Education

Strong signals on non-resident deals

MOHAN R. LAVI | Updated on June 17, 2011 Published on June 11, 2011

Clause 119 of the DTC looks to plug transactions with non-residents that are an eyewash. That the Government intends to collect every penny from such transactions is the signal sent.

Newton's third law of motion on there being an equal and opposite reaction to an action was proved in a world away from physics in the overnight busting of a movement by Baba Ramdev.

All the glare generated by a movement that called for importing all slush money stashed abroad and demonetisation of certain currency notes resulted in the Income-Tax Department and the Enforcement Directorate for details of a balance-sheet that could beat any corporate for strength and liquidity, but not necessarily for transparency.

Peace-Island, a Scottish island apparently gifted by acolytes, hogs the limelight with reports of its being brought to tax under the Direct Taxes Code (DTC).

Scottish islands would not attract wealth-tax under the DTC due to a specific exemption granted to non-profits in Clause 112 of the Code.

Plugging loopholes

Clause 119 of the DTC looks to plug transactions with non-residents that are an eye-wash. It states that the total income of a person shall include all income accruing to a non-resident if the income accrues by virtue of a transfer of any asset by the person, either alone or in conjunction with associated operations, directly or indirectly, to the non-resident, the person acquires any rights by virtue of which he has power to enjoy, whether now or in the future, such income, is entitled to receive, or has received, any capital sum, the payment whereof is in any way connected with the transfer or any associated operations and the income would have been included in the total income of the person, had the transfer not taken place.

The DTC identifies five instances when one would be deemed to have the power to enjoy the income of a non-resident — when the income is so dealt with by him so as to enure for this benefit either as income or in any other form,  the accrual or receipt of the income increases the value of this asset, the person receives or is entitled to receive at any time any benefit provided or to be provided out of that income, the person is empowered to obtain  the beneficial enjoyment of the income and if he is able in any manner to control the application of the income directly or indirectly.

Avoiding the rigours of this Section is possible only if the tax-payer shows to the satisfaction of the Assessing Officer that the transfer and all associated operations were bona fide commercial transactions, and were not designed for the purpose of avoiding liability to taxation.

The General Anti-Avoidance Rule (GAAR) enunciated by Clause 123 of the DTC arms the tax Department with powers to declare certain arrangements as impermissible arrangements the consequences of which could be disregarding, combining or recharacterising a part or the whole arrangement, deeming persons who are connected persons in relation to each other to be one and the same person, reallocating amongst the parties to the arrangement any accrual, or receipt, of a capital or revenue nature or any expenditure, deduction, relief or rebate and recharacterising any equity into debt or vice versa, any accrual, or receipt, of a capital or revenue nature or any expenditure, deduction, relief or rebate.

Transfer Pricing, transactions with non-residents that are colourable planning devices and GAAR Rules are placed in Part F of the DTC which is titled “ Prevention of Abuse of the Code” and in Chapter XII which reads “ Special Provisions relating to Avoidance of Tax”.

This seems to send a strong signal that the Government intends to collect every penny from international transactions.

(The author is a Bangalore-based chartered accountant.)

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Published on June 11, 2011
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