Designed provisions to counteract tax avoidance schemes involving cross-border transactions : Clause 174 of the Income Tax Bill, 2025 Vs. Section 93 of the Income-tax Act, 1961

Clause 174 Avoidance of income-tax by transactions resulting in transfer of income to non-residents.

Income Tax Bill, 2025

Introduction

Clause 174 of the Income Tax Bill, 2025, and its predecessor, Section 93 of the Income-tax Act, 1961, represent critical anti-avoidance provisions within the Indian tax framework. Both are designed to counteract arrangements whereby income that would otherwise be taxable in India is diverted to non-residents through transfers of assets and associated operations. The legislative intent behind these provisions is to prevent tax avoidance schemes that exploit cross-border transactions, particularly those involving complex asset transfers and the shifting of income streams to jurisdictions with lower or no tax liabilities.

The significance of these provisions lies in their broad anti-avoidance scope, targeting not only direct transfers but also indirect and associated operations that may result in the shifting of taxable income. As international tax planning has grown increasingly sophisticated, the need for robust anti-avoidance mechanisms has become more pronounced. Clause 174, as proposed in the Income Tax Bill, 2025, seeks to update and reinforce these mechanisms, ensuring that the Indian tax base is protected against erosion from cross-border structuring and income shifting.

Objective and Purpose

The primary objective of both Clause 174 and Section 93 is to counteract the avoidance of Indian income tax through transactions that result in the transfer of income to non-residents. The legislative intent is to ensure that individuals or entities who, through transfers of assets (alone or in conjunction with associated operations), acquire the power to enjoy income that would otherwise be taxable in India, are taxed as if such income were their own. This deeming provision is designed to prevent the artificial shifting of income out of the Indian tax net, regardless of the legal form or complexity of the underlying transactions.

Historically, Section 93 was introduced in the context of growing concerns regarding the use of offshore structures, trusts, and intermediary entities to route or park income outside India. The provision was crafted to address both direct and indirect methods of income shifting, recognizing that tax avoidance could be achieved not only through outright transfers but also through a series of associated operations. The same policy rationale underpins Clause 174, which updates the framework to reflect modern tax avoidance techniques and aligns with contemporary international standards, such as those promoted by the OECD's Base Erosion and Profit Shifting (BEPS) project.

Detailed Analysis of Clause 174 of the Income Tax Bill, 2025

Key Provisions and Interpretations

1. Triggering Event: Transfer of Assets and Associated Operations

Clause 174(1) establishes the foundational condition: the provision applies where there is a transfer of assets (either before or after the commencement of the Act), and as a result-either alone or in conjunction with associated operations-income becomes payable to a non-resident. The inclusion of both pre- and post-commencement transfers ensures retrospective application, capturing historical transactions that continue to have tax avoidance effects.

The term "associated operations" is defined expansively to include any operation by any person in relation to the transferred assets, their income, or accumulations. This broad scope ensures that not only the initial transfer but also subsequent or related transactions are brought within the ambit of the provision, preventing taxpayers from circumventing the law through multi-layered or staged arrangements.

2. Deeming Provision: Power to Enjoy Income

Clause 174(2) introduces the central deeming rule. If any person, through such a transfer (alone or with associated operations), acquires rights that confer the power to enjoy (immediately or in the future) any income of a non-resident, and if that income would have been taxable had it accrued to the first-mentioned person, then such income is deemed to be the income of that person for all purposes of the Act.

The concept of "power to enjoy" is further elaborated in sub-section (6)(c), which covers a wide array of scenarios, including direct or indirect control over income, the ability to increase the value of one's own assets through the income, entitlement to benefits derived from the income, or control over the application of the income. This approach is designed to look beyond legal ownership and focus on economic benefit and control, thereby countering both straightforward and sophisticated avoidance schemes.

3. Receipt of Capital Sums

Clause 174(3) addresses situations where the first-mentioned person receives or is entitled to receive any capital sum connected with the transfer or associated operations, regardless of whether this occurs before or after the transfer. In such cases, any income that has become the income of a non-resident by virtue of the transfer is deemed to be the income of the first-mentioned person.

The definition of "capital sum" in sub-section (7)(d) is broad, including loans, repayments, and any sum not paid for full consideration in money or money's worth. This prevents taxpayers from disguising income as capital receipts to escape taxation.

4. Prevention of Double Taxation

To prevent double taxation, Clause 174(4) provides that if a person has already been taxed on income deemed to be his under this section, and subsequently receives that income in any form, it shall not again be included in his income for tax purposes. This ensures fairness and avoids the potential for multiple assessments on the same income stream.

5. Exceptions: Bona Fide Transactions

Clause 174(5) carves out exceptions for genuine commercial transactions. The section does not apply if the person can demonstrate to the satisfaction of the Assessing Officer that:

• Neither the transfer nor any associated operation had as its purpose (or one of its purposes) the avoidance of tax liability; or
• The transfer and all associated operations were bona fide commercial transactions not designed for tax avoidance.

This places the onus on the taxpayer to prove the genuineness of the transaction, thereby providing a safeguard for legitimate business arrangements while retaining the teeth to counteract avoidance.

6. Definitions and Interpretive Aid

Clause 174(6) and (7) provide detailed definitions and interpretive rules for key terms, including "assets," "associated operation," "benefit," and "capital sum." The provision also clarifies that in determining whether a person has power to enjoy income, the substantial result and effect of the transfer and associated operations must be considered, and all forms of benefits, regardless of their nature, are to be accounted for.

These definitions are crafted to ensure that the provision captures the economic substance of transactions, not merely their legal form, thus aligning with the principle that tax law should focus on real-world outcomes rather than artificial structures.

Practical Implications

The practical impact of Clause 174 is significant for individuals and entities engaged in cross-border transactions. The provision targets not only direct transfers of income but also indirect arrangements and associated operations, thereby covering a wide array of potential avoidance schemes. Key implications include:

• Increased Scrutiny of Cross-Border Transactions: Taxpayers engaging in transactions that result in income being payable to non-residents must be prepared for heightened scrutiny, especially where there is a possibility of the taxpayer retaining some benefit or control over the income.
• Documentation and Substantiation: The onus is on the taxpayer to demonstrate the commercial substance and bona fide nature of transactions. This necessitates robust documentation and clear evidence of the business rationale behind cross-border transfers and associated operations.
• Potential for Retrospective Application: The inclusion of transfers before the commencement of the Act means that historical transactions may be revisited, particularly if income continues to accrue to non-residents in a manner that could be deemed to involve avoidance.
• Complexity in Structuring: Tax planning involving non-resident entities, trusts, or layered corporate structures must account for the risk of income being deemed under Clause 174, especially where the Indian resident retains any form of benefit or control.
• Compliance Requirements: Businesses and individuals must ensure that their cross-border structures are not only legally compliant but also commercially justified, with clear documentation to rebut any presumption of avoidance.
• Regulatory Impact: The provision empowers tax authorities to look through legal arrangements and focus on the underlying economic realities, which may result in increased audits and assessments in cases involving international transactions.

Comparative Analysis: Clause 174 of the Income Tax Bill, 2025 vs. Section 93 of the Income-tax Act, 1961

1. Structural and Substantive Similarity

At a structural level, Clause 174 is closely modeled on Section 93, with both provisions sharing the same core architecture:

• Triggering condition: transfer of assets resulting in income payable to a non-resident.
• Deeming of income to the transferor or person acquiring rights to enjoy the income.
• Inclusion of associated operations and receipt of capital sums as additional triggers.
• Exception for bona fide commercial transactions.
• Detailed definitions and interpretive aids.

The language and operative principles are substantially similar, ensuring continuity in the anti-avoidance regime.

2. Key Differences and Updates

While the provisions are largely parallel, Clause 174 introduces certain refinements and clarifications:

• Explicit Inclusion of Pre- and Post-Commencement Transfers: Clause 174(1) expressly refers to transfers "before and after the commencement of this Act," whereas Section 93(1) covers transfers by virtue of or in consequence whereof income becomes payable, with an explanation extending to pre-Act transfers. The updated language in Clause 174 is more direct and unambiguous.
• Reorganization and Clarification of Sub-sections: Clause 174 separates the deeming provisions (sub-sections 2 and 3) more distinctly, with clearer drafting, while Section 93 combines them in sub-section (1) with clauses (a) and (b).
• Expanded and Modernized Definitions: The definitions of "associated operation," "benefit," and "capital sum" are updated in Clause 174(7) to reflect modern transaction types and to ensure comprehensive coverage of new forms of financial arrangements.
• Emphasis on Substantial Result and Effect: Both provisions require that the substantial result and effect of the transfer and associated operations be considered, but Clause 174 reiterates this with more modern drafting, emphasizing the need to account for all benefits, regardless of their form.
• Alignment with International Standards: Clause 174 appears to be drafted with greater alignment to international anti-avoidance norms, particularly the BEPS framework, by focusing on economic substance and the real power to enjoy income, irrespective of legal form.

3. Continuity of Exceptions and Safeguards

Both Section 93(3) and Clause 174(5) provide exceptions for transactions that are either not motivated by tax avoidance or are bona fide commercial arrangements. The burden of proof remains on the taxpayer, and the Assessing Officer's satisfaction is the touchstone for the application of the exception. This continuity ensures that the anti-avoidance provision does not penalize legitimate business transactions while retaining its effectiveness against artificial schemes.

4. Potential for Judicial Interpretation

Given the broad and principle-based drafting, both provisions are likely to be the subject of judicial interpretation, particularly in relation to:

• The meaning and scope of "power to enjoy."
• The determination of "associated operations."
• The assessment of commercial substance and bona fide nature of transactions.

Past judicial decisions u/s 93 have emphasized substance over form, and similar interpretive approaches will likely apply to Clause 174.

5. Transitional and Retrospective Application

Clause 174, like Section 93, applies to transfers occurring before the commencement of the Act, provided the income continues to be payable to non-residents. This ensures that long-standing avoidance structures are not grandfathered and remain subject to scrutiny.

Conclusion

Clause 174 of the Income Tax Bill, 2025, represents a modernized and reinforced continuation of the anti-avoidance regime established by Section 93 of the Income-tax Act, 1961. Both provisions are designed to ensure that income which, in substance, accrues to Indian residents but is diverted to non-residents through transfers of assets and associated operations, remains within the Indian tax net. The provisions are drafted broadly to capture a wide range of avoidance schemes, focusing on the economic substance and real power to enjoy income.

The practical implications for taxpayers are significant, requiring careful structuring of cross-border transactions and robust documentation to demonstrate the bona fide nature of commercial arrangements. The continuity and modernization of the provision in Clause 174 reflect the evolving landscape of international tax avoidance and the need for India's tax laws to remain robust and effective in countering base erosion and profit shifting.

Going forward, further judicial interpretation and administrative guidance will be critical in clarifying the boundaries of these provisions, particularly in relation to complex international structures and the assessment of commercial substance. The anti-avoidance framework established by Clause 174 and its predecessor, Section 93, will continue to play a central role in safeguarding the integrity of India's direct tax system.

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Full Text:

Clause 174 Avoidance of income-tax by transactions resulting in transfer of income to non-residents.

 

Dated: 25-4-2025