Contents I-13. About the author I-5 Preface I-7 Chapter-heads I-9

Transcription

1 Contents About the author I-5 Preface I-7 Chapter-heads I-9 1 GAAR - Introduction 1.1 Introduction Abuse of right to arrange affairs Tax avoidance and tax mitigation Fiscal nullity doctrine Gregory v. Helvering Case Need for GAAR GAAR aims and objects Abusive tax avoidance GAAR creates uncertainty No uncertainty as regards bona fide transactions Some unintended hardship inevitable GAAR ensures more certainty 20 2 GAAR - OVERVIEW 2.1 Introduction GAAR reflects substance over form principle Salient features Scheme of the Act 25 I-13

2 Contents I-14 3 JUDGE - MADE TAX AVOIDANCE DOCTRINES 3.1 Court - based general avoidance rules Tax avoidance and GAAR - Meaning Judicial doctrines Two criteria Object and spirit test Ramsay s Principle Fraus Legis Economic substance doctrine Sham doctrine Sham in fact and sham in form Factually sham Economic sham Sham conduit entity Business purpose doctrine Step - transaction - Circular and linear transactions Substance over form doctrine Doctrine is akin to abuse of right Form refers to lawful transactions Substance refers to economic realities Legal substance v. Economic substance Legal effect of transaction not displaced by substance 46 of transaction Form of transaction cannot control the Act Legal substance prevails over form Transactions should be seen in the light of legislative 48 intent Tax motivation or saving is an irrelevant consideration Form and substance - Three stages Form and substance - Tax evasion or avoidance 52

3 I-15 Contents 4 STATUTE BASED - GENERAL AND SPECIFIC TAX AVOIDANCE RULES 4.1 Introduction GAAR more expansive than SAAR GAAR simultaneously applies with SAAR SAARs under the Income-tax Act Source rule Transfer pricing rules CFC rule 63 5 TAX TREATIES GENERAL AVOIDANCE RULES 5.1 Introduction Abuse of treaty Improper use - Transfer of residence Improper use of treaty - Guidelines Conduit company cases Look through, subject-to tax, channel, exclusion approach Limitation of benefit (LOB) LOB does not restrict application of GAAR Beneficial Ownership Indofood case Prevost case Beneficial ownership interpreted differently by different courts Treaty Shopping 77 6 Treaty override 6.1 Tax Treaty Prevails Upon Domestic Law Tax treaty is mini legislation Treaty overrides domestic - Limitations Treaty override - Meaning Treaty override - Circumstances 83

4 Contents I GAAR whether would mean breaking a treaty GAAR overrides treaty - Indian law GAAR - Treaty abuse Treaty abuse - Three ways Abuse of treaty is abuse of domestic law Paul Antle case Parthasarathi Report - Treaty override 96 7 GAAR - GENERAL PRINCIPLES 7.1 Introduction GAAR reflects substance over form principle Artificial, contrived or out of the ordinary arrangement subject 103 to GAAR 7.4 Principles on which GAAR operates APPLICABILITY CHAPTER X-A General Anti-Avoidance Rule Applicability of General Anti-Avoidance Rule [Section 95] Introduction Ingredients Declaration - Scope Three steps Arrangement entered into Arrangement - Meaning Step in or part of arrangement Arrangement not for bona fide purpose Arrangements - Permissible and impermissible avoidance Tax mitigation is not tax avoidance arrangement Tax mitigation arrangement legitimate A permissible arrangement is impermissible for the purposes of GAAR 124

5 I-17 Contents 9 IMPERMISSIBLE AVOIDANCE ARRANGEMENTS Impermissible avoidance arrangement [Section 96] Introduction Impermissible avoidance transaction Ingredients Two tests Steps Purpose test - Purpose of the person and not of the arrangement Purpose meaning Purpose and motive - Distinction Tax motivation - Irrelevant consideration Purpose and intent of the Act Main purpose Dominant purpose Dominant purpose - Objective test Tax benefit purpose or business purpose Bona fide transactions are not arrangements Tax avoidance presumed if no valid business purpose Tainted element (abnormality) test Rights and obligations ordinarily created [section 96(1)(a)] Misuse or abuse of provisions [section 96(1)(b)] Lack of commercial substance [section 96(1)(c)] Arrangement not ordinarily employed for bona fide purposes [section 96(1)(d)] Arrangement in steps or part [sub-section (2)] Presumption rebuttable Entered into or carried out Series of transactions Series of transactions considered as one transaction Fiscal nullity doctrine Step-transactions - Ramsay doctrine 174

6 Contents I Pre-ordained series of transactions - Inserted steps Principles applicable to preordained series of transactions Related transaction completed in contemplation of 176 series Step transaction - US - Jacobs Engineering Arrangement lacking commercial substance Arrangement to lack commercial substance [Section 97] Introduction Presumptive definition Economic substance - criterion for anti-avoidance rule Four circumstances Commercial substance and legal substance Substance inconsistent from individual steps [section 97(1)(a)] Substance or effect of transaction as a whole Step-transaction - Circular and linear transactions Global Fund Equity case Splitting of a transaction into series Ramsay s principle embodied Transactions routed through related enterprise Lack of commercial substance - Characteristics Round Trip Financing [Section 97(1)(b)] Double-dip Back-to-back loan Conduit loan Mutual dealings and the principles of set off Accommodating party Elements offsetting or cancelling each other Device of self-cancelling or circular transactions Device of transaction division Location of asset or of a transaction or the place of residence 210 [Section 97(1)(c)]

7 I-19 Contents But for Asset, Transaction or Residence - Place of income Significant effect upon business risks or net cash flow [Section 97(1)(d)] Ensign Tankers case Factors taken into account [sub-section (4)] Consequences Consequences of impermissible avoidance arrangement [Section 98] Introduction Consequences - Manner of determination Manner deemed appropriate Disregarding or Re-characterisation Re-characterisation of transaction Disregarding entity, transaction or provision GAAR not re-characterisation but anti-avoidance rule Re-characterisation of a step or part of or whole of the transaction Characterisation of income Thin or hidden capitalisation Loan disguised as equity Hidden capitalisation takes the form of hybrid financing Dividends conceptually different from interest Disguised loan - Bank of Scotland case Royalty transaction Treaty shopping Disregarding of transaction CONNECTED PERSONS AND ACCOMMODATING PARTY Treatment of connected person and accommodating party [Section 99] Introduction Section creates a statutory fiction 237

8 Contents I Party Person Permanent establishment Connected persons [section 99(i)] Accommodating party disregarded or treated same person, 240 [section 99(ii) and (iii)] 12.6 Arrangement looked through by disregarding corporate structure [section 99(iv)] Subsidiary company in substance may be a principal 243 company A private company may in substance be a partnership 243 firm 13 GAAR - APPLICATION Application of this Chapter [Section 100] Introduction In addition to In lieu of FRAMING GUIDELINES Framing of guidelines [Section 101] Introduction Shall be read as may As may be prescribed Guidelines - Object and purpose DEFINITION Definitions [Section 102] Definition - Statement limiting the meaning of word Definition clause - Interpretation Words - Common and ordinary meaning Unless the context requires otherwise Means - A word of restriction Includes - A word of extension 260

9 I-21 Contents 15.7 Word not defined in enactment - Subject and object rules Purposive and literal approach Purposive interpretation - principles summarised Purposive interpretation for the application of GAAR Copthorne Holdings Ltd. case Paul Antle case General Principles Arrangement [clause (1) of section 102] Transaction- absence of written contract and particulars Asset [clause (2)] Benefit [clause (3)] Benefit Increment of economic and commercial value Benefit Interest free loans Benefit - Share option scheme Connected person [clause (4)] Fund [clause (5)] Party [clause (6)] Relative [clause (7)] Person having substantial interest in the business [clause (8)] Step [clause (9)] Tax benefit [clause (10)] Tax benefit - Double - Dip, Back-to-back loan Tax avoided is the tax benefit Tax treaty [clause (12)] PROCEDURE 16.1 Introduction Applicability of GAAR - Two steps Stages for declaring an arrangement impermissible avoidance 280 arrangement 16.4 Guidelines Tax treatment of the transaction 284

10 Contents I Assessing Officer making a reference During assessment proceeding Material in possession Considers it necessary Reference to the Principal Commissioner/Commissioner Commissioner making a reference to panel of Commissioners Principal Commissioner/Commissioner of the Opinion Show-cause notice Opportunity of being heard Rebuttal by assessee Satisfaction of Principal Commissioner/Commissioner Invoking of GAAR Subjective satisfaction of revenue authorities Abusive avoidance Burden of proof Onus on taxpayer Approving Panel Such directions as it deems fit Quasi-judicial functions Directions binding Determination of consequences Determination and assessment - Distinction 302 Appendices Appendix 1 : Relevant sections of Income-tax Act, Appendix 2 : Relevant Rules and Forms of Income-tax Rules, Appendix 3 : Draft guidelines regarding implementation of General Anti Avoidance Rules (GAAR) in terms of section 101 of the Income-tax Act, Appendix 4 : Consultation document on UK s GAAR 340 Appendix 5 : Final Report on General Anti Avoidance Rules (GAAR) in Income-tax Act, Subject Index 445