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CA Final · Direct Tax Laws & International Taxation · Tax Planning, Tax Avoidance and Tax Evasion

A scheme of Sharma Industries Ltd is declared an impermissible avoidance arrangement only in respect of one step of a multi-step arrangement, namely the step of routing a service fee through a conduit. The remaining steps are commercially genuine. How are the tax consequences to be determined under the Income-tax Rules, 2026?

Where only a part of an arrangement is declared an impermissible avoidance arrangement, Rule 127 requires that the tax consequences be determined with reference to that part only, not the entire arrangement. The genuine remaining steps are therefore not affected by the declaration.

  1. AWith reference to the entire arrangement
  2. BWith reference to such part only that is declared impermissibleCorrect
  3. COnly with reference to the last step of the arrangement
  4. DThey cannot be determined unless every part is declared impermissible

Explanation

Rule 127 provides that where a part of an arrangement is declared an impermissible avoidance arrangement, the tax consequences are determined with reference to such part only. Treating the whole arrangement as tainted would be wrong.

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