Arrangement to lack commercial substance [ Section 97(1)(c) ]

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....f section 97(1) Deems an arrangement to lack commercial substance where it involves the location of an asset or of a transaction or of the place of residence of any party and such location is without any substantial commercial purpose. It means if a particular location is selected for an asset or transaction or residence, and such selection has no substantial commercial purpose, then such arrangement shall be deemed to lack commercial substance. 1. Example Indco incorporates a Subco in a NTJ with equity of US$100. Subco gives a loan of US$100 to another Indian company (X Ltd.) at the rate of 10% p.a. X Ltd. claims deduction of interest payable to Subco from the profit of business. There is no other activity in Subco. Can GAAR be invoked ....

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....td., a company connected to the Z Ltd. group. As per the tax treaty with country F1, capital gains arising to A Ltd. are not taxable in India. Can GAAR be invoked to deny the treaty benefit? Interpretation - The arrangement of routing investment through country F1 results into a tax benefit. Since there is no business purpose in incorporating company A Ltd. Country F1 LTJ Y Ltd. 100% Country C1 A Ltd. 49% Debt Z Ltd. 51% X Ltd. INDIA 71 in country F1 which is a LTJ, it can be said that the main purpose of the arrangement is to obtain a tax benefit. The alternate course available in this case is direct investment in X Ltd. joint venture by Y Ltd. The tax benefit would be the difference in tax liabilities between the two available courses.....