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CA Final · Direct Tax Laws & International Taxation · Tax Planning, Tax Avoidance and Tax Evasion

Under the Income-tax Rules, 2026, an arrangement entered into by Orion Ltd has been declared an impermissible avoidance arrangement only in respect of one part, being a round-trip loan step; the other steps are commercial. How are the tax consequences determined?

The tax consequences are determined with reference to that part of the arrangement only. Under Rule 127 of the Income-tax Rules, 2026, where only a part is declared an impermissible avoidance arrangement, the remaining commercial steps are not affected by the declaration.

  1. AWith reference to the entire arrangement
  2. BWith reference to such part of the arrangement onlyCorrect
  3. COnly by disregarding the entity Orion Ltd altogether
  4. DThey are not determined until a court rules

Explanation

Rule 127 states that for section 181, where a part of an arrangement is declared an impermissible avoidance arrangement, the consequences in relation to tax are determined with reference to such part only. The commercial steps are therefore not recharacterised on account of the declaration. Applying consequences to the whole arrangement is wrong.

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