TaxTMI 
TaxTMI 
General Anti-Avoidance Rule (GAAR)
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....ole or in part; or • (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes. Arrangement to lack commercial substance [ Section 180 ] An arrangement lacks commercial substance if it is mainly designed to obtain a tax benefit and does not reflect genuine business purpose. This includes arrangements involving round-trip financing, accommodating parties, artificial transactions, offsetting steps, disguised ownership/source of funds, or transactions that do not affect real business risks or cash flows. Factors like the duration of the arrangement, payment of taxes, or availability of an exit route alone do not determine commercial substance. Consequences of impermissible avoidance arrangement [ Section 181 ] If an arrangement is declared an Impermissible Avoidance Arrangement (IAA), tax authorities can determine its tax consequences and deny any tax benefits or treaty benefits obtained through it. The consequences may include: • Ignoring, combining, or changing the nature of any part of the arrangement. • Treating the arrangement as if it never existed. • ....
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.... Arrangement to lack commercial substance - Section 97 Section 97 elaborates the circumstances in which arrangement to lack commercial substance e.g. round trip financing, accommodating etc. Consequences of impermissible avoidance arrangement - Section 98 Section 98 prescribes that if an arrangement is declared as an impermissible avoidance arrangement there would be denial of the tax benefit or denial of the tax treaty benefit. It also prescribes the ways how the tax officer would determine the denial of the tax benefit/tax treaty benefit by making requisite assumptions. GAAR provisions are not applicable - Rule 10U GAAR provisions are not applicable in case of - • GAAR would apply in respect of tax benefit in aggregate to all concerned parties does not exceed Rs.3 crores. • FII who has invested in securities in India with prior permission of competent authority and has not taken any benefit under DTAA, or • Investment made by Non-resident in off-shore derivative instruments of FII. FAQs dealing with various issues relating to GAAR as under [ Circular no. 7 of 2017 dated 27-01-2017 ] Question no. 1: Will GAAR ....
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.... Bonds (FCCBs), Global Depository Receipts (GDRs), acquired prior to 01 April, 2017; (iii) shares which are issued consequent to split up or consolidation of such grandfathered shareholding? Answer: Grandfathering under Rule 10U(1)(d) will be available to investments made before 1st April 2017 in respect of instruments compulsorily convertible from one form to another, at terms finalized at the time of issue of such instruments. Shares brought into existence by way of split or consolidation of holdings, or by bonus issuances in respect of shares acquired prior to 1st April 2017 in the hands of the same investor would also be eligible for grandfathering under Rule 10U(1)(d) of the Income Tax Rules. Question no. 6: The expression "investments" can cover investment in all forms of instrument - whether in an Indian Company or in a foreign company, so long as the disposal thereof may give rise to income chargeable to tax. Grandfathering should extend to all forms of investments including lease contracts (say, air craft leases) and loan arrangements, etc. Answer: Grandfathering is available in respect of income from transfer of investments made before 1st April, 2017. As per ....
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....diverse provisions of the Act? Answer: If the arrangement is covered under section 96, then the arrangement will be disregarded by application of GAAR and necessary consequences will follow. Question no. 12: A definite timeline may be provided such as 5 to 10 years of existence of the arrangement where GAAR provisions will not apply in terms of the provisions in this regard in section 97(4) of the IT Act. Answer: Period of time for which an arrangement exists is only a relevant factor and not a sufficient factor under section 97(4) to determine whether an arrangement lacks commercial substance. Question no. 13: It may be ensured that in practice, the consequences of a transaction being treated as an 'impermissible avoidance arrangement' are determined in a uniform, fair and rational basis. Compensating adjustments under section 98 of the Act should be done in a consistent and fair manner. It should be clarified that if a particular consequence is applied in the hands of one of the participants, there would be corresponding adjustment in the hands of another participant. Answer: Adequate procedural safeguards are in place to ensure that GAAR is invoked in a un....