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Taxpayers are empowered to approach the Authority for Advance Ruling (AAR) for clarifications related to international transactions. However, a fresh clarification cannot be sought from AAR for a question already pending before an income tax authority.
The issue of whether mere filing of a tax return can be considered ‘pending’ before tax authorities has been contentious.
Recently, in a well-reasoned ruling in the case of Mitsubishi Corporation, the AAR held that filing of tax return cannot lead to a question being treated as ‘pending’ before tax authorities, and there should be a notice for assessment before it can be termed “pending”.
While the AAR’s decision is legally binding only on the parties involved in a case, it does have a persuasive value and is likely to allow more assessees to approach AAR.
Curbing profit diversion to tax havens
As capital flow becomes more fluid, the taxable income of multinational corporations has acquired an international flavour with more and more profits being diverted to tax haven countries.
To counter this, the OECD and G20 have released a 15-point action plan as part of the Base Erosion and Profit Shifting (BEPS) initiative. It provides for a coordinated legislative framework to complement existing tax laws and treaties, allowing for an activity-based taxation regime.
In the Indian context, the BEPS action plan provides tax authorities an additional instrument to curb tax evasion and avoidance. This is particularly pertinent following the rise in scrutiny of India Inc and aggressive tax planning in the year gone by.
It remains to be seen, however, how BEPS integrates with current and proposed Indian legislations such as the GAAR.
RBI’s unexpected bonus
The RBI on January 6, 2014, issued a circular under the Foreign Exchange Management Act, 1999, allowing Indian companies to issue under the automatic route non-convertible/ redeemable preference shares or debentures to non-resident shareholders, including depositories that act as trustees for the ADR/GDR holders through distribution as bonus, subject to the following conditions:
Distribution is from general reserves;
It is made under a scheme of arrangement approved by a court in India under the Companies Act; and
No-objection from income tax authorities.
Earlier, issue of redeemable preference shares and debt was considered as External Commercial Borrowing that required RBI approval.
A company can, through such an instrument, reward shareholders and, at the same time, retain the surplus cash for future expansion, working capital, and so on.
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