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TMI BlogFinal Report of the Expert Committee on General Anti Avoidance Rules (GAAR) in Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... orities as strictly legal in form but perhaps not in substance i.e. a business arrangement to avoid tax may not reflect its embedded legislative intent. Various authorities, have, therefore, felt that tax reduction through unethical means should not be allowed, particularly when headline rates of tax have been significantly reduced. This has led to the introduction of anti-avoidance rules in tax statutes across tax jurisdictions internationally. Vide Finance Act, 2012 , India introduced the General Anti-Avoidance Rules (GAAR) in the Income-tax Act, 1961 . These GAAR provisions were analyzed and, based on inputs received from various stakeholders, a number of recommendations are being made by the present Committee. The recommendations are for amendment in the Act, for guidelines to be prescribed under Income-tax Rules, 1962 , and for clarifications and illustrations through circular. They are summarized in these categories as under. 1. Recommendations for amendments in the Income-tax Act, 1961 The Committee makes the following recommendations for amendment in the Act- ( i ) The implementation of GAAR may be deferred by three years on administrative grounds. GAAR is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-abolishing the tax on short term capital gains-may provide a big boost to capital markets, and, in turn, help attracting investments. ( iii ) The Act should be amended to provide that only arrangements which have the main purpose (and not one of the main purposes) of obtaining tax benefit should be covered under GAAR. ( iv ) Section 97 of the Act should be amended to include a definition of "commercial substance" as under - "An arrangement shall be deemed to be lacking commercial substance, if it does not have a significant effect upon the business risks, or net cash flows, of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained but for the provisions of this Chapter." ( v ) The definition of "connected person" may be restricted to "associated person" under section 102 and "associated enterprise" under section 92A. ( vi ) The section 97(2) may be amended to provide that the following factors: ( i ) the period or time for which the arrangement (including operations therein) exists; ( ii ) the fact of payment of taxes, directly or indirectly, under the arrangement; ( iii ) the fact that an exit route (in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration in guidelines to be prescribed under sections 101 and 144BA of the Act in the Income-tax Rules, 1962 - ( i ) The GAAR provisions should be subject to an overarching principle that - (1) Tax mitigation should be distinguished from tax avoidance before invoking GAAR. (2) An illustrative list of tax mitigation or a negative list for the purposes of invoking GAAR, as mentioned below, should be specified- ( i ) Selection of one of the options offered in law. For instance - ( a ) payment of dividend or buy back of shares by a company ( b ) setting up of a branch or subsidiary ( c ) setting up of a unit in SEZ or any other place ( d ) funding through debt or equity ( e ) purchase or lease of a capital asset ( ii ) Timing of a transaction, for instance, sale of property in loss while having profit in other transactions ( iii ) Amalgamations and demergers (as defined in the Act) as approved by the High Court. (3) GAAR should not be invoked in intra-group transactions (i.e. transactions between associated persons or enterprises) which may result in tax benefit to one person but overall tax revenue is not affected either by actual loss of rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of detailed reasoning by the Assessing Officer in the show cause to the taxpayer may be prescribed in the rules. ( ix ) The tax audit report may be amended to include reporting of tax avoidance schemes above a specific threshold of tax benefit of Rs. 3 crores or above. ( x ) The following statutory forms need to be prescribed:- a. For the Assessing Officer to make a reference to the Commissioner u/s 144BA(1) (Annexe-8) b. For the Commissioner to make a reference to the Approving Panel u/s 144BA(4) (Annexe-9) c. For the Commissioner to return the reference to the Assessing Officer u/s 144BA(5) (Annexe-10) ( xi ) The following time limits should be prescribed that - ( i ) in terms of section 144BA(4) , the Commissioner (CIT) should make a reference to the Approving Panel within 60 days of the receipt of the objection from the assessee with a copy to the assessee; ( ii ) in the case of the CIT accepting the assessee's objection and being satisfied that provision of Chapter X-A are not applicable, the CIT shall communicate his decision to the AO within 60 days of the receipt of the assessee's objection as prescribed under section 144BA(4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ked during assessment procedure. There is a responsibility on the payer of any sum to a non-resident under Indian tax laws in the form of a withholding agent of the Revenue as well as representative assessee of the non-resident payee. The payer is required to undertake due diligence to ascertain the correct amount of tax payable in India and, in case of any default, it becomes the payer's liability to pay. Inquiries in the case of the GAAR under consideration in the UK indicated that UK has not addressed this issue. In any case, the UK follows a residence based principle of taxation unlike India which follows the source based principle. Hence, some assurance of collection may be necessary in the Indian case. ( iv ) To minimize the deficiency of trust between the tax administration and taxpayers, concerted training programmes should be initiated for all AO's placed, or to be placed, in the area of international taxation, to maintain officials in this field for elongated periods as in other countries, to place on the intranet details of all GAAR cases in an encrypted manner to comprise an additive log of guidelines for future application. It would be perspicacious as indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltations to finalize the guidelines for General Anti Avoidance Rule (GAAR)-Reg. An Expert Committee on GAAR has been constituted with the approval of the Prime Minister to undertake stakeholder consultations and finalise the guidelines for General Anti Avoidance Rule (GAAR). This Committee would manage the consultation process and finalise the draft GAAR Guidelines. The Expert Committee consist of the following persons:- ( i ) Dr. Parthasarathi Shome - Chairman ( ii ) Shri N. Rangachary, former Chairman, IRDA CBDT - Member ( iii ) Dr. Ajay Shah, Professor, NIPFP - Member ( iv ) Shri Sunil Gupta, Joint Secretary, Tax Policy Legislation, Deptt. of Revenue - Member The terms of reference of the Committee is to- ( i ) Receive comments from stakeholders and the general public on the draft GAAR guidelines which have been published by the Government on its website. ( ii ) Vet and rework the guidelines based on this feedback and publish the second draft of the GAAR guidelines for comments and consultations. ( iii ) Undertake widespread consultations on the second draft GAAR guid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of retrospective taxation through Finance Act 2012. GAAR, in conjunction with retrospective taxation, has thus generated world-wide opprobrium not only against the unpredictable approach to administration of the Indian tax authorities but also of policy makers who enact laws. The outcome is a widely held view that India is not a good place for investment at the moment. With this backdrop, three useful points may be noted - The Indian government (henceforth Govt.) has no problem with tax mitigation by which is implied the use of tax incentives in not only a legal, but also transparent, manner by means of legitimate tax planning with the objective of achieving what tax professionals term "tax efficiency". Instead, Govt's intention is to target tax avoidance which is technically legal (in that it is not evasion which is illegal) but may represent tax planning with the sheer objective of obtaining a tax benefit without any supporting justification in terms of commercial, economic or business purpose. The determination of this separation of objectives comprises a crucial challenge in modern global practices in designing complex corporate structures with good or bad m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations received in writing as well as orally, and applying its own views on each matter, the Committee formulated its draft Report which was put in public domain on 01 Sept. 2012. The Committee received a large number of suggestions and comments on its draft Report. After thorough examination of the suggestions, the Committee has finalized its Report. It must be mentioned, as will be seen from its recommendations, the Committee viewed that an appropriate implementation of GAAR should require selected legislative changes. It has not desisted, therefore, from making such recommendations. The final Report follows. 2. Tax Evasion, Tax Mitigation and Tax Avoidance Tax mitigation is a situation where the taxpayer uses a fiscal incentive available to him in the tax legislation by submitting to the conditions and economic consequences that the particular tax legislation entails. An example of tax mitigation is the setting up of a business undertaking by a taxpayer in a designated area such as a Special Economic Zone (SEZ). In such a case the taxpayer is taking advantage of a fiscal incentive offered to him in the SEZ provisions in the Income-tax Act e.g., setting up the business only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Indian economy, increasingly sophisticated forms of tax avoidance have appeared. The problem has been compounded by tax avoidance arrangements spanning multiple tax jurisdictions. While introducing the GAAR provisions in the Income-tax Act, it was mentioned in the Explanatory Memorandum to the Finance Bill 2012, that the question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied on this. While some courts in certain circumstances have held that legal form of transactions can be dispensed with and the real substance of transaction should be considered while applying the taxation laws, others have held that form is to be given sanctity in the absence of specific or general anti-avoidance rules in the statute. There are specific anti-avoidance provisions in the Act, an overview of which is presented in Annexe-5. But avoidance methods other than those covered under specific rules, remain unaddressed except through judicial decisions. In a regime of moderate rates of tax, it is necessary that the correct tax base be subjected to tax and that aggressive tax planning be countered. Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined subject to the provisions of this Chapter. Explanation.-For the removal of doubts, it is hereby declared that the provisions of this Chapter may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement." The section starts with a non-obstante clause which means, if there is a conflict with provisions, in other sections, then those of this section shall prevail over other conflicting provisions. The provisions allow the tax authority to, notwithstanding anything contained in the Act, declare an 'arrangement' which an assessee has entered into, as an 'impermissible avoidance arrangement'. Once an 'arrangement' has been declared as an 'impermissible avoidance arrangement', the consequence as regards tax liability would also be determined. The term "arrangement" has been defined in section 102 as under- '(1) "arrangement" means any step in, or a part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding; ' Thus, the term arrangement covers not only a scheme but al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h could be interest, penalty etc.; ( iii ) tax benefit also means reduction in total income; ( iv ) tax benefit also includes deferral of tax liability even if there is no reduction of tax liability of all years taken together; ( v ) use of the phrase "increase in loss" suggests the intention to include potential loss of revenue. It has been pointed out by stakeholders that the original version of GAAR in DTC 2009 and DTC 2010, the purpose test required that the main purpose of the arrangement was to obtain tax benefit. However, the GAAR provisions introduced through Finance Act, 2012 provides for "main purpose or one of the main purposes is to obtain tax benefit". Though initially only those arrangements were covered under GAAR where the most predominant purpose was to obtain tax benefit this has been diluted in the recent version of GAAR as there could be many dominant purposes of an arrangement and to obtain tax benefit is one of such purposes Then also GAAR can be invoked even if obtaining tax benefit is not the most predominant or the sole purpose of the arrangement. It was suggested that the provisions as per original DTC 2009 may be restored so that only the arran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o illustration 24 in section 4 of the Report. Concerns have been raised that section 96(2) provides that an arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit. In view of this provision, where only a part of the arrangement is to obtain a tax benefit even if the whole arrangement is permissible, the whole arrangement may be treated as an impermissible arrangement. In order to allay the apprehensions of taxpayers in this regard, the Committee recommends that it should be clarified that, where only a part of the arrangement is impermissible, the tax consequences of an "impermissible avoidance arrangement" will be limited to that portion of the arrangement. 3.3 Arrangement lacking commercial substance The phrase "arrangement to lack commercial substance" has not been defined. It is noted that earlier version of GAAR in the DTC Bill 2009 and 2010 defined the commercial substance as under - "an arrangement shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter), without having any regard to- (A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement; (B) the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or (C) the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received." Refer to illustration 7 in section 4 of the Report. Item (ii) of clause (b) deems an arrangement which includes an accommodating party to lack commercial substance. The phrase "accommodating party" has been further defined as under - "(3) For the purposes of this Chapter, a party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement is declared to be an impermissible avoidance arrangement, then the consequences may include denial of tax benefit or a benefit under a tax treaty. The consequence may be determined in such manner as is deemed appropriate in the circumstances of the case. Certain illustrations of the manner have been provided, namely:- ( a ) disregarding, combining or re-characterizing any step in, or a part or whole of, the impermissible avoidance arrangement; ( b ) treating the impermissible avoidance arrangement as if it had not been entered into or carried out; ( c ) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; ( d ) deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount; ( e ) reallocating amongst the parties to the arrangement- ( i ) any accrual, or receipt, of a capital or revenue nature; or ( ii ) any expenditure, deduction, relief or rebate; ( f ) treating- ( i ) the place of residence of any party to the arrangement; or ( ii ) the situs of an asset or of a transaction, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be prescribed. 3.8 Treaty Override Sections 90 and 90A of the Act provide the legal authority to the executive for entering into an agreement for avoidance of double taxation (DTAA) with another country or specified territory. Sub-section (2) of these sections provide that a taxpayer may choose any provision between domestic law and DTAA whichever is more beneficial. Thus, tax treaties have an overriding status over domestic law. The aforesaid benefit is restricted to the taxpayer for invoking GAAR by insertion of sub-section (2A) through amendment in Act as under - "(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee, even if such provisions are not beneficial to him." This insertion has raised the ire of foreign investors and generated an atmosphere of deep uncertainty. Later in the Report, the Committee has recommended to refrain from treaty override where the treaty itself addresses the issue of tax avoidance. 3.9 Advance Ruling An advance ruling can be obtained in relation to tax liability of a non-resident arising from a transaction to be undertaken from the Authority for Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is essential in the procedures for invoking the GAAR provisions. Adequate safeguards should be provided to ensure that principles of natural justice were not violated and there is transparency in the procedures. Therefore, following statutory forms need to be prescribed:- ( i ) For the Assessing Officer to make a reference to the Commissioner u/s 144BA(1) (Annexe-8) ( ii ) For the Commissioner to make a reference to the Approving Panel u/s 144BA(4) (Annexe-9) ( iii ) For the Commissioner to return the reference to the Assessing Officer u/s 144BA(5) (Annexe-10) 3.10.3 Prescribing time limits There should be absolute certainty about the time limits during which the various actions under the GAAR provisions are to be completed. Some of these time lines have been prescribed under the Act under sections 144BA(1) and 144BA(13). There are remaining actions for which time lines are also needed. The Committee recommends that it should be prescribed that ( i ) in terms of section 144BA(4), the Commissioner (CIT) should make a reference to the Approving Panel within 60 days of the receipt of the objection from the assessee with a copy to the assessee; ( ii ) in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequence of the legislation. As there may be a thin line between tax mitigation and tax avoidance, an illustrative list of tax mitigation or a negative list for the purpose of invoking GAAR should be considered. The negative list, not exhaustive however, should include - ( i ) Selection of one of the options offered in law. For instance - ( a ) payment of dividend or buy back of shares by a company ( b ) setting up of a branch or subsidiary ( c ) setting up of a unit in SEZ or any other place ( d ) funding through debt or equity ( e ) purchase or lease of a capital asset ( ii ) Timing of a transaction, for instance, sale of property in loss while having profit in other transactions ( iii ) Amalgamations and demergers (as defined in the Act) as approved by the High Court. ( iv ) Intra-group transactions (i.e. transactions between associated persons or enterprises) which may result in tax benefit to one person but overall tax revenue is not affected either by actual loss of revenue or deferral of revenue. The Committee recommends that (1) Tax mitigation should be distinguished from tax avoidance before invoking GAAR. (2) An illustrative list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of taxation of listed equity shares and units of equity oriented funds - ( i ) there is a transaction tax as well as capital gains tax (on short term gains); ( ii ) there is a great tax incentive for treaty shopping; ( iii ) taxpayers prefer round tripping of funds due to tax arbitrage between resident and non-residents (using favourable jurisdictions); ( iv ) taxpayers and revenue litigate on characterization of income as capital gains or business income as rates of tax are different for capital gains and business income; ( v ) the fund managers prefer to stay out of the country lest their presence should constitute permanent establishment for foreign investors; and ( vi ) it is advantageous to trade outside in offshore derivatives having underlying assets in India. Currently, the revenue on account of short term capital gains taxation under section 111A of the Act is very small as compared to overall direct taxes collection. On the other hand, such a measure-abolishing the tax on short term capital gains-may provide a boost to capital markets and, in turn, help attracting investment. In view of the above, the Committee recommends that the Government shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out this paradigm shift in tax policy and to establish a critical mass of confidence to counter any doubt regarding GAAR. The Committee recommends that there is a need for deferring the implementation of GAAR by three years on administrative grounds. It needs to be realized that GAAR is an extremely advanced instrument of tax administration - one of deterrence, rather than for revenue generation - for which intensive training of tax officers, who would specialize in the finer aspects of international taxation, is needed. The experience with transfer pricing, the thin training module in specialized fields for Indian tax officers, increasingly in contrast to international benchmarked modules and the time needed to put in place appropriate procedures and processes including the establishment of an Approving Panel, do not impart the needed confidence that an environment of certainty can be regenerated with an immediate application of GAAR, however modified. To note, the immediate tax expenditure for not implementing GAAR (after a requisite threshold is applied) would be minimal. Hence GAAR should be deferred for 3 years. But the year, 2016-17, should be announced now, so that it co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf would receive indefinite protection, and diminish the effectiveness of GAAR. In other words, it would allow an impermissible arrangement to exist in perpetuity if created before commencement of GAAR and grandfathered under GAAR provisions. For instance, if a conduit company (says a letter box company) is incorporated in a favourable jurisdiction in 2008 and this arrangement is grandfathered, then, all future investments made by it would also enjoy tax exemption for the indefinite future. Once this was explained, stakeholders agreed that the intention should be to grandfather investments rather than arrangements. It was also suggested to grandfather only those investments which have remained invested in India for a number of years (say five years or so), this would be unfair to those who invested within the last five years, considering the existing law at that point of time. Thus it is important to grandfather all investments. In view of the above, the Committee recommends that all investments (though not arrangements) made by a resident or non-resident and existing as on the date of commencement of the GAAR provisions should be grandfathered so that on exit (sale of such inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... busive transactions such as those entered into with the view to obtaining unintended benefits under the provisions of these conventions. This interpretation results from the object and purpose of tax conventions as well as the obligation to interpret them in good faith (Article 31 of the Vienna Convention on the Law of Treaties). However, in India the courts have not favoured purposive interpretation, taking a strictly legal stance. In the case of Azadi Bachao Andolan, the Supreme Court held that treaty shopping is legal. The relevant observation of the court is reproduced below- "In para 3.3.2, the working group recommended introduction of anti-abuse provisions in the domestic law. Finally, in paragraph 3.3.3 it is stated "The Working Group recommends that in future negotiations, provisions relating to anti-abuse/limitation of benefit may be incorporated in the DTAAs also." We are afraid that the weighty recommendations of the Working Group on Non-Resident Taxation are again about what the law ought to be, and a pointer to the Parliament and the Executive for incorporating suitable limitation provisions in the treaty itself or by domestic legislation. This per se does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of domestic law. As indicated in paragraph 22.1 below, the answer to that second question is that, to the extent these anti-avoidance rules are part of the basic domestic rules set by domestic tax laws for determining which facts give rise to a tax liability, they are not addressed in tax treaties and are therefore not affected by them. Thus, as a general rule, there will be no conflict between such rules and the provisions of tax conventions." (emphasis added) Thus, the view of the OECD is that if domestic law that covers GAAR provisions is not reflected in a tax treaty, then GAAR can be invoked since there is no conflict with the treaty. However, the OECD does not address the case in which tax avoidance matters are directly or indirectly addressed in a treaty. It may, therefore, be presumed that, in the latter case, the treaty provisions, rather than domestic law, would apply. This has particular relevance for the Indian GAAR with respect to the Mauritius and Singapore treaties. However, in order to provide certainty on this issue, section 90 of the Income-tax Act (which is the legal basis of Indian tax treaties) has been amended vide Finance Act 2012 to specifically pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device" (emphasis added) Factors were considered by the Court to determine whether an arrangement is a colorable or sham device. In the case of conduit company structures created for investment in India through favourable tax jurisdictions, there is always a gap between the time of investment and exit as the value of investment should grow with time. At the time of exit and also, there is a need to judge the permissibility of the structure since the factum of payment of taxes on regular income from investment in India (i.e. by way of business income or interest or dividend income or indirect taxes) will not only be there durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t tax benefit for the purposes of the threshold shall include only income tax, dividend distribution tax and profit distribution tax, and shall not include other amounts like interest, income etc. The tax liability may be actual or potential (i.e. in case of increase in loss). However, in cases of tax deferral, the only benefit to the taxpayer is not paying taxes in one year but paying it in a later year. Overall there may not be any tax benefit but the benefit is in terms of the present value of money. In such cases, tax benefit should be computed in the year of deferral as the amount of taxes not paid in that year on account of the tax avoidance scheme which exceeds the present value of money of corresponding taxes paid in subsequent years. The present value of money should be ascertained based on the rate of interest charged under the Act for shortfall of tax payment under section 234B of the Act. It is noted that in case of transfer pricing regulations, being SAAR, a threshold of Rs. 15 crores as value of international transactions in a year is considered for the purpose of undertaking transfer pricing audit by the Transfer Pricing Officer. Presuming net profit from such tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SAAR is applicable. It was, therefore, suggested that the guidelines should clearly state this and, in case SAAR is misused, then it should be amended to make that particular SAAR more robust. It is in this context that a related statement by the earlier committee under DGIT (IT) came under criticism. It said :- "While SAARs are promulgated to counter a specific abusive behavior, GAARs are used to support SAARs and to cover transactions that are not covered by SAARs. Under normal circumstances, where specific SAAR is applicable, GAAR will not be invoked. However, in an exceptional case of abusive behavior on the part of a taxpayer that might defeat a SAAR, as illustrated in Example No. 16 in Annexure E (or similar cases), GAAR could also be invoked." It is a settled principle that, where a specific rule is available, a general rule will not apply. SAAR normally covers a specific aspect or situation of tax avoidance and provides a specific rule to deal with specific tax avoidance schemes. For instance, transfer pricing regulation in respect of transactions between associated enterprises ensures determination of taxable income based on arm's length price of such transactions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of asymmetry - ( i ) In the case of the same taxpayer in the same assessment year (for instance, some expenditure may not be allowable under GAAR: then corresponding income also may be made not taxable). ( ii ) In the case of the same taxpayer in different assessment years (for instance, in case of deferral of income not allowed under GAAR: then, income offered by the taxpayer voluntarily in a subsequent year should not be taxed). ( iii ) In the case of different taxpayers (for instance, recharacterization of payment from income to dividend: corresponding adjustments would potentially require different tax payers with different assessment years to be compared at the same time). The asymmetry mentioned at (i) and (ii) should be taken care of when determining the consequences of an impermissible tax avoidance scheme as indicated above. However, providing symmetry to situations at (iii) is not feasible. Stakeholders expressed their view that, if by applying GAAR a payment which has been claimed as deduction by one party to the arrangement is disallowed, the tax liability of the recipient should be computed considering as if such payment is never made and thus, such paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the initial intimation by the Assessing Officer (AO) to the assessee. The AO is empowered to initiate GAAR proceedings only during the course of pending assessment proceedings. He may collect all the relevant information and documents from the taxpayer about an arrangement, examine them, and then come to a finding based on facts of the case. Thereafter, he should inform the taxpayer of his finding along with the information he possesses and his detailed reasons thereof. He should not simply ask the taxpayer as to why a particular arrangement should not be treated as impermissible. In his letter to the taxpayer, he should specify in addition to the components already recommended above- ( i ) what is the arrangement; ( ii ) why it results in any tax avoidance in the case of the taxpayer; ( iii ) what is the amount of likely tax benefit and how it is initially calculated; ( iv ) why obtaining the tax benefit is the main purpose of the arrangement, with the detailed explanation thereof, including full and exhaustive background information in the possession of the Revenue so that it may be presumed that the Revenue has no additional information on the matter; ( v ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. After taking into account the numerous representations made to the present Committee, and with the objective of ensuring that the objective of GAAR be deterrence rather than revenue, the Committee recommends that - ( i ) The Approving Panel should consist of five members including Chairman; ( ii ) The Chairman should be a retired judge of the High Court; ( iii ) Two members should be from outside Govt. and persons of eminence drawn from the fields of accountancy, economics or business, with knowledge of matters of income-tax; and ( iv ) Two members should be Chief Commissioners of income tax; or one Chief Commissioner and one Commissioner. In case any of these two officers is the jurisdictional officer of the taxpayer or is in the chain of command of the concerned Assessing Officer, he should be replaced by another officer of the same rank for that particular case. ( v ) Appropriate mechanism may be provided to ensure confidentiality of information of the taxpayer becoming available to the members outside the Government. The AP should be a permanent body with a secretariat. It should have a two year term. In the first AP that is to be appointed, one Chief C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfactory undertaking to the Revenue, the AO may pass a detailed reasoned order with prior approval of the CIT if GAAR is applicable to the transaction. In view of the above, the Committee recommends that, while processing an application under section 195(2) or 197 of the Act pertaining to the withholding of taxes, ( a ) the taxpayer should submit a satisfactory undertaking to pay tax along with interest in case it is found that GAAR provisions are applicable in relation to the remittance during the course of assessment proceedings; or ( b ) in case the taxpayer is unwilling to submit a satisfactory undertaking as mentioned in (a) above, the Assessing Officer should have the authority with the prior approval of Commissioner, to inform the taxpayer of his likely liability in case GAAR is to be invoked during assessment procedure. There is a responsibility cast on the payer of any sum to a non-resident under Indian tax laws in the form of a withholding agent of the Revenue as well as representative assessee of the non-resident payee. The payer is required to undertake due diligence to ascertain the correct amount of tax payable in India and, in case of any default, it becom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves traded on a stock exchange, commercial paper etc. In case of unlisted securities, FIIs are required to hold such shares subject to a lock in period as applicable to foreign direct investor. Further, investment in equity shares of a company by an FII cannot exceed ten percent of the total issued capital of that company, whether listed or unlisted. As it is the FII which is the taxable unit in India, this Committee felt that the intention of the guidelines should be to exclude all investors in portfolio investments above the FII stage from the purview of GAAR. In view of the above, the Committee recommends that - ( i ) where a Foreign Institutional Investor (FII) chooses not to take any benefit under an agreement entered into by India under section 90 or 90A of the Act and subjects itself to tax in accordance with domestic law provisions, then, the provisions of Chapter X-A shall not apply to such FII; ( ii ) Whether an FII chooses or does not choose to take a treaty benefit, GAAR provisions would not be invoked in the case of a non-resident who has invested, directly or indirectly, in the FII i.e. where the investment of the non-resident has underlying assets as investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated above, for Govt. to postpone the implementation of GAAR for three years with an immediate pre-announcement of the date to remove uncertainty from the minds of stakeholders. A longer period of preparation should ensure much needed training at the AO and Commissioner levels. It would also enable taxpayers to plan for a change in the anti-avoidance regime based on legitimate tax planning that reflects a proper understanding of the new legislation and guidelines. Further, it should be considered to make Large Taxpayer Units (LTUs) compulsory for a specified class of taxpayers reflecting international practice. Considering the high threshold of tax benefit for invocation of GAAR, the majority of cases may come in LTU only. Given the importance of such very large taxpayers, the Revenue would need to be very analytical in its invocation and application of GAAR. 3.26 Reporting Requirement In selected jurisdictions such as the UK, tax professionals are required to report any tax avoidance scheme directly advised by them. This helps the tax administration in the selection of cases for audit. In India, taxpayers having a turnover of Rs 1 crore and above are required to get thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax avoidance. Tax evasion, being unlawful, can be dealt with directly by establishing correct facts. GAAR provisions will not be invoked in such a case. Example 1B Facts: In the above example 1A, let us presume that M/s India Chem Ltd. does not show production of non-SEZ unit as a production of SEZ unit but transfers the product of non-SEZ unit at a price lower than the fair market value and does only some insignificant activity in SEZ unit. Thus, it is able to show higher profits in SEZ unit than in non-SEZ unit, and consequently claims higher deduction in computation of income. Can GAAR be invoked to deny the tax benefit? Interpretation: As there is no misrepresentation of facts or false submissions, it is not a case of tax evasion. The company has tried to take advantage of tax provisions by diverting profits from non-SEZ unit to SEZ unit. This is not the intention of the SEZ legislation. However, such tax avoidance is specifically dealt with through transfer pricing regulations that deny tax benefits. Hence, the Revenue would not invoke GAAR in such a case. Example 1C Facts: In the above example 1B, let us presume, that both units in SEZ area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merged company. Would the losses be disallowed under GAAR? Interpretation: As regards setting off of losses, the provisions relating to merger and amalgamation already contain specific anti-avoidance safeguards. Therefore, GAAR would not be invoked when SAAR is applicable. Example -3A: Facts: In the above example 3, let us presume, the profit making company merges into a loss making one. This results in losses setting off profits, a lower net profit and lower tax liability for both companies taken together. Can this be examined under GAAR? Interpretation: In case of merger of profit making company with loss making company, there is no specific anti-avoidance safeguards. However, since such merger would be under the order of High Court, GAAR cannot be invoked as it falls in the negative list (as recommended) for invoking GAAR as mentioned in guidelines. Example -4: Facts: A choice is made by a company by acquiring an asset on lease over outright purchase. The company claims deduction for lease rentals in case of acquisition through lease rather than depreciation as in the case of purchase of the asset. Would the lease rent payment, being higher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n LTJ; ( ii ) there is a closely held company Subco in LTJ which is a wholly owned subsidiary of another closely held Indian company Indco; ( iii ) Subco has reserves and, if it provides a loan to Indco, it may be treated as deemed dividend under section 2(22)(e) of the Act. ( iv ) Subco makes a term deposit with X Ltd. bank and X Ltd. bank based on this security provides a back to back loan to Indco. Say, India-LTJ tax treaty provides that interest payment to a LTJ banking company is not taxable in India. Can this be examined under GAAR? Interpretation: This is an arrangement whose main purpose is to bring money out of reserves in Subco to India without payment of due taxes. The tax benefit is saving of taxes on income to be received from Subco by way of dividend or deemed dividend. The arrangement disguises the source of funds by routing it through X Ltd. bank. X Ltd. bank may also be treated as an accommodating party. Hence the arrangement shall be deemed to lack commercial substance. Consequently, in the case of Indco, the loan amount would be treated as dividend income received from Subco to the extent reserves are available in Subco; and no expense by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l its non core activities. The service company then charges each company for the services rendered on a cost plus basis. Can the mark up in the cost of services be questioned using GAAR. Interpretation: There are specific anti avoidance provisions through transfer pricing regulations as regards transactions among related parties. GAAR will not be invoked in this case. Example -9: Facts: A company sets off losses in the stock market against gains which is aimed at balancing the portfolio. Interpretation: Sale/purchase through stock market transactions would not come under GAAR provisions. Moreover, timing of a transaction by a taxpayer would not be questioned under GAAR. Example -10: ( i ) Y Ltd. is a company incorporated in country C1. It is a non-resident in India. ( ii ) Z Ltd. is a company resident in India. ( iii ) A Ltd. is a company incorporated in country F1 and it is a 100% subsidiary of Y Ltd. ( iv ) A Ltd. and Z Ltd. form a joint venture company X Ltd. in India after the date of commencement of GAAR provisions. There is no other activity in A Ltd. ( v ) The India-F1 tax treaty provides for non-taxation of capital gains in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Y Ltd. These shares are subsequently disposed of by A Ltd after 5 years. This results in capital gains which A Ltd. claims as not being taxable in India by virtue of the India-F1 tax treaty. A Ltd. has not made any other transaction during this period. Can GAAR be invoked? Interpretation: This is an arrangement which has been created with the main purpose of avoiding capital gains tax in India by routing investments through a favourable jurisdiction. There is neither a commercial purpose nor commercial substance in terms of business risks or cash flow to Y Ltd in setting up A Ltd. It should be immaterial here whether A Ltd has office, employee etc in country F1. Both the purpose test and tainted element tests are satisfied for the purpose of invoking GAAR. Unless it is a case where Circular 789 relating Tax Residence Certificate in the case of Mauritius, or Limitation of Benefits clause in India-Singapore treaty is applicable, the Revenue may invoke GAAR and consequently deny treaty benefit. Example -12: Facts: An Indian company, X Ltd., is a closely held company and it is a subsidiary of company Y Ltd. incorporated in country C1. X Ltd. was regularly distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y Ltd. accepts that offer and other shareholders declines. In the process, all accumulated reserves of X Ltd are exhausted and Y Ltd. does not pay any tax in India. Can this be questioned under GAAR? Interpretation: No dividends were distributed by X Ltd. since 1.4.2003, the day the DDT was implemented. Subsequently X Ltd. obtained tax benefit by not declaring dividend and passing this on as exempt capital gain in the hands of connected company Y Ltd. The buyback of shares was accepted only by company Y Ltd. and not by other shareholders companies D Ltd. and E Ltd. D Ltd and E Ltd would have invited capital gains tax by accepting such offer. This appears to be a dubious method; at the same time, there may or may not be genuine commercial reasons for D Ltd and E Ltd for not accepting the buyback offer by X Ltd. The Revenue may, therefore, examine the arrangement under GAAR to ascertain the economic substance and main purpose of the arrangement. Example -13: Facts: The shares of V Ltd., an asset owning Indian company, was held by another Indian company X Ltd. X Ltd. was in turn held by two companies G Ltd. and H Ltd., incorporated in country F2, a NTJ. The In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o withholding provision on interest earned by F3 residents under the India-F3 treaty. Unless there is a significant commercial purpose for assigning loan to the subsidiary in F3 country, the main purpose of the arrangement would be to avoid tax. Further, there is a tainted element being abuse of the treaty. Therefore, the arrangement may be treated as an impermissible avoidance arrangement. The Revenue may invoke GAAR with regard to this arrangement. Example -15: Under the provisions of a tax treaty between India and country F4, any capital gains arising from the sale of shares of Indco, an Indian company would be taxable only in F4 if the transferor is a resident of F4 except where the transferor holds more than 10% interest in the capital stock of Indco. A company, A Ltd., being resident in F4, makes an investment in Indco through two wholly owned subsidiaries (K Ltd. and L Ltd.) located in F4. Each subsidiary holds 9.95% shareholding in the Indian Company, the total adding to 19.9% of equity of Indco. The subsidiaries sell the shares of Indco and claim exemption as each is holding less than 10% equity shares in the Indian company. Can GAAR be invoked to deny treaty benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India but shows the documentation of the purchase and sale in Country A. The day to day management operations are carried out in India. The goods move from P directly to Q. The transactions are recorded in the books of subsidiary in country A, where the profits are tax exempt. Can GAAR be invoked? Interpretation: The above facts reflect the following possibilities: (A) Z Ltd. misrepresents the facts by showing on paper that everything is done outside India and therefore, nothing is taxable in India. This would be a case of tax evasion and not GAAR; or (B) Z Ltd. represents that certain operations relating to A, its subsidiary, are carried out in India but it is not taxable under the relevant DTAA as these operations do not constitute a permanent establishment (PE) in India. This is not a case of tax avoidance but of determination of facts to ascertain whether there is a PE or not. Again, the investigation should reveal if it is a case of correct reporting of facts or a mis-representation. If the latter, it would be tax evasion. Further, if any activity is being carried out by Z Ltd for A Ltd, then Z Ltd is required to be compensated at arm's length price which woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion, then the implications are different. In the latter case, the acquisition of the preferential shares becomes part of an arrangement designed to avoid the tax that would have been required to be paid on salary. The main purpose of the arrangement is to obtain the tax benefit. The tainted elements are misuse of the tax provisions and the arrangement being not for bona fide purposes. The Revenue would invoke GAAR with regard to this arrangement and consequently, in the case of the employee, capital gains would be recharacterised as salary. Example -20: Facts: Company S had a disputed claim with Company T. S transferred its actionable claims against T for an amount which was low, say, for example, 10% of the value of the actionable claim against T to a connected concern U by way of a transfer instrument. U transferred such claim to company V, and company V further gifted it to company W, another connected concern of S. Upon redemption of such actionable claims, W shows it as a capital receipt and claims exemption as not being in the nature of revenue receipt. Can GAAR be invoked? Interpretation: The transfer of actionable claims in the manner as detailed abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a manner as to reduce tax liability of the foreign company in India. Both conditions for declaring an arrangement as impermissible are satisfied. (1) The main purpose of this arrangement is to obtain tax benefit; and (2) the transactions are not at arm's length. Consequently, GAAR may be invoked and prices would be reallocated based on arm's length price of each part of the contract determined as per transfer pricing regulations under the Act. However, it is clarified that GAAR provisions in such cases may be invoked only where there is an overall benefit in reallocation of prices to different parts of the overall contract. For instance, where import duty is levied on offshore supplies, it may not result in any net gain on reallocation of prices; or where offshore designs are not taxable as per the relevant DTAA. Example 23: Facts: A company A Ltd enters into a ready forward contract with B Ltd whereby A Ltd sells its some unlisted securities to M/s B Ltd for a price of Rs 1000 on 1st Jan 2020 and on 1st Jan 2021, the company A Ltd purchases the same unlisted securities for Rs 1100 as agreed in advance. The forward contract price was based on a rate of return of 10% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 crore which is exempt from taxation and no MAT is payable. Subsequently, the firm is dissolved and share of A Ltd in the partnership firm is transferred back along with profits, which is exempt from tax under the Act. Can GAAR be invoked in this case? Interpretation The only purpose of forming a partnership and transferring assets to such firm and selling the shares is to save tax from MAT liability of A Ltd. Further, there is no commercial substance in the formation of the partnership as it does alter the economic position of A Ltd in terms of business risks or cash flow. Moreover, the entire exercise is carried out in an abnormal manner. Even holding of shares by the partnership firm for a year or more is no significant economic risk to the company. Hence, GAAR may be invoked and the partnership firm may be disregarded and capital gains may be taxed under MAT in the hands of A Ltd. Example 25: Facts: M/s Global Architects Inc is a company incorporated in country F1. It is engaged in the business of providing architectural design services all over the world. It receives an offer from Lovely Resorts Pvt Ltd, an Indian company, for design and development of resorts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GAAR may not be invoked if the property is transferred by related company after a gap of reasonable time limit after the acquisition from assessee as that would reflect that main purpose of the arrangement was not to obtain tax benefit. This would comprise a matter of GAAR query. Example 27: Facts: An Indian holding company Holdco borrows Rs. 10 crore for acquisition of shares of Subco which then became subsidiary of Holdco. Holdco and Subco amalgamate so that the interest payable on the monies borrowed to acquire the shares can be deducted in computing the income from the business of the amalgamated company. Interpretation The borrowing by Holdco followed by the amalgamation by Subco is not abusive and GAAR would not apply in the case of merger which is carried out under the orders of High Court. Selected List of Abbreviations SEZ Special Economic Zone Indco Indian Company X Ltd. Another Indian Company Subco Subsidiary Company CFC Controlled Foreign Company NTJ No tax jurisdiction LTJ Low tax jurisdiction DDT Dividend distribution tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose is to obtain a tax benefit and it,- ( a ) creates rights, or obligations, which would not normally be created between persons dealing at arm's length; ( b ) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Code; ( c ) lacks commercial substance, in whole or in part; or ( d ) is entered into, or carried out, by means, or in a manner, which would not normally be employed for bonafide purposes; 3 PRESUMPTION OF PURPOSE: An arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit. 1. An arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit unless the person obtaining the tax benefit proves that obtaining the tax benefit was not the main purpose of the arrangement. 2. An arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or mode through, which funds involved in the round trip financing are transferred or received. (3) For the purposes of this Chapter, a party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the arrangement. (4) The following shall not be taken into account while determining whether an arrangement lacks commercial substance or not, namely:- (i) the period or time for which the arrangement (including operations therein) exists; ( ii ) the fact of payment of taxes, directly or indirectly, under the arrangement; ( iii ) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement. "lacks commercial substance"-a step in, or a part or whole of, an arrangement shall be deemed to be lacking commercial substance, if- ( a ) it does not have a significant effect upon the business risks, or net cash flows, of any par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny effect attributable to the tax benefit that would be obtained but for the provisions of section 112; ( b ) the legal substance, or effect, of the avoidance arrangement as a whole is inconsistent with, or differs significantly from, the legal form of its individual steps; or ( c ) it includes, or involves,- ( i ) round trip financing without regard to,- (A) whether or not the round tripped amounts can be traced to funds transferred to, or received by, any party in connection with the avoidance arrangement; (B) the time, or sequence, in which round tripped amounts are transferred or received; or (C) the means by, or manner in, which round tripped amounts are transferred or received. ( ii ) an accommodating or tax indifferent party; ( iii ) any element that have the effect of offsetting or canceling each other; or ( iv ) a transaction which is conducted through one or more persons and disguises the nature, location, source, ownership, or control, of the fund; 5 Consequence of impermissible avoidance arrangement. If an arrangement is declared to be an impermissible avoidance arrangement, then the consequences, in relation to tax, of the arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be determined by- ( a ) disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement; ( b ) treating the impermissible avoidance arrangement- ( i ) as if it had not been entered into or carried out; or ( ii ) in such other manner as in the circumstances of the case, the Commissioner deems appropriate for the prevention or diminution of the relevant tax benefit; ( c ) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; ( d ) deeming persons who are co-nnected persons in relation to each other to be one and the same person; ( e ) reallocating, amongst the parties to the arrangement- ( i ) any accrual, or receipt, of a capital or revenue nature; or ( ii ) any expenditure, deduction, relief or rebate; or ( f ) recharacterising- ( i ) any equity into debt or vice versa ; ( ii ) any accrual, or receipt, of a capital or revenue nature; or ( iii ) any expenditure, deduction, relief or rebate . (2) The provisions of sub-section ( 1 ) may be applied in the alternative for, or in addition to, any other basis for determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee within such period, not exceeding sixty days, as may be specified in the notice. (3) If the assessee does not furnish any objection to the notice within the time specified in the notice issued under sub-section (2), the Commissioner shall issue such directions as it deems fit in respect of declaration of the arrangement to be an impermissible avoidance arrangement. (4) In case the assessee objects to the proposed action, and the Commissioner, after hearing the assessee in the matter, is not satisfied by the explanation of the assessee, then, he shall make a reference in the matter to the Approving Panel for the purpose of declaration of the arrangement as an impermissible avoidance arrangement. (5) If the Commissioner is satisfied, after having heard the assessee that the provisions of Chapter X-A are not to be invoked, he shall by an order in writing communicate the same to the Assessing Officer with a copy to the assessee. (6) The Approving Panel, on receipt of reference from the Commissioner under sub-section (4) shall issue such directions, as it deems fit, in respect of the declaration of the arrangement as an impermissible avoidance arrangement in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arrangement as impermissible avoidance arrangement. (13) No direction under sub-section (6) shall be issued after a period of six months from the end of the month in which the reference under sub-section (4) was received by the Approving Panel. (14) The Board shall, for the purposes of this section constitute an Approving Panel consisting of not less than three members, being- ( i ) income-tax authorities not below the rank of Commissioner; and ( ii ) an officer of the Indian Legal Service not below the rank of Joint Secretary to the Government of India. (15) The Board may make rules for the purposes of the efficient functioning of the Approving Panel and expeditious disposal of the references received under sub-section (4). (1) The Commissioner shall, for the purposes of section 123, serve on the assessee a notice requiring him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars on which the assessee may rely in support of his claim that the provisions of section 123 are not applicable to him. (2) After hearing the evidence and after taking into account such particulars as the assessee may produce, the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( c ) any partner or member of a firm or association of persons or body of individuals or any relative of such partner or member if the person is a firm or association of persons or body of individuals; ( d ) any member of the Hindu undivided family or any relative of such member, if the person is a Hindu undivided family; ( e ) any individual who has a substantial interest in the business of the person or any relative of such individual; ( f ) a company, firm or an association of persons or a body of individuals, whether incorporated or not, or a Hindu undivided family having a substantial interest in the business of the person or any director, partner, or member of the company, firm or association of persons or body of individuals or family, or any relative of such director, partner or member; ( g ) a company, firm or association of persons or body of individuals, whether incorporated or not, or a Hindu undivided family, whose director, partner, or member have a substantial interest in the business of the person, or family or any relative of such director, partner or member; ( h ) any other person who carries on a business, if ( i ) the person being an individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy; ( d ) any member of the Hindu undivided family or any relative of such member, if the person is a Hindu undivided family; ( e ) any individual who has a substantial interest in the business of the person or any relative of such individual; ( f ) a company, unincorporated body or Hindu undivided family having a substantial interest in the business of the person or any director, participant, or member of the company, body or family, or any relative of such director, participant or member; ( g ) a company, unincorporated body or Hindu undivided family, whose director, participant, or member have a substantial interest in the business of the person; or family or any relative of such director, participant or member; ( h ) any other person who carries on a business, if ( i ) the person being an individual, or any relative of such person, has a substantial interest in the business of that other person; or ( ii ) the person being a company, unincorporated body or Hindu undivided family, or any director, participant or member of such company, body or family, or any relative of such director, participant or member, has a substantial interest in the business of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, beneficially entitled to twenty per cent or more, of the profits of such business; "substantial interest in the business" a person shall be deemed to have a substantial interest in the business, if ( a ) in case where the business is carried on by a company, such person is, at any time during the financial year, the beneficial owner of equity shares carrying twenty per cent. or more, of the voting power; or ( b ) in any other case, such person is, at any time during the financial year, beneficially entitled to twenty per cent. or more, of the profits of such business. "substantial interest in the business" - A person shall be deemed to have a substantial interest in the business, if,- ( a ) in a case where the business is carried on by a company, such person is, at any time during the financial year, the beneficial owner of equity shares carrying twenty per cent., or more, of the voting power; or ( b ) in any other case, such person is, at any time during the financial year, beneficially entitled to twenty per cent., or more, of the profits of such business. 11 "step" includes a measure or an action, particularly one of a series tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 3 p.m. to 5 p.m. PWC Mr.Vijay Mathur 31st July, 12 3 p.m. to 5 p.m. PWC Mr.Vijay Mathur 13th Aug. 12 11 a.m. to 1 p.m. Deloitte Mr. Sekar 13th Aug. 12 3 p.m. to 5 p.m. Nishith Desai Co. Mr. Nisith Desai 14th Aug. 12 11 a.m. to 1 p.m. E Y Mr. Satya Poddar Industry Date Time Invitee Contact Person 16th Aug. 12 Mr. Bajoria, Kolkata 13th Aug. 12 9.45 a.m. to 11 a.m. TCS Mr. S. Ramadorai, Vice Chairman 18th Aug. 12 WIPRO Dr. Vegi Srinivasa R. Business Head for Media Telecommunications at WIPRO Policy Makers Date Time Person Designation /Organisation Shri P C Chidambaram Finance Minister, GOI 13th Aug. 12 5 p.m. Shri Yashwant Sinha Chairman, Parliamentary Standing Committee on Finance 6th Aug. 12 5.30 p.m. Shri Montek Singh Ahluwalia Deputy Chairman, Planning Commission. Annexe-3 Documents presented to GAAR Committee S.No. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BF) Recommendations 18. Letter 19th July 2012 United States Council for International Business(USCIB) Comments on the proposed draft GAAR guidelines 19. Letter 20th July 2012 Alternative Investment Management Association(aima) Comments on the Draft guidelines for implementation of GAAR provisions. 20. Letter ALSTOM Comments on Draft GAAR Guidelines 21. Letter 25.07.2012 Indian Private Equity Venture Capital Association(IVCA) Various representations on GAAR 22. Letter 03.08.2012 Cellular Operators Association of India Representation on draft guidelines issued on implementation of GAAR in India. 23. Letter 31.07.2012 International Fiscal Association (Singap ore Branch) Submission to the Expert Committee on GAAR 24. Letter 3.04.2012 Investment Company Institute(ICI Global) Finance Bill provisions that could impact foreign investors negatively. 25. Letter 17.08.2012 International Chamber of Commerce Review of GAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nishith Desai Associates GAAR Legislation, Administrative Guidance Taxpayer Rights Global Practices - Submissions to Expert Committee on GAAR 45. Slide 13.08.2012 Deloitte Haskins Sells GAAR and Retrospective Amendments - Recommendations. 46. Report Deloitte Haskins Sells General Anti-Avoidance Rules - India and International perspective. 47. Report 24.08.2012 Deloitte Haskins Sells GAAR and taxability of indirect transfers - Note on some of the key issues. 48. Letter 16.08.2012 Indian Venture Capital Association of India Representation on GAAR and Indirect transfer provisions of the Income-tax Act, 1961. 49. Letter 17.08.2012 All India Federation of Tax Practitioners Direct Taxes Representation Committee Review of draft guidelines on GAAR and Retrospective Amendments - Submissions of AIFTP. 50. Letter/Mail 27.08.2012 Mukesh Butani,BMR legal 1. Review of taxability of 'indirect transfer'. 2. Recommendation for formulation of revised guidelines-GAAR. 3. Revie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Guidelines regarding implementation of GAAR in terms of Section 101 of the IT Act,1961. 3 Letter 24.08.2012 Under Secretary (FT TR-I (2) Representation to the Min. of finance, Expert Committee on GAAR looking at the retrospective amendments on behalf of Hitachi Consulting Corporation. 4 E-mail 29.08.2012 Mahesh L. Patil Request for clarification-Taxability of dividends declared by a foreign company. 5 Letter 30.08.2012 Jaydeep Narendra Shah, ICAI Submission of suggestions on draft GAAR Guidelines. 6 E-mail 02.09.2012 Manjunath Mallesh Nauli Comments on GAAR committee. 7 E-mail 03.09.2012 T.R.Seshadri A suggestion. 8 E-mail 10.09.2012 Munish Vakharia Plea for STT removal. 9 E-mail 12.09.2012 Ketan Madia GAAR-Industry perspective. 10 E-mail 13.09.2012 Sudhir Nayak SKP observations and recommendations on GAAR. 11 E-mail 13.09.2012 Nilesh Patel Comments on Draft Report of the GAAR Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 E-mail 18.09.2012 Sage, William Expert Committee on GAAR: ASIFMA-CMTC letter: Application of indirect taxation rules to portfolio investments-further submission. 31 E-mail 18.09.2012 Prapti Acharya Draft Report on GAAR-Feedback. 32 E-mail 18.09.2012 Dinesh Kanabar EPC Example in GAAR Report. 33 E-mail 21.09.2012 Brazil Embassy Retrospective Taxation in Brazil. Annexe-4 Country Experiences with GAAR In order to ascertain the type of arrangements which may be targeted under GAAR, a number of countries have provided GAAR in their taxing statutes as discussed below. United Kingdom Currently, there are no GAAR like provisions in UK Statutes. Since the process of introducing GAAR is ongoing in the UK, it is pertinent to present at the beginning, UK's ongoing experience that should provide useful indicators for India. For some years, HMRC, the UK tax department 8 had expressed concern with tax avoidance. In June 2010, a consultation document contemplated a GAAR2. After public responses, HMRC commissioned Graham Aaronson to provide a R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement includes a transaction at a value significantly different from market value, or otherwise on non-commercial terms; ( d ) that the arrangement, or any element of it, is inconsistent with the legal duties of the parties to it; ( e ) that the arrangement includes a person, a transaction, a document or significant terms in a document, which would not be included if the arrangement were not designed to achieve an abusive tax result; ( f ) that the arrangement omits a person, a transaction, a document or significant terms in a document, which would not be omitted if the arrangement were not designed to achieve an abusive tax result; and ( g ) that the arrangement includes the location of an asset or a transaction, or of the place of residence of a person, which would not be so located if the arrangement were not designed to achieve an abusive tax result. Thus, the proposed GAAR has two primary elements i.e. abnormal arrangement having abnormal features, and abusive tax results. The Report also suggested that doubts be addressed quickly through guidance notes along with GAAR. The Report also recommended that an independent advisory panel with majority non-HM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax Act is the general anti-avoidance rule for income tax. It protects the integrity of the income tax system by ensuring that arrangements that have been contrived to obtain tax benefits will fail. Generally speaking, Part IVA will only apply to an arrangement if the answer is yes to both of the following questions: 1. Did you obtain a tax benefit from a scheme - a benefit that would not have been available if the scheme had not been entered into? 2. Having regard to the eight matters specified in Part IVA would it be objectively concluded that you or any other person entered into or carried out the scheme, or any part of it, for the sole or dominant purpose of obtaining the tax benefit? The matters that would need to be considered in determining an answer to first question include: the overall practical financial consequences of the scheme and other outcomes of the scheme, and whether the same outcomes (other than the tax advantage) could be achieved in a more straightforward, ordinary or convenient way than the way in which they were achieved by the scheme. In some cases, it may even be that no economic activity would have been carried out by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ederal income-tax effects) for entering into such transaction. . The term "economic substance doctrine" means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks business purpose." Thus, it envisages that, for any transaction "to which the economic substance doctrine is relevant", the use of a conjunctive two-pronged test must be used to determine whether or not a transaction should be treated as having economic substance. A transaction should be treated as having economic substance if the two prongs are met. The first prong requires that the transaction changes the taxpayer's economic position in a meaningful way (apart from federal income tax effects) and the second requires the taxpayer to have a substantial purpose (apart from federal income tax effects) for entering into such a transaction. From this definition, it can be concluded that a conjunctive examination is required. Accordingly, there must be an inquiry regarding the objective effects of the transaction on the taxpayer's financial position as well as an inquiry regarding the taxpayer's subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of business and any one or more of three tainted elements for arrangements in the context other than business, which renders it an impermissible avoidance arrangement. The tainted element tests, any one or more of which must be present in an arrangement, in a business context are: Test 1: Entered into or carried out by an abnormal means or manner, not used for a bona fide business purpose (the business abnormality test) other than obtaining a tax benefit Test 2: Lack of commercial substance; which consists of objective indicative tests and an objective general or presumptive test Test 3: Creation of non-arm's length rights or obligations Test 4: Abuse or misuse of the provisions of the Income Tax Act The so-called tainted elements or tainted element tests, any one or more of which must be present in an arrangement, in a context other than business are: Test 1: Entered into or carried out by an abnormal means or manner, not used for a bona fide purpose other than obtaining a tax benefit Test 2: Lack of commercial substance; which consists of objective indicative tests and an objective general or presumptive test Test 3: Creation of non-arm's length rights or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Argentina 0% Canada 0% Mexico 0% United States 0% EUROPE Denmark 0% Germany 0% France 0% Italy 0% Netherlands 0% Sweden 0% Switzerland 0% United Kingdom 0% Assumptions: Non-resident corporate investor Portfolio investments in listed securities No business income No real estate No tax treaty Annexe-7 ( a ) Profile of sample companies across various limits of profits before taxes (financial year 2010-11) [ Sample size 4,59,270] Sl.no. Profit Before Taxes (in rupees) Cumulative Number of Corporate Assessees Share in Total Number of Corporate assessees Cumulative share in Total Corporate Income tax Payable (in percentage Maximum amount of Average Tax Payable by each Company ( Rupees in crore) 1. More than 50 crores 1,737 0.38% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e" or one of the "main purposes" of the "arrangement"? 10 Brief facts of the "Tax Benefit" 11 Has the assessee been confronted with the details of the "Tax Benefit"? If yes, provide the gist of the reply furnished by the assessee on "Tax Benefit" 12 If "Tax Benefit" is the "main purpose" or one of the "main purposes" specify which other condition, out of the following is satisfied giving details how the conclusion has been arrived at: ( a ) Creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length; ( b ) Results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act; ( c ) Lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or ( d ) Is entered into, or carried out, by means, or in manner, which are not ordinarily employed for bona fide purposes. 13 Has the assessee been confronted with the findings given in column 12 ? If yes, provide the gist of the reply furnished by the assessee. 14 Detailed reasons for treating the arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndirectly, in the misuse, or abuse, of the provisions of this Act; ( c ) Lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or ( d ) Is entered into, or carried out, by means, or in manner, which are not ordinarily employed for bona fide purposes. 17 Has the assessee been confronted with the findings given in column 16? If yes, provide the gist of the reply furnished by the assessee. 18 Detailed reasons for treating the arrangement as "Impermissible Avoidance arrangement". 19 Consequences likely to arise if arrangement is declared as "Impermissible Avoidance arrangement" 20 Specify the time barring dates of original assessment or reassessment Date: Place: Name Designation of Commissioner of Income Tax Annexe-10 FORM FOR RETURNING THE REFERENCE U/S 144BA(5) rws SECTION 95 IN CASES OF REFERENCES MADE U/S 144BA(4) rws 95 OF THE INCOME TAX ACT, 1961 TO THE ASSESSING OFFICER 1 Name and Address of the Assessee 2 PAN ..... X X X X Extracts X X X X X X X X Extracts X X X X
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