India: Supreme Court To Examine MAT Applicability To Mauritian Companies

In a significant development, the Supreme Court of India (SC) by its order dated 7 May 2013 has admitted the ‘Special Leave Petition’ (SLP) of Castleton Investments Limited (Castleton), a company based in Mauritius. By way of this SLP, Castleton is seeking to challenge the correctness of the ruling of the Authority for Advance Rulings (AAR) in India (reported in 348 ITR 537) which, while granting capital gains tax exemption under the settled law relating to the India - Mauritius Tax Treaty (Mauritius Treaty), had ruled that Castleton would be required to pay Minimum Alternate Tax (MAT) in India under the Income-tax Act, 1961 (IT Act) with respect to capital gains arising from sale of shares of an Indian company.

The AAR reasoned that the MAT provisions do not make any distinction between an Indian resident company and a non-resident company and would thus apply to all companies. Under the IT Act, companies are required to pay MAT when the income-tax payable under the normal provisions is less than 18.5% of its ‘Book profits’. MAT is payable at the rate of 18.5% (plus applicable surcharge and education cess) on Book profits as per the Profit & Loss Account computed in the manner provided under the IT Act.

While admitting the SLP of Castleton, the SC has also issued directions to its registry to list the matter for final hearing as soon as possible. It will now hear the arguments of Castleton as well as those of the Tax Authorities on the applicability or otherwise of MAT on capital gains realized in India and will give its verdict on the correctness of the advance ruling on the subject.

What Next?

All eyes will now be on further movements of this matter before the SC as applicability of MAT to foreign companies, including Mauritian companies, is a highly debatable and controversial issue. One school of thought is that since under the Mauritius Treaty, India has given up its right to levy tax on capital gains earned by Mauritian companies, it is not open to India to levy tax on the same income by way of MAT. This is due to the fact that as far as the recipient of the income is concerned, the income would still be ‘capital gains’ on which India has given up its right to levy tax under the Mauritius Treaty.

One would eagerly look forward to the ruling from the SC on this important issue concerning cross-border taxation.