An insight into the details and implications of GAAR introduced through Chapter X-A, section 95 to 102 inserted during Finance Act 2013.

2. Hello.
TAX AND REGULATORY SERVICES
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3. GENERAL ANTI AVOIDANCE RULE (GAAR)
18 Jan 2018
TAX AND REGULATORY SERVICES
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4. LEGISLATIVE ANTI-AVOIDANCE MEASURE TAX AND REGULATORY SERVICES
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Specific Anti Avoidance Rules (SAAR)
To address specific kinds of tax avoidance
devices.
Examples:
i. Thin Capitalization (section94B);
ii. Arms length approach (transfer pricing
provisions);
iii. Digital economy taxation (equalization levy);
iv. Controlled Foreign Corporation norms
(POEM guidelines) etc.
General Anti Avoidance Rules (GAAR)
Because its not possible to draft an exhaustive
rule.
Introduced vide Chapter X-A, section 95 to 102
inserted vide Finance Act 2013.
■ Applicable for AY 2018-19 onwards;
■ Over-riding the Act; and
■ Determines when an arrangement may be
declared to be an Impermissible Avoidance
Arrangement (IAA).

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GENERAL GUIDANCE TAX AND REGULATORY SERVICES
Section 95
An arrangement (step in or part of arrangement) entered into by a taxpayer may be declared to be an IAA.
Section 96
IAA is an arrangement, main purpose of which is to obtain tax benefit (presumption), and it
■ Creates right etc. unusual arms length dealings;
■ Results in misuse/ abuse of the Act;
■ Carried out in a manner, unusual for bona fide purpose; and
■ Lacks or deemed to lack commercial substance (section 97)
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ARRANGEMENT TO LACK COMMERCIAL SUBSTANCE TAX AND REGULATORY SERVICES
Section 97
Deemed to lack commercial substance if;
■ Its substance is inconsistent with form of its steps
■ Involves round tripping/accommodating party/ self-canceling elements/ disguising of value, location, source,
ownership, control of subjects
■ Location of an asset/ transaction/ residence without any substantial commercial purpose
■ No significant effect on business risk/ net cash flow
Following may be relevant but not sufficient for determining whether an arrangement lacks commercial
substance on not:
■ the period or time for which arrangement exists
■ payment of taxes, directly or indirectly
■ an exit route is provided
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7. 7
CONSEQUENCES OF IAA TAX AND REGULATORY SERVICES
Section 98
If an arrangement is declared to be an IAA, consequences including denial of tax benefit or benefit under a tax
treaty shall be determined in a manner as deemed appropriate. It shall include (but not limited to):
■ Disregarding/ combining/ re-characterizing any step/part/ whole of IAA
■ Disregarding any accommodating party or treating it and any other party as one and same
■ Deeming connected persons to be one and same;
■ Re allocating any accrual or receipt/ any expenditure deduction, relief or rebate
■ Treating residence of any party/ situs of an asset or transaction, at a place other than the actual one
■ Looking through any arrangement by disregarding any corporate structure
For the purposes of section 98:
■ Any equity may be treated as debt or vice versa
■ Any accrual/ receipt of a capital nature may be treated as revenue nature or vice versa
■ Any expenditure, deduction, relief or rebate may be re-characterized
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CONSEQUENCES OF IAA TAX AND REGULATORY SERVICES
Section 99
In determining whether tax benefit exists:
■ The parties who are connected persons in relation to each other may be treated as one and the same
person
■ Any accommodating party may be disregarded
■ The accommodating party and any other party may be treated as one and the same person
■ The arrangement may be considered or looked through by disregarding any corporate structure
Rule 10 UA
Where a part of an arrangement is declared to be an IAA, the consequences in relation to tax shall be
determined with reference to such part only
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CONSEQUENCES OF IAA TAX AND REGULATORY SERVICES
Section 100
Chapter XA will apply ‘in addition to, or in lieu of’ any other basis of determination of tax liability.
■ Harmonious interpretation of Chapter XA and other provisions of the Act;
■ In case of irreconcilable conflict, provisions of chapter XA will prevail.
Will GAAR be invoked if SAAR applies?
■ Clarification: GAAR and SAAR can co-exist.
Section 101
Framing of guidelines (Rules 10U, 10UA, 10UB and 10UC and relevant forms)
Section 102
Definitions
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CONSEQUENCES OF IAA TAX AND REGULATORY SERVICES
Rule 10U
■ Materiality: Where aggregate tax benefit (aggregate to all the parties) in relevant AY exceeds INR 3 Crores
■ Grandfathering: Income from transfer of investments made before 1st April 2017
 It is clarified that without prejudice to above, GAAR provisions shall apply to any arrangement, irrespective of date on
which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after 1st April 2017.
 It is also clarified that grandfathering benefit is not available in respect of lease contracts and loan arrangements as
they are not investments.
■ FIIs who has not taken benefit of DTAA and NR investors therein.
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CLARIFICATIONS ON IMPLEMENTATION OF GAAR PROVISIONS TAX AND REGULATORY SERVICES
■ GAARs not to apply:
 If sufficiently addressed in LOB in tax treaty
 Jurisdiction of FPI – Based on non-tax commercial considerations. Main purpose is not to tax benefit.
 GAAR shall not be invoked merely because entity is located in tax efficient jurisdiction
 Right of taxpayer to select method of implementing a transaction
 Grandfathering to CCD/CCPs, bonus, split/ consolidation w.r.t. investment before 1st April 2017 in hands of same
investor at terms finalized at the time of issue of such instruments.
 Court/NCLT has explicitly, adequately considered tax implications when sanctioning arrangement
 Arrangement held permissible by AAR
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CLARIFICATIONS ON IMPLEMENTATION OF GAAR PROVISIONS TAX AND REGULATORY SERVICES
■ Compensating adjustments will not be made for the other tax payer;
■ GAAR and SAAR can co-exist;
■ Period of time for which an arrangement exists – relevant factor but not sufficient.
■ Right of the taxpayer to select an alternative:
 GAAR will not interplay with right of taxpayer to select or choose method of implementing a transaction.
 If a taxpayer claims treaty benefits in one year and opts to be governed by domestic law in another year, GAAR will not
apply to deny such claim.
■ If the approving authority has rejected tax officer’s request to invoke GAAR provisions in respect of an
arrangement in any year, GAAR will not be invoked in subsequent years provided the facts and circumstances
remain the same.
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CASE STUDIES TAX AND REGULATORY SERVICES
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Consequences Tax Impact
Treating IAA as not entered
into or carried out
Taxing US Co. as if it has directly
invested in I Co. – WHT @ 15%
Disregarding M Co. as
accommodating party
Treating M Co. & US Co. as
one and same person
Reallocate interest income
from M Co. to US Co.
Treating place of residence of
M Co. to be in USA by
concluding that M Co.’s
location of residence in M is
without any substantial
commercial purpose
Taxing M Co. as if it is a co.
incorporated in USA effective
denial of treaty benefit in absence
of TRC – WHT @ 40% on a net
basis
Disallowing treaty benefit to M
Co.
WHT @ 40% on net basis
I - M Interest WHT 7.5%
I – US Interest WHT 15%
Domestic Law WHT 40% + SC
Indian Co.
US Co.
Mauritian Co.
USA
Mauritius
India
100%
100%
EquityIssueofCCDs
PaymentofInterest
Case 1

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CASE STUDIES TAX AND REGULATORY SERVICES
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Indian Co.
Parent Co.
Foreign Co.
Outside India
Outside India
India
100%
100%
EquityINR1000EquityINR10
CCD’sINR990
Case 2
Can CCD be characterized as equity under GAAR?
Business
Parent Co.
Indian Co.
Outside India
India
100%
EquityINR300
CCDINR700
UsedforBusiness
Acquisition
Case 3
Can CCD be characterized as equity under GAAR?
Bank
Loan of INR 700

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NITIN GARG
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TAX AND REGULATORY SERVICES
ADITI MEHRA
Senior Consultant
aditi.mehra@coinmen.in