The provisions of Section 115JB are not applicable in case of foreign

companies”. Examine in the context of the provisions contained in the various

chapters of the Income Tax Act, 1961.
The statement that "the provisions of Section 115JB are not applicable in case of foreign
companies” is partially incorrect. The applicability of Minimum Alternate Tax (MAT) under
Section 115JB to a foreign company depends critically on its operational presence and income
sources in India, as clarified by the Income Tax Act, 1961, judicial pronouncements, and specific
government circulars.

Introduction
The Minimum Alternate Tax (MAT) was introduced in Indian tax law in 1987, well before India's
1991 economic reforms and the beginning of foreign portfolio investment in its capital markets in
1993.
Prior to 1987, the scenario was that at times it happened that a taxpayer, being a company,
generated income during the year, but by taking the advantage of various provisions of Income-
tax Law (like exemptions, deductions, depreciation, etc.), it reduced its tax liability or did not pay
any tax at all.
The objective of introduction of MAT by the Lawmakers was that there were many companies
which were disclosing massive profit in the accounts as laid in the Annual General Meeting (AGM)
before the shareholder's but at the same time these companies were also showing nil profits or
profits that were a little above nil for the income tax purpose. Variance between profits as per the
Companies Act and as per the Income Tax Act was due to many dissimilar allowance or
disallowance in both the Acts e.g. difference in method and rate of depreciation provided in both
Acts. To put an end to the trend of increase in the number of "zero tax companies", MAT was
introduced by the Finance Act, 1987 according to which corporate entity has to pay minimum tax
with effect from the assessment year 1988-89.
Later on, MAT was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2)
Act, 1996, changes have been introduced in the provisions of MAT and today it is levied on
companies as per the provisions of section 115JB of Income Tax Act, 1961.
ANALYSIS OF PROVISION OF SECTION 115JB:

As per Section 115JB of Income Tax, 1961 (hereafter referred to as the “Act”), if the income tax
payable by a company on its total income as computed under the Act in respect of any previous
year relevant to the Assessment year commencing on or after 1 st April 2012 is less than 18.5% of
such book profit then the tax payable for the relevant previous year shall be deemed to be 18.5%
of such book profit. Surcharge and cess shall be levied separately on such amount. Book Profit is
defined in the explanation 1 to section 115JB as book profit means the net profit as shown in the
profit & loss account for the relevant previous year and as increased and decreased by some
prescribed items. In simple words to compute book profit, we have to take profit & loss account
and make some prescribed additions and deletions to it.

In the simple words, every company has to compute its income tax liability as per two sets of
provisions. The set of provisions which results in higher income tax liability become the income
tax payable.
Following are the two set of provisions:

1). Income tax computed as per normal provisions of Income tax act.
2). Income tax computed as per provision of section 115JB of income tax act.

We can understand the concept of MAT with the help of an illustration. Suppose, the taxable
income of company XYZ Pvt. Ltd. Computed as per the provisions of Income-tax Act is Rs.
30,00,000. Book profit of the company computed as per the provisions of section 115JB is Rs.
20,00,000. What will be the tax liability of XYZ Pvt. Ltd. (ignore cess and surcharge)?

The tax liability of a company will be higher of

(1) Normal tax liability, or

(ii) MAT.
Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable).
Tax @ 30% on Rs. 30,00,000 will amount to Rs. 9,00,000 (plus cess). Book profit of the company
is Rs.20, 00,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.20, 00,000 will
come to Rs. 3,70,000. Thus, the tax liability of XYZ Pvt. Ltd. Company will be Rs. 9,00,000 (plus
cess as applicable), being higher than the MAT liability.
As per Section 115JB(2) of the Act, a company will prepare its profit and loss account for the
relevant previous year in accordance with the provisions of Part II of Schedule VI of the
Companies Act, 1956. However, while preparing the annual accounts including profit and loss
account:
(a) The accounting policies;
(b) The accounting standards followed for preparing such accounts including profit and loss
accounts;
(c) The methods and rates adopted for calculating the depreciation, shall be the same as have
been adopted for the purpose of preparing such accounts including profit and loss account
and laid before the company at its annual general meeting in accordance with the provisions
of Section 210 of the Companies Act, 1956. However, where the company has adopted or
adopts the financial year different from previous year, (a), (b) and (c) aforesaid shall
correspond to the accounting policies, accounting standards and the method and rates for
calculating the depreciation which have been adopted for preparing such accounts
 including profit and loss account for such financial year or part of such financial year
falling within the relevant previous year.
(d) The spirit behind levy of MAT is that every person participating in the economy must
contribute to the exchequer. MAT is aimed at recouping a part of the loss in revenue
collection on account of exemptions, deductions and other tax incentives in the corporate
sector. MAT was introduced to address inequity in taxation of corporate taxpayers and to
promote inter-se equity among them. Accordingly, Finance Bill 2016 proposes to amend
the law with retrospective effect from 1.4.2001.

MAT CREDIT
A new tax credit scheme is introduced by which minimum alternate tax paid can be carried
forward for set-off against regular tax payable. Any company that pays minimum alternate
tax under the MAT clause instead of a regular tax, then if the tax paid is more than that
accrued, the excess amount is credited back as tax credit to the company. Thus, MAT credit
can be understood as the difference between the tax calculated under the general provisions
of the Income Tax Act and that calculated under the MAT provisions of the Act. Such excess
of tax credit is allowed to be carried forward and set off in the financial year in which the
company is liable to pay tax under the general provisions of the Income Tax Act. This MAT
credit can be carried forward and set-off for 10 consecutive assessment years succeeding
the year in which the tax credit first accrued.
MAT Credit to be set off in an AY = Regular Income tax – Minimum alternate tax

APPLICABILITY AND NON-APPLICABILITY OF SECTION 115JB

The provisions of MAT are applicable to every company whether public or private and
whether Indian or foreign.
Section 115 JB of the Act does not make a distinction between the Indian company and a
foreign company.
The definition of a company in Section 2(17) of the Act means an Indian company or any
company incorporated by or under the laws of a country outside India. But, according to
the recent amendments to the Act, the provisions of Section 115 JB shall not be applicable
to certain foreign companies. The reason for the amendment is explained as follows in the
Memorandum explaining provisions of the Finance Bill, 2016:
“Under the existing provisions contained in sub-section (1) of Section 115JB in case of a
company, if the tax payable on the total income as computed under the Income-tax Act, is
less than eighteen and one-half percent of its book profit, such book profits shall be deemed
to be the total income of the assessee and the tax payable by the assessee for the relevant
previous year shall be eighteen and one-half percent of its book profit. Issues were raised
regarding the applicability of this provision to foreign institutional investors (Fll’s) who do
not have a permanent establishment (PE) in India. Vide Finance Act, 2016 provision of
Section 115 JB were amended to provide that in case of a foreign company any income
chargeable at a rate lower than the rate specified in Section 115 JB shall be reduced from
the book profits and the corresponding expenditure will be added back.”
However, since this amendment was prospective w.e.f. The 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, setup by the government
to look into the matter, recommended for an amendment of Section 115 JB to clarify the
applicability of minimum alternate tax (MAT) provisions to foreign institutional
investors/foreign portfolio investors (FII’s/FPI’s) in the view of the fact that Fll’s and Fll’s
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 1-04-2001, the provisions of Section 115 JB shall not be applicable
to a foreign company if –

1. Such foreign company may be a resident of a country with which India has Double
Taxation Avoidance Agreement (DTAA) or an agreement under Section 90A of the Act
and such foreign company does not have a Permanent Establishment
2. Such foreign company, where India does not have a DTAA, and such foreign company
are not required to seek registration under the applicable provisions in India.

Explanation 4, as inserted, with effect from the assessment year 2001-02 provided for the
removal of doubts and, accordingly, it is by way of a clarification. Thus in the case of a
foreign company, to illustrate, not having a permanent establishment or not required to seek
registration (as stated above), the matter is put beyond doubt to end the litigation, by way
of a clarification. In other words, Explanation 4, as such, lays down that only in the
situations clarified, the provisions would not be applicable.

The question relating to minimum alternate tax came up before the Supreme Court in the
case of Castleton Investment Ltd. Vs. Director of Income Tax (International taxation)
[MANU/SC/1354/2015]. The basic issue before the Hon’ble Supreme Court which was
raised pertained to the applicability of Section 115JB of the Income Tax Act, 1961 in
respect of a foreign company which does not have any Permanent Establishment (PE) in
India. The court, in this case, decided that Section 115JB shall not be applicable to a foreign
company if the foreign company is a resident of a country having Double Taxation
Avoidance Agreement with India and such foreign company does not have a Permanent
Establishment within the definition of the term in the relevant Double Taxation Avoidance
Agreement, or the foreign company is a resident of a country which does not have a Double
Taxation Avoidance Agreement 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.

The amendment to Section 115JB of the Act can be hoped to attract more foreign
investment with India paving its way to success in the international market and for being a
progressive and safe country for investing with revised FDI norms.