whether an arrangement lacks commercial substance or not [ Section 97(4) ] - Income Tax - Ready Reckoner - Income Tax

whether an arrangement lacks commercial substance or not [ Section 97(4) ] For the removal of doubts, it is hereby clarified that the following may be relevant but shall not be sufficient for 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. Stakeholders raised serious doubts regarding ignoring the attributes of an arrangement in section 97(4) since they tend to reflect the intentions, bonafide or otherwise, behind an arrangement. It was argued that the above provisions have introduced in direct conflict with the observation of the Supreme Court in the case of Vodafone wherein the Court laid down the following test while analyzing international tax aspects of holding structures, we are of the view that every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device (emphasis addedd) Factors were considered by the Court to determine whether an arrangement is a colorable or sham device. In the case of conduit company structures created for investment in India through favourable tax jurisdictions, there is always a gap between the time of investment and exit as the value of investment should grow with time. At the time of exit and also, there is a need to judge the permissibility of the structure since the factum of payment of taxes on regular income from investment in India (i.e. by way of business income or interest or dividend income or indirect taxes) will not only be there during the course of the life of the business, but the real and significant gains may be expected to arise also at the time of exit. Thus, a holistic view encompassing the life of the business as well as aspects that arise at the point of exit must be taken into account.