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CMA Final · Direct Tax Laws and International Taxation · GAAR

An arrangement yields a tax benefit to Arjun Ltd of Rs 3,00,000 in a year. Which feature would make it most likely to be an impermissible avoidance arrangement under GAAR?

An arrangement whose main purpose is obtaining a tax benefit and which lacks commercial substance is most likely impermissible under GAAR. Arrangements with genuine business purpose, real cash flows and arm's length terms do not fail merely because a tax benefit incidentally arises.

  1. AIts main purpose is to obtain a tax benefit and it lacks commercial substanceCorrect
  2. BIt is entered into with a resident group company at arm's length price
  3. CIt results in a tax benefit but has a genuine business purpose and real cash flows
  4. DIt is a transaction undertaken after obtaining an advance ruling stating that it is valid

Explanation

GAAR applies to an arrangement whose main purpose is to obtain a tax benefit and which also satisfies one of the tests, such as lacking commercial substance. A genuine business purpose or arm's length pricing alone does not make it impermissible, so the other options fail.

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