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Report of the Expert Committee on General Anti Avoidance Rules (GAAR) in Income-tax Act, 1961
September, 04th 2012
            Report on
General Anti Avoidance Rules (GAAR)
      in Income-tax Act, 1961




        Expert Committee
              (2012)

                                      0
        Report on General Anti-Avoidance Rules (GAAR)

                              INDEX



S.No.     Topic                                                     Page No.
          Executive Summary                                             3

1.        Introduction                                                 10
1.1       Terms of Reference of the Committee                          10
          Notification of PM Office                                    12
1.2       Background                                                   14
2.        Tax Evasion, Tax Mitigation and Tax Avoidance                17
3.        GAAR Provisions: Analysis and Recommendations                20
3.1       Applicability of General Anti-Avoidance Rule                 20
3.2       Impermissible avoidance arrangement                          20
3.3       Arrangement lacking commercial substance                     24
3.4       Consequence of impermissible avoidance arrangement           27
3.5       Treatment of connected persons and accommodating             28
          party
3.6       Application of Chapter                                       29
3.7       Framing of guidelines                                        29
3.8       Treaty Override                                              29
3.9       Advance Ruling                                               30
3.10      Procedure to invoke GAAR                                     30
3.11      Overarching principle for applicability of GAAR              32
3.12      Taxing capital gains and business income; validation of      34
          Tax Residence Certificate and Limitation of Benefits
          clause; and application of GAAR to Large Taxpayer
          Units
3.13      Deferring implementation of GAAR                             35
3.14      Grandfathering of existing structures or investments         36
3.15      Status of Circular 789 of 2000 with reference to             38
          Mauritius Treaty.
3.16      Treaty override                                              39
3.17      Factors not relevant for determination of commercial         42
          substance
3.18      Threshold to be prescribed for applying GAAR                 44
          provisions
3.19      GAAR vs SAAR; and GAAR vs LOB                                46
3.20      Corresponding adjustments                                    47
3.21      Implementation of onus on revenue authorities                49

                                                                       1
3.22        Constitution of Approving Panel                             50
3.23        Withholding of taxes                                        52
3.24        Concerns of FIIs                                            53
3.25        Implementation issues                                       54
3.26        Reporting requirement                                       56
4.          Illustrations of GAAR and non-GAAR cases                    57

Annexe-1    Comparison of GAAR 2009-12
Annexe-2    Meeting of GAAR Committee with Stakeholders
Annexe -3   Documents presented to GAAR Committee
Annexe -4   Country Experiences with GAAR
Annexe-5    Overview of India`s Specific Anti-Avoidance Rules
Annexe ­6   Taxation of capital gains on Portfolio Investments in
            various jurisdiction.
Annexe-7    Profile of sample companies across various limits of
             profits before taxes (financial year 2010-11)
Annexe-8    Form for making the reference to the Commissioner by
            the Assessing Officer for initiating the proceedings u/s
            144BA(1) rws 95 of the Income-tax Act, 1961.
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.
Annexe-10   Form for returning the Reference u/s 144BA(5) rws 95
            in cases of References made u/s 144BA(4) rws 95 of
            the Income tax Act 1961 to the Assessing Officer.







                                                                        2
                            Executive Summary

   Recommendations for Amendments in the Act, Guidelines, and
                Clarifications through Circular



Countries impose taxes of various types with the objective of raising revenue
for Government spending. Taxpayers may be expected to minimize their tax
liabilities by arranging their affairs in a manner that is termed tax efficient
i.e. through tax mitigation. This does not include tax evasion. It has been
universally accepted that tax evasion through falsification of records or
suppression of facts is illegal. Tax reduction through legal means, on the
other hand, is increasingly considered a matter of right by taxpayers. The
courts also tend not to frown upon this emergent approach of tax payers.
This could perhaps be considered a paradigm shift in the approach towards
taxability, and has given rise to the grey area of tax avoidance which is
perceived by tax authorities as strictly legal in form but perhaps not in
substance i.e. a business arrangement to avoid tax may not reflect its
embedded legislative intent .

Various authorities, have, therefore, felt that tax reduction through unethical
means should not be allowed, particularly when effective rates of tax are
unduly 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
administration ­ one of deterrence, rather than for revenue generation ­ for

                                                                              3
which intensive training of tax officers, who would specialize in the finer
aspects of international taxation, is needed. The experience with
international taxation such as transfer pricing, as well as the thin training
module in specialized fields for Indian tax officers, increasingly in contrast to
international benchmarked modules, tends to result in administrative
challenges, as strongly pointed out by most stakeholders. This does not
guarantee that an environment of certainty can be regenerated with an
immediate application of GAAR, however modified. To note, the 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. In effect, therefore, GAAR
would apply from A.Y. 2017-18. Pre-announcement is a common practice
internationally, in today`s global environment of freely flowing capital.

(ii) Abolish the tax on gains arising from transfer of listed securities, whether
in the nature of capital gains or business income, to both residents as well
as non-residents.

(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;




                                                                                4
       (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 to prove commercial substance. These
factors will be taken into account in forming a holistic assessment to
determine whether an arrangement lacks commercial substance.

(vii) As regards constitution of the Approving Panel(AP), the Committee
recommends that ­

      (i) The Approving Panel should consist of five members including
      Chairman;

      (ii) The Chairman should be a retired judge of the High Court;

      (iii) Two members should be from outside Govt. and persons of
      eminence drawn from the fields of accountancy, economics or
      business, with knowledge of matters of income-tax; and

      (iv) Two members should be Chief Commissioners of income tax; or
      one Chief Commissioner and one Commissioner.




The AP should be a permanent body with a secretariat. It should have a two
year term. In the first AP that is to be appointed, one Chief Commissioner
and one external 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.

2 Recommendations for guidelines to be prescribed under Income-
tax Rules

The Committee makes the following recommendations for incorporation in
guidelines to be prescribed under section 101 and 144BA of the Act in the
Income-tax Rules, 1962 ­

(i) The GAAR provisions should be subject to an overarching principle that ­

                                                                             5
       (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 (including tax only, and
not interest etc) to a taxpayer in a year should be used for the applicability
of GAAR provisions. In case of tax deferral, the tax benefit shall be
determined based on the present value of money.

(iii) 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.


                                                                                 6
(iv) Where SAAR is applicable to a particular aspect/element, then GAAR
shall not be invoked to look into that aspect/element. Similarly, where anti-
avoidance rules are provided in a tax treaty in the form of limitation of
benefit (as in the case of Singapore) etc., the GAAR provisions shall not
apply overriding the treaty.

(v) 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.

(vi) While determining the tax consequences of an impermissible avoidance
arrangement, corresponding adjustment should be allowed in the case of the
same taxpayer in the same year as well as in different years, if any.
However, no relief by way of corresponding adjustment should be allowed in
the case of any other taxpayer.

(vii) A requirement of detailed reasoning by the Assessing Officer in the
show cause to the taxpayer may be prescribed in the rules.

(viii) 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.

(ix) 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)

(x) 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


                                                                              7
      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 GAAR cannot be invoked against the assessee.

3 Recommendations for clarifications and illustrations through
circular

The GAAR provisions in the statute as well in the rules should be explained
through a circular as discussed in the report with categorical clarification on
the following issues:-

(i) GAAR shall apply only to the income received, accruing or arising, or
deemed to accrue or arise, to the taxpayers on or after the date GAAR
provisions come into force. In other words, GAAR will apply to income of the
previous year, relevant to the assessment year in which GAAR becomes
effective, and subsequent years.

(ii) Where Circular No. 789 of 2000 with respect to Mauritius is applicable,
GAAR provisions shall not apply to examine the genuineness of the residency
of an entity set up in Mauritius.

 (iii) When the AO informs the assessee in his initial intimation invoking
GAAR, he should include how the factors listed in section 97(2) have been
considered (after amendment as recommended).

4 Other recommendations

The Committee has made following recommendations in respect of tax
administration:-

(i) The administration of Authority for Advance Ruling (AAR) should be
strengthened so that an advance ruling may be obtained within the statutory
time frame of six months.

(ii) Until the abolition of the tax on transfer of listed securities, the Circular
789 of 2000 accepting Tax Residence Certificate (TRC) issued by the
Mauritius authorities may be retained.



                                                                                 8
(iii) while processing an application under section 195(2) or 197 of the Act,
pertaining to the withholding of taxes, the assessing officer

      (a) shall not invoke GAAR where the taxpayer submits a satisfactory
      undertaking to pay tax along with interest in case it is found that
      GAAR provisions are applicable in relation to the remittance during the
      course of assessment proceedings; or

      (b) may invoke GAAR with the prior approval of Commissioner in his
      detailed reasoned order u/s 195 (2) or 197, in case the taxpayer does
      not submit any satisfactory undertaking as mentioned above.

(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 Govt. to postpone the
implementation of GAAR for three years with an immediate pre-
announcement of the date to remove uncertainty from the minds of
stakeholders. A longer period of preparation should enable appropriate
training at the AO and Commissioner levels. It would also enable taxpayers
to plan for a change in the anti-avoidance regime that would allow legitimate
tax planning reflecting a proper understanding of the new legislation and
guidelines, while eschewing dubious tax avoidance arrangements.




                                                                               9
          General Anti-Avoidance Rules (GAAR)


1.                            Introduction


1.1   Terms of Reference of the Committee

The Prime Minister constituted an Expert Committee on General Anti
Avoidance Rules (GAAR) to undertake stakeholder consultations and finalise
the guidelines for GAAR after widespread consultations so that there is a
greater clarity on GAAR issues. A copy of the Notification is appended. The
Expert Committee consists of:

      1) Dr. Parthasarathi Shome - Chairman

      2) Shri N. Rangachary, former Chairman, IRDA - Member

      3) Dr. Ajay Shah, Professor, NIPFP - Member

      4) Shri Sunil Gupta, Joint Secretary, Tax Policy & Legislation,
      Department of Revenue - Member


The terms of reference of the Committee are:

      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.




                                                                            10
The Committee is mandated to 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 2012.




                                                                           11
12
13
1.2 Background

GAAR has been received poorly in India due to the somewhat more stringent
versions put out by Govt. between 2009-12 (see Annexe-1 for a
comparison) 1 as well as the perceived lack of adequate consultation with
stakeholders even though there was some accommodation of stakeholders
concerns. 2 International practice on GAAR has generally comprised review
and analysis by experts, wide ranging discussions with stakeholders, and
caution and perspicacity in its introduction and implementation. As India
opens up its economy, it has to make its administrative processes, in
particular its tax administration, internationally comparable. Without that,
invoking modern and benchmarked control instruments are likely to be
misinterpreted and misused, vitiating the objectives of equity and revenue
productivity in taxation.

At the outset, therefore, it may be helpful to note an ongoing international
process to introduce a GAAR, that of the UK. To put the matter in context,
one should not refrain from recognizing that India has closely followed UK`s
principles and judicial pronouncements on such issues for a century while
taking a different view wherever appropriate. However, India`s 2012 GAAR
draft guidelines cannot be said to have resembled UK`s GAAR process. The
UK has spent approximately four years in its GAAR consultation process. In
India, GAAR as an instrument itself became clubbed with the matter of the
Revenue Department`s (henceforth, the Revenue) countering the Supreme
Court`s view by way of retrospective taxation through Finance Act 2012.
GAAR, in conjunction with retrospective taxation, has thus generated world-
wide opprobrium not only against the unpredictable approach to
administration of the Indian tax authorities but also of policy makers who
enact laws. The outcome is a widely held view that India is not a good place
for investment at the moment.

With this backdrop, three useful points may be noted -

        The Indian government (henceforth Govt.) has no problem with tax
        mitigation by which is implied the use of tax incentives in not only a
        legal, but also transparent, manner by means of legitimate tax
        planning with the objective of achieving what tax professionals term

1
 For example tax benefit being the `main purpose' was converted to `main purpose' or, one of the main purposes.
2
 For example later versions shifted the onus of proof from taxpayer to the tax administration, advance ruling and
a threshold were provided.

                                                                                                               14
     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
     egregious, aggressive, highly 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 only in exceptional cases where
     there is clear evidence of an extremely aggressive arrangement to
     escape tax.

     India has not defined commercial substance, an essential term in the
     context of GAAR. This was included in the original version of Direct Tax
     Code (DTC) of 2009 and 2010, but was omitted in the 2012 version.
     This would be reinstated. India has provided illustrative examples that
     have been considered insufficient or confusing by stakeholders. This is
     addressed by the current Committee which has modified, and has
     provided more, illustrations on the basis of its consultations.

     UK`s GAAR was formulated, drafted and recommended by an
     independent panel, representing good practice. In India, the GAAR
     guidelines were formulated by a Departmental Committee. While there
     were some consultations, India`s consultations on GAAR drafts were
     deemed to be insufficient by stakeholders. This Committee has
     attempted to carry out in-depth consultations within the time period
     allotted to it. A list of meetings is provided in Annexe-2 while
     Annexe-3 lists the documents examined.

A short description of the process undertaken by the UK appears in
Annexe-4 which details prevailing practices on GAAR in selected countries
including Australia, Canada, South Africa and the United States. It is crucial
for India to balance, on the one hand, the concerns of revenue by protecting

                                                                              15
the tax base from erosion with, on the other, high compliance costs of
taxpayers as well as the uncertainty in the overall investment environment
that instability in tax legislation and practice create.

The Committee considered the process of consultation as a mainstay of its
task. It undertook intensive consultations with stakeholders. It also received
written representation from a number of stakeholders including professionals
in tax advisory work, chambers of commerce and industry, foreign investor
associations, industrialists, and policy makers.

Based on inputs from consultations received in writing as well as orally, and
applying its own views on each matter, the Committee has formulated its
draft report. It must be mentioned, as will be seen from its recommendations,
the Committee viewed that an appropriate implementation of GAAR should
require selected legislative changes. It has not desisted, therefore, from
making such recommendations. The Report follows.




                                                                            16
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 legal means to prevent or reduce tax liability which
        would otherwise be incurred, by taking advantage of some provisions
        or lack of provisions in the law...it presupposes the existence of
        alternatives, one of which would result in less tax than the other...
        except where the taxpayer adopts the same course for business or
        personal reasons.3
        An arrangement entered into solely or primarily for the purpose of
        obtaining a tax advantage.4

Taxpayers consider it their legitimate right to arrange their affairs in a
manner as to pay the least tax possible. They are routinely supported in
their approach by UK`s common law courts. 5 However, tax authorities
internationally consider aggressive tax planning schemes by taxpayers to
erode the tax base unnaturally, particularly when effective rates of tax
diminish significantly. Several countries have, therefore, legislated to
prevent tax avoidance in various ways (Annexe-4).


3
  Royal Commission on Taxation (Carter Commission), 1966.
4
  Taxation Review Committee (Asprey Committee), 1975
5
  IRC v Duke of Westminster (1936)

                                                                            17
Tax evasion is unlawful and is the result of illegality, suppression,
misrepresentation and fraud.

Tax avoidance could seriously undermine horizontal equity in taxation and
result in wide variation in the tax burdens of comparable taxpayers, as well
as affect vertical equity adversely among differently placed businesses.
Abusive tax avoidance erodes revenue collection. Sectors that provide a
greater opportunity for tax avoidance tend to cause distortions in the
allocation of resources. Therefore, there is a strong view in the literature on
tax policy that tax avoidance through artificial structures, is economically
undesirable. Thus, on considerations of economic efficiency, fiscal justice,
and revenue productivity, a taxpayer should not be allowed to use legal
structures or transactions exclusively to avoid tax.

In the past, the response to tax avoidance has been through the introduction
of legislative amendments to deal with specific instances of tax avoidance.
Since the liberalization of the Indian economy, increasingly sophisticated
forms of tax avoidance have appeared. The problem has been compounded
by tax avoidance arrangements spanning multiple tax jurisdictions.

While introducing the GAAR provisions in the Income-tax Act, it was
mentioned in the Explanatory Memorandum to the Finance Bill 2012, that
the question of substance over form has consistently arisen in the
implementation of taxation laws. In the Indian context, judicial decisions
have varied on this. While some courts in certain circumstances have held
that legal form of transactions can be dispensed with and the real substance
of transaction should be considered while applying the taxation laws, others
have held that form is to be given sanctity in the absence of specific or
general anti-avoidance rules in the statute.

There are specific anti-avoidance provisions, as indicated earlier, but
avoidance methods other than through 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        (Annexe-
4).




                                                                             18
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 reference to the underlying meaning embedded in
the fiscal statute. Thus, where there is no business purpose except to obtain
a tax benefit, the GAAR provisions would not allow such a tax benefit to be
availed through the tax statute. These propositions have comprised part of
jurisprudence in direct tax laws as reflected in various judicial decisions. The
GAAR provisions codify this substance` over form` basis of the tax law. It is,
therefore, necessary and desirable to introduce a general anti-avoidance rule
which will serve as a deterrent against such practices. An overview of the
current specific anti-avoidance rules in the Act is presented in Annexe-5.

The basic critique of a statutory GAAR which is raised worldwide is that it
provides wide discretion and authority to the tax administration which can
cast an excessive tax and compliance burden on the taxpayer without
commensurate remedies. This has to be addressed by providing adequate
safeguards. In the case of India, the matter of consultation and authority
needs to be considered with due diligence, together with the adequacy of
use of the new instruments recently made available to the tax administration
such as transfer pricing and Large Taxpayer Units (LTUs). In other words,
the prevailing state of preparedness of tax officers needs to be correctly
assessed for taking up challenges in the implementation of additional
emerging, complex aspects of international and domestic taxation, in a
manner commensurate with international practice.




                                                                              19
3.          GAAR Provisions : Analysis and Recommendations

3.1 Applicability of General Anti-Avoidance Rule

The provisions relating to GAAR appear in Chapter X-A (sections 95 to 102)
of the Act. Section 95 reads as under ­

     95. Notwithstanding anything contained in the Act, an arrangement
     entered into by an assessee may be declared to be an impermissible
     avoidance arrangement and the consequence in relation to tax arising
     therefrom may be determined subject to the provisions of this
     Chapter.

     Explanation.--For the removal of doubts, it is hereby declared that the
     provisions of this Chapter may be applied to any step in, or a part of,
     the arrangement as they are applicable to the arrangement.

The section starts with a non-obstante clause which means, if there is a
conflict with provisions, in other sections, then those of this section shall
prevail over other conflicting provisions. The provisions allow the tax
authority to, notwithstanding anything contained in the Act, declare an
arrangement` which an assessee has entered into, as an impermissible
avoidance arrangement`. Once an arrangement` has been declared as an
impermissible avoidance arrangement`, the consequence as regards tax
liability would also be determined.

The term arrangement has been defined in section 102 as under-

     (1) "arrangement" means any step in, or a part or whole of, any
     transaction, operation, scheme, agreement or understanding, whether
     enforceable or not, and includes the alienation of any property in such
     transaction, operation, scheme, agreement or understanding;`

Thus, the term arrangement covers not only a scheme but 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 ­

                                                                           20
     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, 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.

The purpose test of obtaining tax benefit and tainted element test as under
clauses (a) to (d) above are twin conditions that satisfy an impermissible
avoidance arrangement`. The purpose test requires that the main purpose or
one of the main purposes is to obtain tax benefit. The term, tax benefit, has
been defined in section 102 as under -

     (11) "tax benefit" means--

      (a) a reduction or avoidance or deferral of tax or other amount
     payable under this Act; or

      (b) an increase in a refund of tax or other amount under this Act; or

     (c) a reduction or avoidance or deferral of tax or other amount that
     would be payable under this Act, as a result of a tax treaty; or

      (d) an increase in a refund of tax or other amount under this Act as a
     result of a tax treaty; or

      (e) a reduction in total income including increase in loss,

     in the relevant previous year or any other previous year.


                                                                              21
The term benefit has also been defined under section 102 as under ­

      (4) "benefit" includes a payment of any kind whether in tangible or
      intangible form;`

An analysis of these two definitions show that ­

(i) the term benefit has always been used as in the phrase tax benefit
except in section 98 as a benefit under a tax treaty, which implies the tax
benefit only;. Hence, there is no need to define benefit separately;

(ii) tax benefit includes not only tax but also other payments which could be
interest, penalty etc.;

(iii) tax benefit also means reduction in total income;

(iv) tax benefit also includes deferral of tax liability even if there is no
reduction of tax liability of all years taken together;

(v) use of the phrase increase in loss suggests the intention to include
potential loss of revenue.

It has been pointed out by stakeholders that the original version of GAAR in
DTC 2009 and DTC 2010, the purpose test required that the main purpose of
the arrangement was to obtain tax benefit. However, the GAAR provisions
introduced through Finance Act, 2012 provides for main purpose or one of
the main purposes is to obtain tax benefit. Though initially only those
arrangements were covered under GAAR where the most predominant
purpose was to obtain tax benefit this has been diluted in the recent version
of GAAR as there could be many dominant purposes of an arrangement and
to obtain tax benefit is one of such purposes Then also GAAR can be invoked
even if obtaining tax benefit is not the most predominant or the sole purpose
of the arrangement. It was suggested that the provisions as per original DTC
2009 may be restored so that only the 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.


                                                                           22
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 are not normally created
between parties dealing at arm`s length. As there are specific transfer pricing
regulations (SAAR) applicable to international transactions and certain
specified domestic transactions, this tainted element is to be examined only
in those transactions which are not covered by TP regulations and where the
main purpose of the arrangement is to obtain tax benefit. As current transfer
pricing regulations are applicable to international transactions and some
specified domestic transactions, a mechanism needs to be provided for the
Assessing Officer (AO) to ascertain whether rights, or obligations, created in
an arrangement are the same as ordinarily created between persons dealing
at arm's length. He should be able to seek expert opinion in this regard from
the Transfer Pricing Officer (TPO). For instance, refer to illustration 22 in
section 4 of the report.

The second tainted element refers to an arrangement which results in
misuse or abuse of the provisions of the tax law. It implies cases where the
law is followed in letter or form but not in spirit or substance, or where the
arrangement results in consequences which are not intended by the
legislation, revealing an intent to misuse or abuse the law. For instance,
refer to illustration 15 in section 4 of the report.

The third tainted element refers to an arrangement which lacks commercial
substance or is deemed to lack commercial substance. It is discussed in
detail in the next section.

The fourth element refers to an arrangement which is carried out in, or by
means of, a manner which is normally not employed for a bona fide purpose.
In other words, it means an arrangement that possesses abnormal features.
This is not a purpose test but a manner test. For instance, refer to
illustration 24 in section 4 of the report.

Concerns have been raised that section 96(2) provides that an arrangement
shall be presumed to have been entered into, or carried out, for the main
purpose of obtaining a tax benefit, if the main purpose of a step in, or a part
of, the arrangement is to obtain a tax benefit, notwithstanding the fact that
the main purpose of the whole arrangement is not to obtain a tax benefit. In

                                                                             23
view of this provision, where only a part of the arrangement is to obtain a
tax benefit even if the whole arrangement is permissible, the whole
arrangement may be treated as an impermissible arrangement.

In order to allay the apprehensions of taxpayers in this regard, the
Committee recommends that it should be clarified that, where only a
part of the arrangement is impermissible, the tax consequences of
an "impermissible avoidance arrangement" will be limited to that
portion of the arrangement.

3.3 Arrangement lacking commercial substance

The phrase arrangement to lack commercial substance has not been
defined. It is noted that earlier version of GAAR in the DTC Bill 2009 and
2010 defined the commercial substance as under ­

     an arrangement shall 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 provisions by way
     of amendment of the Act.

     Under section 97, certain arrangements have been deemed to lack
     commercial substance as under -

      (a) the substance or effect of the arrangement as a whole, is
     inconsistent with, or differs significantly from, the form of its individual
     steps or a part; or

      (b) it involves or includes--


                                                                               24
       (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.

Clause (a) is the codification of substance v. form doctrine. It implies that
where substance of an arrangement is different from what is intended to be
shown by the form of the arrangement, then tax consequence of a particular
arrangement should be assessed based on the substance of what took
place. In other words, it reflects the inherent ability of the law to remove the
corporate veil and look beyond form.

Item (i) of clause (b) deems an arrangement, which includes round tripping
of funds, to lack commercial substance. The phrase round trip financing
has been further defined as under ­

      (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 party in
      connection with the arrangement;


                                                                              25
       (B) the time, or sequence, in which the funds involved in the round
      trip financing are transferred or received; or

       (C) the means by, or manner in, or mode through, which funds
      involved in the round trip financing are transferred or received.

Refer to illustration 7 in section 4 of the report.

Item (ii) of clause (b) deems an arrangement which includes an
accommodating party to lack commercial substance. The phrase
accommodating party has been further defined as under ­

      (3) For the purposes of this Chapter, a party to an arrangement shall
      be an accommodating party, if the main purpose of the direct or
      indirect participation of that party in the arrangement, in whole or in
      part, is to obtain, directly or indirectly, a tax benefit (but for the
      provisions of this Chapter) for the assessee whether or not the party is
      a connected person in relation to any 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 have an element of deceit as regards funds. Refer to
illustration no 5B in section 4 of the report.

Clause (c) deems an arrangement to lack commercial substance where it
involves the location of an asset or of a transaction or of the place of
residence of any party and such location is without any substantial
commercial purpose. It means if a particular location is selected for an asset
or transaction or residence, and such selection has no substantial
commercial purpose, then such arrangement shall be deemed to lack


                                                                            26
commercial substance. Refer to illustrations 7, 10 and 11 in section 4 of the
report.

In sub-section (4), the following factors are not considered relevant for
determining whether an arrangement lacks commercial substance, namely--

     (i) the period or time for which the arrangement (including operations
     therein) exists;

     (ii) the fact of payment of taxes, directly or indirectly, under the
     arrangement;

     (iii) the fact that an exit route (including transfer of any activity or
     business or operations) is provided by the arrangement.

Stakeholders raised serious doubts regarding ignoring the attributes of an
arrangement in sub section (4) since they tend to reflect the intentions,
bonafide or otherwise, behind an arrangement. Their view is relevant and
discussed later in para 3.17.

It should be clarified through legislative amendment that factors (i)
to (iii) in section 97(4) of the Act are not sufficient (instead of being
totally irrelevant) for an arrangement to be excluded from the
commercial substance test but may be relevant in the consideration
of other aspects of GAAR.

3.4 Consequence of impermissible avoidance arrangement

As per section 98(1), if an arrangement is declared to be an impermissible
avoidance arrangement, then the consequences may include denial of tax
benefit or a benefit under a tax treaty. The consequence may be determined
in such manner as is deemed appropriate in the circumstances of the case.
Certain illustrations of the manner have been provided, namely:--

(a) disregarding, combining or re-characterizing any step in, or a part or
whole of, the impermissible avoidance arrangement;

 (b) treating the impermissible avoidance arrangement as if it had not been
entered into or carried out;



                                                                           27
 (c) disregarding any accommodating party or treating any accommodating
party and any other party as one and the same person;

(d) deeming persons who are connected persons in relation to each other to
be one and the same person for the purposes of determining tax treatment
of any amount;

(e) reallocating amongst the parties to the arrangement--

      (i) any accrual, or receipt, of a capital or revenue nature; or

      (ii) any expenditure, deduction, relief or rebate;

(f) treating--

       (i) the place of residence of any party to the arrangement; or

       (ii) the situs of an asset or of a transaction,

      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 as one and the same person;

      (ii) any accommodating party may be disregarded;

                                                                             28
      (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 term tax benefit has been defined to include such benefit to any person
who is connected directly or indirectly to another person and includes
associated person. Concerns have been raised that the definition of
connected person u/s 102(5) is too broad and ambiguous. A committee
under DGIT (IT) had recommended that it may be clarified that -

      Connected person would include the definition of associated
      enterprise given in section 92A, the definition of relative` in section
      56 and the persons covered u/s 40A(2)(b).

The clarification, instead of restricting the scope of the term, effectively
broadened it. Moreover, relative` in section 56 and the persons covered
u/s 40A(2)(b) are already covered in the definition of associated person
under section 102.

In view of the above, the Committee recommends that the definition
of connected person may be restricted only to "associated person"
under section 102 and "associated enterprise" under section 92A.

3.6 Application of Chapter

As per section 100, the provisions of Chapter X-A shall apply in addition to,
or in lieu of, any other basis for determination of tax liability.

3.7 Framing of guidelines

As per section 101, the provisions of Chapter X-A shall be applied in
accordance with such guidelines and subject to such conditions and the
manner as may be prescribed.

3.8 Treaty Override

Sections 90 and 90A of the Act provide the legal authority to the executive
for entering into an agreement for avoidance of double taxation (DTAA) with
another country or specified territory. Sub-section (2) of these sections

                                                                                29
provide that a taxpayer may choose any provision between domestic law
and DTAA whichever is more beneficial. Thus, tax treaties have an overriding
status over domestic law.

The aforesaid benefit is restricted to the taxpayer for invoking GAAR by
insertion of subsection (2A) through amendment in Act as under ­

     (2A) Notwithstanding anything contained in sub-section (2), the
     provisions of Chapter X-A of the Act shall apply to the assessee, even
     if such provisions are not beneficial to him.

This insertion has raised the ire of foreign investors and generated an
atmosphere of deep uncertainty. Later in the Report, the Committee has
recommended to refrain from treaty override where the treaty itself
addresses the issue of tax avoidance.

3.9 Advance Ruling

An advance ruling can be obtained in relation to tax liability of a non-
resident arising from a transaction to be undertaken from the Authority for
Advance 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 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 provided under section 144BA as
under:-


                                                                            30
(i) The Assessing Officer (AO) shall make a reference to the Commissioner
(CIT) for invoking GAAR and on receipt of reference the Commissioner (CIT)
shall hear the taxpayer and if he is not satisfied by the reply of taxpayer and
is of the opinion that GAAR provisions are to be invoked, he shall refer the
matter to an Approving Panel (AP). In case the assessee does not reply or
object, the CIT shall make determination as to whether the arrangement is
an impermissible avoidance arrangement or not.

(ii) The AP has to dispose of the reference within a period of six months from
the end of the month in which the reference was received from the CIT.

(iii) The AP shall either declare an arrangement to be impermissible or
declare it not to be so after examining material and getting further inquiry to
be made.

(iv) The AO will determine the consequences of a positive declaration of
arrangement as impermissible avoidance arrangement.

(v) The final order in case any consequence of GAAR is determined shall be
passed by the AO only after approval by the CIT and, thereafter, first appeal
against such order shall lie to the Appellate Tribunal.

(vi) The period taken by the proceedings before the CIT and AP shall be
excluded from time limitation for completion of assessment.

In addition to the above, it is provided that the Board (CBDT) shall prescribe
a scheme for regulating the condition and manner of application of these
provisions.

3.10.2      Prescription of statutory forms

Consistency of approach is essential in the procedures for invoking the GAAR
provisions. Adequate safeguards should be provided to ensure that principles
of natural justice were not violated and there is transparency in the
procedures. Therefore, following statutory forms need to be prescribed:-

     i)  For the Assessing Officer to make              a   reference   to   the
     Commissioner u/s 144BA(1) (Annexe-8)

     ii)    For the Commissioner to make a reference to the Approving
     Panel u/s 144BA(4) (Annexe-9)



                                                                              31
     iii)   For the Commissioner to return the reference to the Assessing
     Officer u/s 144BA(5) (Annexe-10)



3.10.3     Prescribing time limits

There should be absolute certainty about the time limits during which the
various actions under the GAAR provisions are to be completed. Some of
these time lines have been prescribed under the Act under sections
144BA(1) and 144BA(13). There are remaining actions for which time lines
are also needed.

The Committee recommends that it should be prescribed that

i) in terms of section 144BA(4), the Commissioner (CIT) should
make a reference to the Approving Panel within 60 days of the
receipt of the objection from the assessee with a copy to the
assessee;

ii)in the 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 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 not it represented tax avoidance. According to them, the
provisions were ambiguous and had led to uncertainty. It was feared that
GAAR would end in harassment and litigation. For instance, selection of one
option out of two or more options offered by law, or the timing of a
particular transaction, in itself, may be considered to be tax avoidance.
Reference was made several times to the UK experience where an

                                                                         32
independent study commissioned by HMRC arrived at the view that a broad
spectrum GAAR would not be beneficial to the UK system as it may erode
the attractiveness of the UK`s tax regime to businesses, and therefore
suggested a moderate rule which is targeted at arrangements that are
contrived and artificial. It was, therefore, submitted to this Committee to
take a balanced approach.

It is being generally perceived that GAAR provisions, as currently drawn up,
provide for treating an arrangement as an impermissible avoidance
arrangement without first examining whether the arrangement is an
avoidance arrangement or not. This is particularly important since an
avoidance arrangement should be first distinguished from tax mitigation and
second, if it is avoidance, whether it may, nevertheless, be permissible.
Thus, every case of tax avoidance should not be considered under GAAR
unless it is an abusive, artificial and contrived arrangement.

Tax mitigation, as has been explained in Section 2, means an attempt to
minimize tax liability by a taxpayer as per the existing law, and it is an
intended consequence of the legislation. As there may be a thin line between
tax mitigation and tax avoidance, an illustrative list of tax mitigation or a
negative list for the purpose of invoking GAAR should be considered. The
negative list, not exhaustive however, should include ­

(i) Selection of one of the options offered in law. For instance ­

     (a) payment of dividend or buy back of shares by a company

     (b) setting up of a branch or subsidiary

     (c) setting up of a unit in SEZ or any other place

     (d) funding through debt or equity

     (f) purchase or lease of a capital asset

(ii) Timing of a transaction, for instance, sale of property in loss
while having profit in other transactions

(iii) Amalgamations and demergers (as defined in the Act) as
approved by the High Court.

(iv) Intra-group transactions (i.e. transactions between associated
persons or enterprises) which may result in tax benefit to one

                                                                           33
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 portfolio investments in listed securities as per SEBI guidelines.
Currently, all these transactions in listed securities are subject to Securities
Transaction Tax (STT). Long term capital gains (on holdings for more than
12 months) are exempt from taxation; and short term capital gains are
taxable at 15%. Present revenue from taxation of capital gains from such
securities is less than Rs 3000 crore. However, there would be some revenue
foregone on account of non-taxation of short term capital gains in the case
of FIIs who avail treaty benefit (mainly India-Mauritius and India-Singapore
tax treaties).

The tax depends also on the nature of income, whether business profit or
capital gains. Thus business income is taxed at 30%. Distinguishing capital
gains and business income depends on several factors, and disagreements
have resulted in numerous litigation cases between the Revenue and


                                                                              34
taxpayers. A significant outcome of the present tax regime is that fund
managers of foreign investors do not base themselves in India as the
presence of fund managers would constitute permanent establishment of
such investors in India. Consequently, the business income of foreign
investors would be taxed in India. The abolition of tax on portfolio
investment may encourage fund managers to shift their bases to India.

In view of the above, the Committee recommends that the
Government should abolish the tax on gains arising from transfer of
listed securities, whether in the nature of capital gains or business
income, to both residents as well as non-residents. In order to make
the proposal tax neutral, the Govt may consider to increase the rate
of Securities Transaction Tax (STT) appropriately.

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 administration is more mature for implementation of such law;

(iv) There is a conducive economic environment for application of such law.

The GAAR provisions were introduced in the public domain in 2009 through
the first draft of the Direct Taxes Code (DTC). Subsequently, the provisions
were introduced in the DTC Bill 2010. The Parliamentary Standing
Committee on Finance has had discussions with stakeholders. The Govt. has
deferred it by one year from 2012 to 2013. The guidelines could now be
notified once this Committee`s report is commented upon and selected
comments are incorporated.


                                                                          35
As discussed earlier, there has been a paradigm shift in tax policy and
countries all over the world have resorted to anti-avoidance rules in their
domestic law. In India, introduction of GAAR through Finance Act, 2012 has
been taken as a shock by the stakeholders although GAAR has been in public
domain for discussion since 2009. Probably, it was due to the challenging
economic environment. The market had also not prepared itself for such a
measure. There has been serious apprehension about its immediate
implementation. Considering the vast discretionary powers to the Revenue,
intensive training of officers is needed for a prolonged period, and good care
and attention should be focused on setting up appropriate procedures
including the Approving Panel and related processes. Time is required for
taxpayers to be convinced about this paradigm shift in tax policy and to
establish a critical mass of confidence to counter any doubt regarding GAAR.

The Committee recommends that there is a need for deferring the
implementation of GAAR by three years on administrative grounds.
It needs to be realized that GAAR is an extremely advanced
instrument of tax administration ­ one of deterrence, rather than for
revenue generation ­ for which intensive training of tax officers,
who would specialize in the finer aspects of international taxation, is
needed. The experience with transfer pricing, the thin training
module in specialized fields for Indian tax officers, increasingly in
contrast to international benchmarked modules and the time needed
to put in place appropriate procedures and processes including the
establishment of an Approving Panel, do not impart the needed
confidence that an environment of certainty can be regenerated with
an immediate application of GAAR, however modified. To note, the
immediate tax expenditure for not implementing GAAR (after a
requisite threshold is applied) would be minimal. Hence GAAR
should be deferred for 3 years. But the year, 2016-17, should be
announced now, so that it 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.


                                                                            36
Considering those apprehensions, the Committee is of the view that it may
be clarified as under, in the case that Govt. adheres to the
implementation of GAAR from 2013-14.

"GAAR shall apply only to the income received, accruing or arising,
or deemed to accrue or arise, to the taxpayers on or after
01.04.2013. In other words, GAAR will apply to income of the
previous year 2013-14 relevant to assessment year 2014-15 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 treaty shopping
but the method was kept alive on account of investments that flowed into
India. Be that as it may, Govt. defended its action before the Supreme Court
in the case of Azadi Bachao Andolan wherein the Court held that treaty
shopping may be unethical but not illegal. It had also upheld Circular 789
dated 13.04.2000 which precluded the tax administration to enquire into the
genuineness of tax residency certificate (TRC) issued by the Mauritius
authorities. It was, therefore, requested to grandfather all existing
arrangements.

Stakeholders pointed that substantive investments have come to India by
way of portfolio investment or foreign direct investment from two
jurisdictions Singapore and Mauritius based on the effective assurance that,
on exit, no tax would be levied in accordance with the relevant tax treaty.
Now, it would be unfair according to many stakeholders, both domestic and
international, to say that no tax exemption would be provided if they exit
after 01.04.2013.



While examining the DTC Bill 2010, the Parliamentary Standing Committee
on Finance recommended that all existing arrangements existing as on the
date of commencement of the DTC should be grandfathered.

Grandfathering an existing arrangement (instead of existing investments)
may inadvertently keep many future advance tax avoidance schemes out of
examination under GAAR since a tax avoidance structure itself would receive
indefinite protection, and diminish the effectiveness of GAAR. In other
words, it would allow an impermissible arrangement to exist in perpetuity if
created before commencement of GAAR and grandfathered under GAAR

                                                                          37
provisions. For instance, if a conduit company (says a letter box company) is
incorporated in a favourable jurisdiction in 2008 and this arrangement is
grandfathered, then, all future investments made by it would also enjoy tax
exemption for the indefinite future. Once this was explained, stakeholders
agreed that the intention should be to grandfather investments rather than
arrangements.

It was also suggested to grandfather only those investments which have
remained invested in India for a number of years (say five years or so), this
would be unfair to those who invested within the last five years, considering
the existing law at that point of time. Thus it is important to grandfather all
investments.

In view of the above, the Committee recommends that all
investments (though not arrangements) made by a resident or non-
resident and existing as on the date of commencement of the GAAR
provisions should be grandfathered so that on exit (sale of such
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.

In view of the above, the Committee recommends that, where
Circular No. 789 of 2000 with respect to Mauritius is applicable,
GAAR provisions shall not apply to examine the genuineness of the
residency of an entity set up in Mauritius.



                                                                             38
As needed, the Mauritius treaty itself should be revisited if policy so dictates,
rather than challenged indirectly through the use of the GAAR instrument.

3.16 Treaty override

Stakeholders submitted that so long as the taxpayer falls in the definition of
resident as defined in the relevant tax treaty, it should be sufficient and he
should be precluded from the applicability of GAAR.

It is an internationally accepted principle of interpretation of interplay
between domestic law and a tax treaty that, in case of conflict between the
provisions of the domestic law and the treaty, whatever is more
beneficial (between domestic law and the treaty) to the taxpayer is
applicable. This principle has also been codified in section 90 of the
Income-tax Act.

Reliance is usually placed on the preamble of a tax treaty i.e. the treaty is
for avoidance of double taxation and prevention of fiscal evasion. In some
countries, however, treaty benefit is denied in cases of treaty abuse (like
treaty shopping) based on purposive interpretation of the treaty. 6 These
States consider that a proper construction of tax conventions allows them to
disregard abusive transactions such as those entered into with the view to
obtaining unintended benefits under the provisions of these conventions.
This interpretation results from the object and purpose of tax conventions as
well as the obligation to interpret them in good faith (Article 31 of the
Vienna Convention on the Law of Treaties).

However, in India the courts have not favoured purposive interpretation,
taking a strictly legal stance. In the case of Azadi Bachao Andolan, the
Supreme Court held that treaty shopping is legal. The relevant observation
of the court is reproduced below-

         In para 3.3.2, the working group recommended introduction of anti -
         abuse provisions in the domestic law.

         Finally, in paragraph 3.3.3 it is stated The Working Group recommends
         that in future negotiations, provisions relating to anti-abuse/limitation
         of benefit may be incorporated in the DTAAs also.



6
    OECD commentary on MC, para 9.2

                                                                                39
     We are afraid that the weighty recommendations of the Working Group
     on Non-Resident Taxation are again about what the law ought to be,
     and a pointer to the Parliament and the Executive for incorporating
     suitable limitation provisions in the treaty itself or by domestic
     legislation. This per se does not 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 for money laundering, tax evasion etc. and,
     hence, it is imperative that the Indian Parliament would address all
     these issues with utmost urgency.(para 53)(emphasis added)

Considering such views expressed by the courts, there is a role for anti-
avoidance rules to prevent abuse of tax treaties. Indeed, Parliament enacted
GAAR to deal with tax avoidance schemes in both domestic law as well as
cross-border transactions though GAAR`s perceived wide interpretation
rather than a narrow and strict focus on anti-abuse, has led to vociferous
opposition to it.

On the issue whether specific provisions of the domestic law of a contracting
state that are intended to prevent tax abuse conflict with tax treaties, the
OECD in its commentary on Model Convention has stated as under-



                                                                              40
     9.2 For many States, the answer to the first question is based on their
     answer to the second question. These States take account of the fact
     that taxes are ultimately imposed through the provisions of domestic
     law, as restricted (and in some rare cases, broadened) by the
     provisions of tax conventions. Thus, any abuse of the provisions of a
     tax convention could also be characterised as an abuse of the
     provisions of domestic law under which tax will be levied. For these
     States, the issue then becomes whether the provisions of tax
     conventions may prevent the application of the anti-abuse provisions of
     domestic law. As indicated in paragraph 22.1 below, the answer to that
     second question is that, to the extent these anti-avoidance rules are
     part of the basic domestic rules set by domestic tax laws for
     determining which facts give rise to a tax liability, they are not
     addressed in tax treaties and are therefore not affected by them. Thus,
     as a general rule, there will be no conflict between such rules and the
     provisions of tax conventions. (emphasis added)

Thus, the view of the OECD is that if domestic law that covers GAAR
provisions is not reflected in a tax treaty, then GAAR can be invoked since
there is no conflict with the treaty. However, the OECD does not address the
case in which tax avoidance matters are directly or indirectly addressed in a
treaty. It may, therefore, be presumed that, in the latter case, the treaty
provisions, rather than domestic law, would apply. This has particular
relevance for the Indian GAAR with respect to the Mauritius and Singapore
treaties.

However, in order to provide certainty on this issue, section 90 of the
Income-tax Act (which is the legal basis of Indian tax treaties) has been
amended vide Finance Act 2012 to specifically 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


                                                                           41
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 determination of commercial substance

Stakeholders submitted that certain terms used in GAAR should be defined
in a positive way instead of being negatively defined. It was suggested that
a negative list in the GAAR provisions relating to commercial substance
under section 97(4) of the Act be deleted.

Provisions of section 97(4) of the Act read as under -

      97(4) The following shall not be taken into account while determining
      whether an arrangement lacks commercial substance or not,
      namely:--

       (i) the period or time for which the arrangement (including
      operations therein) exists;

       (ii) the fact of payment of taxes, directly or indirectly, under the
      arrangement;

      (iii) the fact that an exit route (including transfer of any activity or
      business or operations) is provided by the arrangement.

It was argued that the above provisions have introduced in direct conflict
with the observation of the Supreme Court in the case of Vodafone wherein
the Court laid down the following test while analyzing international tax
aspects of holding structures,-

      we are of the view that every strategic foreign direct investment
      coming to India, as an investment destination, should be seen in a
      holistic manner. While doing so, the Revenue/Courts should keep in
      mind the following factors: the concept of participation in investment,
      the duration of time during which the Holding Structure exists; the
      period of business operations in India; the generation of taxable
      revenues in India; the timing of the exit; the continuity of business on

                                                                            42
     such exit. In short, the onus will be on the Revenue to identify the
     scheme and its dominant purpose. The corporate business purpose of
     a transaction is evidence of the fact that the impugned transaction is
     not undertaken as a colourable or artificial device. The stronger the
     evidence of a device, the stronger the corporate business purpose
     must exist to overcome the evidence of a device (emphasis addedd)

Factors were considered by the Court to determine whether an arrangement
is a colorable or sham device. In the case of conduit company structures
created for investment in India through favourable tax jurisdictions, there is
always a gap between the time of investment and exit as the value of
investment should grow with time. At the time of exit and also, there is a
need to judge the permissibility of the structure since the factum of payment
of taxes on regular income from investment in India (i.e. by way of business
income or interest or dividend income or indirect taxes) will not only be
there 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 convince the AO that GAAR should
not be applied in the particular case.


                                                                            43
3.18 Threshold to be prescribed for applying GAAR provisions.

Stakeholders submitted that the threshold to be prescribed for applying
GAAR should be high enough to capture only highly sophisticated structures.

In the draft guidelines, it is proposed to provide a monetary threshold of tax
benefit of ....lakhs of rupees to the taxpayer in a year. Various concerns
expressed by stakeholders relating to this were ­

    (i) the monetary threshold of tax benefit should consider only the tax
    amount and not any other amount;

    (ii) in cases of tax deferral, how the tax benefit would be computed;

    (iii) the threshold should be high enough;

    (iv) can there be any other criterion of specifying monetary threshold
    i.e. total turnover, sales or value of transactions;

    (v) threshold should be qua an arrangement.

As proposed, the threshold has three elements i.e. tax benefit should be
more than a specified amount, the benefit should arise to the taxpayer
involved, and the benefit should be in the income year involved.

The term tax benefit has been defined to include tax or other amount
payable under this Act or reduction in income or increase in loss. The other
amount could cover interest. For the sake of clarity, it may be specified that
tax benefit for the purposes of the threshold shall include only income tax,
dividend distribution tax and profit distribution tax, and shall not include
other amounts like interest, income etc. The tax liability may be actual or
potential (i.e. in case of increase in loss).

However, in cases of tax deferral, the only benefit to the taxpayer is not
paying taxes in one year but paying it in a later year. Overall there may not
be any tax benefit but the benefit is in terms of the present value of money.
In such cases, tax benefit should be computed in the year of deferral as the
amount of taxes not paid in that year on account of the tax avoidance
scheme which exceeds the present value of money of corresponding taxes
paid in subsequent years. The present value of money should be ascertained
based on the rate of interest charged under the Act for shortfall of tax
payment under section 234B of the Act.

                                                                            44
It is noted that in case of transfer pricing regulations, being SAAR, a
threshold of Rs. 15 crores as value of international transactions in a year is
considered for the purpose of undertaking transfer pricing audit by the
Transfer Pricing Officer. Presuming net profit from such 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 five years to minimize any adverse
impact on smaller taxpayers. As large scale training in enhancing tax
administration practices and accountability is undertaken and put in place,
the threshold level may be reduced (so that the number of companies
covered may increase under GAAR).

Based on the above figures, a threshold tax benefit limit of Rs 3crore may be
considered. Hence the recommended threshold based on tax benefit should
imply a scope of about 6000 companies.

The tax benefit should be considered separately for each arrangement, not
taking all arrangements together unless the arrangements are interlinked or
connected with each other.

Other criteria such as turnover or sales should not be used as profitability of
different sectors varies widely.

In view of the above, the Committee recommends that a monetary
threshold of Rs 3 crore of tax benefit (including tax only, and not
interest etc) to a taxpayer in a year should be used for the

                                                                             45
applicability of GAAR provisions. In case of tax deferral, the tax
benefit shall be determined based on the present value of money.

3.19 GAAR vs SAAR; and GAAR vs LOB

Considering the concerns that there could be interplay between Specific Anti
Avoidance Rules (SAAR) and GAAR, stakeholders submitted that many
countries do not apply GAAR where SAAR is applicable. It was, therefore,
suggested that the guidelines should clearly state this and, in case SAAR is
misused, then it should be amended to make that particular SAAR more
robust.

It is in this context that a related statement by the earlier committee under
DGIT (IT) came under criticism. It said :-

     While SAARs are promulgated to counter a specific abusive behavior,
     GAARs are used to support SAARs and to cover transactions that are
     not covered by SAARs. Under normal circumstances, where specific
     SAAR is applicable, GAAR will not be invoked. However, in an
     exceptional case of abusive behavior on the part of a taxpayer that
     might defeat a SAAR, as illustrated in Example No. 16 in Annexure E
     (or similar cases), GAAR could also be invoked.

It is a settled principle that, where a specific rule is available, a general rule
will not apply. SAAR normally covers a specific aspect or situation of tax
avoidance and provides a specific rule to deal with specific tax avoidance
schemes. For instance, transfer pricing regulation in respect of transactions
between associated enterprises ensures determination of taxable income
based on arm`s length price of such transactions. 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




                                                                                46
  (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 invoked.

In view of the above, the Committee recommends that that where
SAAR is applicable to a particular aspect/element, then GAAR shall
not be invoked to look into that aspect/element. Similarly where
anti-avoidance rules are provided in a tax treaty in the form of
limitation of benefit (as in the Singapore treaty) etc., the GAAR
provisions shall not apply overriding the treaty. If there is evidence
of violations of anti-avoidance provisions in the treaty, the treaty
should be revisited, but GAAR should not override the treaty.

3.20 Corresponding adjustments

Stakeholders submitted that, where adjustments are made to the income of
a party to an arrangement, then, corresponding adjustment should be
allowed: (i) in case of the same party; and (ii) in cases of other parties to
the arrangement.

In the Indian tax system, proceedings for a taxpayer for each assessment
year are separate and distinct. Hence, on the face of it, corresponding
adjustment or complete symmetry in the tax system is not feasible. There
can be the following three types of asymmetry -

(i) In the case of the same taxpayer in the same assessment year (for
instance, some expenditure may not be allowable under GAAR: then
corresponding income also may be made not taxable).

(ii) In the case of the same taxpayer in different assessment years (for
instance, in case of deferral of income not allowed under GAAR: then,
income offered by the taxpayer voluntarily in a subsequent year should not
be taxed).




                                                                           47
(iii) In the case of different taxpayers (for instance, recharacterization of
payment from income to dividend: corresponding adjustments would
potentially require different tax payers with different assessment years to be
compared at the same time).

The asymmetry mentioned at (i) and (ii) should be taken care of when
determining the consequences of an impermissible tax avoidance scheme as
indicated above.

 However, providing symmetry to situations at (iii) is not feasible.
Stakeholders expressed their view that, if by applying GAAR a payment
which has been claimed as deduction by one party to the arrangement is
disallowed, the tax liability of the recipient should be computed considering
as if such payment is never made and thus, such 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
arrangement, corresponding adjustment should be allowed in the
case of the same taxpayer in the same year as well as in different
years, if any. However, no relief by way of corresponding adjustment
should be allowed in the case of any other taxpayer.




                                                                            48
3.21 Implementation of onus on the Revenue authority

Stakeholders represented that adequate safeguards should be built in to
ensure that the Revenue discharge their onus effectively, by providing
detailed reasoning for claiming an arrangement to be an impermissible
avoidance arrangement rather than merely alleging an arrangement to be
an impermissible avoidance arrangement.

The onus of initiating and demonstrating that there is an impermissible
avoidance arrangement is indeed on the Revenue as has been clarified by
Govt. The onus of demonstrating that -

     (A)    there is an arrangement,

     (B)    the arrangement leads to a tax benefit`,

     (C)    the main purpose of the arrangement` is to obtain a tax
     benefit`, and

     (D)   the arrangement has one or more of the specified tainted
     elements,

is on the Revenue. (Note that this Committee already recommended above
that condition (C) above should be confined to main purpose` only as was
specified in the 2009 DTC, as also other elements to be included in the initial
intimation by the Assessing Officer (AO) to the assessee.

The AO is empowered to initiate GAAR proceedings only during the course of
pending assessment proceedings. He should collect all the relevant
information and documents from the taxpayer about an arrangement,
examine them, and should come to a finding based on facts of the case.
Thereafter, he should inform the taxpayer of his finding along with the
information he possesses and his detailed reasons thereof. He should not
simply ask the taxpayer as to why a particular arrangement should not be
treated as impermissible. In his letter to the taxpayer, he should specify in
addition to the components already recommended above-

     (i) what is the arrangement;

     (ii) why it results in any tax avoidance in the case of the taxpayer;

     (iii) what is the amount of likely tax benefit and how it is initially
     calculated;

                                                                             49
     (iv) why obtaining the tax benefit is the main purpose of the
     arrangement, with the detailed explanation thereof, including full and
     exhaustive background information in the possession of the Revenue so
     that it may be presumed that the Revenue has no additional
     information on the matter;

     (v) 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 one AP, which shall be
          situated in Delhi. Subsequently, the CBDT should review the
          number of Approving Panels required on the basis of the workload
          in FY 2014-15.

          (b)    The AP should comprise three members, of which two
          members should be of the level of Chief Commissioner of Income
          Tax and the third member should be an officer of the level of Joint
          Secretary or above from the Ministry of Law. All the members
          should be full time members.

                                                                           50
          (c)    The AP should be provided secretariat staff along with
          appropriate budgetary and infrastructure support by the CBDT.
          The secretariat should be headed by an officer of the level of
          Joint/Additional Commissioner of Income Tax.

There are three factors that are relevant for the effectiveness of the AP, i.e.
whether reference to the AP is binding or not; whether order/advice of AP is
binding on the Revenue; and if independence of the AP can be ensured by
including members from outside Govt. On the last issue, as the GAAR
provisions are subjective in nature, it is necessary to have a high level of
independence to ensure confidence of taxpayers.

The statute has already provided that reference to the AP is binding and its
order is also binding on the Revenue.

After taking into account the numerous representations made to the
present Committee, and with the objective of ensuring that the
objective of GAAR be deterrence rather than revenue, the Committee
recommends that ­

     (i)   The Approving Panel should consist of five members including
     Chairman;
     (ii)  The Chairman should be a retired judge of the High Court;
     (iii) Two members should be from outside Govt. and persons of
     eminence drawn from the fields of accountancy, economics or business,
     with knowledge of matters of income-tax; and
     (iv)  Two members should be Chief Commissioners of income tax; or
     one Chief Commissioner and one Commissioner.

The AP should be a permanent body with a secretariat. It should have a two
year term. In the first AP that is to be appointed, one Chief Commissioner
and one 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.



                                                                             51
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 consideration of GAAR, then subsequently it may not be feasible to
recover the amount from a non-resident in case an instance of impermissible
avoidance arrangement comes to light at a later stage. On the other hand,
stakeholders felt that invoking GAAR at the stage of withholding would
increase their compliance burden disproportionately and that there would be
undue delay in remittance. This would, in turn, make business processes
unworkable and prohibitive.

Concerns of both the Revenue and stakeholders are valid and, therefore, a
balanced approach needs to be adopted. Seeking approval from the AP in
every case of withholding tax may be a lengthy procedure. As the orders
under section 195(2) and 197 are only provisional in nature, in case the AO
invokes GAAR, the AO may dispose of the applications with prior approval of
his Commissioner.

However, in cases where the taxpayer submits an undertaking to pay the
taxes payable in India if GAAR is found applicable in respect of the
remittance being made, the AO will allow remittance to be made based on
the domestic law without considering the GAAR provisions. However, where
the taxpayer is not willing to give any satisfactory undertaking to the



                                                                           52
Revenue, the AO may pass a detailed reasoned order with prior approval of
the CIT if GAAR is applicable to the transaction.

In view of the above, the Committee recommends that, while
processing an application under section 195(2) or 197 of the Act
pertaining to the withholding of taxes, the assessing officer

   (i)      shall not invoke GAAR where the taxpayer submits a
            satisfactory undertaking to pay tax along with interest in
            case it is found that GAAR provisions are applicable in
            relation to the remittance during the course of
            assessment proceedings.
   (ii)     may invoke GAAR with the prior approval of his
            Commissioner in his detailed reasoned order u/s 195 (2)
            or 197, in case the taxpayer does not submit any
            satisfactory undertaking as mentioned above. .

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, an investor may exist at subsequent / upper levels, and may not
be a direct investor in the FII.

It was also stated that some FII`s are allowed to invest in unlisted securities
with prior permission. Clarification was sought by stakeholders if the
intention of the guidelines was to cover those cases as well.


                                                                             53
As it is the FII which is the unit for taxation in India, this Committee felt that
the intention of the guidelines should be to exclude all investors in portfolio
investments above the FII stage from the purview of GAAR.

In view of the above, the Committee recommends that ­

(i) where a Foreign Institutional Investor (FII) chooses not to take
any benefit under an agreement entered into by India under section
90 or 90A of the Act and subjects itself to tax in accordance with
domestic law provisions, then, the provisions of Chapter X-A shall
not apply to such FII;

(ii) Whether an FII chooses or does not chose to take a treaty
benefit, GAAR provisions would not be invoked in the case of a non-
resident who has invested, directly or indirectly, in the FII i.e. where
the investment of the non-resident has underlying assets as
investments made by the FII in India. However, this exemption to a
non-resident shall be available only in respect of listed securities
made by the FII in India.

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.



                                                                                54
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 like in other tax implementation instruments. A three
stage process for invoking GAAR with a national level panel is intended to
provide consistency and uniformity in the application of GAAR.
Nevertheless, there is indeed a significant trust deficiency, some of which
reflects the independence of interpretation of various statutes by AO`s across
the administration, against which taxpayers have little option to raise issues
except with considerable loss of time and financial resources. This problem
can be allayed only with appropriate training and guidance for AO`s to
ensure uniformity which is currently not ensured.

In view of the above, the Committee recommends that, 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 may also be perspicacious as indicated above, for Govt. to
postpone the implementation of GAAR for three years with an
immediate pre-announcement of the date to remove uncertainty
from the minds of stakeholders. A longer period of preparation
should ensure much needed training at the AO and Commissioner
levels. It would also enable taxpayers to plan for a change in the
anti-avoidance regime based on legitimate tax planning that reflects
a proper understanding of the new legislation and guidelines.

Further, it should be considered to make Large Taxpayer Units
(LTUs) compulsory for a specified class of taxpayers reflecting
international practice. Considering the high threshold of tax benefit
for invocation of GAAR, the majority of cases may come in LTU only.
Given the importance of such very large taxpayers, the Revenue
would need to be very analytical in its invocation and application of
GAAR.




                                                                            55
3.26       Reporting Requirement

In selected jurisdictions such as the UK, tax professionals are required to
report any tax avoidance scheme directly advised by them. This helps the
tax administration in the selection of cases for audit.

In India, taxpayers having a turnover of Rs 1 crore and above are required
to get their accounts audited by an accountant and to obtain a tax audit
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.




                                                                         56
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% deduction of profits earned from that unit in F.Y.
2021 -22 and subsequent years as per section 10AA of the Act. Is GAAR
applicable in such a case?

Interpretation:

There is an arrangement of setting up of a unit in SEZ which results into a
tax benefit. However, this is a case of tax mitigation where the tax payer is
taking advantage of a fiscal incentive offered to him by submitting to the
conditions and economic consequences of the provisions in the legislation
e.g., setting up the business unit in SEZ area. Hence, the Revenue would not
invoke GAAR as regards this arrangement.

Example 1A:

Facts:

In the above example 1, let us presume M/s India Chem Ltd. has another
unit for manufacturing chemicals in a non-SEZ area. It then diverts its
production from such manufacturing unit and shows the same as
manufactured in the tax exempt SEZ unit, while doing only process of
packaging there. Is GAAR applicable in such a case?

Interpretation:

This is a case of misrepresentation of facts by showing production of non-
SEZ unit as production of SEZ unit. Hence, this is an arrangement of tax
evasion and not tax avoidance.

                                                                           57
Tax evasion, being unlawful, can be dealt with directly by establishing
correct facts. GAAR provisions will not be invoked in such a case.



Example 1B

Facts:

In the above example 1A, let us presume that M/s India Chem Ltd. does not
show production of non-SEZ unit as a production of SEZ unit but transfers
the product of non-SEZ unit at a price lower than the fair market value and
does only some insignificant activity in SEZ unit. Thus, it is able to show
higher profits in SEZ unit than in non-SEZ unit, and consequently claims
higher deduction in computation of income. Can GAAR be invoked to deny
the tax benefit?

Interpretation:

As there is no misrepresentation of facts or false submissions, it is not a
case of tax evasion. The company has tried to take advantage of tax
provisions by diverting profits from non-SEZ unit to SEZ unit. This is not the
intention of the SEZ legislation. However, such tax avoidance is specifically
dealt with through transfer pricing regulations that deny tax benefits. Hence,
the Revenue would not invoke GAAR in such a case.

Example 1C

Facts:

In the above example 1B, let us presume, that both units in SEZ area (say
A) and non-SEZ area (say B) work independently. M/s India Chem Ltd.
started taking new export orders from existing 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

                                                                            58
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?


                 Subco A                    Subco B




         NTJ                    Holdco




         INDIA                   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. Accordingly, GAAR would not be
invoked in such a case.

Example -2A:

Facts:

In the above example 2, dividend is accumulated in Holdco for a number of
years and subsequently, Holdco is merged into Indco through a cross­border
merger. Can GAAR be invoked on the ground that the merger route has
been adopted to avoid payment of tax on dividend in India?




                                                                           59
Interpretation:

It is true that if Holdco declares dividends to Indco before merger, then,
such dividend would have been taxable in India. But the timing or
sequencing of an activity is a business choice available to the taxpayer.
Moreover, section 47 of the Act specifically exempts capital gains on cross
border merger of a foreign company into an Indian company.

Hence, GAAR cannot be invoked when taxpayer makes a choice about timing
or sequencing of an activity to deny a tax benefit granted by the statute.

Example -3:

Facts:

The merger of a loss making company into a profit making one results in
losses setting off profits, a lower net profit and lower tax liability for the
merged company. Would the losses be disallowed under GAAR?

Interpretation:

As regards setting off of losses, the provisions relating to merger and
amalgamation already contain specific anti-avoidance safeguards. Therefore,
GAAR would not be invoked when SAAR is applicable.

Example -3A:

Facts:

In the above example 3, let us presume, the profit making company merges
into a loss making one. This results in losses setting off profits, a lower net
profit and lower tax liability for both companies taken together. Can this be
examined under GAAR?

Interpretation:

In case of merger of profit making company with loss making company,
there is no specific anti-avoidance safeguards. However, since such merger
would be under the order of High Court, GAAR cannot be invoked as it falls
in the negative list (as recommended) for invoking GAAR as mentioned in
guidelines.




                                                                             60
Example -4:

Facts:

A choice is made by a company by acquiring an asset on lease over outright
purchase. The company claims deduction for lease rentals in case of
acquisition through lease rather than depreciation as in the case of purchase
of the asset. Would the lease rent payment, being higher than the
depreciation, be disallowed as expense under GAAR?

Interpretation:

GAAR provisions would not apply in this case as the           taxpayer merely
makes a selection out of the options available 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:

                                                                              61
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 dividend payment
as interest payment. The tainted element here is the abnormal manner in
which such a transaction is being carried out which would not be so in case
of a bonafide transaction (loan). Hence, GAAR provisions would be invoked
in the case of Indco to treat the arrangement as an impermissible avoidance
arrangement.

Consequently, in the case of Indco, the loan by X Ltd. would be treated as
equity for tax purposes; interest payment would not be allowed as deduction
as this would be re-characterized as dividend; and dividend distribution tax
(DDT) may be levied on the amount of payment made/credited to the
account of X Ltd. by way of claimed interest payment.

No corresponding adjustment would be allowed in the case of X Ltd. for
recharacterisation of payment received from Indco as dividend (which would
have been exempt from taxation).

Example 5B

Facts:

In the above example 5, let us assume, that

(i) X Ltd. is a banking institution in LTJ;

(ii) there is a closely held company Subco in LTJ which is a wholly owned
subsidiary of another closely held Indian company Indco;

(iii) Subco has reserves and, if it provides a loan to Indco, it may be treated
as deemed dividend under section 2(22)(e) of the Act.

(iv) Subco makes a term deposit with X Ltd. bank and X Ltd. bank based on
this security provides a back to back loan to Indco.

Say, India-LTJ tax treaty provides that interest payment to a LTJ banking
company is not taxable in India.

Can this be examined under GAAR?

                                                        Deposit
                                                                              62
                                                          Bank X Ltd.

      LTJ                      Subco



      INDIA                    Indco
                                                          Debt




Interpretation:

This is an arrangement whose main purpose is to bring money out of
reserves in Subco to India without payment of due taxes. The tax benefit is
saving of taxes on income to be received from Subco by way of dividend or
deemed dividend. The arrangement disguises the source of funds by routing
it through X Ltd. bank. X Ltd. bank may also be treated as an
accommodating party. Hence the arrangement shall be deemed to lack
commercial substance.

Consequently, in the case of Indco, the loan amount would be treated as
dividend income received from Subco to the extent reserves are available in
Subco; and no expense by way of interest would be allowed.

In the case of bank X Ltd, exemption from tax on interest under the DTAA
may not be allowed as X Ltd is not a beneficial owner of the interest,
provided the DTAA has anti-avoidance rule of beneficial ownership. If such
anti-avoidance 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.




                                                                         63
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 any.



Example 7

Facts:

Indco incorporates a Subco in a NTJ with equity of US$100. Subco gives a
loan of US$100 to another Indian company (X Ltd.) at the rate of 10% p.a.
X Ltd. 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?



         NTJ                    Subco
                                                     Debt


         INDIA
                                Indco                       X Ltd.

                                                                            64
Interpretation:

The arrangement appears to be to avoid payment of tax on interest income
by Indco in the case loan is directly provided by Indco to X Ltd. The
arrangement involves round tripping of funds even though the funds
emanating from Indco are not traced back to Indco in this case. Hence, the
arrangement may be deemed to lack commercial substance.

Consequently, in the case of Indco, Subco may be disregarded and the
interest income may be taxed in the hands of Indco.



Example -8:

Facts:

A large corporate group has created a service company to manage all its non
core activities. The service company then charges each company for the
services rendered on a cost plus basis. Can the mark up in the cost of
services be questioned using GAAR.

Interpretation:

There are specific anti avoidance provisions through transfer pricing
regulations as regards transactions among related parties. GAAR will not be
invoked in this case.




Example -9:

Facts:

 A company sets off losses in the stock market against gains which is aimed
at balancing the portfolio.




                                                                         65
Interpretation:

Sale/purchase through stock market transactions would not come under
GAAR provisions. Moreover, timing of a transaction by a taxpayer would not
be questioned under GAAR.



Example -10:                                                             Country F1 LTJ
Facts

                            Y Ltd.                100%
         Country
                                                                  A Ltd.
         C1
                                                         Debt
                                                                     49%

         INDIA
                        Z Ltd.              51%                 X Ltd.




(i)     Y Ltd. is a company incorporated in country C1. It is a non-resident in
       India.
(ii)   Z Ltd. is a company resident in India.
(iii) A Ltd. is a company incorporated in country F1 and it is a 100%
      subsidiary of Y Ltd.
(iv) A Ltd. and Z Ltd. form a joint venture company X Ltd. in India after the
     date of commencement of GAAR provisions. There is no other activity in
     A Ltd.
(v) The India-F1 tax treaty provides for non-taxation of capital gains in the
    source country and country F1 charges no capital gains tax in its
    domestic law.
(vi) A Ltd. is also designated as a permitted transferee of Y Ltd. Permitted
     transferee means that though shares are held by A Ltd, all rights of
     voting, management, right to sell etc., are vested in Y Ltd.
(vii) As per the joint venture agreement, 49% of X Ltd`s equity is allotted to
      A Ltd. and 51% is allotted to Z Ltd..



                                                                                          66
(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 shareholders of X Ltd. are being exercised by Y
Ltd instead of A Ltd, it again shows that A Ltd lacks commercial substance.
Hence, unless it is a case where Circular 789 relating Tax Residence
Certificate in the case of Mauritius, or Limitation of Benefits clause in India-
Singapore treaty is applicable, GAAR can be invoked.

Example -11:

Facts:

A Ltd. is incorporated in country F1 as a wholly owned subsidiary of
company Y Ltd. which is not a resident of F1 or of India. The India-F1 tax
treaty provides for non-taxation of capital gains in India (the source country)
and country F1 charges no capital gains tax in its domestic law. Some shares
of X Ltd., an Indian company, are acquired by A Ltd in the year after date of
coming into force of GAAR provisions. The entire funding for investment by A
Ltd. in X Ltd. was done by Y Ltd. These shares are subsequently disposed of
by A Ltd after 5 years. This results in capital gains which A Ltd. claims as not
being taxable in India by virtue of the India-F1 tax treaty. A Ltd. has not
made any other transaction during this period. Can GAAR be invoked?




                                                                              67
Interpretation:

This is an arrangement which has been created with the main purpose of
avoiding capital gains tax in India by routing investments through a
favourable jurisdiction. There is neither a commercial purpose nor
commercial substance in terms of business risks or cash flow to Y Ltd in
setting up A Ltd. It should be immaterial here whether A Ltd has office,
employee etc in country F1. Both the purpose test and tainted element tests
are satisfied for the purpose of invoking GAAR. Unless it is a case where
Circular 789 relating Tax Residence Certificate in the case of Mauritius, or
Limitation of Benefits clause in India-Singapore treaty is applicable, the
Revenue may invoke GAAR and consequently deny treaty benefit.


Example -12:

Facts:

An Indian company, X Ltd., is a closely held company and it is a subsidiary
of company Y Ltd. incorporated in country C1. X Ltd. was regularly
distributing dividends but stopped distributing dividends from 1.4.2003, the
date when DDT was introduced in India. X Ltd. allowed its reserves to grow
by not paying out dividends. As a result no DDT was paid by the company.
Subsequently, buyback of shares was offered by X Ltd. to its shareholder
company Y Ltd.
Y Ltd. paid taxes on the capital gains arising on buyback of shares at the
applicable 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:

                                                                          68
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 choice of a
company, which a company is entitled to exercise at any point of time. It
should be interpreted as incidental that the shareholder is entitled to a
treaty benefit which exempts capital gains, but it is subject to SAAR (i.e.
Limitation of Benefit clause). The decision of X Ltd. cannot be questioned
under GAAR.

Example -12B:

Facts:
In the above example 12, let us presume that there are three shareholders
of company X Ltd. i.e. Y Ltd. (resident of country C1), D Ltd. and E Ltd..
(resident of country C2). All three shareholders are associated enterprises.
DTAA with C2 provides India the right of taxation of capital gains as per
domestic law.
After GAAR coming into force, X Ltd. makes an offer of buy back of shares to
all its three shareholders. Only company Y Ltd. accepts that offer and other
shareholders declines. In the process, all accumulated reserves of X Ltd are
exhausted and Y Ltd. does not pay any tax in India.
Can this be questioned under GAAR?

Interpretation:
No dividends were distributed by X Ltd. since 1.4.2003, the day the DDT was
implemented. Subsequently X Ltd. obtained tax benefit by not declaring
dividend and passing this on as exempt capital gain in the hands of
connected company Y Ltd. The buyback of shares was accepted only by
company Y Ltd. and not by other shareholders companies D Ltd. and E Ltd.

                                                                            69
D Ltd and E Ltd would have invited capital gains tax by accepting such offer.
This appears to be a dubious method; at the same time, there may or may
not be genuine commercial reasons for D Ltd and E Ltd for not accepting the
buyback offer by X Ltd.

The Revenue may, therefore, examine the arrangement under GAAR to
ascertain the economic substance and main purpose of the arrangement.


Example -13:

Facts:

The shares of V Ltd., an asset owning Indian company, was held by another
Indian company X Ltd. X Ltd. was in turn held by two companies G Ltd. and
H Ltd., incorporated in country F2, a NTJ. The India-F2 tax treaty provides
for non-taxation of capital gains in the source country and country F2
charges no capital gains tax in its domestic law. X Ltd. was liquidated by
consent and without any Court Decree. This resulted in transfer of the
asset/shares from X Ltd., to G Ltd. and H Ltd. Subsequently companies G
Ltd and H Ltd sold the shares of V Ltd to A Ltd. which was incorporated in
F2. The companies G Ltd and H Ltd claimed benefit of tax treaty and the
resultant gains from the transaction are claimed to be not taxable. Can
GAAR be invoked to deny treaty benefit?




                         G Ltd.       H Ltd.
         Country
                                                           A Ltd.
         F 2 (NTJ)



         INDIA
                      V Ltd.                   X Ltd.
                                     100%




                                                                           70
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 its assets
through proper sequencing of transactions.
The Revenue cannot invoke GAAR as regards this arrangement.


Example -14:

Facts

A foreign bank J Ltd.`s branch in India arranges loan for an Indian borrower
from another branch of J located in a third country. The loan is later
assigned to J`s subsidiary in country F 3. The India-F3 Treaty provides no
source based withholding tax on interest to a bank carrying out bona-fide
business. This, therefore, results in no withholding tax on interest payment
out of India.

Interpretation:

 The above arrangement of finalizing the loan from one country and
assigning it to another country has been made mainly to avoid withholding
tax provisions on the basis that there is no withholding provision on interest
earned by F3 residents under the India-F3 treaty. There is a tainted element
being abuse of the treaty and thus may be treated as an impermissible

                                                                            71
avoidance arrangement. The Revenue may invoke GAAR with regard to this
arrangement.



Example -15:

Facts                             A Ltd.


                          K Ltd.           L Ltd.
        Country
        F4
                          9.95%              9.95%


        INDIA
                                    Indco
                                    Ltd.

Under the provisions of a tax treaty between India and country F4, any
capital gains arising from the sale of shares of Indco, an Indian company
would be taxable only in F4 if the transferor is a resident of F4 except where
the transferor holds more than 10% interest in the capital stock of Indco. A
company, A Ltd., being resident in F4, makes an investment in Indco
through two wholly owned subsidiaries (K Ltd. and L Ltd.) located in F4.
Each subsidiary holds 9.95% shareholding in the Indian Company, the total
adding to 19.9% of equity of Indco. The subsidiaries sell the shares of Indco
and claim exemption as each is holding less than 10% equity shares in the
Indian company. Can GAAR be invoked to deny treaty benefit?

Interpretation:

The above arrangement of splitting the investment through two subsidiaries
appears to be with the intention of obtaining tax benefit under the treaty.
Further, there appears to be no commercial substance in creating two
subsidiaries as they do not change the economic condition of investor A Ltd.
in any manner (i.e on business risks or cash flow), and reveals a tainted
element of abuse of tax laws. Hence, the arrangement would be treated as
an impermissible avoidance arrangement by invoking GAAR. Consequently,

                                                                            72
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:

         Country                 M Ltd.
         C1



         Country                  A Ltd.
         F5



         INDIA
                                Z Ltd.

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/- as annual operating business expenses exceeding the
limit prescribed therein. Can GAAR be invoked when Limitation of Benefit
clause is satisfied?


                                                                              73
Interpretation:

As A Ltd. has satisfied the Limitation of Benefit (SAAR) conditions, it cannot
be treated as a shell/conduit company. Hence GAAR cannot be invoked on
the ground of A Ltd. being a conduit company or that it lacks commercial
substance.



Example -17:

Facts:

Z Ltd., an Indian company, is in the business of import and export of certain
goods. It purchases goods from Country P and sells the same in country Q.
It sets up a subsidiary in Country A ­ a zero / low tax jurisdiction. The
director of Z Ltd. finalizes the contracts in India but shows the
documentation of the purchase and sale in Country A. The day to day
management operations are carried out in India. The goods move from P
directly to Q. The transactions are recorded in the books of subsidiary in
country A, where the profits are tax exempt. Can GAAR be invoked?

Interpretation:

The above facts reflect the following possibilities:

(A) Z Ltd. misrepresents the facts by showing on paper that everything is
done outside India and therefore, nothing is taxable in India. This would be a
case of tax evasion and not GAAR; or

(B) Z Ltd. represents that certain operations relating to A, its subsidiary, are
carried out in India but it is not taxable under the relevant DTAA as these
operations do not constitute a permanent establishment (PE) in India. This is
not a case of tax avoidance but of determination of facts to ascertain
whether there is a PE or not.

Again, the investigation should reveal if it is a case of correct reporting of
facts or a mis-representation. If the latter, it would be tax evasion. Further,
if any activity is being carried out by Z Ltd for A Ltd, then Z Ltd is required
to be compensated at arm`s length price which would be covered by specific
anti-avoidance rules. Hence, it is not a fit case for invoking GAAR.



                                                                              74
Example -18:

Facts:

A company A in country F6, a company B in country F7 and a company
C in country F8 pool their resources and form a special purpose vehicle
(SPV) as a company N situated in country F1 which has a provision of
residence based taxation of capital gains in its tax treaty with India.
N further invests the funds in equities in India and earns capital gains. The
taxpayer claims that ­

(i) as SPV, a 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

                                                                                75
employer company. The preferential shares are purchased by a connected
company of R, or are redeemable at a premium (which is pre-decided with
the employer) that reflects a portion of the employee`s annual salary or
bonus, after a period of one year. The employee thus receives the income as
long term capital gain instead of salary and saves in taxes. Can GAAR be
invoked?

Interpretation:

Investigation will reveal if tax avoidance is embedded in the arrangement. If
the employee has been given the option of taking salary or bonus in the
form of shares, then there is a risk attached to it. In this case, there is no
tax avoidance.

However, if every employee`s remuneration package comprises a mix of
shares and salary in a fixed proportion, then the implications are different.

In the latter case, the acquisition of the preferential shares becomes part of
an arrangement designed to avoid the tax that would have been required to
be paid on salary. The main purpose of the arrangement is to obtain the tax
benefit. The tainted elements are misuse of the tax provisions and the
arrangement being not for bona fide purposes. The Revenue would invoke
GAAR with regard to this arrangement and consequently, in the case of the
employee, capital gains would be recharcterised as salary.



Example -20:

Facts:

Company S had a disputed claim with Company T. S transferred its
actionable claims against T for an amount which was low, say, for example,
10% of the value of the actionable claim against T to a connected concern U
by way of a transfer instrument. U transferred such claim to company V, and
company V further gifted it to company W, another connected concern of S.
Upon redemption of such actionable claims, W shows it as a capital receipt
and claims exemption as not being in the nature of revenue receipt. Can
GAAR be invoked?




                                                                            76
Interpretation:

The transfer of actionable claims in the manner as detailed above to a
connected concern appears to be dubious in nature if the same is not at
arm`s length price. The income in the instant case belongs to S. The
Revenue would invoke GAAR as regards this arrangement.


Example -21:

Facts:

Company X borrowed money from Company Y and used it to buy shares in
three 100% subsidiary companies of X. Though the fair market value per
share was Rs.100, X paid Rs. 600. The amount received by the said
subsidiary companies was transferred back to another company connected
to Y. The said shares were sold by X for Rs. 100/5 each and a short-term
capital 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$ 100million. The
payment has been split in the following parts as per separate agreements

                                                                          77
(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 equipment etc (not taxable as no
role is played by any PE in India. There are not subject to import duty)

(iii) US$ 20 million for local supplies and installation charges (taxable on net
income basis)

It is found that the fair market value of offshore design is about USD 30
million; therefore it is under invoiced. On the other hand, offshore supplies
were over invoiced. The arrangement resulted in significant tax benefit to
the taxpayer. Can GAAR be invoked in such a case?



Interpretation:

The allocation of price to different parts of the contract has been decided in
such a manner as to reduce tax liability of the foreign company in India.
Both conditions for declaring an arrangement as impermissible are satisfied.
(1) The main purpose of this arrangement is to obtain tax benefit; and
(2) the transactions are not at arm`s length. Consequently, GAAR may be
invoked and prices would be reallocated. However, determination of arm`s
length price should be based on transfer pricing regulations under the Act.



Example 23:

Facts:

A company A Ltd enters into a ready forward contract with B Ltd whereby A
Ltd sells its some unlisted securities to M/s B Ltd for a price of Rs 1000 on
1st Jan 2020 and on 1st Jan 2021, the company A Ltd purchases the same
unlisted securities for Rs 1100 as agreed in advance. The forward contract
price was based on a rate of return of 10% p.a.

B Ltd claims the gain of Rs 100 as long term capital gains which are not
taxable at the marginal rate of 30%.

Can GAAR be invoked in this case?


                                                                              78
Interpretation

The ready forward contract and fixation of price based on the rate of interest
clearly suggest that it was given a form of purchase and sale of goods but in
fact it was a financing arrangement. The sole purpose of the arrangement is
to obtain a tax benefit. The substance or effect of the arrangement as a
whole, is inconsistent with the form of its individual steps. Thus, it may be
deemed to lack commercial substance. Hence, GAAR may be invoked to
recharacterise 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 1 st 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 an investment of Rs 1 crore in shares of a
listed company on 1st Jan 2020. After a year, the prices go up and fair
market value of shares becomes Rs 11 crore. If A Ltd sells these shares, the


                                                                            79
long term capital gains of Rs 10 crore would be exempt but it would be liable
to tax under MAT @ 20%.

A Ltd forms a partnership firm with another person with nominal
partnership. It transfers its shares in the firm at a cost price. No capital gain
arises as per section 45 of the Act. After a year, the firm sells these shares
and realises the gains of Rs 10 crore which is exempt from taxation and no
MAT is payable. Subsequently, the firm is dissolved and share of A Ltd in
the partnership firm is transferred back along with profits, which is exempt
from tax under the Act.

Can GAAR be invoked in this case?

Interpretation

The only purpose of forming a partnership and transferring assets to such
firm and selling the shares is to save tax from MAT liability of A Ltd. Further,
there is no commercial substance in the formation of the partnership as it
does alter the economic position of A Ltd in terms of business risks or cash
flow. Moreover, the entire exercise is carried out in an abnormal manner.
Even holding of shares by the partnership firm for a year or more is no
significant economic risk to the company. Hence, GAAR may be invoked and
the partnership firm may be disregarded and capital gains may be taxed
under MAT in the hands of A Ltd.



Example 25:

Facts:

M/s Global Architects Inc is a company incorporated in country F1. It is
engaged in the business of providing architectural design services all over
the world. It receives an offer from Lovely Resorts Pvt Ltd, an Indian
company, for design and development of resorts all over India.

India-F1 tax treaty provides that architectural services are technical services
and payment for the same to a company may be taxed in India. However, if
such professional services are provided by a firm or individual, then payment
for such services are taxable only if the firm has a fixed base in India or stay
of partners/ employees in India exceed 180 days.

                                                                               80
M/s Global Architects Inc forms a partnership firm with a third party
(director of the company) having only a nominal share in the F1. The firm
enters into an agreement to carry out the services in India. The company
seconded its trained manpower to the firm.

Thus, the partnership 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 property directly to the third party). Soon after, the related
company Y Ltd. transfers the property to the third party at fair market value
and sets off the resulting capital gains with its carried forward capital loss.

Interpretation

GAAR may be invoked in this situation since there is no commercial
substance in first transferring the property to the related company at less
than fair market value (i.e. at a non-arm`s length price) followed by transfer
of that property to third party by the related company. However, GAAR may
not be invoked if the property is transferred by related company after a gap
of reasonable time limit after the acquisition from assessee as that would
                                                                              81
reflect that main purpose of the arrangement was not to obtain tax benefit.
This would comprise a matter of GAAR query.

Example 27:

Facts:

An Indian holding company Holdco borrows Rs. 10 crore for acquisition of
shares of Subco which then became subsidiary of Holdco. Holdco and Subco
amalgamate so that the interest payable on the monies borrowed to acquire
the shares can be deducted in computing the income from the business of
the amalgamated company.

Interpretation

The borrowing by Holdco followed by the amalgamation by Subco is not
abusive and GAAR would not apply in the case of merger which is carried out
under the orders of High Court.




                                                                         82
             Selected List of Abbreviations



SEZ      Special Economic Zone
Indco    Indian Company
X Ltd.   Another Indian Company
Subco    Subsidiary Company
CFC      Controlled Foreign Company
NTJ      No tax jurisdiction
LTJ      Low tax jurisdiction
DDT      Dividend distribution tax




                                              83
Annexe 2. Meetings of GAAR Committee with Stakeholders.

                     Chambers of Commerce and Industry

Date &Time            Invitee                   Contact Person
31st July, 12         FICCI                     Mr. Batra, Mr.Kanoria
11 a.m. 1.00 p.m.
6th Aug. 12           CII                       Mr. Jairaj Purandre,
1 a.m.to 1.00 p.m.                              Adi Godrej, Marut Sen Gupta,
                                                Sunil Munjal
6th Aug. 12           ASIFMA                    Mr. Nayak
3 p.m. to 5 p.m.
7th Aug. 12           IVCA                      Mr. Swaroop
11 a.m.to 1 p.m.
7th Aug. 12           ASSOCHAM                  Mr. Rawat, Mr. Ved Jain
2p.m. to 4 p.m.
14th Aug. 12          Chamber of Tax            Mr. Vipul B Joshi
2 p.m. to 4 p.m.      Consultants
17th Aug. 12          American Chambers of      Mr. Ajay Singha, ED,
11 a.m. 12 noon       commerce                  Ms. Madhvi Kataria
17th Aug. 12          ICC                       Mr. Mukesh Butani
12 noon to 2 p.m.

17th Aug. 12          Cellular Operators of     Mr. Sarat Chandra
2.30 p.m. to 3.30     India
p.m.
17th Aug. 12          All India Federation of   Mr.Wadhwa
3.30 p.m. to5.30      Tax Practitioners
p.m.
18th Aug. 12          Bangalore Chambers of     Mr. Sekar
 12 noon              Commerce


                                 Tax Advisory firms
Date &Time            Invitee                   Contact Person
20th July, 12         KPMG                      Mr. Dinesh Kanabar
11 a.m.to1 p.m.
18thAug. 12           KPMG                      Mr.Dinesh Kanabar
11 a.m. to
20th July,12          PWC                       Mr.Vijay Mathur
3 p.m.to 5 p.m.
31st July, 12         PWC                       Mr.Vijay Mathur
3 p.m.to 5 p.m.
13th Aug. 12          Deloitte                  Mr. Sekar
11 a.m. to 1 p.m.
13th Aug. 12          Nishith Desai & Co.       Mr. Nisith Desai
3 p.m.to5 p.m.

                                                                               84
14th Aug. 12       E&Y                      Mr. Satya Poddar
11 a.m.to 1 p.m.


                                 Industry

Date &Time         Invitee                  Contact Person
16th Aug. 12       Mr.Bajoria,Kolkata

13th Aug. 12       TCS                      Mr.S. Ramadorai,
9.45 a.m. to 11                             Vice Chairman
a.m.
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
  th
13 Aug. 12         Shri Yashwant Sinha      Chairman, Parliamentary Standing
5 p.m.                                      Committee on Finance

6th Aug. 12        Shri Montek Singh        Deputy Chairman, Planning
5.30 p.m.          Ahluwalia                Commission.




                                                                          85
       Annexe 3. Documents presented to GAAR Committee

S.No. Letter/   Date          Name of the          Subject
      Slide/                  representative
      Report

                    CHAMBERS OF COMMERCE AND INDUSTRY
1     Letter    02.08.2012   ASIFMA         Application of indirect transfer
                                            taxation rules to portfolio
                                            investments.
2.    Letter    02.08.2012   ASIFMA         ASIFMA/CMTC Submission Letters ­
                                            GAAR Guidelines ­ 6 August 2012
                                            Meeting.
3.    Letter    10.08.2012   ASIFMA         ASIFMA / CMTC Submission letter ­
                                            Indirect Transfer Taxation Rules :
                                            Application to Intra Group
                                            Restructuring.

4.    Letter    07.08.2012    US India Business
                              Council
5.    Letter    11.08.2012    The Chamber of       Suggestions on Draft guidelines on
                              Tax Consultants      GAAR.
6.    Letter    14.08.2012    Dr. Arbind Prasad,   Comments / Suggestions on Draft
                              Director General,    Guidelines on GAAR.
                              FICCI
7.    Letter    17.08.2012    International        Review of taxability of indirect
                              Chamber of           transfer`.
                              Commerce
8.    Letter    18.08.2012    Bangalore Chamber
                              of Industry &
                              Commerce
9.    Letter    18.08.2012    Bangalore Chamber    BCIC Representation on the
                              of Industry &        Application of GAAR.
                              Commerce
10.   Letter    22.08.2012    Mukesh Butani,       Recommendation for formulation of
                              Vice Chair, ICC      guidelines for GAAR and taxation of
                              Taxation             indirect transfer of capital assets
                              Commission, Paris    situated in India.
11.   Mail      23.08.2012    Mukesh Butani        Review of GAAR guidelines-key
                                                   recommendations.
12.   Letter/   27.08.2012    J.K.Batra, FICCI     GAAR-Clarifications on points.
      Mail
13.   Slide                   Indian Mobile        Comments/Suggestions on Draft
                              Telecom Industry     Guidelines regarding implementation
                                                   of GAAR.
14.   Slide                   AMCHAM India         Draft guidelines on GAAR and
                                                   Taxability of Indirect Transfer of

                                                                                      86
                                                     Assets ­
                                                     Issues and Recommendations.
15    Letter                     Bombay Chamber      Memorandum on Draft Guidelines ­
                                 of Commerce and     July 2012
                                 Industry
16    Letter                     Khaitan & Co.        Draft Guidelines on GAAR dated 28th
                                                      June 2012 ­ some
                                                      suggestions/Comments
17    Letter                     Indian Broadcasting Recommendations
                                 Foundation(IBF)
18    Letter   19th July 2012    United States        Comments on the proposed draft
                                 Council for          GAAR guidelines
                                 International
                                 Business(USCIB)
19    Letter   20th July 2012    Alternative          Comments on the Draft guidelines for
                                 Investment           implementation of GAAR provisions.
                                 Management
                                 Association(aima)
20    Letter                     ALSTOM               Comments on Draft GAAR Guidelines
21    Letter   25.07.2012        Indian Private       Various representations on GAAR
                                 Equity & Venture
                                 Capital
                                 Association(IVCA)
22    Letter   03.08.2012        Cellular Operators   Representation on draft guidelines
                                 Association of India issued on implementation of GAAR in
                                                      India.
23    Letter   31.07.2012        International Fiscal Submission to the Expert Committee
                                 Association(Singap   on GAAR
                                 ore Branch)
24    Letter   3.04.2012         Investment           Finance Bill provisions that could
                                 Company              impact foreign investors negatively.
                                 Institute(ICI
                                 Global)
25    Letter   17.08.2012        International        Review of GAAR Guidelines.
                                 Chamber of
                                 Commerce
26    Report   1/08/2012         Srinidh              Issues in GAAR
27    Letter   30th July, 2012   European Fund and General Anti Avoidance
                                 Asset Management Rules(GAAR`) Guidelines ­
                                 Association(efama) 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       Certain amendments proposed in
                                 PMO                  Finance bill dated 12/04/2012
                                 Tax Advisory Firms
30.   Letter   31.07.2012        PWC                  Recommendation on Draft guidelines

                                                                                   87
                                                    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 of the
                                                    GAAR.
32.   Slide                  Ernst & Young          Views on GAAR Guidelines.

33.   Report    August`12    Ernst & Young          Memorandum on Draft GAAR
                                                    Guidelines.
34.   Report    August`12    Ernst & Young          Memorandum on Draft GAAR
                                                    Guidelines.
35.   Slide     17.08.2012   Ernst & Young          Representation on retrospective
                                                    amendments made by Finance Act
                                                    2012.
36.   Slide     August`12    Ernst & Young          Views on Indirect transfer provisions.
37.   Report    August`12    Ernst & Young          Views on Indirect transfer provisions.
38.   Letter/   27.08.2012   Sh. Satya Poddar,      Submission from Coalition on
      Mail                   Ernst & Young          International Taxation in India.
39.   Letter    13.08.2012   Nishith Desai          Comments on Draft guidelines on
                             Associates             GAAR.
40.   Slide     13.08.2012   Nishith Desai          Comments on Draft GAAR Guidelines.
                             Associates
41.   Slide     13.08.2012   Nishith Desai          Comments on Indirect Transfer
                             Associates             Provisions.
42.   Letter    13.08.2012   Nishith Desai          Comments on indirect transfer
                             Associates             provisions.
43.   Slide                  Nishith Desai          Implement GAAR only once economy
                             Associates             stabilizes.
44.   Report                 Nishith Desai          GAAR Legislation, Administrative
                             Associates             Guidance & Taxpayer Rights Global
                                                    Practices ­ Submissions to Expert
                                                    Committee on GAAR
45.   Slide     13.08.2012   Deloitte Haskins &     GAAR and Retrospective
                             Sells                  Amendments ­ Recommendations.
46.   Report                 Deloitte Haskins &     General Anti-Avoidance Rules ­
                             Sells                  India and International perspective.
47.   Report    24.08.2012   Deloitte Haskins &     GAAR and taxability of indirect
                             Sells                  transfers ­ Note on some of the key
                                                    issues.
48.   Letter    16.08.2012   Indian Venture         Representation on GAAR and Indirect
                             Capital Association    transfer provisions of the Income-tax
                             of India               Act, 1961.
49.   Letter    17.08.2012   All India Federation   Review of draft guidelines on GAAR
                             of Tax Practitioners   and Retrospective Amendments ­
                             Direct Taxes           Submissions of AIFTP.

                                                                                   88
                                 Representation
                                 Committee
50.   Letter/   27.08.2012       Mukesh Butani,BMR       1. Review of taxability of indirect
      Mail                       legal                      transfer`.
                                                         2. Recommendation for
                                                            formulation of revised
                                                            guidelines-GAAR.
                                                         3. Review of GAAR guidelines-
                                                            Key recommendation.
51.   Letter/   27.08.2012       Sh. Sunil Jain,      Inputs on GAAR.
      Mail                       Partner J. Sagar
                                 Associates
52.   Letter/   27.08.2012       Bombay Chartered     Representation on Draft guidelines
      Mail                       Accountant Society   of GAAR in terms of section 101 of
                                                      the IT Act, 1961.
53.   Slide     --               KPMG                 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    Note on First Draft Guidelines
                                 Sudha Shah           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         Comments
                                 Verma
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
                                                      14.08.2012.

                                                                                     89
Annexe 4. Country Experiences with GAAR

In order to ascertain the type of arrangements which may be targeted under
GAAR, a number of countries have provided GAAR in their taxing statutes as
discussed below.

United Kingdom

Currently, there are no GAAR like provisions in UK Statutes. Since the
process of introducing GAAR is ongoing in the UK, it is pertinent to present
at the beginning, UK`s ongoing experience that should provide useful
indicators for India.

For some years, HMRC, the UK tax department7 had expressed concern with
tax avoidance. In June 2010, a consultation document contemplated a
GAAR2. After public responses, HMRC commissioned Graham Aaronson to
provide a Report on GAAR. The Report indicated the need for a GAAR but
suggested eschewing a broad spectrum approach that would hurt
responsible tax planning.

The relevant parts of the draft GAAR are reproduced as under ­

       2. Section 8 applies to counteract abnormal arrangements (see
       sections 6 and 7) which, but for this Part, would achieve an abusive
       tax result from the application to the arrangements of the provisions
       of the Acts, and which are contrived to achieve such a result.

       For the purposes of this Part an abusive tax result is an
       advantageous tax result (see section 15) which would be achieved by
       an arrangement that is neither reasonable tax planning (see section 4)
       nor an arrangement without tax intent.

       For the purposes of this Part an abnormal arrangement is contrived
       to achieve an abusive tax result if, and only if, the inclusion of any
       abnormal feature (see sections 6 and 7) can reasonably be


7
 The direct tax and indirect tax departments were consolidated into HM Revenue and Customs in 2006 after a
major Review.

                                                                                                             90
considered to have as its sole purpose, or as one of its main purposes,
the achievement of an abusive tax result by ­
(a) avoiding the application of particular provisions of the Acts, or
(b) exploiting the application of particular provisions of the Acts, or
(c) exploiting inconsistencies in the application of provisions of the
Acts, or
(d) exploiting perceived shortcomings in the provisions of the Acts.


Abnormal arrangements and abnormal features

6. (1) For the purposes of this Part an abnormal arrangement is an
arrangement which, considered objectively ­

(a) viewed as a whole, and having regard to all the circumstances, has
no significant purpose apart from achieving an abusive tax result
(so that in the context of such an arrangement all of its features shall
be regarded as abnormal); or

(b) has features which would not be in the arrangement if it did not
also have as its sole purpose, or as one of its main 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;

                                                                      91
      (f) that the arrangement omits a person, a transaction, a document or
     significant terms in a document, which would not be omitted if the
     arrangement were not designed to achieve an abusive tax result; and

     (g) that the arrangement includes the location of an asset or a
     transaction, or of the place of residence of a person, which would not
     be so located if the arrangement were not designed to achieve an
     abusive tax result.

Thus, the proposed GAAR has two primary elements i.e. abnormal
arrangement having abnormal features, and abusive tax results.

The Report also suggested that doubts be addressed quickly through
guidance notes along with GAAR.

The Report also recommended that an independent advisory panel with
majority non-HMRC members be set up to give its view on transactions on
which GAAR is sought to be applied.

The Report suggested that the opinion should be considered by an appellate
authority while deciding cases, and that its view be published as guidance.

UK`s 2012 Budget accepted the Report`s recommendations, converting the
General Anti Avoidance Rule to General Anti Abuse Rule.

The UK Government announced that there would be a year`s consultation
before bringing the legislation through the 2013 Finance Bill. In May 2012,
HMRC issued a consultation document laying down the draft GAAR provisions
reflecting mainly the Aaronson Report. It elaborates on (i) certain
safeguards before application of GAAR; (ii) the appropriateness of each draft
GAAR provision; (iii) examples of arrangements under the scope of GAAR;
and (iv) HMRC`s position on GAAR`s overriding tax treaties. The crux here is
the elaborate consultation process to assess and incorporate where deemed
right, the views of stakeholders.

It is pertinent to mention the role of safeguards. The first safeguard
indicates that transactions that are outrightly unreasonable would come
under GAAR while admitting that, given expected complexity, unanimous
agreement on reasonableness of a transaction may be difficult to arrive at. If
so, the appellate authority would come in.



                                                                            92
The second safeguard protects arrangements that were not conceived solely
for tax benefit and requires the beneficiary to prove that the transaction was
not planned or designed solely for a favourable tax outcome. The Indian
draft GAAR proposes that a transaction could become an impermissible
avoidance arrangement even if a step in it benefits the taxpayer. This
overarching Indian provision conveys a contrary position to the first UK
safeguard that seems to limit the scope of GAAR; and the second safeguard
is also milder than the implications of the Indian provision.

The third safeguard 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.

Australia8

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 need to be considered in determining an answer to
first question include:

           the overall practical financial consequences of the scheme and other
           outcomes of the scheme, and


8
    Australian Taxation Office, "Part-IVA: the general anti-avoidance rule for income tax", Guide NAT 14332-12.2005

                                                                                                                 93
     whether the same outcomes (other than the tax advantage) could be
     achieved in a more straightforward, ordinary or convenient way than
     the way in which they were achieved by the scheme.

In some cases, it may even be that no economic activity would have been
carried out by the taxpayer if the scheme had not been in place. This is
particularly likely to be true if the scheme mainly results in a taxpayer
artificially obtaining a tax deduction.

The eight matters to be considered for determining answer to second
question are:

1. the manner in which the scheme was entered into or carried out;

2. the form and substance of the scheme;

3. the time at which the scheme was entered into and the length of the
period during which the scheme was carried out;

4. the result achieved by the scheme under the income tax law if Part IVA
did not apply;

5. any change in the financial position of the relevant taxpayer that has
resulted, will result, or may reasonably be expected to result from the
scheme;

6. any change in the financial position of any person who has, or has had,
any connection (whether of a business, family or other nature) with the
relevant taxpayer, that has resulted, will result, or may reasonably be
expected to result, from the scheme;

7. any other consequences for the relevant taxpayer, or for any person
referred to in matter 6 (above) of the scheme having been entered into or
carried out; and

8. the nature of any connection (whether of a business, family or other
nature) between the relevant taxpayer and any person referred to in matter
6.

Answering this purpose question will generally be the most critical step in
determining whether Part IVA applies.



                                                                         94
United States9

There is no provision like GAAR in the US statutes. US courts have applied
five main common law doctrines to deny taxpayers desired tax benefits,
i.e. (1) economic substance; (2) substance over form; (3) step
transaction; (4) business purpose; and (5) sham transaction. On 30
March 2010, the economic substance doctrine was codified in US law
through insertion of section 7701(o) in the Internal Revenue Code (IRC).
The economic substance doctrine applies to transactions entered
into 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 from federal income tax effects) and the second requires the
taxpayer to have a substantial purpose (apart from federal income tax
effects) for entering into such a transaction. From this definition, it can be
concluded that a conjunctive examination is required. Accordingly, there
must be an inquiry regarding the objective effects of the transaction on the

9
 Bulletin for International Taxation by IBFD, "An assessment of Anti Tax Avoidance Doctrines in United States and
European Union", March 2012, page 153.

                                                                                                                95
taxpayer`s financial position as well as an inquiry regarding the taxpayer`s
subjective motives for engaging in the transaction. What it also implies
for India is that GAAR, if introduced, has to be applied to very
selective cases, possibly above a high threshold, so that it can act as
an anti-deterrent instrument, rather than a revenue generating
device.

Canada10

Subsection 245(2) of the Income-tax Act states that where a transaction is
an avoidance transaction, the tax consequences to a person shall be
determined as is reasonable in the circumstances in order to deny a tax
benefit that would result from that transaction or from a series of
transactions that includes that transaction.

An avoidance transaction is defined in subsection 245(3) as a single
transaction or one that is a part of a series of transactions where the single
transaction or the series results directly or indirectly in a tax benefit, unless
the transaction is carried out primarily for bona fide purposes other than to
obtain the tax benefit.

"Tax benefit" is defined to mean a reduction, avoidance or deferral of tax or
other amount payable or an increase in a refund of tax or other amount
under the Act.

Subsection 245(4) provides that the rule in subsection (2) does not apply to
a transaction where it may reasonably be considered that the transaction
would not result directly or indirectly in a misuse of the provisions of the Act
or an abuse having regard to the provisions of the Act read as a whole.

Thus, in Canada the GAAR provisions are applied to a transaction which
results into a tax benefit to a party, unless the transaction is carried out for
bona fide purposes or it is not a misuse of the provisions of the Act.
Nevertheless, such application has been very selective, being ......... over a
period of ........years ( from 200 .. to 2011).




10
     Guidance Note (IC88- 2, Oct 21, 1988) on General Anti-Avoidance Rule section 245 of the Income-tax Act.

                                                                                                               96
South Africa

In 2006, the Income Tax Act, 1962 was amended to introduce the general
anti-avoidance rule (GAAR) which applies to impermissible avoidance
arrangements.

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-arms length rights or obligations

Test 4: Abuse or misuse of the provisions of the Income Tax Act

The so-called tainted elements or tainted element tests, any one or more of
which must be present in an arrangement, in a context other than
business are:

Test 1: Entered into or carried out by an abnormal means or manner, not
used for a bona fide purpose other than obtaining a tax benefit



                                                                             97
Test 2: Lack of commercial substance; which consists of objective indicative
tests and an objective general or presumptive test

Test 3: Creation of non-arms length rights or obligations

Test 4: Abuse or misuse of the provisions of the Income Tax Act.




                                                                          98
                                                                   Annexe 5.

              Overview of India's Specific Anti-Avoidance Rules

A commonly used measure to prevent tax avoidance is to introduce specific
tax avoidance rules (SAAR) in the tax statutes. The SAAR targets known tax
planning schemes which are commonly used by taxpayers but are not
acceptable owing to misuse or abuse of tax laws, or they result in a
consequence unintended in the law.

In Income-tax Act, 1961, the following may be considered specific examples
of SAAR ­

     (i)         Section 40A(2)- Expenses or payments are not deductible in
                 certain circumstances involving related parties.
     (ii)        Section 80-IA(8)- Market value concept to be followed in
                 relation to transactions with tax exempt entities.
     (iii)       Sections 92 to 92F- Transfer Pricing Regulations applicable to
                 international transactions, which have also been made
                 applicable to domestic transactions by the Finance Act, 2012.
     (iv)        Section 93- Avoidance of Income-tax by transfer of income to
                 non-residents through transfer of assets, rights or interest.
     (v)         Section 94- Avoidance of tax by certain transactions in
                 securities.
     (vi)        Section 94A- Transactions with persons located in notified
                 jurisdictions.
     (vii)       Section 2(22)(e)- Deemed dividend.
     (viii)      40(a)(i) and (ia)- Disallowance of expenses for non deduction
                 of tax at source.
     (ix)        Section 9- Scope of income deemed to accrue or arise in
                 India. Vide the Finance Act, 2012 its scope has been widened
                 to overturn the Supreme Court`s ruling in Vodafone and some
                 other cases.
     (x)         Section 43(1)- Explanations 1 to 13- Determination of actual
                 cost of assets ignoring agreements etc. in certain cases.

Tax treaties also provide certain anti-avoidance rules which may be
considered to be SAAR. For instance, Limitation of Benefit (LOB) Clause and
concept of beneficial ownership.



                                                                             99
                                                   Annexe-6

                     Tax Rate on Capital Gains



     ASIA PACIFIC

Australia              0%
Hong Kong              0%
Indonesia              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:
      Nonresident corporate investor
      Portfolio investments in listed securities
      No business income
      No real estate
      No tax treaty

                                                         100
                                                                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     Cumulative   Share in    Cumulative   Maximum
       Taxes (in         Number of    total       share in     amount of
       rupees)           Corporate    number of   Total        Average Tax
                         Assessees    Corporate   Corporate    Payable by
                                      assessees   Income       each
                                                  tax          Company (
                                                  Payable      Rupees in
                                                  (in per      crore)
                                                  centage
1.     More than 50      1,737        0.38%       76.59%       112.59 (
       crores                                                  considering
                                                               maximum PBT
                                                               is Rs. 500
                                                               crores)
2.     More than 10      6,140        1.34%       86.83%       12.45
       crores                                                  (considering
                                                               maximum PBT
                                                               is Rs. 50
                                                               crores)
3.     More than 1       28,767       6.26%       94.65%       2.608
       crore                                                   (considering
                                                               maximum PBT
                                                               is Rs.10
                                                               crores)
4.     Less than1        4,30,503     93.73%      100%         0.27
       crore                                                   (considering
                                                               maximum
                                                               PBTis Rs. 1
                                                               crore)




                                                                         101
            (b) Profile of sample companies across various limits
                of profits before taxes (financial year 2010-11)
                [ Sample size 4,59,270]



Sl.no. Profit Before     Total No.   Share in    Share in    Maximum
       Taxes (in         of          total       Total       amount of
       rupees)           Corporate   number      Corporate   Average Tax
                         Assessees   of          Income-     Payable by each
                                     Corporate   tax         Company (
                                     assessees   payable (   Rupees in
                                                 in per      crore)
                                                 centage)
1.     More than 500     239         0.052%      54.28
       crores
2.     100 to 500        763         0.17%       16.86       112.59
       crores                                                (considering
                                                             maximum PBT is
                                                             Rs. 500 crores)
3.     50 to 100         735         0.16%       5.45        12.45(considering
       crores                                                maximum PBT is
                                                             Rs. 50 crores )
4.     10 to 50 crores   4403        0.96%       10.24       2.608
                                                             (considering
                                                             maximum PBT is
                                                             Rs. 10 crores)
5.     1 to 10 crores    22,627      4.93%       7.82        0.27 (
                                                             considering
                                                             maximum PBT is
                                                             Rs.1 crores )




                                                                           102
                                                            Annexe-8
      FORM FOR MAKING THE REFERENCE TO THE COMMISSIONER BY THE
    ASSESSING OFFICER FOR INITIATING THE PROCEEDINGS U/S 144BA(1)
                  rws 95 OF THE INCOME TAX ACT, 1961
1  Name and Address of the Assessee
2  PAN
3  Status
4  Particulars of Assessing Officer
5  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
6  Provide a factual matrix of the arrangement entered
   into by the assessee
7  Is there any Tax Benefit as defined in section
   102(11) ?
8  If yes, provide the approximate quantum thereof
   assessment year wise.
9   Is Tax Benefit the main purpose or one of the
   main purposes of the arrangement ?
10 Brief facts of the Tax Benefit
11 Has the assessee been confronted with the details of
   the Tax Benefit? If yes, provide the gist of the reply
   furnished by the assessee on Tax Benefit
12 If Tax Benefit is the main purpose or one of the
   main purposes specify which other condition, out of
   the following is satisfied giving details how the
   conclusion has been arrived at:
   (a) Creates rights, or obligations, which are not
   ordinarily created between persons dealing at arm`s
   length;
   (b) Results, directly or indirectly, in the misuse, or
   abuse, of the provisions of this Act;
   (c)    Lacks commercial substance or is deemed to


                                                                 103
     lack commercial substance under section 97, in whole
     or in part; or
     (d) Is entered into, or carried out, by means, or in
     manner, which are not ordinarily employed for bona
     fide purposes.
13   Has the assessee been confronted with the findings
     given in column 12 ? If yes, provide the gist of the
     reply furnished by the assessee.
14   Detailed reasons for treating the 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:                                               Name & Designation of
Place:                                                  Assessing Officer




                                                                       104
                                                   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 (copy thereof to be
   enclosed)
9  Date of receipt of reply from the
   assessee and date of hearing
   provided to the assessee (copy of
   reply of the assessee to be
   enclosed)
10 Provide a factual matrix of the
   arrangement entered into by the
   assessee
11 Is there any Tax Benefit as
   defined in section 102(11) ?
12 If yes, provide the approximate
   quantum thereof assessment year
   wise.

                                                        105
13    Is Tax Benefit the main
     purpose or one of the main
     purposes of the arrangement ?
14   Brief facts of the Tax Benefit
15   Has the assessee been confronted
     with the details of the Tax
     Benefit ? If yes, provide the gist
     of the reply furnished by the
     assessee on Tax Benefit
16   If Tax Benefit is the main
     purpose or one of the main
     purposes specify which other
     condition, out of the following is
     satisfied giving details how the
     conclusion has been arrived at:
        (a)        Creates     rights,   or
            obligations, which are not
            ordinarily created between
            persons dealing at arm`s
            length;
        (b)        Results,   directly   or
            indirectly, in the misuse, or
            abuse, of the provisions of
            this Act;
        (c) Lacks commercial substance
            or    is   deemed      to  lack
            commercial substance under
            section 97, in whole or in
            part; or
        (d)        Is entered into, or
            carried out, by means, or in
            manner,      which    are   not
            ordinarily employed for bona
            fide purposes.
17   Has the assessee been confronted
     with the findings given in column
     16? If yes, provide the gist of the
     reply furnished by the assessee.

                                              106
18 Detailed reasons for treating the
   arrangement as Impermissible
   Avoidance arrangement.
19 Consequences likely to arise if
   arrangement     is  declared   as
   Impermissible           Avoidance
   arrangement
20 Specify the time barring dates of
   original      assessment       or
   reassessment




Date:                                       Name & Designation of

Place:                                 Commissioner of Income Tax




                                                               107
                                                           Annexe-10

FORM FOR RETURNING THE REFERENCE U/S 144BA(5) rws SECTION
 95 IN CASES OF REFERENCES MADE U/S 144BA(4) rws 95 OF THE
       INCOME TAX ACT, 1961 TO THE ASSESSING OFFICER

1   Name and Address of the Assessee
2   PAN
3   Status
4   Particulars of Assessing Officer
5   Assessment year(s) in respect of
    which the proceedings u/s 144BA
    (1) are proposed to be invoked.
6   Date of receipt of reference from the
    AO u/s 144BA (1)
7   Reasons for not agreeing with the
    reference from the AO u/s 144BA
    (1)




Date:                                            Name & Designation of

Place:                                      Commissioner of Income Tax




                                                                    108
 
 
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