An epic legal battle, comparable in its breadth and ramification to the Vodafone case, could be brewing between foreign portfolio investors (FPI) and India's tax authorities.

Five FPIs have teamed up to challenge the applicability of minimum alternate tax (MAT) to capital gains arising from trading in stocks and bonds. The FPIs plan to file a writ petition in the Bombay High Court on Thursday challenging the tax demand.

Harish Salve, corporate India's go-to lawyer in tax cases, would represent the FPIs. Khaitan & Company, a corporate law firm, is the advocate on record.

The five FPIs are from the US and UK, and had received notices about two months ago asking them to pay MAT.

ETcould not ascertain the names of the five FPIs and the quantum of MAT demand. However, demands ranging from Rs 1 crore to Rs 50 crore have been raised by taxmen in draft assessment orders to FPIs at the end of last month.

Junior Finance Minister Jayant Sinha, in a written reply in Parliament on April 23, said 68 notices had been sent to FPIs for payment of Rs 602.83 crore towards MAT.

Earlier, in a statement that had caused considerable consternation, the finance minister had said the government could potentially collect around Rs 40,000 crore from FPIs.

If the high court admits the writ petition, the FPIs would argue that MAT is not applicable to them. A case on the same issue is already pending in the Supreme Court.

The dispute, which has damaged India's international reputation, flared up when the I-T department started sending notices to FPIs about six months ago asking them to pay MAT for the financial year 2011-12. Many tax experts say MAT cannot be applied to an entity that doesn't have a so-called permanent establishment in the country.

"The legal understanding on the subject was that MAT does not apply to foreign companies (FPIs/FDI investments), where such foreign companies do not have a 'place of business' or a 'permanent establishment' in India as they are not required to draw up their accounts as per the Companies Act and related aspects," said Sanjay Sanghvi, partner, Khaitan & Company.

But the I-T department, relying on a 2012 ruling by the Authority for Advanced Rulings (AAR), has stuck to its stand. AAR had said that MAT was applicable to capital gains. The tax department argues that under the Income-Tax Act, FPIs are companies.

A minor respite came their way when the finance minister said in his Budget speech that MAT would not be levied on FPIs from April 1, 2015. However, I-T officials dealing with individual FPIs sent a strong message to investors: "nothing has changed".

By March 31, assessing officers had sent draft assessment orders to FPIs asking them to pay MAT. Subsequently, demands were raised for two more years — FY10 and FY11 — in the first week of April. Indian income-tax laws allow assessing officers to go back seven years in the hunt for previous taxes.

During a conference call last Wednesday, Revenue Secretary Shaktikanta Das, Central Board of Direct Taxes (CBDT) Chairperson Anita Kapur and Minister of State for Finance Jayant Sinha told investors that MAT would not be levied on funds that have invested through countries such as Singapore and Mauritius, with whom India has double-taxation avoidance agreements (DTAAs).

A day later, CBDT issued a circular instructing tax officers that decisions should be taken in "...all cases of foreign institutional investors seeking treaty benefits under the provisions of respective DTAAs, decisions may be taken on such claims within one month from the date such claim is filed". Many tax experts have dubbed this order vague since it doesn't mention the word MAT or tell tax officers what action should be taken in this regard.