Is revenue activism on retrospective applicability of GAAR the way ahead? - PowerPoint Presentation

Slide1

Is revenue activism on retrospective applicability of GAAR the way ahead?

Panel Members

Mr. Vispi Patel, Vispi T. Patel & Associates, Chartered Accountants

Mr

. Uday Ved, Partner, KANV & Co, Chartered Accountants

Mr

. Padamchand Khincha, H C Khincha & Co

Ms

. Swapna Marathe, Executive Editor,

Taxsutra

Mr

. Vishal

Saraiya

, Ajanta Pharma

Key rulings for discussionAVM Capital

Services (Bom HC)Ajanta Pharma & Gabs Investment (NCLT Mum)NIIT Technologies Ltd (NCLT Del) and Vodafone Essar (Del HC) as referred to in NIITAlta Energy (Tax Court of Canada)

AVM Capital Services[TS-512-HC-2012(Bom)]

3

Facts

Merger of 5 companies (Transferor Companies) with ULL (transferee company)

One of the shareholders having 0.001% holding in transferee company objected to scheme

Bombay HC observations

Gujarat HC decision in Wood Polymer Limited

[

(1977) 47 Comp. cases 597 (Guj)] not good law, considering Azadi and Vodafone rulings of Supreme CourtA tax payer can always arrange his affairs to reduce tax liability. Income tax authority is not required to be heard while sanctioning Scheme under Section 391 -394 of the Companies Act, 1956, relies upon Jindal Iron and Steel ruling (Company Application No.123 of 2004 connected with Company Petition No.76 of 2004)

Key objections

Scheme, a ‘colourable device’ to avoid capital gains tax

Seeks a direction to Transferee

company to implead

Income-tax

authority as a

necessary party.

Ajanta Pharma & Gabs Investment

[LSI-314-NCLT-2018(MUM)]4

GABS Investment

Ajanta Pharma

Promoters

100%

More than 60%

Merger

Equity shares issue

9.54%

Revenue’s contentions

Arrangement to avoid tax (tax loss of over Rs. 400 Cr)

Tax on business income on sale of shares to promoters

DDT on dividend

Impermissible Avoidance Arrangement (IAA) under GAAR

Round trip financing

NCLT observations

Promoter would get shares of Ajanta of approx. Rs. 1477 Cr without paying any tax

Scheme benefits only common promotors and not in public interest

‘Deliberate measure to avoid tax’ and misuse/abuse of IT Act provisions

Observes, “it

would be advisable to settle the crucial issue of huge tax liability before sanctioning the scheme

….”

NIIT Technologies Ltd. [LSI-490-NCLT-2018(NDEL)]

5

NIIT

GSPL

PIPL

Merger

Equity shares issue

Revenue’s contentions

Scheme solely benefited family trusts and amalgamating/ amalgamated companies

Purpose not to simplify structure, but to avoid tax liability

Misuse of provisions of Sec 47 of Income-tax Act

Scheme’s appointed date fixed on March 31, 2017 to avoid implication u/s 56(2)(x) applicable from April 1, 2017

Family Trust 1

Family Trust 2

Merger

NIIT Technologies Ltd. [LSI-490-NCLT-2018(NDEL)]

NCLT observationsThe onus to prove tax avoidance is on tax authorities. Taxpayers can arrange their affairs to reduce tax burden in lawful manner. AVM Capital (

Bom

HC)

and Vodafone Essar Ruling

(Del HC) relied

upon

No change in shareholding, NIIT’s

shares not proposed to be transferred, but to be held by the existing promoters directly, instead of through private CompaniesTax authority unable to demonstrate any tax avoidance based on appointed date, NCLT cannot alter such appointed date without sufficient reasons.Role of Income-tax Department limited as compared to Central Government or Regional Director. Its role is to point out if scheme is simply an instrument for abject misuse of provisions of Companies Act, 2013 for evading income taxSanctions scheme subject to that Revenue’s interest with respect to transactions preceding and subsequent to sanction

Vodafone Essar Ltd [TS-151-HC-2011(DEL)]

Delhi HC decision was relied in NIIT caseDemerger of passive infrastructure assets without corresponding liabilitiesSegregation of telecommunication services

and telecommunication

infrastructure business reflects

global

trend and has been adopted by telecommunication companies in

India

Simply because tax payable under adopted structure which assessee is otherwise entitled to adopt in law, is reduced, does not, ipso facto, make such adoption illegal or impermissible.

Scope of objections that may be raised by Central Govt/Regional Director larger - for tax authorities, it is confined to question of revenueRight of Revenue to recover its outstanding dues irrespective of the sanction of the scheme protected. Pending proceedings against the Taxpayer shall not be affected in view of the scheme being sanctioned.SLP against Delhi HC was dismissed. Gujarat HC division bench also upheld the scheme rejecting income-tax Department’s submissions

Alta Energy (Canadian Tax Court)

Alta Energy Luxembourg SARL (Taxpayer) transferred shares of Alta Energy Partners Canada (Alta Canada) Alta Canada owned right to explore, drill hydrocarbons from Duvernay

Formation

Taxpayer claimed capital gains not taxable in Canada under Article 13(5) of Canada- Luxembourg Treaty

Alta Resources LLC (USA) and another US Co

Taxpayer (

LUX)

Alta Canada (CAN)Purchaser

Sale of holding

Article 13(4) provides taxability in Canada if shares principally derives value from immovable

property. However there is exclusion if business of corporation is carried on in such immovable property (‘carve out’ not found in OECD model)

Revenue applied GAAR to deny treaty benefit claiming that Taxpayer was created and became owner of shares of Alta Canada to take treaty benefit by prior restructuring (Prior to restructuring shares were owned by another US LLC )

Alta Energy (Canadian Tax Court)

Canadian Tax Court conclusion GAAR does not apply to preclude Taxpayer from claiming Treaty benefit under Article 13(5)

There

was nothing in treaty to indicate that

single purpose

holding corporation resident in Luxembourg cannot avail treaty

benefit

Rejects Revenue’s 'treaty shopping' contention noting that Canada hasn't adopted comprehensive anti-treaty shopping rules similar

to USA-Canada treaty in treaty under consideration‘Excluded property carve out’ - deviation from OECD Model - Court cannot disturb bargain between treaty partners in this regard.Regarding gains not being taxable in Luxembourg, Court held that Canada could have bargained that treaty benefit under Article 13(5) can be availed only when such capital gains are taxable in Luxembourg

Thank you!!