Dr. Sunil Moti Lala, Advocate, has conducted a detailed study of the provisions of the Income-tax Act relating to ‘Base Erosion and Profit Shifting’ (‘BEPS’), General Anti Avoidance Rule (‘GAAR’) and other critical issues affecting the global arena. Based on this study, he has offered 25 suggestions which can be incorporated in the impending Finance Bill
Background w.r.t. BEPS and GAAR
BEPS – Global Initiative
International tax rules have not always kept up with the development in the world economy and globalisation has increased the need for countries to cooperate with each other to protect their sovereignty on tax matters.In 2013, the shifting of profits by Multi-National Enterprises (MNEs) had gained unprecedented political significance and rightly so.
The corporate tax affairs of these US-based MNEs viz. Starbucks, Apple, Amazon & Google were initially placed under the spotlight by the UK government, which initiated a global and public debate about how large multinational companies organise their tax affairs – in particular those relating to their intangible assets – in terms of the profit they book in certain jurisdictions.Yet they had all emphasised that they were following the tax laws to the letter. The issue here was Base Erosion and Profit Shifting (BEPS). BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
With an objective to counter tax avoidance, Organisation for Economic Co-operation and Development (OECD) and G20 countries took a global initiative in early 2013 to frame anti-BEPS measures. Accordingly, in 2014, the OECD released 15 interim reports, which in 2015, culminated into 15 Action Plans containing anti-BEPS recommendations. Subsequently in 2017, the OECD has also provided further clarifications by way of additional reports to a few action plans and made certain amendments to the Model Conventions in line with the suggestions provided for in the Action Plans. The Action Plans as a whole seek to align a country’s rights to tax with the economic activity carried on therein in a fair and equitable manner.
BEPS – India Initiative
India took the first step towards implementation of BEPS within its taxation framework vide the Finance Act 2016 and over the last three years has implemented the various BEPS recommendations as under:
(i) Action Plan 1 – Introduction of the concept of ‘Equalisation Levy’ by insertion a new Chapter titled "Equalisation Levy" in the Finance Act, 2016 and ‘Significant Economic Presence’ by insertion of Explanation 2A of Section 9(1)(i) of the Income-tax Act, 1961 (the Act)
(ii) Action Plan 4 – insertion of section 94B of the Act to counter profit shifting through thin capitalisation practice
(iii) Action Plan 5 – insertion of section 115BBF of the Act dealing with preferential rate of tax on income from patents
(iv) Action Plan 7 – substitution of clause (a) to Explanation 2 of Section 9(1)(i) of the Act to widen the scope of business connection arising out of dependent agents
(v) Action Plan 13 – amendment to section 92D of the Act and insertion of section 286 of the Act dealing with master file and Country-by-Country (CbC) reporting
India is also a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures (‘MLI’) prepared in accordance with Action Plan 15. The recommendations made in the said BEPS Action Plan 7 have been implemented by way of inclusion in Article 12 of the MLI. Further, vide the MLI, India has also adopted the simplified Limitation of Benefit (LOB) Clause and the suggested Model Commentary on the taxability of Capital gains on immovable property (contained in Action Plan 6).
GAAR – Global Initiative
Universally, it is accepted that tax evasion through falsification of records or suppression of facts is illegal and Tax reduction through legal means is a matter of taxpayers’ right. With the increasing globalisation of economies and growth in cross border transactions, tax avoidance cases have been on the rise globally and in India over the last many decades. Anti-avoidance rules have been framed by various countries to counter harmful tax practices by inserting specific anti-avoidance rules in domestic tax laws, through judicial guidance or general anti-avoidance rules.Different countries have taken different approaches in this regard. Australia was in the forefront of introducing General Anti Avoidance Rule (‘GAAR’) as early as 1981. Mature economies such as Canada, New Zealand, Germany, France, the United Kingdom and South Africa have also introduced GAAR. Emerging economies have also started introducing GAAR with the phenomenal growth of their economies.
GAAR – India Initiative
Similarly, India also introduced GAAR provisions in the Act. Introduction of GAAR provisions in the Act has involved an unprecedented history of intense debate and consultation that started with the Government’s proposal to introduce GAAR in the Direct Taxes Code Bill, 2009 (DTC 2009). GAAR was introduced in the Act vide the Finance Act, 2012. Butit was deferred in its application over the years and was finally introduced in the Act in form of Chapter X-A (section 95 to 102) made applicable w.e.f. April 1, 2017.
Section 95(1)empowers the Assessing Officer to declare an arrangement or any step in, or a part of, the arrangement to be an ‘impermissible avoidance arrangement’ (IAA) and consequently once an arrangement has been so declared, he can deny / re-determine the tax benefit, as is deemed appropriate. As per section 96 of the Act, an arrangement can be declared as an IAA, if:
(i) the main purpose of the arrangement is to obtain a tax benefit
(ii) the arrangement –
– creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
– results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
– lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
– is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.
However, Section 95(2) of the Act, provides that the GAAR provisions shall apply in respect of any assessment year beginning on or after 1stApril, 2018, i.e. assessment year 2018-19 (financial year 2017-18).
25 Humble Submissions / Suggestions
Though, it has been the endeavour of the Indian Government to implement the BEPS recommendations and GAAR provision with maximum effectiveness and minimum inconvenience to the taxpayers, it is respectfully submitted that certain anomalies have been observed in the provisions in the Actand Income-tax Rules, 1962 (the Rules) which may result/ have resulted in unintended consequences / hardships for the taxpayers. To address the said issue, I humbly offer the following suggestions w.r.t.BEPS and GAAR related provisions which the Finance Minister may consider while drafting / finalising the Finance (No.2) Bill, 2019.
(A) BEPS related provisions in the Act / Rules
Action Plan 1 – Significant Economic Presence – Explanation 2A r.w.s. 9(1)(i) of the Act
(1) It has been noticed that, with the onset of the digital economy, a non-resident enterprise company often interacts with customers in another country remotely through a website, an application on a mobile device etc. without maintaining a physical presence in the country. This poses aglobal tax concern as in most countries the domestic laws require a degree of physical presence to tax business profits of an enterprise. To address the above practice and to ensure that profits are taxed in the state in which they are earned (i..e. the Source State) notwithstanding the absence of a physical presence of the taxpayer in that State, Action Plan 1 inter alia recommends/ introducesthe concept of Significant Economic Presence and Equalisation Levy.Under the concept of Significant Economic Presence, the Action Plan seeks to establish nexus between an enterprise in the digital economy and the countries from which it earns profits, based on various factors, i.e. Revenue based factors(viz. Value and quantum of transactions of sale of digital goods and services within a country), Digital factors (viz.a local domain/ digital platform / payment options) and User based factors (viz. monthly active users, the number of contracts concluded online and the data collected from a specific country and its storage).Since revenue may not be a sole accurate factor for the purpose of determination of participation in the economic life of a country, the revenue factor could be combined with other factors, such as the digital and/or user-based factors that indicate a purposeful and sustained interaction with the economy of the country concerned. Further, to avoid some of the difficulties arising from creating new profit attribution rules for purposes of a nexus based on significant economic presence, Action Plan 1 recommends introduction of “equalisation levy” as an alternative.
Based on above recommendations of Action Plan 1, a new Chapter titled "Equalisation Levy" was added as Chapter VIII vide Finance Act, 2016 to provide for an equalisation levy of 6 % of the amount of consideration paid for all the online advertisement made by Indian companies on various sites to a non-resident company, not having a PE in India. Further, the concept of significant economic presence was introduced vide the Finance Act, 2018 by insertion of Explanation 2A of Section 9(1)(i) of the Act which reads as under:
“9. (1) The following incomes shall be deemed to accrue or arise in India :—
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India….
Explanation 2A – For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean –
(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means:
Provided that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India:
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India”
As per the literal interpretation of sub-clause (a) to Explanation 2A to Section 9(1)(i) of the Act all ‘transactions in respect to any goods, services, or property carried on in India’ by the non-resident would be taxable in India even if the non-resident does not have a PE / business connection in India and the transactions are not through digital means. This seems contrary to the intention specified in the Memorandum and would cause an unwarranted and probably unintended increase in the tax base. Further, the provision as is would render the concept of business connection and permanent establishment redundant.
Considering the intent of the proposed amendment is to include digital economy within the ambit of ‘business connection’ and the fact that the literal interpretation of clause (a) expands the scope of “business connection” way beyond the intention, it is humbly suggested that it would be desirable if the words “through digital means” [as contained in clause (b)] are also inserted in Clause (a) to Explanation 2A consequent to which the same would read as under “(a) transaction through digital means in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed”
(2) Another controversy arising out of the aforesaid amendment [insertion of Explanation 2A to section 9(1)(i)] would be the treatment of income arising from download of data or provision of software where such download of data also leads to imparting of information or the provision of software which is also covered under the definition of royalty provided in Section 9(1)(vii) of the Act. Would the amount be taxed as business profits on a net basis or as royalty income on gross basis?Normally, the principle of applying a specific provision over a more general provision should apply. However, in the instant case, the download of data / provision of software are specifically covered under both, the aforesaid amendment as well as the definition of royalty and thus the answer is not clear. In cases where an income (eg. from software) gets covered under the scope of “royalty” as defined under the Act as well as under the scope of business connection under sub-clause (a) of the proposed amendment, it is humbly suggested that suitable clarification / amendment may be introduced by virtue of another Explanation to section 9 of the Act.
Action Plan 5 – Section 115BBF of the Act
(3) With a view to enhance the efficacy of measures for the purpose of countering harmful regimes, Action Plan 5 inter alia suggested insertion of a Substantial activity test for any preferential (tax) regime. Application of substantial activity test under nexus approach requires that the benefit under the regime is restricted only to income that arises from Intellectual Property (IP) where the actual R&D activity was undertaken by the taxpayer itself i.e. it creates a nexus between the expenditure incurred and benefits availed to apply to regimes that apply to income earned after the creation and exploitation of IP.
In view of the above, vide the Finance Act, 2016 a new section 115BBF was inserted in the Act relating to tax on income from patents, with effect from April 1, 2017 which provides that where an eligible assessee (a person resident in India) earns royalty income from a patent developed and registered in India, the royalty would be taxed at 10 percent. Considering the lower rate of tax (i.e. 10 percent as opposed to 30 percent), the same amounts to a preferential regime.
It is to be noted that the provisions of the Act are in line with the suggestions made by the Action Plan as the preferential rate is granted only if the assessee has developed the patent by itself. However, sub-section (4) of the said section provides that if an assessee opts for taxation under Section 115BBF of the Act for a year but does not opt for the same in any of the succeeding five assessment years subsequent to the year in which it first claimed the benefit, then the assessee would not be permitted to claim the benefit of the section for the next five assessment years subsequent to the year in which it failed to opt for the benefit. The provisions of Section 115BBF(4) are not as per any recommendation contained in the Action Planand are in fact extremely stringent in nature. It humbly suggested that the bar of claiming deduction under a situation captured under Section 115BBF(4) be done away with and the said sub-section be deleted.
Action Plan 7 – Explanation 2 to section 9(1) of the Act
(4) To address the BEPS concern of artificial avoidance of PE status under Article 5(5) of DTAA through commissionaire arrangements and similar strategies, Action Plan 7 suggested amendment to Articles 5(5) and 5(6) of the DTAA. As a signatory inter alia to Article 12 of the Multilateral Instrument (MLI), India has accepted the above suggestion. Further, over and above adopting the suggestions by signing the MLI, in order to maintain congruency with the BEPS Action Plan 7 and to ensure the effectiveness of the DTAA, the Finance Act, 2018 expanded the scope of agency business connection by amending Explanation 2 to Section 9(1) of the Actto state that a person who, acting on behalf of the non-resident, ‘habitually plays the principal role leading to conclusion of contracts by that non-resident’would constitute a business connection. However, the language adopted in the amended Explanation 2 is not the same as adopted in the MLI, which reads as, “habitually plays the principal role leading to the conclusion of contractsthat are routinely concluded without material modification by the enterprise (non-resident)”.Accordingly, it may lead to inconsistency.
It is humbly suggested that an amendment should be brought to include the phrase “that are routinely concluded without material modification by the non-resident” in clause (a) to keep the provision in further coherence with the provisions of Article 12 of the MLI and to further channelize the scope of the provision to meet the intention of the amendment to exclude cases where there has been material modification of the contract by the non-resident even where the agent has played a significant role in the conclusion of the contract.
Action Plan 9 – Transfer Pricing Rules
(5) Action Plan 9, which provides for the aligning of substance and form while conducting Transfer Pricing Analysis, states that considerations such as the business strategy (eg.the pricing strategy) involved should be considered while determining ALP and if a company is following a principle such as predatory pricing then adjustment should not be blindly made. However, in India, there is no formal guidance by way of Rules or legislation to address such a consideration and therefore the said concept can be conveniently ignored by the tax authorities. It is thus most humbly suggested that an endeavour may be made to incorporate OECD’s aforesaid recommendation contained in Action Plan 9in the Rules by way of an explicit item of adjustment.
Action Plan 13 – Section 92D and 286 of the Act
(6) Action Plan 13 noted that though countries have elaborate transfer pricing guidelines, BEPS concerns still arise due to the existence of underlying structures and confidentiality of country specific data. Accordingly, it laid the requirement of a three-tier approach to transfer pricing documentation [including a master file, a local file and a Country-by-Country (CbC) report]. India has implemented the suggestions of the Action Plan 13 viz. Master File and CbC reportingby way of amendment to section 92D and insertion of section 286of the Act vide the Finance Act, 2016.However the monetary threshold for filing Master File provided in Rule 10DA(consolidated group revenue exceeding Rs.500 crore and value of international transactions / purchase, sale, etc. of intangibles exceeding Rs. 50 / Rs. 10 crore, respectively), is very low and would lead to onerous burden on taxpayers. It is most humbly suggested that the monetary threshold for Master File be enhanced to Rs.1,000 crores keeping in mind the additional compliance requirements.
(7) Section 286(4) of the Act r.w. sub-section (2) requires a constituent entity of an international group, ‘resident’ in India to furnish CbC report to theprescribed authority. Section 286(9)(d)(iii) defines ‘constituent entity’ to specifically include Permanent Establishment (PE).Ordinarily, a PE, being a part of the non-resident entity, would also be a non-resident. Thus, a conjoint reading of the aforesaid provisions may lead to a conclusion that though a PE is a constituent entity [as defined in section 286(9)], it is not required to file CbC report since it is not resident in India.
It is submitted that based on such reading, an international group which has only a PE in India may not file a CbC report with the prescribed authority in India. This, however, does not appear to be the legislative intent. Further, the Action Plan 13 also provides that a PE should be listed by reference to the tax jurisdiction in which it is situated. Thus, it is humbly suggested that an Explanation may be inserted in section 286 of the Act to clarify that a PE located in India will be deemed to be resident in India, but only for the limited purpose of filing CbC report under the said section.
- GAAR related provisions
In the Act / Rules
(8) Rule 10U(1)(d) of the Rules provides that GAAR provisions will not apply to any income accruing, arising or received from transfer of investments made before April 1, 2017 [this is known as the ‘Grandfathering Rule’]. However, Rule 10U(2) further provides that the aforesaid Rule does not exempt the entire arrangement from the applicability of GAAR (irrespective of the date it was entered into). Thus, a combined reading of the above two provisions suggest that there is no effective or complete grandfathering that is available in respect of investments made up to the said date.
Considering the true intent of grandfathering, i.e. to provide shelter to gains arising from legitimate investments made upto April 1, 2017, it is humbly suggested that either a clarification should be issued by the CBDT explaining the manner in which the two provisions would operate harmoniously or even better still would be to delete Rule 10U(2) so that all the investments made prior to April 1, 2017 are completely grandfathered in all respects.
(9) Rule 10UA provides that tax consequence under the GAAR provisions will be determined only with reference to such part of the arrangement which is declared to be an IAA. Whereas section 96(2) of the Act provides that an arrangement shall be presumed, unless it is proved to the contrary by the assessee, 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. Thus, the above two provisions appear to be contrary to each other. Further, considering the well-recognised rule of interpretation that the Rules cannot override the Act, Rule 10UA would be rendered redundant. It is therefore suggested that a clarification be issued by the CBDT to explain the different scenarios in which both the aforesaid provisions can be applied.Even better would be to amend section 96(2) in consonance with Rule 10UA as the said Rule is more reasonable than section 96(2).
(10) Section 98(1) of the Act provides that,“if an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case…”. Thus, complete discretion is given to the Assessing Officer to determine consequences resulting from declaration of an arrangement to be an IAA, “in such manner as is deemed appropriate”. In absence of any guidance issued by the CBDT explaining and illustrating, the manner of determination to be opted / followed for different arrangements in different situations, the consequence may not be determined in a rationale manner.
It may be worthwhile to take a clue from UK HMRC which has stated in GAAR Guidance that when an arrangement has been determined to be abusive, it will be counteracted in such a way that is just and reasonable (a familiar and well understood term used quite widely in UK tax law). It also provides that where there are various alternative transactions which could have been carried out by the taxpayer in place of the abusive transaction (IAA), for the counteracting adjustment (i.e. the resulting tax consequence) the officer need not select the alternative which would result in the highest tax charge.
It is thus humbly suggested that it may be provided by way of a suitable amendment in the Act that should an Assessing Officer select the alternative with the highest tax charge, he must give his reasons for the same. Further, it is humbly suggested that the CBDT should issue guidelines explaining and illustrating the manner of determining the consequences of declaration of an arrangement to be an IAA, for the purpose of section 98, which should be opted / followed by the Assessing Officer for different arrangements in different situations.
(11) As per section 96 of the Act, one of the conditions to be satisfied, for an arrangement to be declared as an IAA is that the main purpose of the arrangement is to obtain ‘tax benefit’. While the term ‘tax benefit’ has been defined in the Act, there is no guidance on how to determine the tax benefit. In absence of such guidance, there are quite high chances that existence of ‘tax benefit’ may be justified by the Assessing Officer just by showing that the assessee will not be eligible for the ‘tax benefit’ claimed by it if GAAR provisions are applied. That is, he may justify the existence of ‘tax benefit’ by directly determining the consequences by presuming / assuming an arrangement to be an IAA, which would actually come into picture only after the arrangement is so declared.
It is thus humbly suggested that guidelines should be laid down by the CBDT (by amending the Rules or issuing a Circular) or a suitable amendment may be made in the Act to provide for the manner of determining ‘tax benefit’, taking clue from the guidance given by UK HMRC in this regard. UK HMRC guidance with respect to GAAR suggests the use of counterfactual/ alternative transactions for identifying and quantifying ‘tax benefit’.
(12) As per section 96 of the Act, one of the conditions to be satisfied, for an arrangement to be declared as an IAA is that the ‘main purpose’ of the arrangement is to obtain tax benefit. The term ‘Main Purpose’ as used in section 96, has not been defined in the Act. It is of consideration whether the main purpose is to be determined qua the intention of the tax payer or the effect that the arrangement generates. This is bound to lead to litigation.
It is thus humbly suggested that clarification should be issued by the CBDT laying down guidelines which would be useful for identifying / determining the ‘main purpose’ for entering into the arrangement under consideration, as required for the purpose of section 96 of the Act. For example, in the Draft Comprehensive Guide to GAAR issued by the South African Revenue Services, it is provided that when determining the ‘sole or main purpose’ of the avoidance arrangement, relevant facts and circumstances of the arrangement are to be considered and not the subjective purpose or intention of a participating taxpayer, either at the time the arrangement is entered into or subsequently, wherein the purpose of a party may be considered as one of the relevant facts.
(13) As per section 96, an arrangement can be declared to be an IAA if the main purpose of the arrangement is to obtain tax benefit and itinter alialacks/is deemed to lack commercial substance under section 97. The term “commercial substance” has been defined negatively in section 97 of the Act. This approach of defining a term would breed litigation and create confusion, especially in view of the understanding that existence of commercial substance is the core requirement to ward off the threat of GAAR provisions.
It is, thus, humbly suggested that section 97 of the Act may be amended to include definition of the term “commercial substance” in the manner recommended by the Shome Committee. The definition as stated in the Final Report (Pg.5) of the said Committee reads 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”.
(14) As discussed above, an arrangement can be declared to be an IAA, if its main purpose is to obtain tax benefit and it inter alialacksor is deemed to lack commercial substance under section 97 of the Act. Section 97(1) of the Act provides that an arrangement shall be deemed to lack commercial substance, if itinter alia involves or includes ‘round trip financing’. Further, section 97(2) of the Act r.w. Clause (A) defines ‘round trip financing’ to include any arrangement in which, through a series of transactions, funds are transferred among the parties to the arrangement and such transactions do not have any substantial commercial purpose other than obtaining the tax benefit, without having any regard to‘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’.
Thus, as evident from above, the term ‘round trip financing’ has been defined in an inclusive manner inter alia to include by virtue of clause (A) an arrangement even (i) where the funds do not return to the same location from where the funds were sent and also (ii) where the funds do not return to the same person who had sent it. It is submitted that these two conditions are the essential elements for a case of round trip financing as it is only then that the ‘round trip’ (movement of funds) is complete.
It is further submitted that Clause (A) gives extremely wide power to an Assessing Officer to colour / allege a non-round trip finance transaction as one which in turn can lead to huge and unnecessary litigation.It is thus humbly suggested that clause (A) to section 97(2) of the Act may be deleted so that the term ‘round trip financing’ covers only an arrangement where the funds return to the same location of the same person (or the group of persons including connected persons of which the said person is part of) from where and from whom the funds were sent respectively.
(15) Further, unintended consequences and hardship may arise in a case where an arrangement is not considered as round tripping by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act, 1999 (FEMA) regulations but the arrangement falls within the definition of the term ‘round trip financing’ explained in section 97(2) of the Act. It is humbly suggested that a clarification may be issued by the CBDT or by way of suitable amendment in the Act to provide that an arrangement will not be considered as a ‘round trip financing’ arrangement for the purpose of section 97(2) of the Act if the same is not considered as such by the RBI under the FEMA regulations.
(16) Section 144BA(12) of the Act provides that “No order of assessment or reassessment shall be passed by the Assessing Officer without the prior approval of the Principal Commissioner or Commissioner, if any tax consequences have been determined in the order under the provisions of Chapter X-A”. The word ‘approval’ has been interpreted by the Supreme Court in the case of Vijayadevi Naval kishore Bhartia vs. Land Acquisition Officer (2003) 5 SCC 83 (in context of an administrative act under the Land Acquisition Act, 1984) to mean nothing more than either confirming, ratifying, assenting, sanctioning or consenting. It held that the power of granting or not granting prior approval cannot be equated with appellate power whereby the findings could be reversed.
The Income-tax Appellate Tribunal in Toyota Kirloskar Motors (P.) Ltd. [(2012) 28 taxmann.com 293 (Bang)] has held that the aforesaid decision of the Apex Court will be applicable even to administrative approvals under the Act. Thus, considering above ratios, the Pr. Commissioner / Commissioner may not have the power to review, adjudicate or vary the tax consequences determined by the Assessing Officer but would be restricted only to exercise oversight over the discretion. Further, as per section 253(1)(e) of the Act, such order passed pursuant to sanction under section 144BA(12) is directly appealable to the Tribunal.
Also, it is not expressly provided in the aforesaid provisions or the other GAAR provisions as to whether the Principal Commissioner / Commissioner will / can apply his mind to the entire order, which would include not only GAAR consequences but also other additions as well (Transfer Pricing as well Corporate tax), or only the GAAR consequences before giving his approval.
It is submitted that clarity on this aspect is essential since the Commissioner of Income-tax (Appeals) or the Dispute Resolution Panel (DRP), as the case may be, will not have an opportunity to consider such an order before the matter is taken up by the Tribunal, to whom otherwise the appeal is ordinarily made against the assessment / reassessment orders passed by the Assessing Officer.
It is, therefore, humbly suggested that section 144BA(12) of the Act should be amended to provide that the Principal Commissioner / Commissioner should apply his mind to the entire order, including the Transfer Pricing and Corporate tax additions, before giving his approval under the said section. Further, it is also suggested that the Principal Commissioner / Commissioner should also be given powers to adjudicate on such additions in line with the powers of Commissioner of Income-tax (Appeals) to review, adjudicate or vary the tax consequence determined by the Assessing Officer under section 98 of the Act.
(17) Rule 10U(1)(b) of the Rules inter alia provides that the GAAR provisions shall not apply to a Foreign Institutional Investor (FII) who has not taken benefit of any Double Tax Avoidance Agreement (DTAA). It is of consideration as to whether such restriction on claiming treaty benefit is with respect to ALL incomes/ arrangements of the FII or only with respect to the income/ arrangement which is being tested for the applicability of GAAR provisions. For example, where a FII is in receipt of gains on alienation of shares (alienation forming part of the arrangement which is being tested for GAAR applicability) as well as interest income during the year, and treaty benefit has been claimed only with respect to the interest income.
On a literal interpretation of the aforesaid Rule, the FII may not be able to take shelter of the aforesaid safeguard as it would be claiming the benefit under the DTAA with respect to the interest income. However, considering the object behind providing the aforesaid safeguard to the FIIs, it is submitted that the FII should be able to take the shelter of the aforesaid safeguard as it didn’t take benefit of the DTAA with respect to relevant income i.e. gains from alienation of shares.
Accordingly, it is humbly suggested that a clarification may be issued either by way of an amendment in the Act / Rules or by the CBDT to provide that an FII will not be eligible for the safeguard provided under Rule 10U(1)(b) only with respect to the income / arrangement with respect to which it has taken benefit of any DTAA.
(18) Section 195 of the Act requires a resident payer to deduct tax at source while making any payment of income chargeable under the Act to a non-resident. This requires determination of ‘income chargeable under the Act’. Thus, it is of consideration as to whether in a case where a bonafide payer makes any payment to a non-resident without deducting tax at source, will such payer be held to be default under section 201(1) of the Act for such non-deduction if the said payment is subsequently held to be chargeable to tax on account of GAAR provisions.
It is humbly suggested that the Act may be amended to provide that a bonafide payer will not be held to be assessee-in-default under section 201(1) of the Act, in certain conditions such as where the payment was not made to a connected party, payer has carried out necessary due diligence required, etc. (which would show the bonafides).
(19) Section 245N of the Act, defining the term “advance ruling” was amended with effect from 01/04/2015 with insertion of sub-clause (iv) to clause (a), to include a determination or decision by the Authority for Advance Ruling (AAR) on whether an arrangement which is proposed to be undertaken by a resident or non-resident is an IAA. Prior to the introduction of sub-clause (iv) to clause (a) to Section 245N, applications containing questions relating to a transaction or issue designed prima facie for the avoidance of tax were not maintainable before the AAR by virtue of the bar laid down in the proviso to section 245R(2) of the Act.
However, by way of an amendment in the clause (iii) of the said proviso, the bar will not apply to applicants falling under Section 245N(b)(iiia) i.e. applicants who have filed applications under Section 245N(a)(iv). In this regard, attention is drawn to the fact that though section 245N(b) has been amended by the Finance Act, 2017 replacing sub-clause (iiia) with sub-clause (A)(V), the aforesaid proviso to section 245R(2) still refers to sub-clause (iiia) of section 245N(b) of the Act [i.e. the erstwhile sub-clause] instead of sub-clause (A)(V). It is thus humbly suggested that the proviso to section 245R(2) may be amended so as to make reference to sub-clause (V) of section 245(b) of the Act.
CBDT Circular No.7 dated January 27, 2017
(20) The CBDT has stated that where the “Court” has explicitly and adequately considered the tax implication while sanctioning an arrangement, GAAR will not apply to such arrangement. This was in response to the question (Q.no. 8) as to whether GAAR will be invoked in case of arrangements sanctioned by an authority such as the Court, National Company Law Tribunal (NCLT) or is in accordance with judicial precedents, etc. Though in answer to the question, reference is made only to the Court, it is submitted that the intention of the Revenue may be to cover arrangements sanctioned by NCLT also, since under the Companies Act, 2013 the corporate restructuring arrangements are now sanctioned by NCLT and not the Court. It is, therefore, humbly suggested that a clarification may be issued to provide that GAAR will also not apply to arrangements which have been sanctioned by the NCLT after explicitly and adequately considering the tax implications.
(21) The CBDT has clarified that where the Court has “explicitly and adequately considered” the tax implication while sanctioning an arrangement, GAAR will not apply to such arrangement. It is submitted that the term ‘adequately’ is a very subjective term, prone to varied interpretation and, thus, litigative. It is, therefore, humbly suggested that a clarification may be issued explaining the manner of determining such an adequacy. Even better would be to delete the words “explicitly and adequately”.
(22) The CBDT has stated that if a case of avoidance is “sufficiently addressed” by Limitation of Benefit (LOB) clause in the treaty, there shall not be an occasion to invoke GAAR. It is submitted that the term ‘sufficiently addressed’ used in the said Circular is very subjective and is prone to varied interpretation. It is therefore humbly suggestedthat a clarification may be issued explaining or illustrating cases where the LOB does and does not sufficiently addresses such case of avoidance. Even better would be to delete the word “sufficiently”.
(23) Though the CBDT considers a situation where there is a LOB clause in the tax treaty, but it does not consider applicability of GAAR provisions in a situation where the tax treaty includes the Principal Purpose Test (PPT) in accordance with the OECD BEPS Action Plan 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), alongwith or without the LOB clause. PPT act as general anti-abuse rule which denies treaty benefit if it is reasonable to conclude that obtaining such benefit was ‘one of the principal purpose’ of the arrangement. Since PPT refers to ‘one of the principal purpose’ as against ‘Main purpose’ referred in the GAAR provisions under the Act, in this sense the PPT is wider in coverage.
However, there is a carve out in PPT rule which makes an exception to allow treaty benefits which are in accordance with the object and purpose of the said treaty. It is submitted that there is uncertainty with regard to the applicability of GAAR provisions where PPT forms part of the tax treaty. It is therefore humbly suggested that a clarification may be issued explaining theinterplay between the GAAR provisions and the PPT rule forming part of the tax treaties.
(24) Earlier, accepting the recommendation of the Shome Committee, the Ministry of Finance in its press release dated January 14, 2013 had stated that where GAAR and SAAR are both in force, only one of them will apply to a given case. However, now the CBDT has stated that the provisions of GAAR and SAAR can co-exist and are applicable depending on the facts and circumstances of the case. It is submitted that this provides room for ambiguity and potential misuse of GAAR even in genuine cases where the taxpayers have met the test of SAAR conditions to the satisfaction of the Assessing Officer. German GAAR provisions, which have been around since initial inception of the General Tax Code in Germany for close to 100 years ago, also provide that if SAAR applies, GAAR will not be applied cumulatively. It isthus humbly suggested that suitable amendment / clarification may be made / given so asto provide that GAAR will not apply to the particular aspect/ element to which SAAR is applicable.
(25) TP provisions / regulations being SAAR will obviously co-exist with the GAAR provisions. It is submitted that this will increase litigation in cases where the arrangements attracting TP provisions are tested for GAAR implications even after the Transfer Pricing Officer holds the arrangement to be at arm’s length price as per the TP provisions. It is thus humbly suggested that while a clarification / amendment may be issued with respect to non-applicability of GAAR where SAAR is applicable (as mentioned above), it should specifically deal with the interplay of TP provisions and GAAR provisions so that there is no room for conflicting views / interpretations by the Assessing Officer and the tax payer in this regard.
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