Rule 10U

Rule 10U — the law in short

What the courts have decided on section Rule 10U, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• AAR v Tiger Global International II Holdings Supreme CourtHelps departmentNo later treatment found
  I hold a Mauritius TRC. Can the department still deny me treaty relief on the capital gains?
  Yes. A Tax Residency Certificate is a necessary eligibility requirement under s.90(4) but is not sufficient or conclusive evidence of residence, beneficial ownership or entitlement to treaty benefits, and the authorities may examine the substance of the arrangement. The Supreme Court set aside the High Court's judgment, restored the AAR's rejection and held the gains taxable in India.
• Statutory position — Chapter X-A applies only from AY 2018-19, and Rule 10U's three-crore threshold and the grandfathering of investments made before 1 April 2017 CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says my client's 2015 restructuring is an impermissible avoidance arrangement. Can GAAR reach an arrangement entered into before it came into force, and is there a monetary floor below which it simply does not apply?
  Chapter X-A applies in respect of any assessment year beginning on or after 1 April 2018 — that is, from AY 2018-19 — under s.95(2). Rule 10U(2) then makes the Chapter apply to an arrangement irrespective of when it was entered into, so long as the tax benefit is obtained on or after 1 April 2017; but Rule 10U(1)(a) takes out any arrangement where the tax benefit in the relevant assessment year, in aggregate to all parties, does not exceed three crore rupees, and Rule 10U(1)(d) read with the exception in Rule 10U(2) takes out income from the transfer of investments made before 1 April 2017.
• Statutory position — section 99, section 97(3) and section 102: connected persons and the accommodating party, and how they are collapsed into one taxpayer CBDT Circulars & InstructionsCuts both ways
  The GAAR notice says a Mauritius company in my client's structure is an 'accommodating party' and that two group companies are 'connected persons'. What do those words actually mean and what follows if they are made out?
  Section 99 says that in determining whether a tax benefit exists, connected persons may be treated as one and the same person, an accommodating party may be disregarded, an accommodating party and any other party may be treated as one and the same person, and the arrangement may be considered or looked through by disregarding any corporate structure. 'Accommodating party' is defined in section 97(3) — a party whose main purpose in participating, directly or indirectly and in whole or in part, is to obtain a tax benefit for the assessee, whether or not it is a connected person; 'connected person' is defined at length in section 102(4), with a twenty per cent 'substantial interest' test in section 102(8).
• Statutory position — sections 100 and 101: Chapter X-A applies in addition to or in lieu of any other basis, and only in accordance with prescribed guidelines CBDT Circulars & InstructionsCuts both ways
  Can the department run GAAR and a specific anti-avoidance provision on the same transaction, and is there anything that limits how GAAR is applied?
  Section 100 provides that the provisions of Chapter X-A shall apply in addition to, or in lieu of, any other basis for determination of tax liability — so GAAR is not an alternative of last resort and can be invoked alongside, or instead of, a specific charging or anti-avoidance provision. Section 101 provides that the Chapter shall be applied in accordance with such guidelines and subject to such conditions as may be prescribed, and it is under that section that rules 10U to 10UC are made.
• Statutory position — s.102: "tax benefit", "arrangement", "step", "party" and "benefit" — the definitions that decide whether Chapter X-A can start at all CBDT Circulars & InstructionsCuts both ways
  The department says I obtained a "tax benefit" from an "arrangement". Where are those words defined, how wide are they, and does an increase in my carried-forward loss count?
  Section 102 is the definition section for the whole Chapter, and its two most important entries are drafted as wide as they could be. "Tax benefit" in s.102(10) is an INCLUSIVE definition — the section says "includes" — and its six sub-clauses cover a reduction, avoidance or deferral of tax or other amount payable under the Act; an increase in a refund; the same two things where they arise as a result of a tax treaty; a reduction in total income; and an increase in loss — each of them "in the relevant previous year or any other previous year". An increase in loss therefore is a tax benefit even in a year in which no tax was payable at all. "Arrangement" in s.102(1) means "any step in, or a part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not", and includes the alienation of property in it, and "step" in s.102(9) includes "a measure or an action, particularly one of a series taken in order to deal with or achieve a particular thing or object in the arrangement".
• Statutory position — s.95: the gateway into Chapter X-A, the years it reaches, and the Explanation that lets the department attack one STEP of an otherwise genuine transaction CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer has written that he proposes to invoke Chapter X-A. Which provision actually gives him that power, from which assessment year does it bite, and can he pick on a single step of a transaction that as a whole was done for real commercial reasons?
  Section 95(1) is the gateway, and it does two things: it opens with "Notwithstanding anything contained in the Act", so Chapter X-A overrides the rest of the Act, and it allows an arrangement to be "declared to be an impermissible avoidance arrangement" with the tax consequences then determined under the Chapter. Section 95(2) confines the whole Chapter to "any assessment year beginning on or after the 1st day of April, 2018" — that is AY 2018-19 onwards, and nothing earlier. The Explanation is the sting: the Chapter "may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement", so the officer does not have to condemn your whole transaction; he can isolate one step inside it.
• Statutory position — Rule 10U: the exclusions a cross-border case must clear first — the Foreign Institutional Investor and offshore-derivative carve-outs, and how the three crore rupee tax benefit is actually computed CBDT Circulars & InstructionsCuts both ways
  Before I argue the merits of a GAAR notice for a foreign investor, which exclusions in Rule 10U do I have to run, and how is the three crore rupee tax benefit figure arrived at?
  Rule 10U(1) takes four classes of case outside Chapter X-A altogether. Clause (a) is the monetary floor: the Chapter does not apply to an arrangement where the tax benefit in the relevant assessment year arising "in aggregate, to all the parties to the arrangement" does not exceed three crore rupees. Clause (b) excludes a Foreign Institutional Investor that is an assessee under the Act, that "has not taken benefit of an agreement referred to in section 90 or section 90A", and that has invested in listed or unlisted securities in accordance with the SEBI (Foreign Institutional Investors) Regulations, 1995. Clause (c) excludes a non-resident in relation to an investment made by him "by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor". Clause (d) grandfathers income from the transfer of investments made before 1 April 2017. Rule 10U(3)(iv) then tells you how to quantify the tax benefit for the clause (a) threshold: for sub-clauses (a) to (e) of s.102(10) it is "the amount of tax", and for sub-clause (f), an increase in loss, it is "the tax that would have been chargeable had the increase in loss referred to therein been the total income".
• Statutory position — s.90(2A): the treaty does not save you from GAAR, because Chapter X-A applies "even if such provisions are not beneficial" to the assessee CBDT Circulars & InstructionsCuts both ways
  My client is a treaty resident and the treaty plainly gives him the better of it. The department is invoking Chapter X-A anyway. Can it, when s.90(2) says the more beneficial provision applies?
  It can, and s.90(2A) is the provision that says so. Section 90(2) is the ordinary rule that where India has a treaty, the provisions of the Act apply "to the extent they are more beneficial to that assessee". Section 90(2A) then reads: "Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him." So the treaty override that normally protects a non-resident is expressly switched off for Chapter X-A, and the fact that a Chapter X-A determination leaves the taxpayer worse off than the treaty is not an answer to it.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.