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Administrative rules for implementation of the general anti-avoidance rule notified — Orbitax Tax News & Alerts

On 23 September 2013, the Central Board of Direct Taxes amended the Income Tax Rules 1962, to introduce specific rules for the "Application of the General Anti-Avoidance Rule" (the Rules). Simultaneously with the GAAR (chapter XA, sections 95-102) in the Income Tax Act 1961 (the ITA), these Rules are scheduled to come into force on 1 April 2016. The GAAR was introduced pursuant to the Finance Act 2012, and amended by the Finance Act 2013.

Exceptions

The Rules begin with laying down the exceptions to the applicability of the GAAR. It stipulates that the GAAR will 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 INR 30 million;

(b) a Foreign Institutional Investor (FII), who satisfies the following criteria:
(i) the FII is an assessee under the ITA: implying that the FII must be liable to tax, either in one's personal or representative capacity, for the relevant financial year under the ITA;
(ii) the FII does not claim the benefits of a tax treaty; and
(iii) who has invested in listed 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 2005;

(c) a person, who is not a tax resident of India, in relation to investments made by way of offshore derivative instruments or otherwise, directly or indirectly in an FII (no requirement that the FII must satisfy the criteria stated above has been notified); and

(d) any income earned or received, or deemed to be earned or received, by any person from transfer of investments made before 30 August 2010 by such person. However, this exception would not apply to tax benefits obtained after 1 April 2015, even if the transaction may have been executed before that date.

Interpretation

The expression "tax benefit" has been defined to be calculated as the overall reduction in the amount of tax payable caused by an arrangement.
The Rules further clarify that the consequence of the application of the GAAR would arise to the extent that an arrangement has been declared to be an impermissible avoidance arrangement, and only to that extent. In other words, if a severable part of an arrangement is declared to be an impermissible avoidance arrangement, independent of the other parts, the consequences of such a declaration would arise only insofar as that part of the transaction is concerned.

Procedure & natural justice

Section 144BA(1) of the ITA requires the Assessing Officer to make a reference to the Commissioner if the former considers, based on the available material and evidence that it is necessary to declare an arrangement as an impermissible avoidance arrangement. The Rules further stipulate that before making such a reference to the Commissioner, an Assessing Officer must issue a notice to the taxpayer, seeking the taxpayer's objections against invoking the GAAR. The Rules require that the taxpayer is confronted with:

-   the details of the arrangement in connection with which the Assessing Office seeks to invoke the GAAR;
-   the [alleged] tax benefit arising under such an arrangement;
-   the basis and reason for considering that the main purpose of the identified arrangement was to obtain a tax benefit, so as to qualify as an impermissible avoidance arrangement, i.e. how the arrangement:
-   creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;
-   results, directly or indirectly, in the misuse, or abuse, of the provisions of the ITA;
-   lacks commercial substance or is deemed to lack commercial substance (in circumstances described in section 97 of the ITA), in whole or in part; or
-   is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes; and
-   the list of documents and evidence relied upon by the Assessing Officer for establishing such bases and reasons.

The Rules further require the authorities involved to use pro forma forms for communications towards the implementation of the GAAR. Assessing Officers are required to make their references to Commissioners (under section 144BA(1) of the ITA) in Form No. 3CEG. Commissioners must issue directions to Assessing Officers in Form No. 3CEH if they consider that the GAAR need not be invoked. Such directions must be made after considering the reference made by the Assessing Officer (under section 144BA(1), ITA) and the response/objections of the taxpayer (under section 144BA(2), ITA).
Should the Commissioner consider that the GAAR ought to be invoked, despite any objections filed by the taxpayer (under section 144BA(2), ITA), the Commissioner must make a further reference to the Approving Panel (under section 144BA(4), ITA). This reference should be accompanied with a Form 3CEI, which must record the Commissioner's satisfaction regarding the applicability of the GAAR. However, no reference is required to be made to the Approving Panel if the taxpayer does not file objections.

Time limits

The Rules stipulate a number of limitations of time corresponding with the duties of the tax authorities under section 144BA:

-   A Commissioner may not issue any directions to the Assessing officer to invoke the GAAR after the expiry of 1 month, after the month in which the taxpayer has the right to raise objections.
-   The Commissioner may not make any reference to the Approving Panel after the expiry of 2 months, after the month in which the taxpayer makes its final submission in response to the notice issued under section 144BA(2).
-   The Commissioner should issue directions to the Assessing Officer under Form No. 3CEH:
-   within a period of 1 month of receiving a reference from the Assessing officer under section 144BA(1) of the ITA; and
-   within a period of 2 months of receiving the final submissions of the assessee under section 144BA(2) of the ITA.

The Rules conclude by annexing the pro forma Form Nos. 3CEG, 3CEH, and 3CEI.