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

Under the Income-tax Act, 2025, an arrangement is deemed to lack commercial substance if it involves the location of an asset, a transaction or the residence of a party without any substantial commercial purpose other than obtaining a tax benefit. Which of the following arrangements fits this test?

The arrangement that parks an asset in a low-tax jurisdiction with no staff or operations lacks commercial substance, because its location has no substantial commercial purpose other than the tax benefit. The other options rest on real business reasons like raw material, customers or contracts.

  1. AA company sets up a manufacturing unit in a backward area because raw material is available nearby and labour costs are lower
  2. BA company parks ownership of an asset in a low-tax jurisdiction where it has no staff, premises or operations, only to get a tax benefitCorrect
  3. CA company relocates its registered office to another State to be closer to its main customers
  4. DA company opens a branch abroad to serve an overseas customer base it has already contracted with

Explanation

The location test is failed when the location of an asset, transaction or residence has no substantial commercial purpose beyond the tax benefit. Parking an asset in a jurisdiction with no real presence has only a tax motive. The other options have genuine commercial reasons such as raw material, customers and contracts.

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