Know all about the applicability of Minimum Alternate Tax (MAT)

Table of Content

1. Who is liable to pay MAT

1.1 Companies exempted from applicability of MAT

1.2 Companies eligible for concessional MAT rate of 9% of book profit

1.3 Where taxable income computed under MAT, whether penalty can be levied for additions under normal provisions?

1.4 Where assessee-company incurred loss and paid MAT on book profit, can reassessment be initiated?

1.5 Allowance of double taxation relief under DTAA where company is liable to pay MAT

2. “Company”

3. MAT is applicable to LLPs incorporated outside India (Foreign LLPs), not to Indian LLPs

4. Applicability of MAT to Foreign Companies

5. MAT not applicable to income from life insurance business

6. Company exempted from MAT if it has opted for the tax regime under section 115BAA or section 115BAB

Checkout Taxmann's Guide to Minimum Alternate Tax (MAT) & Alternate Minimum Tax (AMT) which provides a comprehensive analysis of Minimum Alternate Tax (MAT) & Alternate Minimum Tax (AMT). The analysis is done in light of the Income-tax Act 1961, Income-tax Rules 1962, and Relevant Case Laws. This book is amended by the Finance Act 2022.

1. Who is liable to pay MAT

Unless specifically exempted from MAT provisions, every company including foreign company whose tax payable on total income in respect of any assessment year is less than 15% of book profit is liable to pay MAT at the rate of 15% of its book profit.

1.1 Companies exempted from applicability of MAT

The following companies are exempted from applicability of MAT :

• • Foreign company which
    • (a) is a resident of a country with which India has a DTAA and
    • (b) does not have a permanent establishment in India in accordance with the provision of such DTAA [Clause (i) of Explanation 4 to section 115JB(2)]
  • Foreign company which is
    • (a) resident of a country with which India does not have a DTAA and
    • (b) such foreign company is not required to seek registration under section 380 of the Companies Act, 2013 [Clause (ii) of Explanation 4 to section 115JB(2)]
  • Foreign company whose total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections [Explanation 4A to section 115JB(2)]
  • Life insurance company [Section 115JB(5A)(i)]
  • A company which has exercised the option under section 115BAA [Section 115JB(5A)(ii)]
  • A company which has exercised the option under section 115BAB [Section 115JB(5A)(ii)]
  • A shipping company which has opted for the Tonnage Tax Scheme [Section 115VO]

1.2 Companies eligible for concessional MAT rate of 9% of book profit

In terms of sub-section (7) of section 115JB, if the company is a “unit located in an International Financial Services Centre which derives its income solely in convertible foreign exchange”. MAT at the rate of 9% of book profit shall apply to such company for any assessment year in which tax on total income is less than 9% of book profit.

1.3 Where taxable income computed under MAT, whether penalty can be levied for additions under normal provisions?

When taxable income is computed under section 115JB, no penalty can be imposed under section 271(1)(c) for additions made under normal provisions [Unison Hotels Ltd. v. Deputy Commissioner of Income-tax [2013] 40 taxmann.com 237 (Delhi)]

1.4 Where assessee-company incurred loss and paid MAT on book profit, can reassessment be initiated?

Where assessee-company incurred loss and paid tax on book profit computed under MAT provision and it was found that after making proposed addition to income, assessee would still be governed by provisions of section115JB and be assessed on same book profit, there would be no excess tax liability under MAT provision, reassessment could not be initiated [Motto Tiles (P.) Ltd. v. ACIT [2016] 73 taxmann.com 176 (Gujarat)]

1.5 Allowance of double taxation relief under DTAA where company is liable to pay MAT

In Deputy Commissioner of Income-tax, Circle-4 v. iGate Global Solutions Ltd. [2019] 111 taxmann.com 192 (Pune – Trib.), it was held that assessee is entitled to credit for the tax paid in foreign countries only to the extent of the doubly taxed income and not the remaining amount, whose corresponding income is not a part of the computation of income under section 115JB. If the doubly taxed income was subjected to tax in the other country at a rate higher than the MAT rate, then the amount of foreign tax credit should be restricted to the amount arrived at by applying MAT rate to doubly taxed income. If the doubly taxed income was subjected to tax in the other country at a rate higher than the MAT rate, then the amount of foreign tax credit should be restricted to the rate of tax paid in foreign country on doubly taxed income.
The Tribunal, analysing the provisions of section 90 and section 115JB, explained as under:

• • Under section 90(1)(a)(i), relief is to be allowed in respect of income on which tax has been paid in India and the other country.
  • The assessee admitted before the Assessing Officer that the income which suffered double taxation both in foreign countries and India is Rs. 10.13 crore.
  • In that view of the matter, it becomes clear that the relief under section 90(1)(a)(i) has to be granted only to the extent of such doubly taxed income and not beyond that.
  • The assessee paid total taxes in foreign countries to the tune of Rs. 1.91 crore.
  • The amount of doubly taxed income is Rs. 10.13 crore. As the income of the assessee has been finally computed under section 115JB and it is not the case of the Assessing Officer that such income of Rs.10.13 crores is not fully part of the book profits computed under section 115JB, it is this amount of income which would require exclusion from the amount of income computed under section 115JB.
  • Therefore, it is to be held that the assessee is entitled to credit for the tax paid in foreign countries only to the extent of the doubly taxed income and not the remaining amount, whose corresponding income is not a part of the computation of income under section 115JB.
  • The language of section 90(1)(a)(i) which talks of granting relief in respect of doubly taxed ‘income’. Similarly, it is to be noted that Article 25(2) of the DTAA between India and the USA provides for deduction from the tax on the income of an amount equal to the income tax paid in the USA.
  • On a conjoint reading of the above provisions, following two things emerge. First is that it is the amount of doubly taxed income which has to be excluded from the income chargeable to tax in India. Once such doubly taxed income is excluded from the income computed under the Act, then whatever is the amount of tax and surcharge thereon will get automatically excluded from the total tax liability computed under the Act. Second is that the deduction from the income tax liability under the Act has to be restricted to the amount of income tax paid in the USA on such doubly taxed income.
  • The above two propositions, when applied to the factual panorama of the instant case, leads to the inevitable conclusion that once the doubly taxed income is to be excluded, it would mean that the foreign tax credit will have to be allowed on it at the rate at which such income attracted taxation under the Act, which is 11.33 per cent under section 115JB. If however, the amount of tax paid in the other country is less than 11.33 per cent, then the deduction should be limited to the amount of tax paid on such doubly taxed income in the other country. The Assessing Officer has noted in the assessment order that the assessee paid foreign tax at the rates ranging from 10 per cent to 40 per cent.
  • Thus, if the doubly taxed income was subjected to tax in the other country at the rate of 10 per cent, then tax credit should be restricted to 10 per cent and in case it was subjected to foreign tax in the other country at a rate higher than 11.33 per cent (say, 15 per cent or 20 per cent or 40 per cent), then the amount of foreign tax credit should be restricted to 11.33 per cent of the concerned doubly taxed income.
  • The Assessing Officer is to be directed to verify the respective tax rates in Netherland, France, US, UK and Belgium for the year under consideration on which the assessee paid taxes and then allow the benefit accordingly.

2. “Company”

The term “company” is defined by section 2(17) of the Act to mean:

(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year commencing on or before the 1st day of April, 1970, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company. Such institution, association or body shall be deemed to be a company only for such assessment year or assessment years as may be specified in the declaration.

Section 2(26) of the Act defines “Indian company” means a company formed and registered under the Companies Act, 1956. The term also includes—

(i) a company formed and registered under any law relating to companies formerly in force in any part of India [other than the State of Jammu and Kashmir and the Union territories specified in sub-clause (iii) of this clause];

(ia) a corporation established by or under a Central, State or Provincial Act;
(ib) any institution, association or body which is declared by the Board to be a company under clause (17) ;

(ii) in the case of the State of Jammu and Kashmir¹, a company formed and registered under any law for the time being in force in that State;
(iii) in the case of any of the Union territories of Dadra and Nagar Haveli², Goa³, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory :

Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India.

3. MAT is applicable to LLPs incorporated outside India (Foreign LLPs), not to Indian LLPs

From the definitions given in clauses (17) and (26) of section 2 of the Act, it can be seen that the term “company” as defined in the Act is a much wider term than the definition given in Companies Act, 2013. It not only covers companies registered under the Companies Act but also foreign companies and statutory corporations. The expression “any body corporate incorporated by or under the laws of a country outside India” in Section 2(17)(ii) will also cover Limited Liability Partnerships [LLPs] incorporated abroad. LLP incorporated in India under LLP Act, 2008 is a “firm” as per the definition given in section 2(23) and is not a company. Hence, LLP incorporated in India will not be liable for MAT. However, foreign LLP is a company within the meaning of section 2(17)(ii) and will be treated as foreign company and will be liable for MAT, unless exempted under Explanation 4 or Explanation 4A in section 115JB(2).

4. Applicability of MAT to Foreign Companies

MAT provisions shall apply to a foreign company, unless exempted in terms of Explanation 4/Explanation 4A to section 115JB(2) or section 115JB(5A)(i). The exemption in Explanation 4/Explanation 4A is specifically applicable to foreign companies. Exemption in section 115JB(5A)(i) (applicable to life insurance companies) applies to all companies whether Indian or foreign.

Explanation 4A to section 115JB(2) clarifies that for the removal of doubts, the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where

(a) its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and
(b) such income has been offered to tax at the rates specified in those sections.

Where foreign company is not eligible for exemption from MAT in terms of Explanation 4A, then it has to be seen if it is exempt in terms of Explanation 4 to section 115JB(2).

Explanation 4 clarifies that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—

(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or
(ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.

Explanation 4 was inserted in the Act by the Finance Act, 2016 w.r.e.f. AY 2001-02 as it became necessary to clarify the legal position in view of conflicting rulings by AAR in the cases of Timken and Castleton.

In Timken Co., In re [2010] 193 Taxman 20 (AAR – New Delhi), the AAR held that section 115JB would not be applicable to a foreign company which has no presence or PE in India. The AAR held that as the applicant Foreign Company does not have a place of business in India, it is not required to prepare its account under section 594, read with section 591, of the Companies Act, 1956*. That being so, the applicant could not have prepared its accounts in accordance with the provisions of Schedule VI to the Companies Act, 1956 [now Schedule III to the Companies Act, 2013]. Therefore, section 115JB is not designed to be applicable to the case of the applicant, a foreign company, who has no presence or PE in India.

However, in a subsequent decision in Castleton Investment Ltd., In re [2012] 24 taxmann.com 150, the AAR gave an opinion which was completely contrary to the opinion given in Timken (supra). In Castleton, the AAR held that section 115JB overrides sections 34 to 48. So by reading section 115JB as confined in its operation to domestic companies alone, one may be doing violence to the special scheme of taxation adopted for taxing certain companies. Unless there are compelling reasons no such interpretation is justified. There is no compelling reason to jettison the scheme of taxation adopted by the Act by reading down section 115JB as confined in its application to domestic companies alone. Therefore, section 115JB(1) would equally apply to a foreign company.

In the appeal against the above Castleton ruling of AAR filed under Article 136 of the Constitution, the Supreme Court took note of the Press Release of Government of India dated 24-9-2015 wherein it was clarified that:

“the Government has decided that with effect from 1-4-2001 the provisions of section 115JB shall not be applicable to a foreign company if—

• • the foreign company is a resident of a country having DTAA with India and such foreign company does not have a permanent establishment within the definition of the term in the relevant DTAA, or
  • the foreign company is a resident of a country which does not have a DTAA with India and such foreign company is not required to seek registration under section 592 of the Companies Act, 1956 or section 380 of the Companies Act, 2013.

An appropriate amendment to the Income-tax Act in this regard will be carried out.”

The Learned Attorney General assured the Supreme Court that the Government shall abide by the Press Release dated 24-9-2015. Accordingly, the Supreme Court disposed of the SLP with the consent of the appellant and respondent Government of India.

Pursuant to the solemn assurance given to the Supreme Court to abide by the Press Release dated 24-9-2015, the Finance Act, 2016 has inserted a new Explanation 4 with retrospective effect from assessment year 2001-02 which embodies the above clarification in Press Release dated 24-9-2015. Accordingly, the new Explanation 4 clarifies that

“…the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—

(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in accordance with the provisions of such agreement.
(ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies”.

The Explanatory Memorandum to the Finance Bill, 2016 explains the above amendment as under:

Applicability of Minimum Alternate Tax (MAT) on foreign companies for the period prior to 1-4-2015.
Issues were raised regarding the applicability of this provision to Foreign Institutional Investors (FIIs) who do not have a permanent establishment (PE) in India. Vide Finance Act, 2015 of the provisions of section 115JB were amended to provide that in case of a foreign company any income chargeable at a rate lower than the rate specified in section 115JB shall be reduced from the book profits and the corresponding expenditure will be added back.

However, since this amendment was prospective w.e.f. assessment year 2016-17, the issue for assessment year prior to 2016-17 remained to be addressed.

A Committee on Direct Tax matters headed by Justice A.P. Shah, set up by the Government to look into the matter, recommended for an amendment of section 115JB to clarify the applicability of Minimum Alternate Tax (MAT) provisions to Foreign Institutional Investors/ Foreign Portfolio Investors (FIIs/FPIs) in view of the fact that FIIs and FPIs normally do not have a place of business in India.

In view of the recommendations of the committee and with a view to provide certainty in taxation of foreign companies, it is proposed to amend the Income-tax Act so as to provide that with effect from 1-4-2001, the provisions of section 115JB shall not be applicable to a foreign company if—

(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such Agreement; or
(ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above and the assessee is not required to seek registration under any law for the time being in force relating to companies.

This amendment is proposed to be made effective retrospectively from the 1st day of April, 2001 and shall accordingly apply in relation to assessment year 2001-02 and subsequent years.

Explanation 4 to section 115JB clarifying that provisions of this section shall not be applicable to a foreign company if the applicant is a resident of the country with which India has an agreement under section 90(1) and the applicant does not have a permanent residence in India in accordance with the provisions such agreement. It has been admitted by the assessee that for assessment year 2012-13 when the buy back had taken place applicant had a supervisory PE in India and that for assessment year 2014-15 the department had treated PQR India itself as PE in India. In view thereof and express provisions, the Assessing Officer was required to compute the book profits of the supervisory PE and the MAT liability would be restricted to the profit attributable to PE for relevant assessment year [PQR Gmbh., In re [2021] 125 taxmann.com 411 (AAR – Mumbai)]

5. MAT not applicable to income from life insurance business

The Finance Act, 2012 inserted sub-section (5A) in section 115JB with retrospective effect from assessment year 2001-02. Sub-section (5A) provides that MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B.

6. Company exempted from MAT if it has opted for the tax regime under section 115BAA or section 115BAB

Clause (ii) of sub-section (5A) of section 115JB provides that the provisions of this section (section 115JB) shall not apply to a person who has exercised the option referred to under section 115BAA (See Para 2.7 below) or section 115BAB (See Para 2.8 below)

1. Now the Union Territories of Jammu & Kashmir and Ladakh as per the Jammu and Kashmir Reorganization Act, 2019.
2. ‘Dadra and Nagar Haveli and Daman and Diu’ as per the Dadra and Nagar Haveli and Daman and Diu (Merger of Union Territories) Act, 2019.
3. Now the State of Goa.
   *Corresponding sections of the Companies Act, 2013 (sections 351 and 379).