Reference to Authorities to invoke GAAR
Introduction
If the Assessing Officer considers an agreement as an Impermissible Avoidance Agreement, at any stage of the assessment or reassessment, he may make a reference to the Principal CIT or CIT. If CIT is not satisfied with the objections raised by the assessee, then it shall make a reference to the Approving Panel for the declaration of an arrangement as an Impermissible Avoidance Arrangement within the meaning of GAAR.
1. Reference to CIT
1.1 When can a reference to CIT be made?
If Assessing officer, having regard to the material and evidences available with him at any stage of assessment or reassessment proceedings pending before him, considers that it is necessary to declare an agreement as an impermissible avoidance agreement and to determine the consequences of such agreement within the meaning of General Anti Avoidance Agreement Rule (GAAR), he may make a reference to the Commissioner or Principal Commissioner for this purpose. Such a reference shall be made in Form 62.
1.2 Procedure to be followed by the Assessing Officer
Rule 129 provides that before making a reference to the Commissioner, the Assessing Officer shall issue a notice to the assessee seeking objections as to the applicability of GAAR provisions in his case. This notice shall contain the following:
(a) Details of the arrangement to which the provisions of GAAR are proposed to be applied.
(b) The tax benefit arising under the arrangement.
(c) The basis and reason for considering that the main purpose of the identified arrangement is to obtain a tax benefit.
(d) The basis and the reasons why 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 this Act
• lacks commercial substance or is deemed to lack commercial substance under Section 180, in whole or in part
• is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.
(e) The list of documents and evidence relied upon in respect of the basis and reasons to propose the invocation of GAAR.
1.3 Procedure to be followed by CIT
1.3-1. Issue notice to the assessee
On receiving a reference from the Assessing Officer, if the Principal CIT or CIT is of the opinion that the provisions of GAAR are required to be invoked, he shall issue a notice to the assessee to submit the objections. The notice should contain the reasons and basis on which such opinion has been made. The assessee shall be provided an opportunity of being heard within the time specified in the notice. However, such period shall not exceed 60 days.
1.3-2. Satisfied with the response of the assessee
If Principal CIT or CIT is satisfied with the objection of the assessee that the provisions of GAAR are not to be invoked, he shall record his satisfaction and issue directions in Form 63 to the Assessing Officer, communicating the same, and a copy will also be issued to the assessee.
Such a direction should be issued within the following time period:
(a) Within 1 month from the end of the month in which the reference is received from the assessing officer; or
(b) Within 2 months from the end of the month in which the final submission in response to the notice is received from the assessee.
1.3-3. Not satisfied with the response of the assessee
Where the Principal CIT or CIT is not satisfied with objections, then CIT shall record its satisfaction and make a reference to the Approving Panel in Form 64 for the declaration of arrangement as an impermissible avoidance arrangement. If the assessee is an entity located in an IFSC, the Principal CIT or CIT shall also seek a specific factual report in writing from the IFSC Authority before making a reference to the Approving Panel.
Such a reference should be made within 2 months from the end of the month in which the final submission of the assessee in response to the notice issued is received.
1.3-4. No response received from the assessee
Where an assessee does not furnish any objection within the time allowed in the notice issued to him, the Principal CIT or CIT shall issue such directions as he deems fit for the declaration of the arrangement to be an Impermissible Avoidance Arrangement.
Such a direction should be issued within 1 month from the end of the month in which the date of compliance of the notice issued falls.
1.4 Proceedings as per the direction of CIT
The Assessing Officer shall proceed to complete the proceedings as per the directions of the Principal CIT or CIT or Approving Panel, as the case may be, and as per the provisions of the GAAR.
If any tax consequences have been determined in the assessment or reassessment under the provisions of GAAR, then the Assessing Officer is required to take the approval of the Principal CIT or CIT before passing such assessment order.
2. Reference to Approving Panel
2.1 What is the Approving Panel?
The Central Government shall constitute one or more Approving Panels for the purpose of making a decision on the reference made by the Principal CIT or CIT to declare an arrangement as an impermissible avoidance arrangement in accordance with the provisions of GAAR.
The members of an Approving Panel shall be the following:
(a) Chairperson, a person who is or has been a judge of the High Court;
(b) A member of the Indian Revenue Services not below the rank of Principal CCIT or CCIT;
(c) A member who is an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.
The Board shall provide the Approving Panel with such officials as may be necessary so that it can exercise its powers efficiently and discharge its functions.
The term of the Approving Panel shall be for one year. However, it may be extended from time to time, but shall not exceed a period of 3 years.
2.2 When can a reference be made to the Approving Panel?
Where an assessee has objected to the proposed action of declaring an arrangement as an impermissible avoidance arrangement as per the provisions of GAAR, but after hearing him, the Principal CIT or CIT is not satisfied with it, then the Commissioner shall make a reference to the Approving Panel in Form 64 for the declaration of the arrangement as an impermissible avoidance arrangement.
2.3 Procedure before the Approving Panel
Upon receipt of the reference from the Principal CIT or CIT, the Chairperson of the Approving Panel shall circulate it among the other members within seven days from the date of receipt of such reference. It shall also issue a notice to both the Assessing Officer and the assessee, affording a reasonable opportunity of being heard, specifying therein the date and place of hearing.
2.4 What directions can the Approving Panel issue?
Where the Principal CIT or CIT makes a reference to the Approving panel, it shall issue such directions as it deems fit in respect of the declaration of the arrangement as an impermissible avoidance arrangement in accordance with the provisions of GAAR. It shall also specify the tax year or years to which such declaration shall apply.
If the directions issued by the Approving Panel are prejudicial to the interest of the assessee or revenue, an opportunity of being heard shall be provided to the assessee or to the Assessing officer, as the case may be.
2.5 Validity of Directions
The Directions issued by the approving panel shall be binding on the assessee, Principal CIT or CIT, and the Income tax authorities subordinate to him. No appeal can be filed against the directions issued by the Approving Panel.
Where directions issued by the Approving Panel are applicable for any tax year other than the tax year for which the reference is made, then the Assessing officer shall follow these directions and provisions of GAAR while making assessment or reassessment of such tax year, and it shall not be necessary for him to seek fresh direction on the issue for such tax year.
2.6 Time limit to issue directions
Where the Approving Panel receives any reference, then it is required to issue directions within 6 months from the end of the month in which the reference was received.
The following period shall be excluded while computing this time limit:
(a) The period starting from the date on which the Approving Panel issues the first direction to the Principal CIT or CIT for getting the inquiries conducted through the competent authority under an agreement referred to in Section 159 and ending with the date on which the information so requested is last received by the Approving Panel or one year, whichever is less;
(b) Period commencing on the date on which the stay on the proceeding of the Approving Panel was granted by an order or injunction of any court and ending on the date on which a certified copy of the order vacating the stay was received by the Approving Panel.
If the period remaining with the Approving Panel immediately after excluding the above period is less than 60 days, then the same shall be extended to 60 days, and the period of 6 months shall be deemed to be extended accordingly.
2.7 Powers of the Approving Panel
The Approving panel shall have the powers that are vested in the Authority for Advance Rulings. In addition to these powers, the Approving Panel may exercise the following power before issuing any direction:
(a) If it is of the opinion that any further inquiry is necessary, it may direct the Principal CIT or CIT to make such inquiry or cause the inquiry to be made by any other Income-tax authority and furnish the report for the same;
(b) It may call for and examine any records relating to the matter as it deems fit;
(c) It may require the assessee to furnish the documents and evidence that were required by it.
Where the members of the Approving Panel differ in opinion on any point, such point shall be decided according to the opinion of the majority of the members.
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.