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The Bombay High Court on Tuesday provided interim relief to foreign portfolio investor Aberdeen. The tax authorities had passed an order requiring it to pay Minimum Alternate Tax (MAT) on gains in the Indian market.
The court has stayed the tax authorities’ move till the matter is next heard.
Lead counsel Porus Kaka said the next hearing would be around June 23.
“There is an interim order. It provides a stay on proceedings,” he said.
The investor’s lawyer had argued that the tax authorities had passed a final order instead of a draft order. This left it without the option to appeal before the dispute resolution panel (DRP). The panel hears appeals against tax demands.
A writ petition on the matter had been filed last week.
With a foreign fund house getting a court stay on the controversial MAT levy, the tax department on Tuesday said it would study the Bombay High Court order before taking a view on the matter.
“I have yet not studied the Bombay High Court order on MAT notice to Aberdeen.... We will have to see if it is a general stay order. We will have to see if capital gains exemptions applies to Aberdeen under the bilateral tax treaty,” Central Board of Direct Taxes Chairperson Anita Kapur said on Tuesday.
MAT was originally introduced to ensure companies that make large profits do not escape the tax net entirely on account of exemptions and incentive schemes. The Authority of Advance Rulings recently said MAT could also apply to FPIs.
The government clarified in the Budget that MAT would not apply to FPIs. Tax authorities said the decision was a prospective one and previous years’ MAT would still have to be paid. This raised their tax rate from as low as zero per cent to as high as 20 per cent.
Other foreign investors have also moved the Bombay High Court. These include National Westminster Bank Plc and BNP Paribas L1. The former has filed three pleas. Others who have moved court include First State Asia Pacific Sustainability Fund, First State Indian Subcontinent Fund and First State Global Emerging Market Sustainability.
Khaitan & Co is the law firm representing them, according to Bombay High Court records.
Around seven other funds are also said to be in various stages of filing petitions before the high court, according to a source.
The tax department has sent 68 notices for a total value of Rs 602 crore so far, according to a reply filed in Parliament. However, tax experts say this figure is limited to the notices sent out so far. Others could still be in the works. Also, a decision to apply it over the last seven years would significantly increase the tax liability of foreign investors, they said.
Meanwhile, the government introduced an amendment in Parliament last week to extend the exemption granted for foreign investors’ capital gains to interest income and other income as well. However, this is valid from the current Budget. There is no exemption from the tax liability for previous years.
A tax consultant handling these matters said while the stay was a positive, there might be limited impact for other foreign investors.
“This was a case where the final order was passed and there was no option given to appeal at the DRP. Other FPIs are dealing with draft orders... If the Bombay High Court has provided for interim relief and agreed to hear one of the foreign portfolio investors, it will be seen as a positive by the others. They would hope that their matters would also be heard with this one," said the person.
A tax department spokesperson could not be immediately contacted for comment. Sameer Gupta, tax leader for financial services, EY, said, “We understand that the matter has been admitted by the Bombay High Court on technical grounds that the tax officer has directly issued a final order instead of a draft order since there is a variation to the returned income made on assessment of a non-resident company. The MAT issue was seemingly not taken into account by the Bombay High Court in admitting the case which will now only be heard on merit in June 2015.”
"If the interim stay has been granted on technical procedural grounds then there would not be any material impact on the larger issue of MAT applicability. For clarity, one will have to wait for the court to opine on the substance of the matter or until there is any substantial government action in this regard," said Tejesh Chitlangi, partner, IC Legal.
THE BATTLE OVER MAT SO FAR
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Sept 2014: First report of MAT notices being sent out
- 2015
- Feb: FM Jaitley says MAT not applicable prospectively
- Mar: Tax department sends notices on previous years' claims
- Apr 14: Jaitley says the government will press ahead with Rs 40,000-crore tax demand
- Apr 23: Government officials ask FPIs to provide estimated liability in concall
- Apr 24: Demands made to only 68 FPIs for dues totalling Rs 608.83 crore so far, says MoS Jayant Sinha
- Apr 29: FPIs move Bombay High Court against MAT notices
- May 5: Bombay High Court provides interim relief to one of the funds on technical grounds
