Table of Contents

Introduction

Over the last decade or so, law enforcers in India have shown both, the willingness and the ability to go behind law breakers in a myriad ways, and have gathered a veritable arsenal of general and specific tools. In this, the 100th issue of our Taxsutra Database Newsletter, we bring you a roundup of the formidable arsenal now available to law enforcers. Due to the sheer number of tools, we have been forced to classify them. While our focus primarily is on tax law enforcement, we also look at developments from other departments of law enforcement, and also the new boldness in going behind large exposure cases. Law enforcers have also shown a resolve and willingness to collaborate with other law enforcers in order to get better results, so it is a matter of time that tax law enforcers pick up any new idea and use it in course of their work.

A. Legislative/ Administrative Changes in India

1. GAAR

One major recent development in the tax laws is the coming into effect of GAAR, the General Anti-Avoidance Rules, with effect from financial year 2017-18, codifying the concept of ‘substance over form’. Its entry into force has been quiet, but its impact is likely to be deep and long-lasting. Quiet, because the Government lit two fires that are still raging – Demonetisation and GST. While the first, by its very nature is likely to be a one-off move, the other is something which all businesses are still learning to cope with.

GAAR is an attempt to tax those transactions that are 'legal' yet lead to 'avoidable' tax avoidance. Even the BEPS project of OECD largely revolves around the concept of GAAR. In the recently published edition of the UN Handbook on ‘Selected issues in protecting tax base of developing countries’, two new chapters have been added; one dealing with base-eroding payments of rent and royalties, and the other on GAAR. The GAAR chapter elaborates on the relevance of GAAR for developing countries, policy considerations for domestic GAAR, and major features of GAAR. It further highlights specific exceptions in many GAAR provisions, whereby they do not apply to transactions or arrangements despite having primary purpose of obtaining a tax benefit, when such transactions/arrangement are “consistent with and not contrary to the object and purpose of the tax legislation”.^[1]

The coming years are likely to see a plethora of litigation arising out of what the taxpayers will view as overzealous application of GAAR to genuine transactions, while the Tax Department’s view would be exactly opposite, accompanied by a strenuous denial of intent to push the envelope of what is considered as needless tax avoidance. It won’t be surprising to see a revival of the litigiousness around the controversy of tax evasion versus avoidance that we saw following the SC decision in McDowell & Co Vs Commercial Tax Officer (Karnataka) [TS-1-SC-1985-O] in the second half of the 1980s.

2. Demonetisation and its fall-out – measures for flushing out black money

On 8^thNovember 2016, the Government took an audacious step of demonetisation, declaring Rs.500 & Rs.1,000 notes as invalid with immediate effect. During the 51-day window that the Government kept open to deposit the scrapped notes into banks, the banks witnessed deposits totalling to about Rs. 7 lakh crores in more than 60 lakh accounts exceeding Rs. 2 lakhs in each account. The CBDT is seeking reports from the banks on such deposits, dormant accounts and new accounts being used during the period to make cash deposits. It suspects that a part of illicit cash in circulation may have entered the banking system through such big deposits.^[2]

After much of the dust had settled, and the difficulties faced had started fading from public memory, the Ministry of Finance issued a press release on 7th April 2017, listing out its ‘Significant Achievements Towards Eliminating Domestic Black Money’ during the last three years. It said it had conducted 23,064 searches/ surveys, out of which more than Rs.1.37 lakh crore tax evasion was detected, and criminal prosecutions were launched in 2,814 cases. The Enforcement Directorate also intensified its anti-money laundering actions during the same period, by registering 519 cases and conducting 396 searches. The CBDT claims to have tightened the laws and plugged several loopholes. Further, effective steps were said to have been taken to track and curb cash transactions through various other means like penalising cash transaction of more than Rs.2 lakh; limiting allowable cash expense up to Rs.10,000 only; making Aadhaar mandatory for obtaining PAN and filing of income tax returns.  Crackdown against thousands of shell companies engaged in ‘nefarious activities’ was reportedly effected through enforcement actions, and more than 100,000 notices issued for striking off names of defunct/ non-compliant companies.

3. Benami Transactions

Following Demonetisation, the Benami Prohibition Act, 1988 was comprehensively amended and made operational once more after 28 years, and more than 400 benami transactions (and still counting …) involving over Rs. 600 crores have been unearthed. Several instances of persons with no means have been found owning properties worth crores of rupees, with some other persons allegedly being the beneficial owners. One such instance was of a driver in Madhya Pradesh holding properties worth Rs.7.7 crores in his name, which purportedly belonged to his employer.^[3]

In addition to the wide sweep by tax officials to unearth benami properties, it very recently has come up with a plan to take the aid of informers. The CBDT has proposed a scheme to handsomely reward with up to Rs.1 crore any person who provides actionable information about those who deal in benami transactions.^[4] This scheme, once it receives the nod of the Finance Ministry, is certain to make the task of unearthing benami transactions a lot easier, faster and more effective.

4. Efforts to get more assessees to file income tax returns

As a further tightening measure, the CBDT has very recently (in September 2017) set an all-India target of adding 1.25 Crore ‘new income-tax return filers’ during FY 2017-18, in a focused effort to significantly widen India’s tax base. These targets are in respect of number of new return filers, and not new taxpayers. A 'new return filer' for this purpose is a person who has not filed any return in the three preceding Financial Years, but has filed a return in the current financial year^[5]. It remains to be seen what strategies and tactics are adopted to induce registered taxpayers to begin filing returns once again.

It is also not clear what purpose would be served by persons who were taxpayers once upon a time and are no longer earning incomes above threshold limits being pushed to file returns showing no new taxable income, which would be what can happen in a large number of cases, especially (for example) those who have retired from salaried jobs.

5. GST

The biggest reform till date in tax laws, the GST, came along from July 2017. Most of us are at least somewhat familiar with the GST laws now. As per revenue figures released by the Ministry of Finance, the GST revenue garnered as on 25^th September 2017 is Rs.94,063 crores, and Rs.90,669 crores for the months of July and August 2017 respectively^[6]. What is interesting about GST, particularly in goods, is the single point of tax, i.e., on ‘supply’ as against multiple taxable events that existed under the VAT law. The GST regime also provides for seamless input tax credit mechanism to suppliers, as the tax charged by the Central and State Government would be a part of the same tax regime.

Yet another interesting aspect about the GST law is the ‘reverse charge mechanism', designed to act as a self-policing mechanism that puts the burden of paying the tax on the buyer, in cases where the supplier is not registered to pay GST, and in certain other specified cases. The recently conducted 22^nd meeting of GST Council decided to suspend the reverse charge mechanism till March 31, 2018 as a part of the facilitative measures and will be reviewed by Committee of Experts. Once re-implemented, this will help in increasing the reach of the indirect tax laws and flushing out small businesses that were hitherto ‘flying under the radar’. It will also make cash transactions more expensive. It will ensure a maker-checker system wherein, if a person is not registered for GST, those registered for GST would not want to do business with him as they would run the risk and cost of losing input tax credits. Thus, GST will serve CBDT’s purpose as well, indirectly, of increasing the base of new tax return filers.

It is also worth noting that in a bid to integrate direct and indirect tax systems, the Government has linked GST identification numbers with PANs. This integration is expected to facilitate data exchange and taxpayer compliances, in addition to curbing of malpractices and tax evasion, and to pave way for cross-checking Income Tax payments with GST.

6. Panama Leaks

On 3rd of April, 2016, a whopping 11.5 million encrypted confidential documents belonging to a Panama-based law firm, Mossack Fonseca, were leaked, exposing a network of about 214,000 tax havens involving people and entities from 200 different nations. There were several (almost 500) Indian names mentioned, including many film actors, politicians and businessmen. The Indian Government immediately jumped into action and constituted a multi-agency group, called the Special Investigation Team (SIT) on 4th of April, 2016 for facilitating co-ordinated investigation in cases of Indian persons allegedly having undisclosed foreign assets, and whose names were reportedly included in the Panama Papers leaks. The SIT Group consists of officers of the Investigation Division of the CBDT, Foreign Tax & Tax Research Division of CBDT, Enforcement Directorate (ED), Financial Intelligence Unit (FIU) and the Reserve Bank of India, and its Convenor is the Member (Investigation), CBDT^[7].

7. Linking Aadhaar numbers with bank accounts and PAN

Another initiative by the government in its objective of cornering money launderers and fake account holders was the linking of Aadhaar numbers to bank accounts and PAN. Law and IT Minister, Ravi Shankar Prasad disclosed in a recently held Cyber Conference that 60 lakh bank accounts have been linked to Aadhaar, and  the government had saved Rs.58,000 crore^[8] under direct benefit transfer scheme, and also detected fake gas connections and ration cards with help of Aadhaar.

The Aadhar-PAN linking has helped the Government to detect duplicate/ multiple PANs, which has led to mass deactivation of 11.44 lakh PANs^[9]. This is yet another action expected to prevent benami transactions and circulation of black money and tax evasion

8. Co-operation and information sharing between MCA and  CBDT

Greater co-operation between various regulators for more effective law enforcements was a strongly felt need. Responding to this, the Ministry of Company Affairs (MCA) and the CBDT have agreed recently to share information, which would aid both departments to “curb the menace of shell companies, money laundering and black money in the country and prevent misuse of corporate structure by shell companies for various illegal purposes”.

The MCA and the CBDT signed an MOU on 6th September, 2017, to share information such as tax returns, PANs and financial statements filed by corporate entities with the CBDT and the Registrar of Companies, returns of allotment of shares, etc. As per the agreement, information related to both, Indian companies and foreign companies operating in India will be shared.^[10]

9. Campaign against Shell Companies and their Directors

The CBDT has been cracking down on dubious companies, and is now collaborating with the MCA to get names of such companies struck off from the MCA register and website. Several companies are under the microscope for possible tax evasion and stock price manipulation.

In a recent move, the Finance Ministry imposed restrictions on directors of more than 2 lakh struck-off companies from accessing bank accounts in the name of shell companies until they are legally restored by an NCLT order^[11]. Followed by this was a move to identify directors of such shell companies and disqualify them from directorships in any company. Almost 100,000 directors have been identified so far.^[12]

In addition to the above, other likely impacts on Directors of such companies could be blocking of their DIN; restraint from taking up other Directorships or filling in data on MCA website; referrals to professional bodies for misconduct proceedings; freezing of bank accounts, etc.

10.  Insolvency & Bankruptcy Code: Towards Solving the Problem of Banks’ NPAs

NPAs are a major issue that India’s Banking sector is today grappling with. A new bankruptcy legislation, the Insolvency &Bankruptcy Code, 2016 (IBC) has been introduced, which seeks to combine the existing framework by creating a single law for insolvency and bankruptcy. It helped that the Doing Business survey (which ranks countries on the ease of doing business, India’s ranking on which the Government is committed to improve) places significant weightage on an effective regime to manage Bankruptcy and Insolvency. With the new law in force, the Banking sector’s NPA threat is expected to subside, with a noteworthy increase in speed and rate of recoveries and settlements. More powers have been given to the RBI to intervene in the banks’ handling of recoveries, and is expected to improve the resilience of the Indian banking system. As on 18^th May 2017, 67 cases were filed. First insolvency was filed by ICICI bank on 17^th January, 2017 against Innoventive Industries of Rs.  100 crores^[13]. Under the IBC, two separate tribunals have been set up to supervise the insolvency process – the National Company Law Tribunal (NCLT) for companies and LLPs, and the Debt Recovery Tribunal (DRT) for individuals and non-LLP partnerships. Time period for completion and closure of cases has been capped at 180 days, which can be extended further by a maximum of 90 days.

11. Listed companies have to disclose to SEBI default on debt to banks in 1 working day

Corporate loan defaults have become commonplace today. To bring in much-needed financial discipline in the corporate sector, the SEBI has recently tightened disclosure norms for listed companies. Listed companies have been directed to disclose defaults on loan repayments within one working day of the default starting from 1st of October 2017. The disclosure would be required for delay or defaults in payment of interest, instalment obligations on debt securities, loans from banks and financial institutions and external commercial borrowings, in addition to delay/ default in payment of interest/ principal on debt securities, including listed non-convertible debentures, listed non-convertible redeemable preference shares, and foreign currency convertible bonds.

Listed banks are directed to disclose deviations in bad debt estimates to stock exchanges as soon as they receive a communication from the RBI. The RBI had earlier directed banks to make disclosures in their financial statements if bad debt estimates rose by more than 15%.^[14]

12. Applicability of tax on gains arising out of indirect transfers of Indian assets

Though not among the most recent developments, taxation of gains arising on ‘Indirect Transfer’ of Indian assets can certainly be counted among the major developments having a huge impact on the Indian legal system and economy. Subsequent to, and to overcome the landmark ruling by Supreme Court in the Vodafone case [TS-23-SC-2012-O], section 9 of the Income Tax Act, 1961 was amended by Finance Act, 2012 to provide for taxation of a transfer of share or interest in a company or entity outside India that derived its value substantially from an asset situated in India. Though amended in 2012, the provision is till date evolving in the form of further amendments and clarifications by the CBDT. Due to the sweeping scope and language, the provision lacked much-needed clarity, which led to an amendment in 2015 which clarified the phrase, “substantially derive value” and provided a carve-out for transfers of shares of a foreign company deriving substantial value by investors who held less than 5% of the interest in such foreign company. Vide Circular No. 41 of 2016,the CBDT further provided clarifications on various vexed issues raised by stakeholders, addressing some major issues such as taxation of transfer of shares of FPIs, Offshore funds, Feeder/ Master Funds, Nominee/ Distributor type of structures, Tax Treaty exemption situation, valuation of Indian and global assets etc.

13. Change in tax residency conditions by introduction of Place of Effective Management (PoEM) concept

Another major amendment which sought to change the tax residency status of an entity was the introduction of concept of Place of Effective Management (POEM) by the Finance Act 2016. As per this, a foreign company could be deemed to have their POEM (a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made) in India and, as a consequence, would be deemed to be an Indian tax resident having to pay tax on global income. This acts as yet another major move to render ineffective use of shell companies to shift profits outside India, and thus save on taxes. The amendment in section 6 regards a company incorporated outside India as a resident in India if the territorial nexus of that company with India is established by virtue of its POEM being in India. An administrative circular was issued by the CBDT on 24^th January 2017, which emphasised that the test of POEM is one of “substance over form”, and is to be determined with regard to the facts and circumstances of each case on a yearly basis. A new machinery section, section 115JH, was also introduced for determining the tax liability of a POEM-hit foreign company. On June 15^th, a draft notification was issued, providing clarity on many aspects involving mode of computation of income of such foreign companies.

14. Tax impact on account of transition to Indian Accounting Standards (Ind-AS)

Many Indian companies witnessed a significant change in the way their books were presented post adoption of the Indian Accounting Standards (Ind-AS). The Ind-AS were introduced as a balance between existing Indian GAAP and IFRS. Companies that adopted Ind-AS prepared their first financial statements as per Ind-AS for the year ended 31 March 2017. Apart from the positive/ negative impact on profits or losses of Ind-AS compliant companies, Ind-AS would also impact book profits u/s.115JB of the Income Tax Act and MAT computation. Section 115JB has now been amended to incorporate adjustments as mandated by Ind-AS, such as adjustments to retained earnings, valuation of assets and liabilities at fair value through profit & loss account, or through Other Comprehensive Income and profits/losses on Demerger.

15. Tax impact of the new Income Computation and Disclosure Standards

As the roadmap for introduction of Ind-AS was being laid down in 2010, the CBDT started working on drafting ‘Income Computation and Disclosure Standards’ (ICDS) to align tax treatment with the Ind-AS. Vide Notification No. 32/2015, dated 31/03/2015, 10 ICDS  have been notified u/s.145(2) and made effective from 1 April 2015. These ICDS prescribe the method of accounting to be followed for computing taxable income. These ICDS will be applicable to all assessees following mercantile system of accounting for computing income under the heads “Income from Business and Profession” and “Income from Other Sources”. The implementation of ICDS in several situations results in earlier recognition of income or later recognition of expenses or losses, resulting in potential tax impact. So implementation of ICDS is expected to impact working of taxable income substantially and, like Ind-AS, would demand considerable attention and decision-making from Boards of Directors and other stakeholders.

16. Push towards Big Data Analysis

Recent focus on big data on financial behaviour of taxpayers is promising to make tax administration faceless and non-intrusive, yet accurate. Project INSIGHT (undertaken by CBDT to enhance analytical capability of tax authorities) uses data analytics, and is expected give the Government leverage to deepen and widen the tax base. The Government recently issued a list of accepted and implemented recommendations of the Tax Administration Reforms Commission (TARC) Reports headed by Dr. Parthasarathi Shome^{[15] [16]}. The TARC was set up to review the application of tax policies and tax laws in India in the context of global best practices, and to recommend measures for reforms required in tax administration. Out of about 586 recommendations made by the TARC, 119 have been accepted and implemented, while many others are at various stages of examination/ acceptance/ implementation. The broad recommendations accepted include changes in structure and governance of CBDT & CBEC, tax base expansion, dispute and compliance management, promotion of e-payments,  improvement in taxpayers’ services, exchange of information with other agencies, strengthening of human resource management, key internal processes, expansion of base, revenue forecasting, predictive analysis and research for tax governance, etc.

A special focus was laid on digitisation and modernisation of the manner of conduct of proceedings by the tax departments. The Finance Ministry has accepted the recommendations of the Committee that the Boards need to commence the journey to the “digital by default” status in order to reach a level of maturity in the use of data analytics. Data analytics should be made an integral part of the strategic planning process and the analytical efforts should be integrated with programme and project management. Implementation of alert management framework and use of advanced data analytics  to sharpen process of selection of returns for scrutiny, and avoid unproductive workload for assessing officers, is a part of  Project INSIGHT.

17. Training officers in preparing EoI requests

There is an increasing need for effective co-operation and communication amongst taxing jurisdictions to effectively tackle tax evasion/ avoidance adopted by cross-border businesses, and for proper administration and enforcement of domestic laws. Such international co-operation in tax matters is done through exchange of information mechanisms available in the Double Taxation Avoidance Agreements (DTAAs), Tax Information Exchange Agreements (TIEAs) and Multilateral Agreements for Exchanging Information. India has joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information along with 59 other countries. When fully implemented, it will enable Indian tax authorities to receive information from almost any major country about assets of Indians held abroad. In order to equip its investigating officers to handle the process of exchange of information efficiently, the CBDT has published and issued a manual outlining the legislative framework of Exchange of Information and other forms of Administrative Assistance under India’s DTAAs and TIEAs, Guidelines and the Proforma which the field formations should follow while making a specific request from foreign tax administrations, Guidelines to be followed in case a request is received from abroad, Guidelines for utilisation of information received from a foreign jurisdiction; and necessity of maintaining strict confidentiality in all forms of Exchange of Information. Administrative measures such as strengthening of the Foreign Tax and Tax Research Division in the CBDT, and creation of a dedicated Exchange of Information Cell have been taken up^[17].

B.    Innovative sources of evidence for aiding law enforcement

With the aim of leaving no stone unturned in gathering evidence against law breakers, Government Departments are seeking greater, deeper and tighter department-to-department/ agency-to-agency co-operation. The IT Department is taking aid of SEBI and MCA/ ROC to track transactions on stock exchanges and information related to shell companies respectively. Banks are often approached to cull out information regarding undisclosed income. Especially post-demonetisation, banks are a leading source of information for the Tax Department. Help of the ROC is sought in scooping out information regarding benami property transactions. Access to phone call records, and information posted on social networking sites that are publicly available have also been used as circumstantial evidence by Departments to prove their cases.

1. Satellite pictures data (to prove that land not cultivated for 3 years)

In a recent incident, the Gujarat IT Department sought help from ISRO to gather satellite pictures of a plot of land to prove that it was not used for agricultural cultivation, and thereby not eligible for tax exemption on its sale. Claiming exempt agricultural income is one of the most common means to convert black money into white. This mode is most often adopted by corporates as well. Top three corporate claimants of agricultural income during financial year 2013-14 were Kaveri Seed Company, Monsanto India, and Mcleod Russel India. The Income Tax Department has been making efforts to identify and scrutinise taxpayers who have high agricultural income. In nine years through March 2016, Indians declared nearly Rs 1.34 lakh crore as agricultural income. More than 4 lakh taxpayers had claimed exemption for agricultural income in the first eight months of year to March 2014^[18]. Suspecting foul play in one such case, the IT Department approached ISRO to provide them with satellite images of a plot of land claimed as being agricultural land being cultivated, in the previous 3 years. It was clear from the images that there was absolutely no cultivation on the land during this period, and exemption was denied on the basis of the ISRO-provided images with date and time stamps.

In another case, where the assessee was the HUF of a former Chief Minister [TS-6734-ITAT-2016(CHANDIGARH)-O], the Tribunal upheld the CIT’s invocation of his revisionary powers to question the claim of very high agricultural income, where the AO had not applied his mind or conducted any inquiry, but had completed the assessment in a routine and casual manner. The Revenue’s stand was that the high agricultural income was intended to cover a huge investment made in LIC annuity policies during the year.  

2. “Fontgate”:  Printed documents can be ‘fo(u)nts of information’

Though unrelated, a similar thing happened in a case popularly dubbed as “Fontgate” that brought about the downfall of Nawaz Sharif, former PM of Pakistan, in a case in which his children were linked to offshore companies and were named in the 2016 Panama Papers leak of documents belonging to the law firm, Mossack Fonseca. Sharif's daughter Maryam was the sole shareholder of one of two British Virgin Island companies which had invested in high-end London property, described by Pakistan’s Federal Investigations Agency as “ill-gotten wealth earned through corrupt practices”. Maryam claimed that she had disclosed her ties to the British Virgin Islands firm in Jan-Feb 2006. She produced a copy of the disclosure statement, but got caught because it transpired that the font used in that statement was the Calibri font, which was first introduced by Microsoft in 2007.  Even the first public beta version of the font, it transpired, was released on June 6, 2006, four months after Maryam Nawaz allegedly signed the papers^[20].

3. Social media (LinkedIn) posts (To prove that GE expat was providing services in India that amounted to PE

In a fairly well-known case of GE Energy Parts Inc. [TS-400-ITAT-2014(DEL)-O] (assessee), a company belonging to the GE group, the Income Tax Appellate Tribunal accepted data culled from the social media platform, Linkedin, as evidence to decide whether or not the company had a PE in India. On finding that the taxpayer carried out certain activities not permitted by RBI, and that certain expats were directly responsible for concluding sales for the foreign company in India, the tax authorities alleged that the US-based assessee constituted a PE in India. To establish its claim, the tax authorities pulled out profiles of the expats from social-cum-professional networking site, Linkedin. The tribunal accepted such evidence gathered from networking sites as having considerable bearing on the impugned issue. It stated that admission of such evidence, though not conclusive, is binding and decisive, unless it was proved to be erroneous. The ruling was subsequently stayed by the High Court.

4. Mobile tower data (To prove that alleged co-conspirators were in same location at same time)

In another case which dates back to 2008, a listed company, Pyramid Saimira, was in the middle of a major controversy when a forged letter purportedly written by it to SEBI was published in newspapers, leading to manipulation of stock prices. SEBI, in order to prove the allegation, and to support the testimony of one witness against the alleged perpetrators, had gathered data from mobile towers to trace the location of the place where the alleged key conspirators met, to establish that meetings between them did take place at the time and in the vicinity of the location as alleged, when the plan was being hatched/ implemented. The conspirators were convicted of manipulation of stock price and insider trading primarily on supporting evidence of mobile phone tower records^[21].

SEBI is leaving no stone unturned in using technology and social networking sites in hunting out the offenders. Recently, in an interim order passed on 16th April 2018, SEBI took aid of the famous networking site Facebook to hold two sets of persons as co-conspirators in an instance of insider trading. SEBI checked their Facebook profiles and found that the parties were ‘friends’ and that they had ‘liked’ the photos posted on Facebook  of each other and/or their families. The parties have been asked to deposit profits allegedly made, with interest @ 12% p.a. ^[21a]

Small wonder, then, that the Income Tax Department decided in 2016 to invest in a world-class forensic lab^[22]. The state-of-the-art lab will help tax sleuths crack passwords, carry out mathematical hashing, recover files and identify file signatures, backed by latest forensic technology like highly-configured computer systems with in-built write blockers, extra USB ports, pre-installed forensic software to acquire and analyse data collected during inspectors’ search and survey. Admissibility of such digital evidence has improved after the Information Technology Act has been passed.

C. Going behind high-profile taxpayers/ heavy demand cases

1. Unexplained Cash Credits u/ss. 68 and 69A

That the Department has been willing to take on the mighty and question explanations given and evidence presented, becomes clear when we see the case of a former Chief Minister’s family members (Kalaignar TV Pvt. Ltd. [TS-6813-ITAT-2016(CHENNAI)-O]) in which the Department disbelieved the explanation (though fully supported by documents) that Rs.200 crores were intercorporate loans and share application money. This case was a fallout of what is commonly known as the “2G spectrum case”,  which involved a charge-sheet filed against A. Raja (former Central telecom minister from the DMK party) alleging that he ‘illegally’ granted 2G spectrum licenses to ineligible firms, in lieu of which Rs. 200 cr was allegedly transferred to the assessee-company (owned by DMK chief M. Karunanidhi’s family) in Tamil Nadu.

A case that is still unfolding is that of NDTV India [TS-6186-ITAT-2017(DELHI)-O], where the Revenue is alleging that Rs.642 crores ($150 million) raised at the level of a Dutch subsidiary, followed by series of re-structuring transactions spanning several countries including India, Netherlands, UK and Bermuda, was actually a transaction used principally as a device for the distribution/ diversion of sum to the Indian entity and that the beneficial owner of the money is the assessee. The ITAT observed that in the present corporate world and complex business environment, courts cannot shut their eyes and close their ears by accepting the complex cobweb of structures for tax avoidance devices adopted like this. Therefore, this sum was added as unexplained money u/s.69A. [As per Sec.69A, in any financial year if the assessee is found to be an owner of any money etc. which is not recorded in the books of account and the assessee offers no explanation about the nature and source of the acquisition of the money or the explanation offered by him is not in the opinion of AO satisfactory, then such money may be deemed to be the income of the assessee for that financial year]. We may point out here that this case also had huge Transfer Pricing additions, which we are not discussing here.

Yet another recent case involves companies belonging to the Reliance Group (Reliance Utilities P Ltd [TS-6169-ITAT-2017(MUMBAI)-O]). The AO held that the nature and genuineness of the transaction of investment in CCPS issued was not explained as required in Section 68 of the Act, and made an addition of almost Rs.1,500 crores u/s. 68 in the assessee’s hands. Of course, in this case, at the Tribunal stage, the case was decided in the assessee’s favour, but we cite it here to illustrate the Department’s willingness to go after big targets and attempt to justify huge additions.

2. Use of AIR Information:

Annual Information Report (AIR) is collected routinely from various assesses by the Department, which has found this to be a treasure-trove of tax evasion. To cite an example of how the Department used this money, we look at yet another high-profile case, the case of the former Dy. CM of Maharashtra, AjitPawar’s son Parth was taken up for scrutiny assessment when, based on the AIR, it was found that he had purchased a property for Rs.5 crores [TS-419-ITAT-2017(Mum)]. The source was explained as an unsecured loan taken during the year from his mother. It was later found that this loan from his mother was not paid to the seller of the property, but to another company, and that the payment for the property pre-dated the alleged loan.  Further, it was found from data gathered from the Sub-Registrar’s office that the disclosed consideration was less than the Stamp Duty Valuation, and attracted Section 50C. All this came out when the CIT invoked his revisionary jurisdiction. This case showcases not only the usefulness of AIR to tax gatherers, but also the fact that they co-operated with other Government Departments (the Sub-Registrar of Assurances) to get relevant information/ evidence.

D. External Push

1. Information Exchange - making cross-border taxpayer information available to local regulators/ tax authorities

Tools of exchange of information between countries in the form of Exchange of Information clauses in the DTAAs, TIEAs (Tax Information Exchange Agreements) and Multilateral Agreements for exchanging Information have been in existence since a long time, but were not utilised effectively by Indian Tax Authorities.

In recent times, however, with greater availability of information and greater willingness among Governments of countries across the globe to share information relating to tax evaders, the Tax Department is becoming more and more proactive, alert and conscious of the value of information received from foreign Governments, and its usefulness as an enforcement tool. On the one hand, it is providing extensive training to its officers to make use of the provisions efficiently, and on the other hand, the Government is actively taking steps to create an appropriate legislative framework for receiving and effectively utilising the information received from foreign jurisdictions. These steps include re-negotiating existing DTAAs to update the provisions on exchange of information to internationally agreed standards, including enabling India to receive banking information (e.g. from Switzerland), entering into new DTAAs with new clauses relating to exchange of information as per internationally agreed standards, and entering into TIEAs with no tax or low tax jurisdictions (e.g. with Cayman Islands, British Virgin Islands etc.).

Besides, section 94A of the Income-tax Act enables India to notify a country as a non-cooperative jurisdiction if it does not effectively exchange tax-related information with India. India used this power very effectively against Cyprus recently.

Administrative measures such as strengthening of the Foreign Tax and Tax Research Division in the CBDT, and creation of a dedicated Exchange of Information Cell have also been taken up. India has a network of TIEAs with eighteen low/ no tax jurisdictions. India has also signed the Multilateral Convention on Mutual Administrative Assistance. Limited Multilateral Agreement with wide scope of providing administrative assistance and training has been entered into among members of the South Asian Association for Regional Cooperation (SAARC).

Several DTAAs recently negotiated/ re-negotiated  and signed by India have an Information Exchange clause, which is the equivalent of, and has the same effect as a TIEA. India is among the 48 countries that have started automatic information exchange from Sept  2017.

Further, Multilateral Convention signed by India provides an additional instrument for receiving administrative assistance from foreign jurisdictions having scope wider than DTAAs and TIEAs. The Parties to the Convention (to the extent they have agreed and signed) are obliged to provide a wide range of administrative assistance to each other such as Mutual Administrative Assistance, exchange of information on request, automatic exchange of information, spontaneous exchange of information, simultaneous tax examinations, tax examination abroad, assistance in recovery, service of documents etc^[17].

India has also entered into a bilateral Inter-Governmental Agreement (IGA) with the US Government to implement the United States law called Foreign Account Tax Compliance Act (FATCA) to promote transparency between the two nations on tax matters. The agreement aims to underscore growing international co-operation to end tax evasion everywhere^[23].

2. BEPS: CBCR – driving transparency about locations where value is added

CBCR, a fallout of OECD’s BEPS Action 13 with a primary objective of transparency and accuracy in reporting, is essentially a tool to ensure that taxes paid in the jurisdictions by MNCs are commensurate with the profits generated/ value added therein. Large MNCs with revenue of 750 Million Euros or more have to provide an annual return, a CBC report, that breaks down key elements of a financial statement by jurisdiction, in the country where the company is headquartered, or the country in which the surrogate reporting entity is incorporated. A CBC report would include a report on performance, tax charge, details of the cost and net book value of its fixed assets of each subsidiary and affiliate in each country etc. This process will open up the financial statements of an MNC so that the countries in which it adds value can be more accurately deduced. This is expected to change the international transfer pricing regime enormously. Indeed, some are even talking about “formulaic” calculation of Arms’ Length Pricing and sharing of tax base, once almost all countries are on board with CBCR.

3. BEPS: CFCs/ Thin Capitalisation – Discouraging structures that shift profits away from value-creating jurisdictions and into low-tax jurisdictions

Companies with presence in different jurisdictions often structure their financing arrangements to establish a tax-efficient mixture of debt and equity in borrowing countries. Debt being a more tax efficient method of finance than equity, companies manage an interest pay-out and thereby claim a deduction against taxable profits by maintaining a debt with an entity in a country where there is either no tax on interest, or low rates of taxes overall. Borrowing principles from BEPS Action 4 on limiting base erosion involving interest deductions and other financial payments, the Indian Income Tax Act has introduced Section 94B – Limitation on Interest Deduction. This section, applicable to an Indian company and overseas companies with a PE in India, having interest payable above INR 10 Million, disallows interest paid in excess of 30% of a company’s EBITDA with the disallowed amount to be carried forward up to 8 years.