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TMI BlogDesigned 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, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss 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 purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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