The Finance Bill 2012 proposes to introduce a Chapter X-A to the
Current Income-tax Act, 1961 on General Anti-avoidance Rules
GAAR seeks to provide wide discretionary powers to the revenue
authorities in taxing impermissible avoidance arrangements‟
including the power to disregard entities in a structure,
reallocate income and expenditure between parties to the
arrangement, alter the tax residence of such entities and the legal
situs of assets involved, treat debt as equity and vice
versa, etc. By doing so, the revenue authorities may deny tax
benefits even if conferred under a tax treaty.
An impermissible avoidance arrangement‟ is defined as an
arrangement where the main purpose (or one of the main purpose) is
to obtain a tax benefit and which contains any of the following
a. Non-arm‟s length transactions:
b. Misuse or abuse of the Act: However, the Budget does not
provide any clarity on what will constitute a misuse or abuse.
c. Non - bona fide purpose:
d. Lack of commercial substance: For eg. Arrangements that
include round trip financing involving transfer of funds between
parties without any substantial commercial purpose. Arrangements
are also deemed to lack commercial substance if the location of
assets, place of transaction or the residence of parties does not
have any substantial commercial purpose.
Furthermore, it has been provided by the provisions of GAAR that
the reason that a structure provides an exit route would not be
considered in determining commercial substance. This is in contrast
to what was held in Vodafone Judgment.
The AO has been given the power to make a reference to the CIT
(ref.Sec.144 BA) for invoking GAAR and make determination of a
transaction as an impermissible avoidance arrangement. If
objections of taxpayer received and not construed as tenable, the
CIT shall refer the matter to an Approving Panel post hearing the
taxpayer in a time bound manner (six months as stipulated).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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