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Inconsistent AAR rulings led to MAT dispute: AP Shah

The government Tuesday accepted the recommendation of the Justice AP Shah committee report to not pursue cases against foreign institutional investors (FIIs) involving minimum alternate tax (MAT) levied prior to April 1, 2015, said Finance Minister Arun Jaitley.

In an interview to CNBC-TV18’s Shereen Bhan and Menaka Doshi, Justice AP Shah explains the findings of his committee.

Below is the verbatim transcript of the interview

Shereen: Because the Finance Minister in his press conference a short while ago said that there were some questions that Central Board of Direct Taxes (CBDT) officials had raised with regards to the reasoning or the rationale behind certain recommendations and then your committee met again to incorporate your response to those reasonings. Could you please take us through what were the comments or the objections or the criticisms, if any, raised by the CBDT and in what manner did you incorporate your response to the final report that you submitted on August 25?

A: First let me clarify, there was no criticism by the CBDT. The CBDT wanted to know or had some questions, some concerns about the impact of the report on foreign companies having permanent establishment or having a place of business in India. The issue which was referred to us was only in respect of Foreign Institutional Investors (FIIs) or Foreign Portfolio Investments (FPIs).

Now, as far as foreign companies with permanent establishment or place of business is concerned there was an earlier judgement in P14 and Niko in 1998 holding that such companies would be covered. In 2010 in Timken and Praxair the advanced ruling authority held that Minimum Alternative Tax (MAT) provisions would not apply to a foreign company without a permanent establishment or a place of business. Now this view was upset in Castleton by a single member of the advance ruling authority.

Now the issue before us was whether FIIs or FPIs were covered by MAT prior to the amendment of April 2015. Now the issue was limited and we submitted our report and in our report we categorically observed that we are not expressing any opinion about the foreign companies with permanent establishment or with place of business.

Now the CBDT felt that some of the observations might impact the cases of the foreign company with PE or with place of business. So we make some small changes and our recommendation remains the same that the 115JB prior to April 1, 2015 would not apply to FIIs and the reason for that was according to us the 115JB would apply to a company which is regulated by company law. Now the company law would not cover a case of a foreign company which doesn’t have a place of business in India.

If our view is that FIIs having no place of business are not covered by the regulatory regime of the companies law and therefore naturally the MAT would not apply because not only the machinery section but also the computation section would fail because how you compute the income of an FII which is not required to file its accounts under the companies law. There is no guidance, as a result the whole global income would be considered and therefore we say we applied some of the judgements of Supreme Court and we said that the FIIs are not covered by the 115JB prior April 1, 2015 and there is no change in the report. The report remains the same, it is only by way of clarificatory nature and this you will find it is in the chapter 5 and 6 of the report that position has been clarified.

Shereen: If you can explain to us what were the changes incorporated on the basis of the reasoning you just gave us?

A: There is another reason given by us for why the MAT is inapplicable to FIIs was that the FIIs are covered by a fixed tax regime and the minimum tax cannot be more than the maximum, this has really happened in case of FIIs. We considered that and we felt that it is a completely different tax regime and obviously 115JB is not attracted. We looked into the legislative history and the other relevant judgements and this was our view. Now we have recommended that either CBDT should issue a circular to the effect that FIIs would not be liable to pay MAT prior to April 1 2015 or it can be done by a simple clarificatiory amendment to 115JB, that FIIs were never covered by this law. This is our recommendation.

It is a fact that in the mean time some 600 odd notices were sent, some of the matters were adjudicated and thereafter some are in writ courts, some are with some other authorities. So, this is the issue and then it can be easily clarified. It is for the government to take a call on this, how it can be rectified. I really won’t be able to comment as to what course of action the government should adopt now because it is for the Finance Minister to take a decision in that regards.

Menaka: I understand that you have clarified time and again that the scope of your committee was only to opine on the levy of MAT on FPIs but in my rapid reading of your report, I have come across a paragraph which says, “Therefore we find that the ratio in Castleton that even foreign companies having no place of business or permanent establishment are also covered by section 115JB is not the correct position of law. We therefore are of the view that MAT provisions cannot be applicable to FIIs and FPIs.” Are you also of the opinion even though it may not be part of what your committees scope was, are you also of the opinion that MAT cannot be levied on those foreign companies that do not have a permanent establishment in India?

A: Let me put the things in correct perspective. The reference was about FPIs or FIIs but if you see the judgements – the Niko and P14, that said that the foreign companies are liable. However those companies which were before the authorities were companies with permanent establishment or place of business.

In Timken, the court said that it will not apply to a foreign company without a place of business or without FPIs. In our reasoning that flows from the Timken judgement or it is our interpretation also that if the foreign company or FII, in the present case doesn’t have a permanent establishment or place of business – because we recorded a specific finding that FIIs do not have a place of business in India within the meaning of the Companies Act. Therefore in effect we have said that the judgement in Timken is a correct law.

So, if a foreign company is not having a permanent establishment or a place of business MAT will not be attracted. That is our view. However since we were talking only about the FIIs we gave our final conclusion about FII but if that very ratio of that reasoning is to be applied to a foreign company, which is not having a permanent establishment or place of business in India, the effect will be the same. Timken would prevail, that is what we have said.

Menaka: I know you said that it is not part of your mandate to suggest what the government process should be hereon but he nonetheless I will ask you. The Finance Minister said that it would be most robust if there was an amendment to the act in itself to clarify this situation as opposed to just issuing a clarificatory circular which may only be an interim provision right now to deal with the demand notices that have been sent out. In your opinion that would be the best way to go about, setting this process right?

A: If the Finance Minister has felt that the amendment to section 115JB would be a more desirable course of action, I am sure that must be so because a simple clarificatory amendment would put this issue to rest completely forever, otherwise with circulars you can’t be certain because there might be some issues even after a circular has been issued by the CBDT.

Menaka: I do want to ask you what your impression has been of this entire controversy that was born out of, as you have reiterated several times – just a single advance ruling authority order, we have had previous AAR orders as you have pointed out yourself in Timken and Praxair which you said that MAT would apply only to those foreign companies in India with a permanent establishment here. And then you had the Castleton matter which was a foreign company, not even an FPI, you had just one Authority for Advance Rulings (AAR) ruling, the AAR itself says that it does not set precedent for other AAR orders and yet this became precedent for an entire tax department to take action against FPI in the country. What is your impression of how this controversy came to rise?

A: Really, why it happened because the issue kept alive because of the inconsistent judgements of the advance ruling authority. The first judgement was not very clear, did not distinguish between a company with a permanent establishment (PE) or place of business and without a PE or place of business. The second judgement did that and it was accepted by the department and the department did not contest this position in Castleton but the Castleton the authority had a different interpretation in his mind. So, it felt that the 115JB has an overriding effect and it gave a different interpretation.

So, perhaps sometimes even I feel that the advance ruling authority should be – I should not say this- but it should be more consistent and if a different view has to be taken such view should be taken with a lot of consideration. Because in taxation it is my view that the certainty is really a relevant factor and if it gives to uncertainty then it really sends perhaps wrong signals to the investors abroad and even the investors within the country.

Menaka: You have hit upon the irony in this matter, because in the Castleton case revenue did not even argue in favour of levying MAT and yet the judge presiding over the AAR decided that MAT would apply to a foreign company that has a permanent establishment in India. Again you have mentioned that the AAR should maybe take a broader view of the impact on foreign investment. Wouldn’t you say that the tax department ought to have done so as well, not to have relied on one AAR decision?

A: No, I have not said that AAR should take a broader view. AAR is supposed to interpret the law. I am only saying that there should be a consistent taxation regime or consistent orders by the AAR, it is necessary. Again you are not right when you say that the one ruling in Castleton has created this problem, it is not correct. Even if it is single ruling still it has at least some persuasive value and the department in view of this ruling had according to me perhaps was compelled to issue notices and which lead to this panic in the market and whatever, this lead to the formation of the committee.

Surely, it has been repeatedly stated by the present government that they wish to bring more certainty in the tax regime in the country.

Menaka: Just to get your view on that bit of the bindingness of an AAR decision – the perception was that an AAR decision is usually only binding on the person or the entity making the application and the tax department. Do you believe that AAR decisions can also have precedent value?

A: No, I entirely agree with you that the AAR ruling would be ordinarily binding between the parties but thereafter there are some decisions in Supreme Court that it has some persuasive value otherwise with every authority there will be different judgements. So, it is necessary that there is more consistency in the AAR rulings and it should have some sort of persuasive value because it is also some sort of a guiding factor for those who want to invest in India, there is nothing wrong in that. Technically, the ruling by the AAR would bind the parties not even the department. but it has a persuasive value.

Shereen: In the course of your conversation with the finance ministry, with the government and specially, after you presented your report and then had consultations and then revisited your report, do you believe that given the investment climate, given the kind of inconsistent judgements that you yourself have pointed out perhaps it would have been prudent to have expanded the scope and the terms of reference to include foreign companies as well because that clearly was the expectation. We had a line-up of tax experts who have expressed exactly that sentiment and that view?

A: It is for the government to take a decision in that regard. A committee cannot say what type of references should be made to it.

Shereen: Did you raise the issue at all?

A: No. I would not like to raise such issues. The committee is concerned with the issues referred to it by the government. You may say that I am a bit conservative about that. I feel that ordinarily committee should be giving answer to the reference made to the committee and not going beyond it unless it is inevitable to go into the issues, which are related to the main issue.

Let the government take a call if any other issue is to be referred to the committee. Then at that time the committee will definitely look into that.

Shereen: Since you are speaking of other issues that will be taken up by the committee, when the committee was instituted by the government it had made it very clear that the immediate matter that this committee is going to look at is the issue of MAT on FIIs and FPIs but other matters will also be sent to the Shah panel. Has there been any indication of what next for you now, what will be the next mandate?

A: No, there is no indication but from the terms of reference it appears that this committees tenure is for one year and reference speaks about retrospectivity etc but there is no such conversation, at least I have no idea what the government will do next.

Menaka: You have made it clear in our conversation this evening and also in parts of your report that you do believe that if one was to extent the ratio of AAR decisions then MAT would not apply on foreign companies that don’t have a permanent establishment or place of business in India. That is something that the finance ministry has said or seems to have indicated that they will now leave that determination to the Supreme Court when the Castleton case is heard in the Supreme Court in the weeks to come. I am asking not just the head of the committee whose mandate was limited to FPIs but as Justice Shah do you believe that the reading of the Income Tax Act and that specific section should make it fairly clear and therefore this is a case that will go in favour of foreign companies and that the Supreme Court will also find as you have found?

A: I would not wish to comment on the larger issue because it was not before us. The committee has not expressed any opinion on that and I do not think it is proper on my part to express any opinion in my individual capacity since I dealt with the matter. There are any number of experts, any number of lawyers in this country, let them speak about the broader issues. I don’t think I should comment on this.

Menaka: I do understand that you did invite several very detailed representations before determining or writing out this committee report. So, you have an in-depth understanding of the situation. Therefore I ask you in your personal capacity again, do you believe that foreign companies with no place of business or permanent establishment in India should have to pay MAT?

A: I would only say that this was also the argument of some of the lawyers who appeared before the committee but I do not wish to give any personal comment on this.


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