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CMA Final · Direct Tax Laws and International Taxation · GAAR

Under the General Anti-Avoidance Rule (GAAR) in Indian income-tax law, an arrangement entered into by a taxpayer can be declared an 'impermissible avoidance arrangement' only if its main purpose is to obtain a tax benefit and it also satisfies at least one of certain further tests. Which of the following is one of those further tests?

Lack of commercial substance, actual or deemed, is one of the alternative tests. Along with the main-purpose-of-tax-benefit condition, an arrangement that lacks commercial substance can be declared an impermissible avoidance arrangement. Non-resident counterparties, the absence of a treaty or any tax benefit alone do not trigger GAAR.

  1. AIt is entered into with a non-resident counterparty
  2. BIt lacks commercial substance or is deemed to lack itCorrect
  3. CIt results in a tax benefit of any amount, however small
  4. DIt involves a transaction in a country with no DTAA with India

Explanation

An arrangement whose main purpose is a tax benefit becomes impermissible if it creates rights and obligations not ordinarily created between arm's length persons, misuses or abuses the tax provisions, lacks commercial substance, or is carried out in a manner not normally employed for bona fide purposes. Lack of commercial substance is one such test. Residence of the counterparty, treaty status or a mere tax benefit by itself does not satisfy the tests.

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