General Anti-Avoidance Rules (GAAR)

GAAR shall apply in addition to or in lieu of any other basis for determination of tax liability.
It overrides the provisions of Double Taxation Avoidance Agreement (DTAA).
GAAR apply when tax benefit in aggregate by all entities exceeds Rs. 3 Crores.

Section – 95: Applicability
Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement (IAA) and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter.
It shall apply in respect of any assessment year beginning on or after the 1st day of April, 2018.
Note: The initial burden of proof is on AO to treat any transaction as IAA.

Section – 96: Impermissible avoidance arrangement.
An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length.
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act.
(c) lacks commercial substance or is deemed to lack commercial substance under section-97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

Section – 97: Arrangement to lack commercial substance.
1. The 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.
Example: Sale and Lease back transaction.

2. It involves or includes—  
(i) Round trip financing;
round trip financing includes any arrangement in which, through a series of transactions—  
(a) funds are transferred among the parties to the arrangement; and  
(b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit,
Example: A company (X Ltd.) obtains loan from the market and lends that money to its related group entity at zero interest, and claims it to be for the purpose of business.

Below mentioned justifications will not be considered—  
(A) whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement;  
(B) the time, or sequence, in which the funds involved in the round trip financing are transferred or received; or  
(C) the means by, or manner in, or mode through, which funds involved in the round trip financing are transferred or received.

(ii) An accommodating party;  
Example: XYZ Ltd. Wants to earn a loss so it sells shares (Investment) to A Ltd. And A Ltd. Further sell that share in market at profit.(here A Ltd. works as an accommodating party).

(iii) Elements that have effect of offsetting or cancelling each other.
Example: such transactions which are entered into to avoid clubbing provisions.

(iv) A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.
Example: Investment made in India from any other country without disclosing the such information.

3. It involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit for a party.
Example: Branch or a unit open in SEZ to obtain tax benefit but no actual work is done from that SEZ unit.

4. It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.
Example: Increasing the profit of an entity established in tax heaven country of territory and reduce the profit of other entity which leads to overall increase in group profit due to tax benefit.

Section – 98: Consequences of impermissible avoidance arrangement.
If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to the following, namely:—

• disregarding, combining or re-characterising any step in, or a part or whole of, the impermissible avoidance arrangement
• treating the impermissible avoidance arrangement as if it had not been entered into or carried out
• disregarding any accommodating party or treating any accommodating party and any other party as one and the same person
• deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount
• reallocating amongst the parties to the arrangement:-   
  (i) any accrual, or receipt, of a capital nature or revenue nature or  
  (ii) any expenditure, deduction, relief or rebate.
• treating:-
     (i) the place of residence of any party to the arrangement; or
    (ii) the situs of an asset or of a transaction,
  at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or
• considering or looking through any arrangement by disregarding any corporate structure

Note: For this purposes:-
1. Any equity may be treated as debt or vice versa
2. Any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or
3. Any expenditure, deduction, relief or rebate may be re-characterised.

Section-144BA Reference to Principal Commissioner or Commissioner in certain cases:
1. If, the Assessing Officer may make a reference to the Principal Commissioner or Commissioner having regard to the material and evidence available, considers that it is necessary to declare an arrangement as an impermissible avoidance arrangement.
2. The Principal Commissioner or Commissioner shall, on receipt of a reference, issue a notice to the assessee, setting out the reasons and basis of such opinion, for submitting objections, if any, and providing an opportunity of being heard to the assessee within a period not exceeding 60 days.
3. If the assessee does not furnish any objection to the notice within the time specified in the notice, the Principal Commissioner or Commissioner shall issue such directions as he deems fit in respect of declaration of the arrangement to be an impermissible avoidance arrangement.
4. If the Principal Commissioner or Commissioner is satisfied, after having heard the assessee that the provisions are not to be invoked, he shall by an order in writing, communicate the same to the Assessing Officer with a copy to the assessee.
5. In case the assessee objects to the proposed action, and the Principal Commissioner or Commissioner after hearing the assessee in the matter is not satisfied by the explanation of the assessee, then, he shall make a reference in the matter to the Approving Panel for the purpose of declaration of the arrangement as an impermissible avoidance arrangement.
6. The Approving Panel, on receipt of a reference from the Principal Commissioner or Commissioner, shall issue such directions, as it deems fit, in respect of the declaration of the arrangement as an impermissible avoidance arrangement including specifying of the previous year or years to which such declaration of an arrangement as an impermissible avoidance arrangement shall apply.
7. No direction shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interests of the revenue, as the case may be.
The Approving Panel may, before issuing any direction:
(i) if it is of the opinion that any further inquiry in the matter is necessary, direct the Principal Commissioner or Commissioner to make such inquiry or cause the inquiry to be made by any other income-tax authority and furnish a report containing the result of such inquiry to it.
(ii) call for and examine such records relating to the matter as it deems fit.
(iii) require the assessee to furnish such documents and evidence as it may direct.
8. The Assessing Officer, on receipt of directions of the Principal Commissioner or Commissioner or of the Approving Panel, shall proceed to complete the proceedings in accordance with such directions.
9. If any direction issued specifies that declaration of the arrangement as impermissible avoidance arrangement is applicable for any previous year other than the previous year to which the proceedings referred to in sub-section (1) pertains, then, the Assessing Officer while completing any assessment or reassessment proceedings of the assessment year relevant to such other previous year shall do so in accordance with such directions and it shall not be necessary for him to seek fresh direction on the issue for the relevant assessment year.
10. No order of assessment or reassessment shall be passed by the Assessing Officer without the prior approval of the Principal Commissioner or Commissioner, if any tax consequences have been determined in the order.
11. The Approving Panel shall issue directions within a period of 6 months from the end of the month in which the reference was received.
12. The directions issued by the Approving Panel shall be binding on the assessee and the Principal Commissioner or Commissioner and the income-tax authorities subordinate to him and notwithstanding anything contained in any other provision of the Act, no appeal under the Act shall lie against such directions.