIIs on past MAT cases. The combined tax dispute amounts to Rs 603 crore. Tax experts called the latest development a big positive for the investment climate in the country.