It took 6 months to resolve something so basic
The good news is the government has put to rest the issue of levying MAT on FIIs by accepting the AP Shah-committee report. The bad news is that a non-issue was allowed to become such a big issue, first by the taxman and, after that, by a lead-footed finance ministry. Indeed, as the committee points out, ‘before analysing the relevant rulings of the AAR … Section 245S of the IT Act … states that the orders of the AAR are only binding on the applicant … AAR rulings are thus not intended to lay down the law on the matter and are, in fact, not even binding … in respect of another taxpayer within their jurisdiction’. In other words, the Castleton ruling could never have been made the template for raising tax demands on other FIIs, but that is precisely what happened. The report goes on to say that Section 115AD of the Income Tax (IT) Act was a ‘self-contained code for FIIs/FPIs’ and ‘if Section 115JB were to apply to foreign companies, FIIs/FPIs … (would be) effectively losing their concessional tax basis, specifically provided in Section 115AD of the IT Act … Given that the provisions of a statute has to be read harmoniously, we do not believe that Section 115JB would apply to FIIs/FPIs and they would instead, continue to be governed under the separate code under Section 115AD’.
While it is possible to argue individual assessing officers did not apply their minds carefully, and just took off from the Budget speech which said no MAT would be applicable to FII transactions in future – therefore, their logic went, it was applicable for the past – surely senior revenue babus should have got alerted to the problem and looked for a solution? By April, even newspapers were writing about the inconsistencies in AAR rulings – MAT had been disallowed in Timken in 2009 and Praxair in 2010 on grounds they had no permanent establishment (PE) in India, it had been allowed in 2012 in Castleton which had no PE but disallowed in Bank of Tokyo in 2014 which had a PE but had treaty benefits. Not only did no one look for a resolution to the inconsistent rulings, no one looked at 245S or 115AD of the IT Act. Indeed, finance minister Arun Jaitley was so wrongly briefed he justified the notices and scoffed at FIIs, saying they were in favour of retrospective legislation when it suited them – he spoke of how India was not a tax haven, and that the face of India’s irrigation sector could be changed with the Rs 40,000 crore such tax demands could fetch him.
Given how there are still many cases of arbitrary taxation pending – new revenue secretary Hasmukh Adhia did well to promise just and fair decisions in tax matters – the government must resolve them at the earliest, preferably by referring them to the Shah panel. While the Vodafone arbitration has finally got moving, the same cannot be said of Cairn. As in the case of the FIIs, the government goofed up by not bringing Cairn before AP Shah on grounds it was an ‘existing’ case though a final demand had not been served on Cairn, and till recently, it was arguing the case could not be arbitrated under the Indo-UK bilateral treaty – if the government does not appoint an arbitrator in the next 8 days, interestingly, Cairn can go to the International Court of Justice asking it to appoint an arbitrator on behalf of the government. Rejecting charges of ‘tax terror’, as Adhia did on taking over his new charge carries little weight – resolving the pending cases will.