TaxAuthorities have power to declare transactions as Impermissible Avoidance Arrangement : Time to avoid aggressive tax planning
Across the globe, there is always a tussle between the taxpayers & tax collectors with regard to the mode of tax saving. What is tax saving, what is tax planning, what is tax avoidance, what is tax evasion, all are subject to varied interpretation depending upon each and individual transactions.
It do happen that there are various transactions where there exists no direct taxing provisions or which provides enough scope of tax planning and enough scope to save tax. However, in all such cases, taxpayers must read few important provisions in the Income Tax Act – 1961 which have a dominant role to play in the tax arena. This are contained in Chapter X-A in the chapter titled “General Anti Avoidance Rule” and well incorporated in section 95 to section 102. Tax-payers desires to reduce the tax impact need not be by way of aggressive tax planning or tax avoidance
Tax authorities have enough power to recognize certain transactions as “Impermissible avoidance arrangement” if Arrangement to lack commercial substance. It even involves transactions which involves round trip financing, an accommodating transactions or transactions which have effect of offsetting or cancelling some transactions.
The relevant provisions of chapter X-A are drafted in a simple language and can be easily understood by anyone without the help of the tax professionals as well. The same is reproduced hereunder:
Applicability of General Anti-Avoidance Rule.
- (1) 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.
(2) This Chapter shall apply in respect of any assessment year beginning on or after the 1st day of April, 2018.
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.
Impermissible avoidance arrangement.
Arrangement to lack commercial substance.
- (1) An arrangement shall be deemed to lack commercial substance, if—
(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—
(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; or
(d) 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).
(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;
(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.
(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.
(4) For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for 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.
- (1) An impermissible avoidance arrangement means an arrangement, the main purpose 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.
(2) An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.
Consequences of impermissible avoidance arrangement.
- (1) If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:—
(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 nature 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.
(2) For the purposes of sub-section (1),—
(i) any equity may be treated as debt or vice versa;
(ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or
(iii) any expenditure, deduction, relief or rebate may be recharacterised.
Treatment of connected person and accommodating party.
- For the purposes of this Chapter, in determining whether a tax benefit exists,—
(i) the parties who are connected persons in relation to each other may be treated as one and the same person;
(ii) any accommodating party may be disregarded;
(iii) the 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.
Application of this Chapter.
- The provisions of this Chapter shall apply in addition to, or in lieu of, any other basis for determination of tax liability.
Framing of guidelines.
- The provisions of this Chapter shall be applied in accordance with such guidelines and subject to such conditions, as may be prescribed.
Definitions.
- In this Chapter, unless the context otherwise requires,—
(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;
(2) “asset” includes property, or right, of any kind;
(3) “benefit” includes a payment of any kind whether in tangible or intangible form;
(4) “connected person” means any person who is connected directly or indirectly to another person and includes,—
(a) any relative of the person, if such person is an individual;
(b) any director of the company or any relative of such director, if the person is a company;
(c) any partner or member of a firm or association of persons or body of individuals or any relative of such partner or member, if the person is a firm or association of persons or body of individuals;
(d) any member of the Hindu undivided family or any relative of such member, if the person is a Hindu undivided family;
(e) any individual who has a substantial interest in the business of the person or any relative of such individual;
(f) a company, firm or an association of persons or a body of individuals, whether incorporated or not, or a Hindu undivided family having a substantial interest in the business of the person or any director, partner, or member of the company, firm or association of persons or body of individuals or family, or any relative of such director, partner or member;
(g) a company, firm or association of persons or body of individuals, whether incorporated or not, or a Hindu undivided family, whose director, partner, or member has a substantial interest in the business of the person, or family or any relative of such director, partner or member;
(h) any other person who carries on a business, if—
(i) the person being an individual, or any relative of such person, has a substantial interest in the business of that other person; or
(ii) the person being a company, firm, association of persons, body of individuals, whether incorporated or not, or a Hindu undivided family, or any director, partner or member of such company, firm or association of persons or body of individuals or family, or any relative of such director, partner or member, has a substantial interest in the business of that other person;
(5) “fund” includes—
(a) any cash;
(b) cash equivalents; and
(c) any right, or obligation, to receive or pay, the cash or cash equivalent;
(6) “party” includes a person or a permanent establishment which participates or takes part in an arrangement;
(7) “relative” shall have the meaning assigned to it in the Explanation to clause (vi) of sub-section (2) of section 56;
(8) a person shall be deemed to have a substantial interest in the business, if,—
(a) in a case where the business is carried on by a company, such person is, at any time during the financial year, the beneficial owner of equity shares carrying twenty per cent or more, of the voting power; or
(b) in any other case, such person is, at any time during the financial year, beneficially entitled to twenty per cent or more, of the profits of such business;
(9) “step” includes a measure or an action, particularly one of a series taken in order to deal with or achieve a particular thing or object in the arrangement;
(10) “tax benefit” includes,—
(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; or
(f) an increase in loss,
in the relevant previous year or any other previous year;
(11) “tax treaty” means an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A.
It may be relevant here to read the Rule 10U of the Income Tax Rules – 1962 which reads as under:
- Application of General Anti Avoidance Rule
10U. Chapter X-A not to apply in certain cases.—(1) The provisions of Chapter X-A shall not apply to—
(a) an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of rupees three crore;
(b) a Foreign Institutional Investor,—
(i) who is an assessee under the Act;
(ii) who has not taken benefit of an agreement referred to in section 90 or section 90A as the case may be; and
(iii) who has invested in listed securities, or unlisted securities, with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 and such other regulations as may be applicable, in relation to such investments;
(c) a person, being a non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor;
(d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the [1st day of April, 2017] by such person.
(2) Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the [1st day of April, 2017].
(3) For the purposes of this rule,—
(i) “Foreign Institutional Investor” shall have the same meaning as assigned to it in the Explanation to section 115AD;
(ii) “off shore derivative instrument” shall have the same meaning as assigned to it in the Securities and Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 issued under Securities and Exchange Board of India Act, 1992 (15 of 1992) ;
(iii) “Securities and Exchange Board of India” shall have the same meaning as assigned to it in clause (a) of sub-section (1) of section 2 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(iv) “tax benefit” as defined in clause (10) of section 102 and computed in accordance with Chapter X-A shall be with reference to—
(a) sub-clauses (a) to (e) of the said clause, the amount of tax; and
(b) sub-clause (f) of the said clause, the tax that would have been chargeable had the increase in loss referred to therein been the total income.]
Rules are there with regard to Time limits. It is contained in section 10UC and reads as under:
10UC. (1) For the purposes of section 144BA,—
(i) no directions under sub-section (3) of section 144BA shall be issued by the Commissioner after the expiry of one month from the end of the month in which the date of compliance of the notice issued under sub-section (2) of section 144BA falls;
(ii) no reference shall be made by the Commissioner to the Approving Panel under sub-section (4) of section 144BA after the expiry of two months from the end of the month in which the final submission of the assessee in response to the notice issued under sub-section (2) of section 144BA is received;
(iii) the Commissioner shall issue directions to the Assessing Officer in Form No.3CEH,—
(a) in the case referred to in clause (i) of sub-rule (4) of rule 10UB, within a period of one month from the end of month in which the reference is received by him; and
(b) in the case referred to in clause (ii) of sub-rule (4) of rule 10UB, within a period of two months from the end of month in which the final submission of the assessee in response to the notice issued under sub-section (2) of section 144BA is received by him.]
