GENERAL ANTI AVOIDANCE RULE.

[Mr. M. GOVINDARAJAN]

                        Sec. 41 of Finance Act, 2012 inserted new Chapter X-A in the Income Tax Act, 1961 dealing with General Anti Avoidance Rule with effect from 01.04.2012 containing Sections 95 to Section 102.  The provisions of this Chapter shall apply in addition to, or in lieu of, any other basis for determination of tax liability.   The provisions of this Chapter shall be applied in accordance with such guidelines and subject to such conditions and the manner as may be prescribed.

                        Section 95 of the Act deals with the applicability of General Anti Avoidance Rule.   It provides that notwithstanding anything contained in the Income Tax Act, 1961, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising there from may be determined subject to the provisions of Chapter X-A.

                        Section 102(1) defines the term ‘arrangement’ as 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 any property in such transaction, operation, scheme, agreement or understanding.

                        Impermissible avoidable arrangement, as per Section 96 of the Act, means as an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it-

• creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
• results directly or indirectly, in the misuse or abuse of the provisions of the Income Tax Act;
• lacks commercial substance or is deemed to lack commercial substance under Section 97 in whole or in part; or
• is entered into, or carried out, by means or in a manner, which are not ordinarily employed for bona fide purposes;

An arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.

                        What is a tax benefit?  It is-

• a reduction or avoidance or deferral of tax or other amount payable under the Income tax Act; or
• an increase in a refund of tax or other amount under the Income Tax Act; or
• a reduction or avoidance or deferral of tax or other amount that would be payable under the Income Tax Act, as a result of a tax treaty; or
• an increase in a refund of tax or other amount under the Income Tax Act as a result of tax treaty; or
• a reduction in total income including increase in loss

in the relevant previous year or any other previous year.

                        Sec. 99 of the Act provides for the treatment of connected person and accommodating party.  For the purposes of this chapter, in determining whether a tax benefit exits-

• the parties who are connected persons in relation to each other may be treated as one and the same person;
• any accommodating party may be disregarded;
• such accommodating party and any other party may be treated one and the same person;
• the arrangement may be considered or looked through by disregarding any corporate structure.                    

                        When an arrangement shall be deemed to lack commercial substance?   An arrangement shall be deemed to lack commercial substance, according to Section 97, if-

(a)    the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or

(b)   it involves or includes-

(i)                 round trip financing;

(ii)               an accommodating party;

(iii)             elements that have effect of offsetting or cancelling each other; or

(iv)             a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or’

(c)    it involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party.

The following shall not be taken into account while determining whether an arrangement lacks commercial substance or not, namely:-

(i)     the period or time for which the arrangement (including operations therein) exists;

(ii)    the fact of payment of taxes, directly or indirectly, under the arrangement;

(iii)   the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.

Section 97(2) explain the ‘round trip financing’ which includes any arrangement in which, through a series of transactions-

(a)    funds are transferred among the parties to the arrangement; and’

(b)   such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (but for the provisions of this Chapter),

without having any regard to-

(A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement;

(B)  the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or

(C)  the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received.

Then next question arises as who is an accommodating party.  A party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of the party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in relation to any party to the arrangement.

                        What is the consequence of impermissible avoidance agreement?  If an arrangement is declared to be an impermissible avoidance arrangement, then the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:-

(a)    disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement;

(b)   treating the impermissible avoidance arrangement as if it had not been entered into or carried out;

(c)    disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

(d)   deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount;

(e)   reallocating amongst the parties to the arrangement-

(i)    any accrual, or receipt, of a capital or revenue nature; or

(ii)   any expenditure, deduction, relief or rebate;

(f)    treating-

(i)   the place of residence of any party to the arrangement; or

(ii)  the situs of an asset or of a transaction

at a place other than the place of residence, location of the asset or location of the transaction as provided  under the assignment; or

(g)   considering or looking through any arrangement by disregarding any corporate structure.

For this purpose any equity may be treated as debt or vice versa; any accrual, or receipt of capital nature may be treated as of revenue nature or vice versa; or any expenditure, deduction, relief or rebate may be recharacterised.

                       The explanation to Section 95 declares that the provisions of Chapter X-A may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement.