9911796707
TMI BlogArrangement to lack commercial substance [ Section 97(1)(b) ]X X X X Extracts X X X X X X X X Extracts X X X X ..... in part. An arrangement shall be deemed to lack commercial substance, if- (b) it involves or includes - (1) Item (i) of clause (b) of section 97(1) deems an arrangement, which includes round tripping of funds, to lack commercial substance. The phrase round trip financing has been further defined as under section 97(2) For the purposes of section 97(1), round trip financing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in such a case? Interpretation - The arrangement appears to be to avoid payment of tax on interest income by Indco in the case loan i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, 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. It means that where a party is included in an arrangement mainly for obtaining tax benefit to the taxpayer, then such party may be treated as an accommodating party and consequently the arran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has raised funds from a company (X Ltd.) incorporated in a low tax jurisdiction outside India (LTJ) through borrowings, (i) X Ltd. is a banking institution in LTJ; (ii) there is a closely held company Subco in LTJ which is a wholly owned subsidiary of another closely held Indian company Indco; (iii) Subco has reserves and, if it provides a loan to Indco, it may be treated as deemed divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Indco, the loan amount would be treated as dividend income received from Subco to the extent reserves are available in Subco; and no expense by way of interest would be allowed. In the case of bank X Ltd, exemption from tax on interest under the DTAA may not be allowed as X Ltd is not a beneficial owner of the interest, provided the DTAA has anti-avoidance rule of beneficial ownership ..... X X X X Extracts X X X X X X X X Extracts X X X X
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