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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Location of Business

Ruchika Pvt Ltd argues that its arrangement cannot lack commercial substance, because it paid full taxes under the arrangement, it has existed for six years and it includes an exit route. Under the Income-tax Act, 2025, what is the position on these three factors?

These three factors are relevant but not sufficient by themselves. The duration of the arrangement, the payment of taxes under it and the availability of an exit route may be considered, but none of them decides whether the arrangement lacks commercial substance.

  1. AThey are conclusive, so any one of them proves that the arrangement has commercial substance
  2. BThey are relevant but not sufficient on their own to decide whether the arrangement lacks commercial substanceCorrect
  3. CThey are irrelevant and must be ignored completely when examining the arrangement
  4. DThey are conclusive only when all three are present together in the same arrangement

Explanation

The Act states that the period for which the arrangement exists, the payment of taxes under it and the provision of an exit route may be relevant, but they are not sufficient on their own. So they are weighed with other facts. Treating them as conclusive or as irrelevant misstates the rule.

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