Monday, May 14, 2018

GAAR (contd.)


GAAR iT Act Ch. XA

GAAR  Version II

<> Indirect Transfer - 'DEEMING' Provision- Related (< under Service Tax / GST Code) :

(KEY Note: Below)

KEY Note:  


“29. The use of a legal fiction is a well known legislative device to assume a state of facts (or a position in law) for the limited purpose for which the legal fiction enacted, that does not exist. The Parliament is fully competent to enact such legal fiction. In the present case the Parliament has done precisely that; it has enacted a legal fiction, where a set of activities carried on by a builder for himself are deemed to be that on behalf of the buyer. In J.K. Cotton Spinning and Weaving Mills Ltd. and Anr v. Union of India (UOI) and Ors. : (1987) Supp 1 SCC 350 the Supreme Court held that ―It is well settled that a deeming provision is an admission of the non- existence of the fact deemed…The Legislature is quite competent to enact a deeming provision for the purpose of assuming the existence of a fact which does not really exist‖. In G. Viswanathan v. Hon’ble Speaker Tamil Nadu Legislative Assembly, Madras and Ors.: (1996) 2 SCC 353, the Supreme Court held that “By the decision of this Court it is fairly well settled that a deeming provision is an admission of the non-existence of the fact deemed. The Legislature is competent to enact a deeming provision for the purpose of assuming the existence of a fact which does not even exist. It means that the Courts must assume that such a state of affairs exists as real, and should imagine as real the consequences and incidents which inevitably flow there from, and give effect to the same. The deeming provision may be intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provision. The law laid down in this regard in East End Dwellings Co. Ltd. case (1952) AC 109 : (1951) 2 All. E.R. 587 has been followed by this Court in a number of cases, beginning from State of Bombay v. Pandurang: 1953Cri LJ 1049 and ending with a recent decision of a three Judge Bench in M. Venugopal v. Divisional Manager, LIC.” In Manish Trivedi v. State of Rajasthan: (2014) 14 SCC 420, the Supreme Court held that “It is well settled that the legislature is competent to create a legal fiction. A deeming provision is enacted for the purpose of assuming the existence of a fact which does not really exist. When the legislature creates a legal fiction, the court has to ascertain for what purpose the fiction is created and after ascertaining this, to assume all those facts and consequences which are incidental or inevitable corollaries for giving effect to the fiction.” (also see: State of Uttar Pradesh v. Hari Ram: (2013) 4 SCC 280).”
These observations are seen to have been made on the premise that the deeming provisions of relevance herein are impregnable or unimpeachable, and therefore, have to be construed as a ‘legal fiction’, so as to be given full effect and taken to its logical conclusion. No doubt, that is just one of the principles enunciated by courts as an aid for interpretation of any enactment of a deeming provision of the ordinarily – come-across types. However, the deeming provisions of relevance herein, as viewed, are not so, but are of a different type. In that, the deeming is NOT about or confined to just one ‘fact’ or ‘phrase’ as envisaged and found covered in case law. On the contrary, if the provisions were to be critically examined, it may be realised that those have been so framed as to change the very meaning of, –

(A)‘Sale’ and ‘Purchase’ transaction;

(B) ‘Immovable property’, a legal concept by itself,  not simply a ‘fact’or ‘phrase’;

(C) ‘Works contract’ being a concept, which has an altogether different meaning in commercial parlance, so also for accounting in accordance with prescribed ‘standards’.

Moreover, admittedly, the deeming provisions came to be introduced / brought in on the statute, solely with a view to / the aim of changing and rewriting the concept of ‘works contract’, so as to serve the Government’s obviously intended purpose of breaking /dissecting the property i.e. Flat, an otherwise ‘immovable property’, violently, into its 3 components – land, goods and services, thereby tax payments attributed to the latter two- goods and services – as liable, respectively, for VAT and Service tax.
In view of the foregoing, in one’s firm conviction, there may be good scope for successfully urging that legal validity of the subject deeming provisions require to be examined, on first principles. For, the deeming provisions could be contested to prima facie suffer from a faulty logic and to be ill-founded by any reasoning; that is, – primarily for two reasons: 
(A) Any such deeming which , in effect, has the result of cutting at the very root of the basic concept/legal meaning of ‘immovable property’ is not to be construed to be within the constitutional powers of  the central and / or state legislatures to enact any such de-meaning deeming provisions; and 
(B) that the subject deeming provisions, no doubt, create a fiction though, but not a legal fiction, in its profound sense, so as to be upheld that it is within the legislative powers,
To be precise, the bone of contention, as suggested, is that any ‘fiction’ sought to be created must be ‘legal’, so as to qualify as a ‘legal fiction’; otherwise, its legal validity may be open to be challenged as not being legitimate, if that were to be tested on the supervening ‘principles of natural justice’.
In the instant case, so also in the line of cited cases, so far as is gathered, there is no answer to be found to a very fundamental question; that is, – why and how, by resort to a deeming provision, a property (Flat), which, having regard to its essentially inherent characteristics, ought to be necessarily treated as an ‘immovable property’, could be treated to be not so; that too, in isolation, for only VAT or ST.
In short, the submission is that, any such fiction, more so a combination of more than one as irrationally imputed herein, may not qualify as a ‘legal fiction’ in its absolute sense. No doubt, it is a fiction, but it is not to say that could be rightly construed to be a ‘legal fiction’, within its legal meaning, and within the fundamental principles of jurisprudence.
In this context, further, it needs to be essentially kept in focus that, for income tax and wealth tax purposes the legislature has, in its wisdom, considered it necessary hence through specially designed /structured provisions enabled the Government to treat it as an ‘immovable property’ so as to be taxed. In a manner of viewing, therefore, any deeming provision brought in solely to treat it as NOT an immovable property, only with a view to rendering it exigible to VAT and Service tax is tantamount to offending the wisdom of the very same legislature by whom both income tax and wealth tax laws happen to have been enacted.
The suggested line of reasoning, as above, of course, gives rise to a moot point, of its unique kind, never thought of, or raised and gone into, ever before. The intriguing poser, however, is, -even so, there is no valid or sensible reason why it should not be raised even at this stage, in order to having it to the end of judicially considered and specifically adjudicated upon, in the next opportune occasion if and when that arises.
Paragraphs 30, 31, 32, and 33 ……

(FONT supplied above)

In one's perspective, the foregoing lines of reasoning / the logic could likewise be validly urged, in regard to issues arising out of the deeming provisions governing 'indirect transfer', as well.

To Dilate: 

GAAR- if carefully gone through, in the so called 'general' rules the other related innovative concepts of 'indirect transfer' and 'TPR' have been bundled together; the common thread passed through them all, is the object of 'anti-avoidance' .

All such 'amendments' have been conceived of and given statutory effect , admittedly with the one and only purpose of 
and done so, raising the bogey of clarifying the 'intention'.

On the amendment made through a drastic and terrible horryfying modification, by insertion of new clauses, of sec 9 (1), for a complete commentary suggest to look up, -

A) the experts' viewpoints and case law as covered in the text books; for instance, in the leading Palkhivala's text book,  Tenth Edition, Volume I, pg. 346 to 364; And


> Income deemed to accrue or arise in India to a non-resident

Section 9 provides for situations where income is deemed to accrue or arise in India.

Vide Finance Act, 1976, a source rule was provided in section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for income by way of interest, royalty or fees for technical services respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein. The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India.

This was the settled position of law till 2007. However, the Hon'ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007)[288 ITR 408], held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India.

This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India. Therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-section (2) of section 9 with retrospective effect from 1st June, 1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India. However, the Karnataka High Court, in a recent judgement in the case of Jindal Thermal Power Company Ltd. vs DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under section 9. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme Court in its judgement in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) remains untouched and unaffected by the Explanation.
In order to remove any doubt about the legislative intent of the aforesaid source rule, it is proposed to substitute the existing Explanation with a new Explanation to specifically state that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,
(a) the non-resident has a residence or place of business or business connection in India; or
(b) the non-resident has rendered services in India.
This amendment is proposed to take effect retrospectively from 1st June, 1976 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Clause 4]

<> To be specially noted, - all such amendments , with a retrospective effect, have been resorted to, using the bogey of  'legislative intent', objectionably so. Such an objection could be forcefully addressed on , -besides other valid legal grounds, - by questioning the 'constitutional vires' / the 'constitutional morality'. 


[2008] 169 TAXMAN 14 (ART)

An Extract (To Ready READ only) :

On the aspect of retrospective amendment, in several cases where the matter was taken to the Courts, the following view has been consistently taken :

The word ‘deemed’ is not to include the obvious, the uncertain and the impossible. One of the external aids to construction of a statutory provision is the legislative history and background.

Retrospective legislation may be held to be invalid on the ground that it is unreasonable, or not in general public interest, or is beyond the legislative competence.

An amendment cannot be made retrospectively only for the purpose of nullifying a Court judgment where there was no lacuna or defect in the original law. On this point, there is a line of decisions in support.

Apparently, the subject budget proposal does not meet or satisfy, but is contrary to, the aforementioned guidelines or criteria settling the correct position in law.

Further, it brings to sharp focus also a moot but intricate point, which calls for a clinical analysis as outlined below :

The revenue’s explanation that the proposed amendment is to clarify the ‘intent’ or ‘purpose’ of the provision is, by its very nature, based on a purely subjective view. In that, it has basically something to do with the perception of the individuals originally involved and responsible for the framing and legislating the provisions. The validity of the point made will be better appreciated if one takes an insightful look at the reality by lifting, for this limited purpose, the veils of the Government and the Legislature.

The Act embodying the law on income-tax is, same way as any other law, a man made law, which is unquestionably distinct in its characteristics from the Law of Nature in its profound sense. The Government as such has neither a body to be kicked nor a soul to be condemned. In a democracy like ours, it is formed by the elected representatives of a political party (in today’s context, of more than one) constituting the majority at a given point of time. The Legislature is again a body constituted by such elected representatives of several political parties, including the one or more of them forming the Government. Technically, in the eyes of law, the Government as well as the Legislature are treated as bodies distinct from their constituent individuals. However, as mentioned hereinabove, for the limited purpose of examining the highlighted point, especially because what has been questioned or brought under scrutiny is ‘intention’, a state of mind, it is not but only fair, rather sensible, to relate it to the individuals constituting the Government or the Legislature.

Keeping in full view the reality brought out as above, it requires to be appreciated that the subject proposal to amend and assign a new meaning, a deemed one, to the term ‘actually allowed’ offends, in a manner of speaking, the very intellect or wisdom of the individuals who, as part of the Government and of the Legislature had an active role to play in framing or legislating the law originally. Besides, of course, it offends also the intellect and competence of the several authorities, including courts, who had thus far subscribed/been a party to the consistently accepted opinion on the meaning of the subject term. In all fairness, they must be taken to have done so being fully conscious of the purpose of the provision [i.e., section 43(6)] and the setting or context in which it has been used.

Further, the subject proposal to amend the law stems from what, in the perception of the individuals now on the scene, is considered, in retrospect, to be the intention or the purpose of the provisions.

It is no doubt the sole responsibility of the Government and its authorities to be vigilant and keep monitoring the proper implementation and enforcement of the Act. But that is not to say that it is within the powers of the Government to keep making changes in the Act all the time, especially retroactively, so often as one would keep changing his mind or perception. The primary objective of monitoring must be to ensure that the administration of the Act is strictly on, as is basis; that is, what is actually provided in the Act. Not on the basis of what, in the individual perception for the nonce, is the intention behind or the purpose of any provision.

(Refer MASTER Note, below)

< Within

The  view the recent court verdict has brought to surface once again, if looked at or through, is to the following effect: the subject matter of transfer is really the intangible asset, dubbed as ‘controlling interest ‘. Pithily stated,  according to the thinking behind, what has been transferred by seller and bought by the purchaser should be taken as  a slice of the operating company’s net worth, i.e. Proportionate assets minus liabilities as on the date of transfer.
The stated premise, if perceptively analyzed, as sufficiently canvassed in knowledgeable circles, goes against the very grain of the underlying scheme of the provisions of the law. Further, more importantly,  is seen  to give rise to a quandary; that can be illustrated as under:
Cost of acquisition of the shares (even if it be looked at or through as ‘controlling interest’/ a proportionate slice of the business) could not, by no means, be taken at no more or less than the price negotiated and actually /factually paid for. In case it were to be regarded as price paid for not the ‘shares’  but the controlling interest / the slice of the business it represents , going by common sense and logical reasoning, on its transfer the seller has to be taken to have demanded and received, and the buyer has to be taken to have agreed and paid, such an amount as considered its fair market value or its intrinsic value.
In the nature of things, however, there could again be no denying that, the seller has been able to realize more than what he paid for, only because of the appreciation in the value of the “capital asset”. There could be no doubt that it is such appreciation in value which in tax parlance is referred to as/termed ‘cost of improvement’.
Now, if the foregoing is translated arithmetically:
Cost of acquisition (of controlling interest) being the cost/equivalent of the shareholding held – say. X
Sales price – say, y
Cost of improvement (being excess of y over x ) – i.e. Y-x
Cost + improvement cost = x + (y -x)
Cg = y – (x + (y – x))
I.e. Y – x – y + x
Is not the result/can it be different than an absolute – ‘zero’?
Key note:
The suggested line of reasoning, in one’s conviction, cannot be simply ignored as a puzzle requiring a mathematical genius to solve; much less, as fiendishly difficult to understand by anyone, even if endowed with an average iq, hence deserves to be gone into in-depth. For, after all, the fact staring in the face is that the same line of reasoning, as is more than obvious, has been adopted in framing the corresponding provisions proposed in the dtc (pending enactment). Except that, the formula as framed therein for arriving at the taxable income , in one’s view, does not have any semblance of simplification sought to be accomplished , but suffers from certain other fallacies of a different kind. 
Is the comment puzzling and open to any intelligent and well reasoned counter-view?
If so, readers remain to be enlightened.

(Refer MASTER Note, below)


The thoughts /viewpoints shared on the aspect of 'Legislative Intent' AND 'Share X Controlling Interest' do not seem to have been urged and addressed for judicial adjudication, as yet. In own perspective, premised that those are not without merits and substance ('commercial' , as opposed to FORM (legal) or 'SUBSTANCE' (Economic substance)), might be worthwhile consider seriously to do so! 

TO note, however, the concept of 'commercial' prefixing 'substance', left to itself,-going by the ordinary as well as the legal meaning, as to be gathered from history of legislation, and related case law, would have had to be given a larger and comprehensive construction. For example, consider the legal interpretation as placed on 'commercial expediency' , in the context of deciding the destructibility of expenditure incurred for business.Be that as it may, scope for such a wide construction of the term has been now restricted, by tweaking, through a 'deeming provision', seemingly couched in a clumsy language,  as embodied in sec 97(1); in which an arrangement "shall be deemed to lack commercial substance", if- (READ ON)           
For some solace, of negativity, from across the border- on 'Intent'  X 'Language' - Judiciary's  task is unenviable  >

Legislative 'INTENTION' and Courts' Role TO 'INTErPRET' - Swamilook


"When courts fill in the gaps in a law, sometimes the judges are
criticized as being "activist" judges or crossing the line into legislating."

(Un-Finished /- EDITED < OPEN/ INVITE eminent Experts To)

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