GAAR relief may be temporary

Overseas investors can now breathe easy, at least for a year. General Anti-Avoidance Rules, which was earlier proposed to be introduced in the Income Tax Act, 1961, with effect from FY 2012-13 now stands postponed until FY 2013-14. But wait! Don't be in a hurry to close your transactions this year just to avoid GAAR. It may still be triggered if the transaction has a tax effect in the year when GAAR is applicable.

Further, following apprehensions expressed by industry, the Finance Minister, Mr Pranab Mukherjee, has decided to shift the onus of proof from the taxpayers to the Revenue Department for any action under GAAR. A new investor would now be allowed to approach the Authority for Advance Rulings to ascertain whether an arrangement is permissible or not under the GAAR provisions. This would help investors gain certainty in the transaction and avoid undue litigation. It is also proposed to introduce an independent member in the GAAR panel to ensure objectivity and transparency.

Tricky issue of disallowance

A three-judge Bench of the Supreme Court dismissed the Revenue Department's special leave petition, bringing relief to a large number of corporate taxpayers.

A tax officer had made certain disallowances under the regular provisions of the Income-tax Act, 1961, but the tax liability was ultimately determined under Minimum Alternate Tax provisions. Subsequently, the tax officer levied penalty for concealment of income in respect of disallowances made under the regular provisions.

The Court observed that the assessment under regular provisions was not acted upon and assessment was closed under MAT provisions. Accordingly, it held that no penalty could be levied with respect to the disallowances made under regular provisions.

This position was already adopted by various courts and tax tribunals across the country. The present dismissal of the SLP affirms this position and should bring certainty to the situation. However, going by the current scenario, an amendment in the next Finance Bill overturning the SC decision will not come as a surprise.

Tax relief for overseas services

Profit in lieu of salary for services rendered outside India cannot necessarily be taxed in India. In the Delhi High Court decision dated April 24, it was contended that the amount received on account of retirement benefits for services rendered outside India cannot be taxed in India in cases where

amount has accrued outside India for employment rendered outside India, and was received and taxed outside India;

there is no nexus between the payment made by the erstwhile employer (outside India) on account of retirement benefit and the service rendered in India (with new employer in India);

status of the assignee in India in the year under assessment is of ‘not ordinary resident'.

A Division Bench of Delhi HC in the present case upheld the ITAT order and held that the payment in question was received towards retirement benefit from the erstwhile employer on termination of employment in November 1999; the employer was based in the US and the services were rendered to the erstwhile employer in that country; the said amount cannot be taxed in India as the status of the assessee during the year in question was that of “not ordinary resident”; the said income did not accrue or arise in India in terms of Section 6 and Section 9(1) (ii).

TRC utility under cloud

The Supreme Court in the landmark case of Azadi Bachao Andolan (2003) upheld availability of benefits under the India-Mauritius Double Taxation Avoidance Agreement as long as the transferor has a valid tax residency certificate. The principle was set that holding a certificate from the tax authorities of the other country regarding residency and beneficial ownership would be sufficient evidence for beneficial ownership.

The Finance Bill 2012 proposed an amendment in Sections 90 and 90A of the Income Tax Act, whereby the certificate shall be necessary but not sufficient condition for availing DTAA benefits. The proposed amendment had questioned the validity of the tax residency certificate, the law of the land and the circular, especially in cases where GAAR is invoked. In those cases, a valid tax residency certificate would have no significance and the revenue authorities may challenge the commercial viability of the overseas transactions.

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