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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 ..... l 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 an extremely advanced instrument of tax ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (including transfer of any activity or business or operations) is provided by the arrangement, are releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 revenue or deferral of revenue. (4) GAAR is to be applicable only in cases of abusive, contrived and artificial arrangements. (ii) A monetary threshold of Rs 3 crore of tax benefit (inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c 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) r.w.s. 144BA(5) with a copy to the assessee. (iii) no action u/s 144BA(4) or 144BA(5) shall be taken by the CIT after a period of six months from the end of the month in which the reference under sub-section 144BA(1) was received by the CIT and consequently GAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 above, for Government 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 enable appropriate training at the AO and Commissioner levels. It would also enable taxpayers to plan f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 guidelines. (iv) Finalise the GAAR guidelines and a roadmap for implementation and submit these to the Government. The Committee will work to the following time schedule- (i) Receive comments from stakeholders and general public till end - July 2012. (ii) Vet and rework the guidelines based on this feedback and publish the second draft GAAR guidelines by 31 August, 2012. (iii) Finalise the GAAR guidelines and a roadmap for implementation and submit these to the Government by 30 September, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 motives. Hence GAAR may be necessary to incisively analyse and detect the purpose of a business structure. The UK's proposed target is abusive, contrived, and artificial arrangements, thus truncating the scope of GAAR arrangements. It is narrower in scope than India's which is misuse or abuse [section 96(1)]. In essence, the outcome of UK's consultation process has been to opt for a model that will be applied in exceptional cases where there is clear evidence of an extremely aggressive arrangement to escape tax. • Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 in the SEZ areas and exporting from the SEZ area. Tax mitigation is, thus, allowed under the tax statute. Tax avoidance, on the other hand, is by and large not defined in taxing statutes. Tax avoidance is, nevertheless, the outcome of actions taken by the assessee, none of which or no combination of which is illegal or forbidden by the law as such. International literature, on the subject tends to describe it as : • Tax avoidance involves the legal exploitation of tax laws to one's own advantage. • Every attempt by le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances 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. Internationally, selected countries have codified the "substance over form" doctrine in the form of General Anti Avoidance Rule (GAAR) and are administering statutory GAAR provisions (see Annexe-4). In the Indian case, GAAR has, therefore, been enacted as a codification of the proposition that, while interpreting the tax legislation, substance should be selected over a legal form. Transactions have to be real and are not to be looked at in isolation. The fact that they are legal, does not imply that they are acceptable with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 also a transaction, operation, agreement or understanding. It also includes alienation of any property in all the aforesaid activities. The term impermissible arrangement is defined in section 96 of the Act. 3.2 Impermissible avoidance arrangement. The phrase "impermissible avoidance arrangement" has been defined under section 96(1) as under - "96. (1) An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it- (a) creates rights, or obligations, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "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 arrangements which have the main purpose or the most dominant purpose to obtain tax benefit should be covered under GAAR. In view of the above, the Committee recommends that the Act may 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. The "tainted element" test requires that the arrangement should have one or more specified tainted elements mentioned at clauses (a) to (d) above. The first tainted element refers to non-arm's length dealings where an arrangement creates rights and obligations, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rangement. 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 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 section…" It implies that besides having a commercial purpose, the taxpayer should also have commercial substance in the arrangement, which mean change in economic position of the taxpayer by altering the business risks or net cash flow to him. The Committee recommends that above generic definition of commercial substance may be introduced in GAAR provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 party to the arrangement." It means that where a party is included in an arrangement mainly for obtaining tax benefit to the taxpayer, then such party may be treated as an accommodating party and consequently the arrangement shall be deemed to lack commercial substance. Also, it is not necessary that such party should be connected to the taxpayer. Item (iii) of clause (b) deems an arrangement, which includes elements that have effect of offsetting or cancelling each other to lack commercial substance. Item (iv) of clause (b) deems an arrangement, which disguises value, source or location etc. of funds, to lack commercial substance. In other words, such arrangements h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or (g) considering or looking through any arrangement by disregarding any corporate structure. It has also been provided that - (i) any equity may be treated as debt or vice versa; (ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or (iii) any expenditure, deduction, relief or rebate may be recharacterised. 3.5 Treatment of connected persons and accommodating party. As per section 99, for the purposes of Chapter X-A, in determining whether a tax benefit exists- (i) the parties who are connected persons in relation to each other may be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ruling (AAR). This benefit is not available to a resident. Moreover, the AAR is precluded from giving any advance ruling where it involves any tax avoidance scheme. By amendment of the Act through Finance Act, 2012, any resident or non-resident may approach AAR for determination whether an arrangement to be undertaken by him is an impermissible avoidance arrangement or not. Concerns were raised by the stakeholders on delay in obtaining advance ruling. The statute provides a time limit of 6 months but rarely any ruling is obtained in time. The Committee, therefore, recommends that the administration of AAR should be strengthened so that ruling may be obtained within the time frame of 6 months. 3.10. Procedural GAAR provisions 3.10.1 Procedure to invoke GAAR The procedure for invoking GAAR is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maining 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 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) r.w.s. 144BA(5) with a copy to the assessee. (iii) No action u/s 144BA(4) or 144BA(5) shall be taken by the CIT after a period of six months from the end of the month in which the reference under sub-section 144BA(1) was received by the CIT from the assessing officer and consequently GAAR cannot be invoked against the assessee. 3.11 Overarching principle for applicability of GAAR Almost all stakeholders who were consulted (Annexe-2) expressed serious apprehension that GAAR may be widely invoked by the tax administration whenever tax benefit was perceived to have been taken by the taxpayer whether or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 of tax mitigation or a negative list for the purposes of invoking GAAR, as mentioned above, should be specified. (3) The overarching principle should be that GAAR is to be applicable only in cases of abusive, contrived and artificial arrangements. 3.12 Taxing capital gains and business income; validation of Tax Residence Certificate and Limitation of Benefits clause; and application of GAAR to Large Taxpayer Units Stakeholders indicated that several countries do not tax gains from the transfer of listed securities. A copy of a chart submitted by stakeholders is enclosed as Annexe-6. They submitted that slowdown in the world economy has impacted investments into India. The FDI inflow in the first quarter of 2012-13 has been less than half as compared to last year. The issue raised was whether India should implement GAAR at this stage, particularly in the context of foreign inward investments. FIIs make por ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection. 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 should abolish the tax on gains arising from transfer of securities, being equity shares or units of equity oriented mutual funds which is subject to securities transaction tax (STT), whether in the nature of capital gains or business income, to both residents as well as non-residents. While it would make this tax aspect internationally comparable, if Government cannot accept it on political economy grounds, a second best alternative would be to retain, until the abolition of the tax as mentioned above, the Circular accepting Tax Residence Certificate issued by the Mauritius authorities.(See subsection 3.14 below). 3.13 Deferring implementation of GAAR Stakeholders submitted that implementation of GAAR be deferred by one to five years so that - (i) The guidelines to be notified would be better understood by both the taxpayers and the income-tax department; (ii) Ambiguities in the law may be removed by way of amendments; (iii) Tax administrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 could apply from A.Y. 2017-18. Pre-announcement is a common practice internationally, in today's global environment of freely flowing capital. 3.14 Grandfathering of existing structures or investments Certain apprehensions were raised about retrospective application of GAAR. It was feared that GAAR provisions may be applied retrospectively if they are considered to be procedural provisions and not substantive in nature. Considering those apprehensions, the Committee is of the view that it may be clarified as under- "GAAR shall apply only to the income received, accruing or arising, or deemed to accrue or arise, to the taxpayers on or after date of affectivity of GAAR provisions. In other words, GAAR will apply to income of the previous year relevant to assessment year from which GAAR provisions become effective and subsequent years". The FDI and FII growth story cannot be overlooked. Stakeholders submitted that it was well known that certain treaties were used for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 investments) on or after this date, GAAR provisions are not invoked for examination or denial of tax benefit. 3.15 Status of Circular 789 of 2000 with reference to Mauritius Treaty Stakeholders also raised an issue regarding the status of Circular No 789 of 2000 issued by the Govt. The Circular provided that a Certificate of Residence (TRC) issued by the Govt. of Mauritius would constitute sufficient evidence for accepting the status of residence of a person as well as beneficial ownership for applying the tax treaty. Currently, the Revenue cannot look into the genuineness of residence of a company incorporated in Mauritius based on commercial substance, or other criteria, once a TRC is issued by the Mauritius authorities. Thus, the Circular would be in direct conflict with GAAR provisions. Hence, clarity was sought by stakeholders whether the Circular would be withdrawn after commencement of GAAR or, if not withdrawn, whether it would still be applicable to avail treaty benefit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw 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 render an attempt by resident of a third party to take advantage of the existing provisions of the DTAC illegal." (emphasis added) The Supreme Court in the Vodafone case, again opting for a legalistic stance, expressed the need for a policy decision in such matter as under- Justice Kapadia and Swatantra Kumar of SC in Vodafone (dated 20 Jan 2012): "Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like "Limitation of Benefits" and "look through" are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws." (para 91)(emphasis added) Justice Radhakrishnan in the above judgment: "It is often said that insufficient legislation in the countries where they operate gives opportunities fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provide for treaty override in case where GAAR is applicable. This has been done as a matter of abundant precaution as there is no conflict between anti-avoidance rules in the domestic law and the treaty provisions which do not have any anti-avoidance rule as such. However, there may be conflict with treaty provisions which specifically have special anti avoidance rules (SAAR) in the form of limitation of benefits clause etc. as the tax avoidance is being addressed both in the domestic law as well as the treaty law. It should, therefore be clarified through subordinate legislation so that there is no treaty override where the treaty itself has anti-avoidance provisions in the form of limitation of benefits clause. In other words, in such cases, GAAR should not be invoked. In view of the above, the Committee recommends that where the treaty itself has anti-avoidance provisions, such provisions should not be substituted by GAAR provisions under the treaty override provisions 3.17 Factors not relevant for determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 during the course of the life of the business, but the real and significant gains may be expected to arise also at the time of exit. Thus, a holistic view encompassing the life of the business as well as aspects that arise at the point of exit must be taken into account. In view of the above, the Committee recommends that section 97(2) may be amended to provide that 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 (including transfer of any activity or business or operations) is provided by the arrangement." are relevant but may not be sufficient and these factors will be taken into full account in forming a holistic assessment to determine whether an arrangement lacks commercial substance. When the AO informs the assessee in his initial intimation invoking GAAR, he should include how the above factors (i) to (iii) have been considered and why they fail to convi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of undertaking transfer pricing audit by the Transfer Pricing Officer. Presuming net profit from such transactions at 10%, the average net profit to the taxpayer would be Rs. 1.5 crore and the average tax payable on such transaction would be around Rs. 50 lakhs. In other words, the cases having tax implications of Rs. 50 lakh and above are selected for transfer pricing audit. While this is quite low, having too high a threshold also carries a potential danger of a perception that tax avoidance below that threshold will not be questioned. Thus the threshold has to be determined with due care. The threshold level should be decided based on the taxpayer population in different slabs. (Receipt Budget 2012) Companies having profit before tax (PBT) of Rs 1 crore and above, account for 6.2% (28,767 in number) of all companies (4,59,270) and contribute about 95% of total corporate tax revenue. Similarly, companies having PBT of Rs 10 crore and above account for 1.34% (6,141 in number) of all companies and contribute about 87% of total corporate tax revenue (see Annexe-7). It is recommended to apply GAAR to companies having PBT in a year of more than Rs.10 crore in the initial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprises ensures determination of taxable income based on arm's length price of such transactions. Here GAAR cannot be applied if such transactions between associated enterprises are not at arm's length even though one of the tainted elements of GAAR refers to dealings not at arm's length. The Limitation of Benefit (LOB) clause in some of India's tax treaties is a specific anti-avoidance rule to prevent tax abuse. For instance, the India-Singapore treaty provides that a company A, resident of a Contracting State, is deemed not to be a shell/conduit company if: (a) it is listed on a recognized stock exchange of the Contracting State; or (b) its total annual expenditure on operations in that Contracting State is equal to or more than S$200,000 or Indian Rs. 50,00,000 in the respective contracting state as the case may be, in the immediately preceding period of 24 months from the date the gains arise. So, if a company incorporated in Singapore incurs operating expenditure equal to, or in excess of, the aforesaid limits, then GAAR cannot be invoked to look into the genuineness of the company. But if there are SAAR elements that are revealed in its operations, then SAAR would be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted considering as if such payment is never made and thus, such payment should not form part of the recipient's income. Similarly, if by applying GAAR, an interest payment is recharacterized as dividend and the payer company is required to pay Dividend Distribution Tax (DDT) on the same, the tax liability of the recipient should be computed treating the payment as dividend. It was also stated by stakeholders that this treatment may be intended/ implicit in the provisions of Section 98(1) which prescribes that the consequences of an impermissible avoidance arrangement shall be computed in such a manner as is deemed appropriate. Nevertheless, it is the Committee's view that such compensation across parties is not desirable since it would diminish GAAR's deterrent role. GAAR is after all an anti-avoidance provision that should have deterrent consequences as a potential risk faced by aggressive tax planners and corresponding adjustments across different taxpayers would militate against deterrence. And, under SAAR, such corresponding adjustments are not allowed either. In view of the above, the Committee recommends that, while determining tax consequences of an impermissible avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation on the matter; (v) the show cause notice should specify what are the tainted element(s) of the arrangement; In view of the above, the Committee recommends that a requirement of detailed reasoning by the Assessing Officer in the show cause to the taxpayer may be prescribed in the rules, that should list explanations based on specifications (i) to (v) mentioned above. 3.22 Constitution of Approving Panel (AP) Some stakeholders submitted that, instead of having a standing body, at least one member of the AP should be drawn in each GAAR case from a field considering the business, commercial and economic aspects of the arrangement. Such member should be a person having expertise in the industry in which the relevant taxpayer is engaged. Section 144BA(14) has empowered the CBDT to constitute an AP consisting of not less than 3 members, out of which one member of the panel would be an officer of the level of Joint Secretary or above from the Ministry of Law, the others being from the Revenue of the rank of Commissioner or above. In the draft guidelines that are under examination by this Committee, the following recommendations were made- (a) To begin with, there should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne member from a specified field would be appointed to a one-year term. This should ensure an overlap among members in future AP's. If there is any need for further representation from particularly specialized fields, an updated roster of specialists should be maintained from which any additional member, may be drawn in an individual GAAR case. A decision of the AP should occur by a majority of members. In view of the above, the Committee recommends amendment of the Act for the constitution and working of the Approving Panel as elaborated above. 3.23 Withholding of taxes Stakeholders raised concerns about the procedure to be followed while determining withholding tax liability. They submitted that at the time of withholding, GAAR provisions should not be considered. Specific safeguards of seeking approval from the AP have been provided in determining tax liability under an assessment proceeding. There is no clarity whether GAAR provisions can be invoked by the AO while disposing of an application for determination of a withholding tax amount under section 195(2) or 197 of the Act. On the one hand, the concern of the Revenue is that, if remittance is allowed without considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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. 3.24 Concerns of FIIs The draft guidelines under examination by this Committee recommended the following- "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 the domestic law provisions, then, the provisions of Chapter X-A shall not apply to such FII or to the non-resident investors of the FII. Where an FII chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be invoked in the case of the non-resident investors of the FII." Stakeholders expressed the concern that the above clarification provides certainty only to immediate (first level) investors in the FII. As the FII structure is generally multi-layered and may be a synthetic investment structure (use of offshore derivativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons holding offshore derivative instruments (commonly known as Participatory Notes) issued by the FII. 3.25 Implementation issues Though a number of stakeholders agreed to the objective of preventing abusive tax planning schemes, they expressed apprehension in the manner in which the GAAR provisions were likely to be implemented in their view. Various reasons cited for such apprehension were - • deficiency of trust between tax administration and taxpayers; • anticipated attempts to invoke GAAR in a general manner, if not in every possible case; • lack of accountability in the manner in which tax officers conduct business, and for its outcome; • fear of audit by C&AG ; • compulsion for tax officers to meet budget targets; • past experience in implementing regulations pertaining to transfer pricing which gave little confidence, according to them, in fair and appropriate implementation; • advance ruling not being obtained in the specified period of six months. In order to allay fears of tax payers, a number of safeguards have been built into the GAAR provisions. It is not a one-to-one relationship between the tax officer and taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t report in a specified format. A suggestion was made by some stakeholders to include reporting of tax avoidance schemes in such tax audit reports by a tax professional. As the income-tax department plans to collect online all statutory reports, an annexure forming part of the return of income would help in picking up potential anti-avoidance cases in good time. In view of the above, the Committee recommends that 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 which is considered by the tax auditor as more likely than not to be held as an impermissible avoidance arrangement under the Act. 4. Illustrative cases where GAAR provisions will be considered applicable or not applicable It is clarified that the illustrations given below should be considered as a guide to the overall intent of GAAR. They comprise an indicative list, and cannot be construed as an exhaustive list of GAAR cases Example 1: Facts: M/s India Chem Ltd. is a company incorporated in India. It sets up a unit in a Special Economic Zone (SEZ) in F.Y. 2013-14 for manufacturing of chemicals. It claims 100% deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as well as new clients for unit A and gradually, the export from unit B declined. There has not been any shifting of equipment from unit B to unit A. The company offered lower profits from unit B in computation of income. Can GAAR be invoked on the ground that there has been shifting or reconstruction of business from unit B to unit A for the main purpose of obtaining tax benefit? Interpretation: The issue of tax avoidance through shifting/reconstruction of existing business from one unit to another has been specifically dealt with in section 10AA of the Act. Hence, the Revenue would not invoke GAAR in such a case. Example -2: Facts: An Indian company (Indco) has set up a holding company (Holdco) in a no tax jurisdiction outside India (say NTJ) which has set up further subsidiary companies (Subco A and Subco B) which pay dividends to Holdco. Such dividends are not repatriated to Indco. Can GAAR be invoked to look through Holdco to tax dividends in the hands of Indco? Interpretation: Declaration/repatriation of dividend is a business choice of a company. India does not have anti-deferral provisions in the form of Controlled Foreign Company (CFC) rules in the I.T. Act. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to him. Example -5: Facts: Indco has raised funds from a company (X Ltd.) incorporated in a low tax jurisdiction outside India (LTJ) through borrowings, when it could have issued equity. Would the interest be denied as an expense deduction under GAAR? Interpretation: There is no specific provision dealing with thin-capitalization in the I.T. Act. An evaluation of whether a business should have raised funds through equity instead of debt should generally be left to commercial judgment of a taxpayer and GAAR would not be attracted. Example 5A Facts: In the above example 5, the loan agreement between Indco and X Ltd. provide that Indco shall pay interest annually at the rate as mentioned below: Rate of interest = (Annual Profit of the Indco/Loan amount)*100 Can GAAR be invoked in such a case? Interpretation: This is a case where the form of the arrangement is to show Indco has received a debt from X Ltd. but in substance there is high likelihood that it is equity investment, as the rate of interest is directly based on the rate of return, or profit of Indco. Thus, it could be viewed as an arrangement whose main purpose is to obtain a tax benefit by claiming actual divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce rule is absent in DTAA, then GAAR may be invoked to deny treaty benefit as arrangement will be perceived as an attempt to hide the source of funds of Subco. Example 6 Facts: Indco incorporates a Subco in a NTJ with equity of US$100. Subco has no reserves; it gives a loan of US$100 to Indco at the rate of 10% p.a. which is utilized for business purposes. Indco claims deduction of interest payable to Subco from the profit of business. There is no other activity in Subco. Can GAAR be invoked in such a case? Interpretation: The main purpose of the arrangement is to obtain interest deduction in the hands of Indco and thereby tax benefit. There is no commercial substance in establishing Subco since without it there is no effect on the business risk of Indco or any change in the cash flow (apart from the tax benefit). Moreover, it is a case of round tripping which means a case of deemed lack of commercial substance. Hence, it would be treated as an impermissible avoidance arrangement. Consequently, in the case of Indco, interest payment would be disallowed by disregarding Subco. No corresponding relief would be allowed in the case of Subco by way of refund of taxes withheld, if a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's equity is allotted to A Ltd. and 51% is allotted to Z Ltd.. (viii) Thereafter, the shares of X Ltd. held by A Ltd. are sold to C Ltd., a company connected to the Z Ltd. group. As per the tax treaty with country F1, capital gains arising to A Ltd. are not taxable in India. Can GAAR be invoked to deny the treaty benefit? Interpretation The arrangement of routing investment through country F1 results into a tax benefit. Since there is no business purpose in incorporating company A Ltd. in country F1 which is a LTJ, it can be said that the main purpose of the arrangement is to obtain a tax benefit. The alternate course available in this case is direct investment in X Ltd. joint venture by Y Ltd. The tax benefit would be the difference in tax liabilities between the two available courses. The next question is, does the arrangement have any tainted element? It is evident that there is no commercial substance in incorporating A Ltd. as it does not have any effect on the business risk of Y Ltd. or cash flow of Y Ltd. As the twin conditions of main purpose being tax benefit and existence of a tainted element are satisfied, GAAR may be invoked. Additionally, as all rights of shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate. Can GAAR be invoked on the ground that there is a deferral of tax liability by X Ltd., the Indian company? Interpretation: Whether to pay dividend to its shareholder, or buy back its shares or issue bonus shares out of the accumulated reserves is a business choice of a company. Further, at what point of time a company makes such a choice is its strategic policy decision. Such decisions cannot be questioned under GAAR. Example -12A: Facts: In the above example 12, let us presume, there is a DTAA between India and Country C1 which provides that capital gains arising in India to a resident of country C1 shall not be taxed in India provided that the resident incurs $200,000 annually as operating expenditure. The shareholder Y Ltd. incurs an operating expenditure above that limit and is entitled to the treaty benefit. Y Ltd. therefore does not pay any tax on capital gains. Can GAAR be invoked on the ground that accumulation of profits by company X Ltd. and subsequent buyback is an arrangement mainly to obtain tax benefit? Interpretation: Payment of dividend to its shareholder or buy back of its shares or issuing bonus shares out of the accumulated reserves is a business ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax treaty and the resultant gains from the transaction are claimed to be not taxable. Can GAAR be invoked to deny treaty benefit? Interpretation: The alternative courses available to taxpayer to achieve the same result (with or without the tax benefit) are: (i) Option 1 (as mentioned in facts) : X Ltd. liquidated, G Ltd. and H Ltd. become shareholders of V Ltd.; A Ltd. acquires shares from G Ltd. and H Ltd.; and becomes shareholder of V Ltd. (ii) Option 2: A Ltd. acquires shares of X Ltd. from G Ltd. and H Ltd.; X Ltd. is liquidated; and A Ltd. becomes shareholder of V Ltd. (iii) Option 3: X Ltd. sells its entire shareholding in V Ltd. to A Ltd. and subsequently, X Ltd is liquidated. In Options 1 & 2, there is no tax liability in India except the deemed dividend taxation to the extent reserves are available in X Ltd. This is because of the treaty between India and country F1. In option 3, tax liability arises to X Ltd., an Indian company, on sale of shares of V Ltd. Subsequently, when X Ltd. is liquidated, tax liability arises on account of deemed dividend to the extent reserves are available in X Ltd. The taxpayer exercises the most tax efficient manner in disposal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le avoidance arrangement by invoking GAAR. Consequently, treaty benefit would be denied by ignoring K and L, the two subsidiaries, or by treating K and L as one and the same company for tax computation purposes. Example -16: Facts: A Ltd. is a resident of country F5 and is wholly owned by company M Ltd. in country C1. M Ltd. is a financial company with substantial reserves and is looking for investments in India. M Ltd uses A Ltd, its subsidiary company, to route its investment in Z Ltd., an Indian company, whereby A Ltd purchases the shares of Z ltd. Later, A Ltd sells the shares of Z Ltd to C Ltd., another company, and realizes capital gains. As per the provisions of relevant DTAA between country F5 and India, a shell/conduit company is not eligible for capital gains exemption in India. However, a company shall not be deemed to be a shell/conduit company if its total annual expenditure on operations in country F5 is equal to, or more than, $ 200,000/- in the immediately preceding period of 24 months from the date the gains arise. A Ltd claims that capital gains are not taxable in India as it is not a shell company as per the relevant DTAA Protocol since it incurred $250,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neutral jurisdiction was needed and, after exploring various options, country F1 was selected; (ii) it is easy to incorporate a company in F1; it is easy to operate; cost of compliance is low; and it is easy to migrate; (iii) there is no tax liability in country F1; (iv) the treaty network of country F1 protects investments and also saves taxes in jurisdictions including India. Can GAAR be invoked in such a case? Interpretation: The arrangement results into a significant tax benefit to the investors by routing their investments through country F1. Can it be said that obtaining tax benefit in India is the main purpose of the arrangement? Given the facts, it may be held that forming an SPV in an efficient jurisdiction was the main purpose of the arrangement and obtaining tax benefit was not the main purpose of the arrangement. Hence, the Revenue would not invoke GAAR with regard to this arrangement. Example -19: Facts An employee of a company R is to receive a bonus in the form of preferential shares or salary. The employee subscribes for preferential shares of the employer company. The preferential shares are purchased by a connected company of R, or are redeemable at a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss was claimed. This was set off against short-term capital gains from other sources. All the companies are Indian companies. Can GAAR be invoked? Interpretation: By the above arrangement, the tax payer has obtained a tax benefit and created rights or obligations which are not ordinarily created between persons dealing at arm's length. Since transactions of purchase and sale of shares of a closely held company at a price other than the fair market value are covered under section 56 of the Act, GAAR may not be invoked as section 56, being SAAR, is applicable. However, if SAAR is not applicable considering the limited scope of section 56 to the shares of closely held companies only, then GAAR may be invoked. Example -22: Facts: Y Tech Ltd. is a company resident of country C1. It enters into an agreement with Z Energy Ltd., an Indian company for setting up a power plant in India. It is a composite contract for an agreed price of US$ 100 million. The payment has been split in the following parts as per separate agreements (i) US$ 10 million for design of power plant outside India (payment for which is taxable at 10% on gross basis) (ii) US$ 70 million for offshore supplies of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terise the capital gains in the hands of B Ltd as interest income and taxed at applicable rates. Further, corresponding deduction of interest expense would not be allowed in the case of A Ltd. Example 23A: Facts: In the above example, let us presume that B Ltd instead of having a forward sale price, has a put option to sell at a rate of Rs 1100 on 1st Jan 2021. On that date, the market price of the assets is Rs 900 only. Hence, B Ltd exercises its option and sells the assets at Rs 1100 to A Ltd. as per the put option. Can GAAR be invoked in such a case? Interpretation This case is different from example 23 since it is not a simple financing arrangement, as an element of risk is involved. If the price of the goods on 1st Jan 2021 goes beyond Rs 1100, then B Ltd would not have exercised the put option and would have sold the goods in the market at the higher price. Thus, the gains to B Ltd would be much higher than the interest income. On the other hand, when prices go down, the return to B Ltd upto the agreed rate of interest is secured through the put option. This being a purely commercial transaction, GAAR cannot be invoked. Example 24: Facts: An Indian company A Ltd makes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip firm claimed the treaty benefit and no tax was paid in India. Can such an arrangement be examined under GAAR? Interpretation It is obvious that there was no commercial necessity to create a separate firm except to obtain the tax benefit. The firm was only on paper as the manpower was drawn from the company. The firm did not have any commercial substance. Moreover, it is a case of treaty abuse. Hence, GAAR may be invoked to disregard the firm and tax payment for architectural services as fee for technical services. However, the rate of tax on such payment shall be as applicable under the treaty, if more beneficial. Example 26: Facts: A company X Ltd. has property that it proposes to transfer to a third party. Such a transfer would result in capital gains in its hands. Another company Y Ltd. (which is related to X Ltd.) has a carried forward capital loss. X Ltd. (instead of selling the property directly to third party) transfers the property to its abovementioned related company Y Ltd. at book value, which is less than fair market value. Such a transfer does not result in any capital gains in the hands of the X Ltd. (which would have resulted had the assessee transferred the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p in, or a part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not, and includes any of the foregoing involving the alienation of property. 2 IMPERMISSIBLE AVOIDANCE ARRANGEMENT: An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it- (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 a manner, which are not ordinarily employed for bona fide purposes. "Impermissible avoidance arrangement" means a step in, or a part or whole of, an arrangement, whose main purpose 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes- (i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; or (iv) a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or (c) it involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party. (2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions- (a) funds are transferred among the parties to the arrangement; and (b) such transactions do not have 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which- (a) funds are transferred among the parties to the arrangement; and (b) the transfer of the funds would- (i) result, directly or indirectly, in a tax benefit but for the provisions of section 123; or (ii) significantly reduce, offset or eliminate any business risk incurred by any party to the arrangement; "accommodating party" means a party to an arrangement who, as a direct or indirect result of his participation, derives any amount in connection with the arrangement, which shall- (a) be included in his total income which would have otherwise been included in the total income of another party; (b) not be included in his total income which would have otherwise been included in the total income of another party; (c) be treated as a deductible expenditure, or allowable loss, by the party which would have otherwise constituted a non-deductible expenditure, or non allowable loss, in the hands of another party; or (d) result in pre-payment by any other party; "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 would result in a significant tax benefit for any party to the arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or location of the transaction as provided under the arrangement; or (g) considering or looking through any arrangement by disregarding any corporate structure. (2) For the purposes of sub-section (1),- (i) any equity may be treated as debt or vice versa; (ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or (iii) any expenditure, deduction, relief or rebate may be recharacterised. The provisions of this Chapter shall be applied in accordance with such guidelines and subject to such conditions and the manner as may be prescribed. The provisions of this Chapter shall apply in addition to, or in lieu of, any other basis for determination of tax liability. For the purposes of this Chapter, in determining whether a tax benefit exists- (i) the parties who are connected persons in relation to each other may be treated as one and the same person; (ii) any accommodating party may be disregarded; (iii) such accommodating party and any other party may be treated as one and the same person; (iv) the arrangement may be considered or looked through by disregarding any corporate structure. the consequences, under this Code, of the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice-versa; (ii) any accrual, or receipt, of a capital or revenue nature; or (iii) any expenditure, deduction, relief or rebate; 2. The provisions of this section may be applied in the alternative for, or in addition to, any other basis for making an assessment. 6 REFERENCE TO COMMISSIONER AND APPROVING PANEL INCLUDING BURDEN OF PROOF: (1) If, the Assessing Officer, at any stage of the assessment or reassessment proceedings before him having regard to the material and evidence available, considers that it is necessary to declare an arrangement as an impermissible avoidance arrangement and to determine the consequence of such an arrangement within the meaning of Chapter X-A, then, he may make a reference to the Commissioner in this regard. (2) The Commissioner shall, on receipt of a reference under sub-section (1), if he is of the opinion that the provisions of Chapter X-A are required to be invoked, issue a notice to the assessee, setting out the reasons and basis of such an opinion, for submitting objections, if any, and providing an opportunity of being heard to the assessee within such period, not exceeding sixty days, as may be specified in the notice. (3) If the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer on receipt of the directions shall proceed to complete the proceedings referred to in sub-section (1) in accordance with the directions and provisions of Chapter X-A. (11) If any direction issued under sub-section (6) specifies that declaration of the arrangement as impermissible avoidance arrangement is applicable for any previous year to which the proceeding referred to in sub-section (1) pertains, then, the Assessing Officer while completing any assessment or reassessment proceedings of the assessment year relevant to such other previous year shall do so in accordance with such directions and the provisions of Chapter X-A and it shall not be necessary for him to seek fresh direction on the issue for the relevant assessment year. (12) No order of assessment or reassessment shall be passed by the Assessing Officer without the prior approval of the Commissioner if any tax consequences have been determined in the order under the provisions of Chapter X-A pursuant to a direction issued under sub-section (6) or sub-section (3) declaring the arrangement as impermissible avoidance arrangement. (13) No direction under sub-section (6) shall be issued after a peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (1), or as soon afterwards as may be, the Commissioner shall, by an order in writing, determine the consequences, if any, under section 112 after,- (a) hearing such evidence and after taking into account such particulars as the assessee may produce; and (b) taking into account all relevant material which he has gathered. (3) Upon the determining the consequences, if any, the Commissioner shall issue direction to the assessing officer to make such adjustment to the total income, or the tax liability, in the case of the assessee and any other party to the arrangement, that are necessary, appropriate and consistent. (4) No order under sub-section (2) shall be issued after twelve months from the end of the month in which the notice under sub-section (1) is issued. 7 "associated person", in relation to a person, means-- (a) any relative of the person, if the person is an individual; (b) any director of the company or any relative of such director, if the person is a company; (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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 other person; "associated person" in relation to a person, means-- (a) any relative of the person, if the person is an individual; (b) any director of the company or any relative of such director, if the person is a company; (c) any participant in an unincorporated body or any relative of such participant, if the person is an unincorporated body; (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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant financial year or any other financial year; (c) a reduction, avoidance or dererral of tax or other amount that would be payable under this Code but for a tax treaty, in the relevant financial year or any other financial year; or (d) an increase in a refund of tax or other amount under this Code as a result of a tax treaty, in the relevant financial year or any other financial year; 10 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; "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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Federation of Tax Practitioners Mr.Wadhwa 18th Aug. 12 12 noon Bangalore Chambers of Commerce Mr. Sekar Tax Advisory firms Date &Time Invitee Contact Person 20th July, 12 11 a.m.to1 p.m. KPMG Mr. Dinesh Kanabar 18thAug. 12 11 a.m. to KPMG Mr.Dinesh Kanabar 20th July,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. Letter/Slide/ Report D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 GAAR Guidelines. 26. Report 1/08/2012 Srinidh Issues in GAAR 27. Letter 30th July, 2012 European Fund and Asset Management Association(efama) General Anti Avoidance Rules('GAAR') Guidelines -Perspective of the European Investment fund industry. 28. Report 31st July, 2012 CII CII Comments on Draft Guidelines on General Anti Avoidance Rules(GAAR) 29. Letter 23.07.2012 ASIFMA through PMO Certain amendments proposed in Finance bill dated 12/04/2012 TAX ADVISORY FIRMS 30. Letter 31.07.2012 PWC Recommendation on 6Draft guidelines regarding implementation of GAAR in terms of section 101 of the IT Act, 1961. 31. Letter 10.08.2012 Ernst & Young Private equity/venture capital funds - comments/suggestions on draft guidelines for implementation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxation of 'Indirect' Transfers. 54. Note India's General Anti-Avoidance Rule (GAAR) Draft Guidelines Released by Government Committee 55. Letter 20th July 2012 PWC Recommendation on draft GAAR Guidelines from the perspective of Asset Management industry 56. Letter CA Ankit Virendra Sudha Shah Note on First Draft Guidelines regarding implementation of GAAR - Comments/Suggestions 57. Letter Manvendra Goyal GAAR Comments on the Draft Guidelines. 58. Letter Niraj Shah Comments 59. Letter Poornima Mepani Comments 60. Letter S.G.Bhokarikar Comments 61. Letter Swami Sharan Verma Comments 62. Letter Manish Agarwal Comments 63. Slide KPMG Representation on Draft Guidelines on GAAR 64. Report KPMG Comments/Suggestions on Draft Guidelines on GAAR 65. Letter 17.08.2012 PWC Potential impact of the provisions of the Finance Act, 2012 relating to tax on offshore transfers in the context of the Financial Services Sector. 66. Letter BMR BMR Recommendations on the draft guidelines on GAAR 67. Letter BMR & Associates Recommendations on the proposed GAAR guidelines. 68. Mail 29.08.2012 Ernst & Young Supplements to Memorandum dated 14.08. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 Chiranjib Das Comments on GAAR Committee Report. 24 E-mail 15.09.2012 Ankit Shah Supplementary 1- Comments on GAAR committee - Request for relaxation for sometime to provide feedback. 25 Letter 15.09.2012 Dr. Arbind Prasad, FICCI Comments on the draft report of the Expert Committee on GAAR. 26 E-mail 17.09.2012 Kunal Karnani Comments on Shome Committee Report. 27 E-mail 17.09.2012 Gaurav Goel PWC Representation on GAAR. 28 Letter 17.09.2012 Rishi Harlalka Comments and suggestions on the GAAR Draft Report of the Committee. 29 Letter 17.09.2012 ASIFMA ASIFMA/CMTC Submissions letters: GAAR Guidelines-Draft report of the Expert Committee. 30 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in purposes, achieving an abusive tax result. The features are - (a) that the arrangement would, apart from the operation of this Part, result in receipts being taken into account for tax purposes which are significantly less than the true economic income, profit or gain; (b) that the arrangement would, apart from the operation of this Part, result in deductions being taken into account for tax purposes which are significantly greater than the true economic cost or loss; (c) that the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afeguard requires HMRC to prove that the transaction is not protected by the first two safeguards. This locks HMRC from using GAAR for a revenue objective. Only highly artificial tax avoidance schemes are to be targeted. This contrasts with the Indian presumption of an underlying tax benefit where the burden of proof lay on the taxpayer until a subsequent explanation was provided, indicating that the onus of proof was on the Revenue. Australia9 Part IVA of the Income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to after 31 March 2010. The relevant part is reproduced as under- "(1) Application of Doctrine - in the case of any transaction to which economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if - (A) the transaction changes in a meaningful way (apart from federal income-tax effects) the taxpayers economic position, and (B) the taxpayer has a substantial purpose (apart from federal 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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts". Four requirements have to be fulfilled in order for GAAR to apply, namely- (i) the existence of an arrangement; (ii) the existence of a tax benefit (that is, an arrangement resulting in a tax benefit); (iii) the sole or main purpose of the avoidance arrangement is to obtain a tax benefit; and (iv) the avoidance arrangement is characterized by the presence of any one or more of four tainted elements for arrangements in the context 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 tain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% Japan 0% Korea 0% Malaysia 0% New Zealand 0% Singapore 0% Taiwan 0% China [rule evolving] AMERICAS 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% 76.59% 112.59 (considering maximum PBT is Rs. 500 crores) 2. More than 10 crores 6,140 1.34% 86.83% 12.45 (considering maximum PBT is Rs. 50 crores) 3. More than 1 crore 28,767 6.26% 94.65% 2.608 (considering maximum PBT is Rs.10 crores) 4. Less than1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 arrangement as "Impermissible Avoidance arrangement" 15 Consequences likely to arise if arrangement is declared as "Impermissible Avoidance arrangement" 16 Specify the time barring dates of original assessment or reassessment Date: Place: Name & Designation of Assessing Officer Annexe-9 FORM FOR RECORDING THE SATISFACTION BY THE COMMISSIONER OF INCOME TAX FOR REFERRING THE PROCEEDINGS U/S 144BA(4) rws 95 OF THE INCOME TAX ACT, 1961 TO THE APPROVING PANEL 1 Name and Address of the Assessee 2 PAN 3 Status 4 Particulars of Assessing Officer 5 Particular of Commissioner of Income Tax 6 Assessment year(s) in respect of which the proceedings u/s 144BA (1) are proposed to be invoked : (a) Assessment Years pending in scrutiny (b) Other assessment years proposed to be covered 7 Date of receipt of reference from the AO u/s 144BA (1) 8 Date of issuance of notice, setting out reasons, by the CIT to the assessee ( ..... 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