GAAR Chythanya K.K., Bcom, FCA, LLB Advocate, Bangalore 9844114184 [email protected] Chythanya K.K.,Advocate Basic edifice of GAAR 1. Substance over form doctrine is hitherto applied only by courts 2. Courts would decide this issue without being aided by explicit provisions of law but being guided by interpretative process 3. Courts’ rulings are diverse – there are cases where form is preferred over substance [like Vodafone 341 ITR 1 SC] and there are cases where substance is preferred over form [like Bhopal Sugars 40 STC 42 SC] 4. Department did not have statutory back up for invoking this doctrine Basic edifice of GAAR 1. In the absence of statutory back up, the courts are likely to hold that department’s invoking the doctrine of substance over form is not tenable 2. GAAR provisions provide this statutory backup. 3. In situations permitted under chapter XA, department may invoke GAAR 4. In situations not covered by chapter XA, the pre- existing position prevails Transactions that may be GAARed 1. Not only international transactions and cross border transactions but even the desi transactions could be brought under GAAR 2. GAAR applies to both personal and corporate taxation 3. The cases to come under GAAR are not exhaustive 4. GAAR could nullify the effect of court rulings without carrying amendment to tax provisions : Slump sale disguised as slump exchange to overcome Bharat Bijlee decision in 2014-TIOL-730-HC-MUM-IT Domestic transactions that may be GAARed 1. Debt restructuring like fresh loan to repay old loan and equity coloured as debt 2. Corporate restructuring : Dalmia Power Ltd 420 ITR 339 SC 3. Revaluations followed by business acquisition 4. Private Trust where author is a beneficiary, sole or otherwise 5. Circuitous routes like cross gifts, cross transfers, cross perquisites : CIT v. Keshvaji Morarji [1967] 66 ITR 142 SC 6. Executive salary planning like flexi pay, ESOP etc Domestic transactions that may be GAARed 1. Transfer to trust to avoid application of sec 56(2)(x) 2. Section 179 – where corporate veil may be lifted to deem a public company as a private company. 3. Where HC held that wife’s unit earned 5% profit and husband’s tax holiday unit earned 35% profit, GAAR may be used to undo the same : Malay N. Sanghvi 391 ITR 382 Bom Crossborder transactions that may be GAARed 1. Non AE transactions 2. Routing of investments through low tax/no tax jurisdictions 3. Corporate inversions similar to those resorted by Google, Starbucks, Apple, Fiat, Pfizer, Facebook 4. POEM determination 5. Overseas trusts 6. PE fragmentations not covered by MLIs/SAARs GAAR : Nature of mandate • There is no mandate on assessee not to get into IAA. • Entering into IAA is not barred by law. • It is only at the instance of AO, can an arrangement be declared as IAA. • Assessee is not bound to suo motu declare his arrangement as IAA. It is not like sec 92 which creates a suo motu mandate. • It is more like section 14A read with Rule 8D which can be invoked only at the instance of revenue : Holcim India P Ltd Delhi HC 2014-TIOL-1586-HC-DEL • Thus , there cannot be penalty when GAAR is invoked GAAR : Sources for interpretative principles • Memorandum • Finance Minister’s assurance • Standing Committee Recommendations on DTC • Shome Committee on GAAR • Court rulings GAAR : Interpretative principles • Tax mitigation v. Tax evasion v. Tax avoidance • Negative list [illustrative] of tax mitigations where GAAR should not apply 1. Choice of legal options 2. Timing of transaction 3. Corporate restructuring blessed by courts • GAAR not to apply to intra group transactions where the tax effect is neutral within the group GAAR : Interpretative principles • Even for cases of tax avoidance, GAAR should be applied only to abusive, contrived and artificial arrangements • In UK, GAAR is applied in exceptional cases where there is clear evidence of an extremely aggressive arrangement to escape tax • Onus lies on revenue to establish the case for invocation of GAAR GAAR : Interpretative principles • Very strict interpretation • Natural preference should be to rescue the assessee than uphold GAAR • Every natural act does not come under GAAR • Mere obtaining tax benefit is not sufficient unless coupled with tainted act GAAR Chapter X-A Sections 95 to 102 Section 95 Section 96 & Section 98 1. Sec 99 - Parameters 97 for determining tax benefit Basic Impermissible 2. Sec 100 -Provisions enabling Avoidance Consequences are in lieu of/in addition to provision Arrangement 3. Sec 101 -Guidelines (IAA) & Conditions 4. Sec 102- Definition 5. Sec 144BA - GAAR assessment Section 95 Basic Enabling provision Entered into May be Arrangement IAA by assessee declared as Tax Consequences May be determined TB S. 102(10) Means (a) Reduction/avoidance/deferral of tax/other amount payable under IT Act (b) Increase in refund of tax/other amount under IT Act In the (c) Reduction/avoidance/deferral of relevant PY tax/other amount under IT Act as a result of or any other DTA PY (d) Increase in refund of tax/other amount under IT Act as a resultof DTA (e) Reduction of total income (f) Increase in loss Section 96 IAA Arrangement 102 (1) (a) creates rights, or Main purpose AND obligations, which are not ordinarily created between persons dealing at arm’s To obtain length; Tax Benefit (b) results,directly or Sec 102 (10) indirectly, in the misuse, or Sec 99 abuse, of the provisions of this ActAct;; Main Purpose of (c) lacks commercial Step/ part = Main substance or is deemed to purpose of lack commercial substance arrangement {Sec under section 97, in whole or 96(2)} in part part;; or (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide Purposes Purposes.. Lacking Commercial Substance (LCS) Actual Deemed Relevant but no sufficient factors - S. 97(4) Section 97(1) 1. Period/time for which arrangement (including operation therein) exits 2. Payment of taxes, directly/indirectly, under arrangement 3. Exit route (including transfer of any activity/business/operations) is provided by the arrangement Arrangement deemed to lack commercial substance DLCS Section 97 Section 97(1)(a) Section 97(1)(b) Section 97(1)(c) Section 97(1)(d) Substance/ Effect is inconsistent with/ significantly differs from the Form Involves/includes Involves No significant (i) RTF:Eg6&7 location of effect upon the (ii) AP:Eg5B asset/ business risks or (iii) Offsetting/cancelling transaction/ net cash flows of elements place of any party to the (iv) Disguising residence value/location/ arrangement without SCP apart from any source/ownership/co but only for effect attributable ntrol of funds obtaining a TB for a party to the tax benefit that would be obtained RTF S. 97(2) Includes any arrangement in which Through a series of transactions Funds [S. 102(6)] are Such transactions have no transferred among parties And SCP other than obtaining to arrangement TB [S. 102(11)] Without regard to Whether or not (a)Funds involved can be traced to funds transferred to/received by any party in connection with arrangement (b)Time/sequence in which funds are transferred/received (c)Means/manner/mode in which funds are transferred/received AP S. 97(3) For purpose of Chapter X-A Whether or not a A party who connected person to any party to arrangement Participate s directly/indirectly and wholly/partly in arrangement for the Main purpose of obtaining, directly/indirectly A TB for the assessee Tax Consequences Section 98 Means Consequences in Denial of relation to tax, of the including (a) Tax benefit arrangement (b) DTA Benefit Shall be determined In such manner as deemed appropriate Including by way of (but not limited to) a) disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out c) disregarding any accommodating party or treating any accommodating party and any other party as one and the same person d) deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount …. e) reallocating amongst the parties to the arrangement— (i) any accrual, or receipt, of a capital or revenue nature; or (ii) any expenditure, deduction, relief or rebate; f) treating— (i) the place of residence of any party to the arrangement; or (ii) the situs of an asset or of a transaction, 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. Manner of determining Tax Consequences May include [Section 98(2)] a) any equity may be treated asdebt orviceversa b) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or c) any expenditure, deduction, relief or rebate may be re- characterised For determining Whether TB exists (Section 99) (i) the parties who are connected persons in relation to each other may be treated as one and the same person (ii) any accommodating party may be disregarded (iii)such accommodating party and any other party may be treated as one and the same person (iv) the arrangement may be considered or looked through by disregarding any corporate structure. TS-395-ITAT-2019(Ahd) Assessee User charges Tech Co R & D facility India Technology BVI Nominal BVI Co Cost USD 4L (Sub) Technology USA Shares USA Co USD 1.17 Cr (Sub) SUN PHARMA • AO held that technology was developed by assessee and not by UTL • AO held that SUN BVI is a paper company • AO concluded that the profit on transfer of technologies from SUN BVI to CARACO, USA is taxable in the hands of assessee.