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Minimum Alternate Tax Not Applicable to Foreign Companies That Aren’t Physically Present in India
The Authority for Advance Ruling ("AAR") has delivered an important ruling in the case of The Timken Company holding that the provisions of section 115JB of the Income-tax Act, 1961 ("the Act") levying Minimum Alternate Tax ("MAT") on the book profit of a Company would not apply to a Foreign Company not having any physical presence in India. Taxand India examines the new ruling.
The Applicant, a US company, proposed to transfer the shares held in an Indian listed company to a Mauritius Company on the stock exchange. The applicant approached the AAR to determine whether MAT was applicable to foreign companies which did not have a physical presence in India.
In response to the Revenue's contention that as per Section 2(17) of the Act the term 'company' included a foreign company, the taxpayer contended that Section 2 of the Act started with the words "In this Act, unless the context otherwise requires". Hence, if the circumstances so require, the meaning of the word 'company' used in section 115JB of the Act should not apply to a Foreign Company not having any presence in India.
The Applicant relied on the Finance Minister's speech, the notes on clauses and the Memorandum explaining the provisions of Finance Bill on introduction of the provisions relating to MAT, which indicate that the provisions are applicable only to Domestic Companies. Reliance was placed on the Circular which explained the rationale for the rate of MAT originally fixed with reference to tax rates applicable for Domestic Companies which clearly indicated that the legislature did not intend to levy MAT on Foreign Companies.
The applicant contended that the provisions of the Act require MAT to be computed with reference to book profits arrived at based on the Profit and Loss account placed before the shareholders in the Annual General Meeting as per the Companies Act, 1956 ("Co Act"). This indicated that the intention was never to cover the Foreign Companies, whose global accounts were not prepared in accordance with the requirements under the Co Act and whose accounts were not placed in any shareholders' meeting conducted in India. Further, the computation of book profits for the purpose of the levy of MAT was based on certain adjustments, many of which were applicable only to the Domestic Companies. Accordingly, it was argued that MAT would not apply to a foreign company.
The AAR held that if the definition of 'company' under Section 2 of the Act, which includes a Foreign Company, is applied to section 115JB of the Act, MAT provisions may become unworkable as it was not designed to apply to a Foreign Company not having any presence or PE in India. Since the Applicant did not have any business in India, the AAR noted that there was no requirement for preparing its financial statements in accordance with the requirements of the Co Act, which was a fundamental requirement for levy of MAT. Accordingly, the AAR ruled that MAT would not apply to a foreign company, which did not have any physical presence in India.
This is an important ruling in the context of levy of MAT which sets to rest the doubts relating to the interpretation of the word 'company' and whether it could apply to a Foreign Company not having any presence in India. It also re-emphasises the fundamental requirement to prepare the financial statements in accordance with the Co Act for MAT to apply.
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