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CMA Final · Direct Tax Laws and International Taxation · GAAR

An Indian company, A Ltd, routes a Rs 40 lakh income through a conduit entity set up solely for obtaining a treaty benefit, with no business substance. Tax on the income without the conduit would be Rs 12 lakh, and with the conduit it is Rs 4 lakh. If the arrangement is declared impermissible, how may the tax benefit be dealt with, and what is the tax benefit?

The tax benefit is the difference, Rs 12 lakh minus Rs 4 lakh, equal to Rs 8 lakh. If the arrangement is declared impermissible, the conduit entity can be disregarded and the treaty benefit denied, so tax is charged as if the conduit did not exist.

  1. ATax benefit is Rs 8 lakh; the conduit can be disregarded and treaty benefit deniedCorrect
  2. BTax benefit is Rs 12 lakh; the income is exempt
  3. CTax benefit is Rs 4 lakh; only a penalty applies
  4. DTax benefit is Rs 16 lakh; the income is taxed twice

Explanation

Tax benefit is Rs 12 lakh minus Rs 4 lakh = Rs 8 lakh. On declaring the arrangement impermissible, consequences include disregarding the conduit entity and denying the treaty benefit, so tax of Rs 12 lakh is recovered. The other options use the wrong base (full tax, post-conduit tax, or sum) and invent consequences.

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