GAAR provisions are aimed at countering aggressive tax avoidance practices that result in loss of tax revenue. The key elements of GAAR framework include: 1. Section 96 defines an "impermissible avoidance arrangement" as an arrangement whose main purpose is to obtain a tax benefit and has at least one of the four tainted elements - creating rights/obligations not ordinarily created, misuse or abuse of tax provisions, lack of commercial substance, or means not ordinarily employed for bona fide purposes. 2. Section 97 outlines factors to determine lack of commercial substance such as inconsistency between form and substance of steps, round tripping of funds, involvement of accommodating parties. 3. Section

1. AN INSIGHT INTO GENERAL
ANTI-AVOIDANCE RULES (GAAR)
Study Circle Meet, Bangalore Branch
of SIRC – April 5, 2017
By: Sandeep Jhunjhunwala, FCA

2. BACKGROUND

3. • Lets say a company has a policy to help employees reach home on time for a better work life balance
• The policy states "Employees who stay beyond 20 km from the office can leave 30 minutes early"
• Some employees bend the rules in their favour - change of address on records, just to leave early
• System implemented with a good intent quickly abused
• Case of public transport – Seats reserved for elderly, taken by sturdy
• Similarly, a law designed for specific purpose can get undermined by elements that seek loopholes to create an unfair advantage
for themselves!
WHY GAAR?

4. APPLICABILITY OF GAAR
Tax Evasion Generally the result of illegality,
suppression, misrepresentation and
fraud
Deliberately misrepresenting/
declaring less income, profits or
gains than the amounts actually
earned, or overstating deductions
GAAR provisions do not deal with
cases of tax evasion. Tax evasion is
clearly distinct from tax avoidance
and is already prohibited under the
current provisions of the Income-tax
Act, 1961
Tax Avoidance Result of actions taken by the
assessee, none of which individually
or collectively is illegal or forbidden
by the law itself
Diversion of production from one
unit to another under developed tax
exempt unit
GAAR applies to tax avoidance
which is an impermissible
avoidance arrangement
Tax Mitigation Situation where the taxpayer takes
advantage of a fiscal incentive
afforded by the tax legislation by
actually following the conditions
and economic consequences that
the particular tax legislation entails
Setting up of a business undertaking
by a taxpayer in a specified area
such as an SEZ/ EOU
Tax mitigation, as distinct from tax
avoidance is allowed under the tax
statute. GAAR provisions do not
deal with cases of tax mitigation

5. NEED FOR GAAR
Counter any tax avoidance practices/ schemes which result in a serious loss of revenue to tax authorities
Codify the principle of ‘substance over form’
Examine cases of aggressive tax planning with use of sophisticated structures
Taxpayer should not be allowed to use legal constructions/ transactions to violate horizontal tax equity
Plugging loopholes that may possibly result in tax avoidance
Critical examination of inbound/ outbound transactions and check cases of treaty shopping

6. JUDICIAL BASED GAAR
Vodafone
Internation
al Holdings
BV vs UOI -
2012
Azadi
Bachao
Andolan vs
UOI - 2003
Arvind
Narottam -
1988
McDowell
vs CIT -
1985
CIT vs
Raman &
Co - 1967
Tax planning within the framework of
law is fine, but "colorable device"
suppressing the true nature of
transaction for tax avoidance cannot
be part of tax planning
• Revenue precluded from questioning the
commercial necessity or justification of a
transaction provided that such transactions
was not colorable or prohibited
• An Act otherwise legal cannot be treated as
non-est on the basis of some underlying
substance
Avoidance of tax liability by so
arranging commercial affairs that
charge of tax is distributed is not
prohibited
No amount of moral sermons
would change people's
attitude to tax avoidance
• No conflict between Mc Dowell and
Azadi Bachao Andolan
• Preferred "look at" over "look
through"
• Substance over form test

7. • The Supreme Court of India has categorically held [Rash Lal Yadav vs State of Bihar (1994) 5 SCC 267] that fairness and
reasonableness must be the pivotal touchstones to check exercise of wide discretion vested with administrative authorities -
a test which squarely applies to tax administration in the wake of wide powers conferred by the statutory GAAR
"6. … If the statute confers drastic powers it goes without saying that such powers must be exercised in a proper and fair manner. Drastic
substantive laws can be suffered only if they are fairly and reasonably applied. In order to ensure fair and reasonable application of such
laws courts have, over a period of time, devised rules of fair procedure to avoid arbitrary exercise of such powers. True it is, the rules of
natural justice operate as checks on the freedom of administrative action and often prove time-consuming but that is the price one has to
pay to ensure fairness in administrative action. And this fairness can be ensured by adherence to the expanded notion of rule of natural
justice. Therefore, where a statute confers wide powers on an administrative authority coupled with wide discretion, the possibility of its
arbitrary use can be controlled or checked by insisting on their being exercised in a manner which can be said to be procedurally fair"
• Failure to provide such detailed rules discerning fairness and controlling the discretion of field formations may demonstrate
violation of constitutional norms with a high degree of probability of being declared arbitrary and thus unenforceable
• In this backdrop, even with the entrustment of wide powers with the tax officers to challenge artificial corporate structures by
applying GAAR, taxpayers may seek to test waters by putting the competence of the officers to test. Such challenges are not
unheard of in India and have a fair bit of success as well [Azadi Bachaoo Andolan, Vodafone International, Walfort Share & Stock
Brokers etc, wherein the arguments of the taxpayers have been accepted]
CONSTITUTIONAL LAW PERSPECTIVE

8. Anti avoidance doctrines developed by, and demolished by, judicial precedents from time to time
Generally, personality driven and perceptions on these doctrines vary from judge to judge – No discernable unanimous
principle
Many of the judgements are subjective [considered economic factors such as FDI and economic growth etc]
Subsequent interpretations of judicial doctrines, laid down by the Courts, sometimes even more unpredictable which
gave difficult task for the lower courts to effectively apply these doctrines
Not always feasible for the judiciary to address the unforeseen implications of transactions carried out every time for
tax purposes
Sophisticated tax avoidance forms always a pace ahead of legislative amendments
NEED FOR LEGISLATIVE/ STATUTORY GAAR OVER AND
ABOVE JUDICIAL GAAR

9. GAAR – AROUND THE WORLD
• Anti abuse provisions such as:
- GAAR
- Controlled Foreign Corporation (CFC) - To prevent tax evasion, on account of setting up of offshore companies in
jurisdictions with little or no tax
- Thin Capitalization Rules - Debt-equity ratio more than normal for taking undue tax advantage on interest payouts
Prevalent in many economies such as the United States, United Kingdom, Germany, Japan, Australia, New Zealand, Brazil,
Russia, Sweden and many others
• Countries where GAAR exist:
Australia (1915) France (1941) Sweden (1981) China (2008) South Korea
(1990)
United Kingdom
(2013)
The Netherlands
(1924)
Germany (1977) Singapore (1988) Indonesia (2008) Italy (1997) India (2017)
Canada (1988) Brazil (1988) Ireland (1989) Belgium (2012) South Africa
(1941)

10. GAAR – AROUND THE WORLD
Countries Australia China South Africa
Year introduced 1981 2008 1941 (amended in 2008)
Trigger event Taxpayer entering into a scheme
for "sole or dominant purpose" of
obtaining a tax benefit
Enterprise entering into
arrangements without reasonable
commercial purpose resulting in a
deduction of taxable revenue or
income.
Following factors relevant :
a) Form and substance
b) Time of establishment and
duration of arrangement
c) Manner of implementation
d) Inter connect between various
components of the
arrangement
e) Financial impact; and
f) Tax consequences
Sole or main purpose of the
avoidance arrangement is to
obtain a tax benefit and contains
one or more of the following
tainted elements:
(a) Entered into or carried out in a
way not normally employed
for bona fide business
purpose;
(b) Lacks commercial substance,
in whole or in part;
(c) Not at an arm’s length; and
(d) Results in direct/ indirect
misuse/ abuse of provisions of
South Africa Income Tax Act

11. GAAR – AROUND THE WORLD
Countries Australia China South Africa
Burden of Proof Onus on taxpayer
If taxpayer fails to establish
objective facts under various
prescribed categories from which
a reasonable person would not
conclude that its dominant
purpose of entering or carrying
out the scheme was to obtain a
tax benefit, it is deemed to have
failed to discharge its statutory
onus to proof
Taxpayer to prove that the
arrangement has reasonable
commercial purpose
Onus on proving that the
arrangement is tainted lies on
Revenue
Tax payer to prove that tax
avoidance was not the sole or
main objective
Treaty vs GAAR GAAR to override treaties Treaty to prevail No specific provision

12. March 16,
2012
February
1, 2017
Finance Act 2017 - GAAR to be
implemented with effect from
April 1, 2017
June 28,
2012
September
1, 2012
September
30, 2012
July 17, 2013
September
23, 2013
Finance Bill 2012
proposed GAAR into
the domestic tax law
Expert Committee under the
chairmanship of Dr Parthasarathi
Shome submitted draft report on its
recommendations on GAAR
Finance Act, 2013 deferred GAAR
to go-live with effect from April 1,
2016. Amendments made to the
GAAR provisions
GAAR Committee issued draft
guidelines regarding implementation
of GAAR
Expert Committee
submitted its Final
Report on GAAR
GAAR Rules notified
EVOLUTION OF GAAR IN INDIA
June 22,
2016
CBDT issued notification
amending GAAR rules
– Indian GAAR modelled on South African GAAR guidelines
– GAAR provisions were first time introduced in the Direct Taxes Code 2009
– On May 14, 2015 (vide Finance Act 2015), GAAR was proposed to be effective from AY beginning April 1, 2018
– February 29, 2016 - the Finance Minister reiterated the intent of the Government to implement GAAR with effect from April 1, 2017
– CBDT issued Circular 7 of 2017 dated January 27, 2017 clarifying few aspects of GAAR

13. FRAMEWORK OF GAAR

14. FRAMEWORK OF GAAR
Section/ Rule Overview
Sec 95 Applicability of GAAR
Sec 96 Impermissible avoidance arrangement
Sec 97 Determinants for lack of commercial substance
Sec 98 Consequences of impermissible avoidance arrangement
Sec 99 Treatment of connected person and accommodating party
Sec 100 Application of Chapter X-A
Sec 101 Framing of Guidelines
Sec 102 Definitions
Sec 144BA Administration
Rule 10U Exclusions from applicability of Chapter X-A
Rule 10UA Determination of consequences of Impermissible avoidance arrangement
Rule 10UB Notices and forms
Rule 10UC Time Limits
Arguably the conferment of such
wide powers upon tax administration
has created apprehension of
exploitation and vindictiveness
though the law conceives guidelines
(Section 101) to curb opportunistic
behavior by the members of the tax
administration
Applies to all assessees (corporate/
non-corporate/ resident/
non-resident)
Applicable to all arrangements
(business or non-business) so long as
the conditions required to invoke
GAAR are met

15. Section 96 - Impermissible Avoidance Arrangement
• An arrangement, the main purpose of which is to obtain a tax benefit and it – [PRIMARY CONDITION]
 Creates rights/ obligations not ordinarily created between persons dealing at arm’s length; or
 Results, directly or indirectly, in misuse, or abuse of provisions of the Act; or
 Lacks or is deemed to lack commercial substance, in whole or in part; or
 Is entered into, or carried out, by means or in a manner, which are not ordinarily employed for bona fide purpose
• Arrangement presumed to been entered into, or carried out, for the main purpose of obtaining tax
benefit even if -
 The main purpose of a step in the arrangement is to obtain tax benefit; or
 The main purpose of a part of the arrangement is to obtain tax benefit
Notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax
benefit
Onus on the Assesse to prove
the contrary. An anti-abuse
provision that shifts the burden
of proof on the assessee goes
against the fundamental
principle of "innocent unless
proven guilty"
FRAMEWORK OF GAAR
Atleast1of4
taintedelements
present

16. BURDEN OF PROOF
Country Burden of proof on? Country Burden of proof on?
Australia Taxpayer Poland Shared
Belgium Tax Authority Russia Taxpayer
Brazil Taxpayer Singapore Taxpayer
Canada Shared South Korea Taxpayer
China Taxpayer South Africa Shared
France Tax Authority Sweden Taxpayer
Germany Shared Switzerland Shared
Indonesia Shared UK Tax Authority
Ireland Taxpayer USA Taxpayer
Italy Tax Authority Mexico Tax Authority
Japan Tax Authority The Netherlands Tax Authority
No global consistency
In some countries in survey (Canada,
Germany, Indonesia, Poland, South
Africa, Switzerland and Turkey), the
burden of proof is shared
Whatever approach a country takes
on this matter, it is utmost important
for taxpayers to have the right
documentation in place

17. Section 97 - Arrangement deemed to lack commercial substance
• Substance or effect of the arrangement as a whole, is inconsistent with, or differs
significantly from, the form of its individual steps or a part
• Involves or includes round trip financing
• Involves or includes an accommodating party
• Involves or includes elements that have effect of offsetting or cancelling each other
• Involves or includes a transaction conducted through one or more person and disguises
the value, location, source, ownership or control of funds
• Involves the location of an asset or of a transaction or the place of residence of any party,
which does not have a substantial commercial purpose other than obtaining a tax benefit
• Does not have significant effect upon business risks/ net cash flows other than that
attributable to tax benefit that would be obtained
Factors for determining lack of
commercial substance
Period or time for which the
arrangement exists
Payment of taxes, directly or indirectly,
under the arrangement
Exit route provided by the arrangement
Relevant but not sufficient factors
FRAMEWORK OF GAAR

18. Section 97(2) - Round Trip financing
FRAMEWORK OF GAAR
Includes any arrangement in which through a series of transactions,
- Funds are transferred among the parties
- Without any substantial commercial purpose except for obtaining the tax benefit
Without having any regard to:
- Tracing of funds among the parties;
- Time or sequence of movement of funds among the parties; or
- Means or manner or mode in which funds are transferred or received
Section 97(3) - Accommodating Party
A party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect participation of that party in
the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit for the assessee whether or not the party is a
connected person to any party to the arrangement

19. Section 98 - Consequences of impermissible avoidance arrangement
• Denial of tax benefit (under treaty or the Act)
• Disregarding/ combining /re-characterising any step in, or a part or whole of the arrangement
• Treating the arrangement as if it had not been entered into or carried out
• Disregarding any accommodating party or treating any accommodating part and any other party as one and the same person
• Deeming connected persons as one and the same
• Reallocating income, expense, relief, rebate, etc amongst the parties
• Re-assign place of residence/ situs of asset or transaction (to other than what has been provided under the arrangement)
• Disregarding the corporate structure (“look through")
• Re-characterize equity-debt, income, expenses, relief, rebate etc
FRAMEWORK OF GAAR

20. Rule 10U - What is excluded from the purview of GAAR?
Arrangement where the tax benefit in the relevant AY arising, in aggregate, to all the parties to the arrangement does not exceed
INR 30 million [Rule 10U(a)]
who is an assesse under the Act
FII who has not taken benefit of a Treaty
who has invested in listed securities, or unlisted securities, with the prior permission of the competent authority, in
accordance with the SEBI FII Regulations
Investments made by a non-resident by way of offshore derivative instruments or otherwise, directly or indirectly in a FII
Any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by any person from
transfer of investments made before April 1, 2017
– Without prejudice to the above, GAAR shall apply to any arrangement, irrespective of the date on which it has been
entered into, in respect of the tax benefit obtained from the arrangement on or after the April 1, 2017
GAAR RULES

21. Finance Act 2015 – Memorandum to Finance Bill 2015
March 31, 2017
GAAR provisions to be made applicable to the income of FY
2017-18 and subsequent years
Investments made up to March 31, 2017 are
proposed to be outside the purview of GAARGAAR will
not apply
GAAR will
apply
Structures prior to April 1, 2017 to also be GAAR compliant – Main purpose being tax benefit and tainted element test in a way is
tested retrospectively??
WHAT IS GRANDFATHERED?

22. SECTION 144BA - ADMINISTRATION (1/2)
Tax Officer
Commissioner Tax Payer
Refers arrangement to
the Commissioner
If opines to invoke GAAR, notice
issued
Furnishes Objection
Approving Panel –
3 member bench
Tax Payer
Provides opportunity of being
heard if further inquiry is required
Hearing -
Satisfactory
Tax Officer
Appeal before
ITAT
Yes
No
Issues directions
(time limit of 6
months applies)
Issues Final
Assessment
order
GAAR not to be
invoked
Yes
Matter referred to the
Approving Panel
No
Constitution of Approving Panel – 3 Members – Retired/ current HC judge, IRS not below PCIT/ CCIT and academic/ scholar. To be constituted for a period of 1-3 years. To have the
powers of AAR as specified under Section 245U of the Act.
At any stage of assessment or
reassessment proceedings
Having regard to material and
evidence available
Hearing -
Satisfactory
GAAR not to be
invoked

23. SECTION 144BA - ADMINISTRATION (2/2)
Tax Payer
Tax officer
Approving Panel – 3
member bench
Hearing
Satisfied
No GAAR
Appeal before
ITAT
Commissioner
Hearing
Satisfied
No GAAR
1. Tax Officer to consider arrangement as impermissible
avoidance arrangement
2. Tax officer to refer arrangement to the Commissioner
3. Commissioner to issue notice to tax payer and tax payer
to furnish objections
4. Opportunity of hearing to the tax payer
5. No GAAR – if the Commissioner is satisfied
6. Reference to the Approving panel - if not satisfied
7. Approving panel to give opportunity of being heard
8. No GAAR – If approving panel is satisfied
9. Approving panel not satisfied – Issues directions to tax
officer. Tax Officer to compute the consequences and
pass the final assessment order
10. Appeal where assessment is framed invoking GAAR -
Tribunal
1
2
3
4
5
6
7
8
9
10

24. SOME OPEN POINTS
• Section 97(4) of the Act provides that factors such as period or time for which the arrangement exists, payment of taxes and the
fact that an exit route is provided by the arrangement may be relevant but shall not be sufficient for determining whether an
arrangement lacks commercial substance or not
– Change in financial position of the taxpayer or the party connected?
• Section 97(1) of the Act provides for a condition that an arrangement shall also be considered to be lacking commercial
substance, if it does not have a 'significant' effect upon business risks, or net cash flows apart from the tax benefit
– The term "significant" needs to be defined appropriately to avoid potential litigation
• Section 90(2A) provides that the provisions of GAAR should apply to the taxpayer even if such provisions are not beneficial
– DTAA is a bilateral agreement entered between two sovereign governments
– Article 27 of the Vienna Convention - a Government cannot invoke its internal law as a justification for its failure to
perform the DTAA; a unilateral amendment in the domestic law of any particular country cannot override a DTAA
– India Indonesia tax treaty renegotiated in 2012/ India Korea tax treaty renegotiated in 2015 - Provisions of tax treaty shall
not prevent a Contracting State from application of its domestic law/ measures concerning tax avoidance or evasion

25. SOME OPEN POINTS
• Section 144BA(6) of the Act - Directions issued by the Approving Panel shall be binding on the taxpayer and the Commissioner and
no appeal under the Act shall lie against such directions
– Direction issued by the Approving Panel is as per the provisions; taxpayer should be provided with a right to appeal against
such directions
• As per the notified Rules, the provisions of GAAR shall not apply to an arrangement where the tax benefit arising to all the parties
to the arrangement in the relevant AY does not exceed INR 3 crore in aggregate
– This threshold limit should be further enhanced so as to capture only highly sophisticated structures
• A distinction between tax mitigation and tax avoidance should be made to ensure that legitimate business choices do not result in
the invocation of GAAR
– To ensure clarity, as recommended by the Shome Committee, an illustrative negative list of such instances where GAAR
cannot be invoked should be issued
– Need for broad basing the scope of guidelines
• Impact on tax withholding and Section 163 liability (who may be regarded as agents)

26. CLARIFICATIONS VIDE
CIRCULAR NO 7 OF 2017

27. CIRCULAR NO 7 OF 2017
GAAR may also apply as may be necessary along with SAARs in the context of such
transactions/ structures as considered necessary
GAAR will not apply only where the LoB conditions "sufficiently address" the tax
avoidance element(s) in a transaction/ structure
GAAR will not interfere with the taxpayer’s right to select a method of undertaking a
transaction
A large corporate group has created
a service company to manage all its
non-core activities.
The service company then charges
each company for the services
rendered on a cost plus basis.
Can the mark up in the cost of
services be questioned using GAAR?
GAAR shall not be invoked merely on the ground that the entity is located in a tax
efficient jurisdiction. If the jurisdiction of the FPI is finalised based on non-tax
commercial considerations and the main purpose of the arrangement is not to obtain
tax benefit, GAAR will not apply.

28. CIRCULAR NO 7 OF 2017
View 1:
There are specific anti-avoidance provisions through transfer pricing as regards transactions among related parties. GAAR should
not be invoked.
As per the views of Bowman A.C.J. in the Canadian case Geransky vs The Queen [2001] 2 CTC 2147 at Paragraph 42:
"The Income-tax Act is a statute that is remarkable for its specificity and replete with anti-avoidance provisions designed to
counteract specific perceived abuses. Where a taxpayer applies those provisions and manages to avoid the pitfalls the Minister
cannot say "Because you have avoided the shoals and traps of the Act and have not carried out your commercial transaction in
a manner that maximizes your tax, I will use GAAR to fill in any gaps not covered by the multitude of specific anti-avoidance
provisions"
View 2:
As per the Circular, the provisions of GAAR could apply along with SAAR. In situations of tax avoidance (even after the applicability
of transfer pricing provisions), GAAR could be invoked

29. CIRCULAR NO 7 OF 2017
Grandfathering benefit related clarifications:
• Compulsorily convertible instruments: Shares issued post March 31, 2017 in relation to
instruments compulsorily convertible from one form to another (such as compulsorily
convertible debentures, compulsorily convertible preference shares), acquired before April 1,
2017, would be grandfathered if the terms were finalised at the issue of such instruments
• Bonus shares: Bonus shares issued in respect of shares issued prior to April 1, 2017 would be
eligible for grandfathering benefit in the hands of the same investor
• Share split or share consolidation: Shares coming into existence by way of split or consolidation
of shares issued prior to April 1, 2017 will be eligible for grandfathering benefit
• Scope of "investment" for grandfathering benefit: Reference has been drawn to accounting
standards wherein "investment" is defined to mean assets held by an enterprise for earning
income by way of dividends, interest, rentals and for capital appreciation. Accordingly, lease
contracts and loan arrangements are not an ‘investment’ and, hence, outside the purview of
grandfathering benefits.
Shares of A Ltd, issued on April
28, 1992 to F Co
A Ltd, merges with B Ltd on
November 2018 and
accordingly new shares issued
to F Co
Whether grandfathering will
apply to new shares issued by
B Ltd in the course of a merger
where the shares of the A Ltd
has been grandfathered?

30. CIRCULAR NO 7 OF 2017
GAAR not to apply on transaction/ structure held as permissible by a ruling of the Authority for Advance Rulings (“AAR”) or
approved by other authorities such as the National Company Law Tribunal (“NCLT”) or a Court where the authority has "explicitly
and adequately considered" tax implications before approving the transaction/ structure – Deemed approval under Companies
Act, 2013?
Application of GAAR where taxpayer opts to claim DTAA benefits in the year of gain and opts to get governed by provisions of the
Act in the year of loss - GAAR provisions are applicable if the arrangement is an impermissible avoidance arrangement. The scope
of GAAR provisions does not deal with admissibility of a claim under the tax treaty or the Act in different years.
Safeguards to invoke GAAR - GAAR is to be invoked only in deserving cases and adequate safeguards in terms of two-step vetting
procedure for invoking GAAR are already put in place, ie firstly the PCIT/ CIT will have to satisfy himself about invoking GAAR, and
secondly, the same will have to be approved by the Approving Panel chaired by a person who is or has been a High Court judge –
DRP experience!!
No corresponding adjustment will be made in the hands of another taxpayer where consequences of GAAR are applied in case of
a particular taxpayer. This is because corresponding adjustment across different taxpayers could militate against deterrence of
GAAR

31. For evaluating whether main purpose of an arrangement is to obtain tax benefit, the tax benefit arising in Indian jurisdiction should
only be considered. Tax benefit will have to be seen as tax year specific and also after taking into account the impact on all the
parties to an arrangement. GAAR is with respect to an arrangement or part of the arrangement and limit of INR 30 million cannot
be read in respect of a single taxpayer only.
Rule of consistency will be followed by the authorities across all the assessment year provided the facts remain the same
CIRCULAR NO 7 OF 2017
Penalty provisions are not automatic and depend on the facts and circumstances. No blanket exemption is available under the Act
from the levy of penalty. Taxpayer can, under the normal provisions of the Act which provide for waiver of penalty in certain
circumstances, apply for the same (Section 273A of the Act)
No exemption to long-standing structures

32. • Multilateral Instrument ("MLI") to modify bilateral tax treaties, released by the OECD as part of its project on Base Erosion and
Profit Shifting ("BEPS") provides that as a minimum standard, countries should implement at least one of the following measures in
its treaties:
– Principal purpose test ("PPT") only (a general anti-abuse rule based on the principal purpose of transactions or
arrangements)
– PPT supplemented with either a simplified or a detailed LOB provision, or
– Detailed LOB provision supplemented by a mechanism to deal with conduit arrangements not already dealt with in tax
treaties
• Given its enabling nature and flexible form, MLI provides various alternatives in its provisions concerning treaty abuse and
limitation of benefits. Signatories to the convention may elect to opt in any of these alternatives in respect of their tax treaties.
• It would be interesting to see if such PPT 'sufficiently addresses' the abuse as envisaged by GAAR and whether GAAR would still be
applicable to the transaction even after MLI is in force
• Legal nature of Guidelines/ rules/ Circulars - Same force as a statute, if not inconsistent; Binding on tax authority and approving
panel (even if it deviates from statute) but not on Courts/ taxpayers – Is Circular 7 a further guideline under Section 101 of the Act?
THE TAKEAWAYS

33. SPECIFIC ANTI AVOIDANCE
RULES

34. • "Known" would constitute something which may already have happened or which could foreseeably happen in respect of tax
avoidance
• Also known as Targeted Anti avoidance Rules (TAAR)
• SAAR lays down specific situations or conditions for invocation
• SAAR provides certainty to the tax payer and are intended not to grant any discretion to tax authorities at the same time
• Have limited scope of application and hence have inherent limitations in curbing all possible cases of tax evasion. The tax
authorities cannot possibly make SAAR’s for all situations of Tax avoidance.
• SAAR being specific help reduce time/ cost involved in tax litigation
SPECIFIC ANTI AVOIDANCE RULES (SAAR)
SAAR – Set of rules to counter specific abusive behavior/ malpractices by an assessee, which are "known"

35. SAAR
Section under the Act Provision relating to
Section 2(22) Deeming certain transactions with shareholders/ their related parties as dividend
Section 14A Disallowance of expense incurred for earning exempt income
Section 40A(2) & 92 Disallowance of expenditure paid to specified related parties in excess of fair market value
Section 50C Deeming the sale consideration in case of transfer of land and building at less than fair value
Section 56(2) Treating any transfer of property at nil or inadequate consideration as income of recipient.
Section 60 To club income where there is transfer of income without transfer of assets
Section 61 To target revocable transfer of assets
Section 64 To club income of specified persons in the income of the assesse in certain cases

36. SAAR
Section under the Act Provision relating to
Section 79 Carry forward and set off of losses in the case of certain companies
Section 80IC and similar other
provisions
No tax benefits to a business formed by splitting up, or the reconstruction or a business
already in existence/ Denying tax benefits to a business formed by transfer to a new
business of machinery or plant previously used for any purpose
Section 93 To counter avoidance of income-tax by transactions resulting in transfer of income to
non-residents
Section 94 To target avoidance of tax by certain transactions in securities, such as dividend stripping
In respect of abuse of tax treaties or treaty shopping, the anti-avoidance works through ‘ Limitation of Benefit’ clause, which is there in treaties
signed by India with many countries

37. CAPITAL STRUCTURE – GAAR ANALYSIS
GAAR analysis
• High debt equity ratio – Applicability of thin
capitalization norms and Revenue Authorities seeking
to recharacterise debt as equity and interest on debt
and dividends
• Consequent disallowance of interest as dividends are
not tax deductible
• DDT could be levy on interest paid under Section 115O
of the Act
• MAT is levied on book profits computed as per the
Companies Act, 2013, disallowing interest in computing
book profits would be against the computation
mechanism prescribed under the IT Act
In defence
• Use of debt instead of equity left to commercial
judgement of taxpayer
• GAAR provisions not applicable to an FII entity subject
to not availing treaty benefits. Consequently no
re-characterization possible in the case of FII entities.
However, Revenue Authorities may seek to make a
unilateral recharacterisation and disallow interest in the
hands of the SPV
• Strong merits to argue that unilateral recharacterisation
should not apply
• Even if interest is recharacterised as dividends and
disallowed, tax on dividend should be applied as per
the DTAA ie 10 per cent in the case of India Singapore
DTAA

38. BEPS ACTION PLAN 4 VS SECTION 94B
• Finance Act 2017 has introduced the concept of limitation on interest deductions
• In line with the OECD's BEPS Action Plan 4
Sl
No
Proposed
provisions
BEPS Action Plan 4 Section 94B of he Act
1 Approach Recommend interest to EBIDTA ratio (10 -30
percent) and supplements ‘worldwide group
ratio rule’
Interest to EBIDTA ratio of 30 percent
2 Threshold for
application
Recommended, amount not specified Interest payments must exceed INR 10 Million
3 Carry forward of
disallowed interest
Discussed but period not specified Allowed for 8 years
4 Deemed interest
from
AE
Not specifically covered, however guarantee
fee is considered as interest equivalent
Recognized deemed interest from AE based on
guarantee/ money deposit by borrower’s AE
with Lender
5 Exclusions Discussed need of specific rules for banking and
insurance companies
Excludes banking and insurance companies

39. Company A
(Lender)
Country B
Country A
Company B
(Borrower)
Equity 10
Loan 90
Particulars No SAAR Under SAAR
Pre-tax and pre-interest taxable profit 15.00 15.00
Deduction of interest payments (9.00) (4.50)
Post interest taxable profits 6.00 11.50
Tax @ 30 percent 1.80 3.45
Interest allowable as per Section 94B of the Act
Illustration:
• Company A, establishes group affiliate Company B with an
investment of 10 in equity capital and a loan of 90 from
Company A at a 10 percent interest rate
• Company B generates pre-tax and pre-interest income of
15 for a year and must pay interest to Company A at 10
percent ie a total interest payment of 9
• As per proposed Section 94B of the Act, deductions for
payments of interest is limited by reference to interest to
EBIDTA ratio of 3:10
• Then, interest on debt in excess of 0.3 the EBIDTA will be
denied. In such case, interest of 4.5 (15*0.3) would only
be allowed
Repay (90) + 10%
interest (9)
ILLUSTRATION

40. CARRY FORWARD OF LOSSES (SEC 79)
Specific Anti-Abuse Rule
• Section 79 introduced to curb taxpayers’ attempt at transferring losses incurred by
a corporate entity by means of transfer of shareholding
• Restricts carry forward and set off of losses in the hands of a closely held company,
if the shares of such company carrying at least 51 percent of voting power are not
beneficially held by persons who beneficially held such shares on the last day of the
previous year in which the loss was incurred.
 What is required is there shall be no change beyond 51 percent in voting power as
against shareholding
• In addition to third party deals, corporate restructuring is also impacted by
provisions of this section
Yum Restaurants (India) Pvt Ltd vs ITO, ITA Nos 349
and 388 of 2015 (Delhi)
• Piercing corporate veil to identify beneficial
ownership not permitted
• Judgement states that there was nothing to
state that there was any agreement or
arrangement that the beneficial owner is the
ultimate holding company
CIT vs AMCO Power Systems Ltd [2015] 379 ITR 375
(Karnataka)
• Expression 'not less than 51 percent of voting
power' indicates that only voting power is
relevant and not shareholding pattern
Intention of Section 79 of the IT Act
• Benefit of carry forward and set-off of business losses for previous years of a
company should not be misused by any new owner, who may purchase the shares
of the Company, only to get the benefit of set-off of business losses of the previous
years, which may bear profits in the subsequent years after the new owner takes
over the Company

41. ISSUE
• A Co and B Co are equity shareholders of Sub Co with equal voting rights
• Further infusion of funds in either of the following forms:
• CCDs/ OCDs
• CCPS/ OCPS
• Preference shares
• Equity Shares with Differential Voting Rights ("DVR")
Mechanics
• CCDs/ OCDs : Until actual conversion into equity shares (subject to
conversion terms) no voting power exists
• CCPS/ OCPS/ Preference shares : Although there is change of total
shareholding, no voting rights (except in the case of default in payment of
dividend for two years)
• Equity Shares with DVR : The terms of issue could be worded in such a
manner that no voting rights are provided to the shareholder
A Co
Current Shareholding and Voting rights
B Co
Sub Co
Shareholding in Red Voting rights in Green
Shareholding and Voting rights post issue of CCPS/ OCPS/
Preference shares/ Equity shares with DVR
A Co B Co
Sub Co
Shareholding and Voting rights post issue of CCDs/ OCDs
A Co B Co
Sub Co
Implication on voting rights pursuant to further infusion
51%
51%
49%
49%
C Co
35%
51%
25%
49%
40%
Nil
51%
51%
49%
49%
C Co
Nil
Nil
Issue of CCPS/OCPS/ Preference
Shares/ Equity shares with DVR
Issue of CCDs/ OCDs

42. Potential GAAR Impact
• In the presence of SAAR, would GAAR be applicable in such cases?
• Where the terms of CCDs/ OCDs are such that it contains a flavour of
equity shares, would the nomenclature of the instrument be disregarded
and treated as equity shares, counted for the purpose of voting rights?
• Could issue of equity shares with DVR where initially no voting rights are
provided, however, a clause is mentioned that the terms as to voting are
alterable, be looked at as equity shares with voting rights and the issue be
considered as a transaction to avoid loosing the benefit of Section 79?
ISSUE
Possible Solution
• Terms of issue relevant to voting rights to be loosely worded apart from
having a strong commercial substance
A Co
Current Shareholding and Voting rights
B Co
Sub Co
Shareholding and Voting rights post issue of CCPS/ OCPS/
Preference shares/ Equity shares with DVR
A Co B Co
Sub Co
Shareholding and Voting rights post issue of CCDs/ OCDs
A Co B Co
Sub Co
51%
51%
49%
49%
C Co
35%
51%
25%
49%
40%
Nil
51%
51%
49%
49%
C Co
Nil
Nil
Issue of CCPS/OCPS/ Preference
Shares/ Equity shares with DVR
Issue of CCDs/ OCDs
Shareholding in Red Voting rights in Green

43. TYPICAL OFFSHORE FUND STRUCTURE
Offshore
Fund
(“Fund”)
• Fund setup as a Singapore company/ GBC1 company as per
Mauritius Laws to carry out investment activities in and outside
India
• Capital structure is designed in such a way that one class of
shares are held by General Partners, second class of shares by
Limited Partners and third class of shares are carry shares
Mechanics
Investment
Manager
(“IM”)
• Fund managed by its Board of Directors and enters into a
Investment management agreement with the Investment
Manager (“IM”)
• IM remunerated for the services to be rendered to the Fund and
it also receives investment advice from the IA
Investment
Advisor
(“IA”)
• IA shall provide non-binding investment advice to the IM on
entering into a contractual agreement
• IA will not have authority to take decisions on behalf of IM or to
enter into contracts on behalf of, or to otherwise bind the Fund/
IM, and will not act as an agent or manager of Fund/IM
• IA would be compensated for the services at arms' length on a
cost plus margin basis
IM
IA
Singapore/
Mauritius
India
Typical Offshore Fund Structure
(Plain vanilla structure)
Portfolio
Companies
Investment
Fund

44. POEM VS GAAR
Impact
• Since the rules of Place of Effective Management (“POEM”) shall not be
applicable to IM and therefore the income of IM/ offshore fund shall not
be liable to tax, would GAAR be applicable?
• Assuming the conditions as provided in Section 9A of the Act are complied
with, the IM would not be considered to constitute a business connection
in India. Accordingly, as the conditions for applicability of Section 9A of the
Act, has been specifically addressed, the provisions of GAAR should not be
applicable.
IM
IA
Singapore/
Mauritius
India
Typical Offshore Fund Structure
(Plain vanilla structure)
Portfolio
Companies
Investment
Fund

45. Mechanics
INVESTMENT IN PORTFOLIO COMPANIES
S CoM Co
Mauritius Singapore
Equity/
CCDs
Equity/
CCDs
Fund• Typical private equity investment structure entailing
equity investment from a Mauritius Company (“M Co”)
• Investment in the form of Compulsorily Convertible
Debentures (“CCDs”) from a Singapore Company (“S
Co”) in portfolio companies in India
Setup
Income
• Distribution from portfolio companies:
o Dividend shall be receivable by M Co after
deduction of Dividend Distribution Tax (“DDT”)
o Interest shall be receivable by S Co, taxable at a
beneficial rate of 15 percent as per India-Singapore
Treaty/ 7.5 percent as per India-Mauritius
Interest
Portfolio Companies

46. Impact
• Can the CCDs be re-characterised as Equity?
– If yes, will the interest paid be treated as dividend and DDT along
with penalty payable?
• Look though approach under GAAR provisions
• Challenges in establishing place of residence of the Fund/S Co/ M Co in
the structure in light of the specific GAAR provisions on place of residence
• Whether the main purpose of the structure was to obtain treaty benefit
on interest income and therefore the provisions of GAAR to apply?
INVESTMENT IN PORTFOLIO COMPANIES
S CoM Co
Mauritius
Equity/
CCDs
Equity/
CCDs
Fund
Interest
Portfolio Companies

47. WITHOLDING OF TAXES
Whether GAAR shall be applicable at the time of withholding taxes?
Fund
Investor A Investor B
Remittance
of income
India
Outside India
Key Concerns
• Whether GAAR provisions can be invoked by the Assessing officer while
disposing of an application for determination of a withholding tax
amount under Section 195(2) or 197 of the Act?
• In a case where income to be remitted outside India is exempt by virtue
of treaty benefits, whether GAAR could be invoked on account of a
suspected impermissible avoidance agreement at the withholding stage
itself?
• Any protection to the payer – Section 201 proceedings/ indemnity to be
taken by the payer etc?

48. CASE STUDIES

49. Direct conversion of company into an LLP would not be tax neutral if
exemptions conditions are not met [Section 47(xiiib)]
In order to circumvent the exemption conditions, the existing Company is
merged with a newly formed company and then converted into LLP in the
year of merger
Could GAAR be invoked?
Yes, GAAR could be invoked
CASE STUDY I
A Co Ltd
Taxable Conversion
A LLP
A Co Ltd
A LLP
New Co Ltd
Merger

50. An employee of a private limited company A is to receive a bonus or
salary.
The employee subscribes for preferential shares of the employer
company. The preferential shares are purchased by a connected company
of A and are redeemable at a premium after a period of one year.
The differential consideration reflects a portion of the employee's annual
salary or bonus. In this manner, the employee receives the income as
capital gains.
Could GAAR be invoked?
The acquisition of preferential shares is part of an arrangement designed
to avoid the tax on salary income. GAAR could be invoked.
CASE STUDY II
A Co Ltd
Purchases shares
After one year
A Co Ltd
Redemption of shares by A Co Ltd/ sale of shares to AE of A
Co Ltd
AE of A Co Ltd

51. UNDER THE GAAR SCANNER
•Corporate gifting of shares/ cross gifts /
circuitous gifts
•Externalisation
•Beneficial compensation plans (car lease
policy etc)
•Tax Havens/ Preferential tax regimes
•Shell companies
•Share swaps
•Trust schemes
•56(2)(viib) structures – issue of few
shares at higher premium to increase the
initial NAV; subsequent issue not to
trigger 56(2)(viib)
•Creative structures
•Interposed foreign (multiple) entities –
for treaty benefits/ twin tier structures
•Reverse Mergers
•Cross Border Mergers
•RE holding structures
•Retrospective mergers (say to claim
Section 32AC benefits etc)
•Selective (i) buy back or (ii) rights issue or
(iii) bonus issue or (iv) capital reduction
•Use of convertible instruments to meet
IRR (fixed returns)
•Treaty Shopping
•Re-domiciling IP outside India
•Section 79 – transfer of shareholding
rights but voting rights kept intact to
preserve past losses
•Double dip structures
•Assigning of loan to lower tax jurisdiction
•Demerger instead of merger (to avail past
losses), Issue of RPS in demerger (so as to
delink shareholding), Bonus Debenture
structures
•Abuse of SAAR provisions
•Artificial avoidance of Permanent
Establishment

52. HOW WILL DOING BUSINESS CHANGE WITH GAAR? (1/2)
• Right to plan tax affairs is a fundamental right of every taxpayer
• Does introduction of GAAR mean an end to tax planning?
• Does GAAR mean that the taxpayer loses right to choose how a transaction is executed or implemented?
• Instances could be many - having decided to exit a business, does the taxpayer have the right to choose to implement this as
either a share sale or a business transfer? And in a business transfer, can he not choose between a slump sale or an itemised sale
or a demerger?
• Can a taxpayer entering India, choose an entity being a subsidiary (Company form) or an LLP or to just have a branch?
• Do taxpayers have a choice to consider distribution by way of dividend vs buy-back or capital reduction?
• Does a taxpayer who for good business reasons needs a holding co (or SPV) have the right to choose the most efficient jurisdiction
in which to house the SPV?
• Merger of a loss-making company and a profit-making company of a group with the follow-on consequence of a reduced tax
liability could be questioned
• In GAAR regime, taxpayers could consider various dispute resolution methods such as private rulings from the Authority for
Advance Ruling, advance pricing agreements and Mutual Agreement Procedures while determining litigation strategy

53. • It calls for a paradigm shift in thinking and in mindset
• Tax will not be seen to be driving businesses any more - it should be business driving tax
• Tax functions to have right skills and capabilities
• Business reasons and commercial rationale will be central to any planning in a GAAR environment
• Real substance-based planning, closely aligned with the taxpayers' business and operating model would increasingly be seen
• Documentation will be the key - Clear and consistent documentation demonstrating the business purpose and intent will acquire
critical significance as never before
• It needs to be ensured that robust tax governance procedures (for the entire tax life cycle, ie planning, provisioning, compliance
and controversy) are in place to keep enterprise from being unnecessarily exposed to GAAR
• Will stick do the trick?
• Choice Principles (lease vs buying of asset, equity vs borrowing etc) – Mixed Basket – to be carefully tested for GAAR
• Long experience of working of GAAR in other jurisdictions clearly shows that despite GAAR the instances of opportunistic
tax-behavior have not declined – will India Inc experience differently?
HOW WILL DOING BUSINESS CHANGE WITH GAAR? (2/2)

54. ROLE OF PROFESIONALS (1/2)
• Revisit tax positions and test for compatibility with GAAR (may require amending actions at corporate front)
• With GAAR coming into picture, the weighing of commerciality of every any transaction crossing the prescribed monetary
threshold of tax benefit would become the order of the day
• Corporate decisions would need to be tested not just from the perspective of corporate managers but also from a reverse
perspective as to how the tax administration may view (or rather portray) the transaction to be
• Tight-rope situations to tackle GAAR – Contemporaneous documentation will be the key – to demonstrate the business purpose
and intent will acquire critical significance as never before
• It is at the back of documentation that the real intent behind a transaction could be examined and such documentation would
assist in making assertions for defence during a tax scrutiny/ audit
• Receiving an opinion on GAAR – a mere reassurance that the position satisfies the technical requirements of the law or something
more? Adequate disclaimers to cover risks!

55. ROLE OF PROFESIONALS (2/2)
• Overall, need to examine the below questions regarding those transactions that could potentially result in the application of
GAAR:
– Does the transaction/ structure have a valid commercial purpose (Principal purpose test)?
– Is the transaction/ structure distinctive and complex?
– Is the tax benefit material to the financial statements?
– Could the transaction/ structure be undertaken in a changed manner without drawing the potential application of GAAR?
– Has a technical opinion been obtained that such transaction/ structure will more likely than not (MLTN situation) withstand a
GAAR challenge?
– Is the transaction/ structure defendable in the public eye (reputational ramifications)?
– What is the company's tax risk profile – internationally and locally?
– How comfortable is the company with litigation if it is required to defend the transaction/ structure against GAAR (Risk
appetite)?
• Shome Committee recommendation - Tax audit report may be amended to include reporting of tax avoidance schemes above a
specific threshold of tax benefit of INR 3 crores or above which is considered by the tax auditor as more likely than not to be held
as an impermissible avoidance arrangement under the Act – Likely to come given the manpower shortage at field level?

56. THE FINALE – HITS AND MISSES
Hits
•Training of tax officers
•Detailed report of reasons
•Monetary Threshold
•No discrimination
•May increase the attractiveness of
India as investment destination
Misses
•Larger power to tax authorities
could lead to arbitrary actions
•SAAR and GAAR to apply in
parallel
•Onus lies on the assessee to
prove that there is no avoidance
•Overrides tax treaties
•Serious institutional failures of
judiciary
•May be premature to use GAAR in
India unless tax officers are
adequately trained to target only
ingenuine transactions

57. RECOMMENDATIONS
• Tax authorities should respect the form of a legitimate business transaction even when such a form allows a reduction of overall
tax costs
• What qualifies as a legitimate business decision should be broadly defined in this rapidly changing and technologically driven
global market place
• SAAR must be sufficiently clear and precise so that the taxpayer may be certain that a transaction which is in strict accordance
with the law would not be put into question
• Tax authorities should not take it upon themselves to interpret and/ or to apply a clear law according to their expectations
(particularly when the administrative interpretation of the law is not published)
• Application of such rules should be limited to exceptional cases in which there is no economic substance and no fundamental
business reason for a transaction
• Overarching principle should be that GAAR is to be applicable only in cases of abusive, contrived and artificial arrangements
• If only part of arrangement is impermissible, GAAR applicability to part and not the whole
• To be implemented with consistency, transparency and adherence to principles of natural justice

58. Sandeep Jhunjhunwala, FCA, ACS, B.Com (H)
E: writetosandeepj@gmail.com
M: +91 97401 55469
The views in this presentation are personal views of the Presenter. The information contained is of a general nature and is not intended to address the circumstances of any
particular individual or entity. Although, the endeavor is to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date
it is received or that it will continue to be accurate in the future. This presentation is meant for general guidance only and no responsibility for loss arising to any person/ entity
acting or refraining from acting as a result of any material contained in this presentation will be accepted. It is recommended that professional advice be sought based on the
specific facts and circumstances. This presentation does not substitute the need to refer to the original pronouncements.