General Anti-Avoidance Rules (GAAR) India

GAAR stands for general-anti-avoidance rules and it came into act due to VODAFONE case ruling in favour of this company by the Supreme Court. These new rules came into implementation from 01 April, 2012.


The Present President of India, The former finance minister Pranab Mukherjee had proposed GAAR in Union Budget for the current fiscal year in order to ensure minimal avoidance of tax.
The main aim of GAAR in India was to bar companies from aggressive tax planning by using opaque low tax jurisdictions for residence as well as for sourcing capital. To put it in layman terms we can say that Gentleman please pay taxes honestly and be part of India growing economy. 

GAAR ensures

• Indian Government is trying to give powers to income tax authorities as implementation of GAAR provides tremendous powers to deny tax benefit to an entity if a transaction has been carried with the sole intention of tax avoidance. Due to powers in the hand of taxmen, now innocents may be harassed by them.
• FII & FDI money coming to India through Mauritius route will now become taxable.
• Increased litigations.

GAAR drawbacks

The onus lies on the assesse to prove that there is no tax benefit and the transaction is not an avoidance transaction.

GAAR – Example

To make it easier to understand GAAR; we can say that suppose a person or a company is setting up business in Gulf Country and its clear intention is to claim exemption from capital gains tax, in such a scenario Indian govt has the right to deny the legitimate claim for exemption provided under DTAA as it falls under tax avoidance and Indian govt is trying to fix up tax vulnerability.

Page 1 of 1

 GAAR Committee Report 

  

Draft guidelines regarding implementation of General Anti Avoidance 

Rules (GAAR) in terms of section 101 of the Income Tax Act, 1961. 

Background

The Chairman, CBDT, Vide OM F.NO. 500/111/2009-FTD-1 Dated 27 February, 2012  

constituted a Committee under the Chairmanship of the Director General of the Income 

Tax (International Taxation) to give recommendations for formulating the guidelines for 

proper implementation of GAAR Provisions under the Direct Tax Code Bill, 2010 and to 

suggest  safeguards  to these provisions to curb the abuse thereof. The Committee 

comprised of the following officers :- 

1.  Director General of Income Tax (International Taxation)- Chairperson 

2.  Joint Secretary (FT& TR-I) 

3.  Joint Secretary (FT& TR-II)  

4.  Joint Secretary (TPL-I) 

5.  Director of International Taxation, Ahmedabad 

6.  Director, FT & TR-III 

7.  Addl. Director on Income Tax, Range-I (IT), New Delhi, Member Secretary. 

 The terms of reference of the Committee was as under :- 

a)  Recommendations for formulating guidelines to implement the provisions of 

General Anti-Avoidance Rules(GAAR) as per section 123 of the Direct Tax Code 

Bill, 2010; and 

b)  Draft a circular as a safeguard so that the GAAR provisions are not applied 

indiscriminately in every case. Page 2 of 2

 GAAR Committee Report 

The Committee met for the first time on 6

th

 March, 2012 and felt that the existing 

provisions of the Direct Tax Code Bill 2010(DTC) needed certain modifications and 

therefore various specific suggestions were made in this regard. These included 

suggestions on defining various terms as appearing in the DTC, changing the procedure 

of invoking the provisions of GAAR, prescribing time limits etc. 

Subsequent to the first meeting, the Finance Bill 2012 was presented before the 

Parliament and it was gathered that most of the suggestions given in the first meeting 

were addressed in the Finance Bill 2012. The Committee thereafter examined the 

provisions related to GAAR in the Finance Bill 2012 as modified through Government 

amendments during the passage of the Bill in Parliament. The recommendations 

regarding guidelines/circulars have been made in light of the final provisions relating to 

GAAR in the Finance Act, 2012. 

The Committee held several meetings between 06.03.2012 to 28.05.2012. 

After exhaustive deliberations and broad based discussions with the officers, 

representatives of FII’s, members of the advisory committee and others stake holders, 

the Committee makes the following recommendations which would need to be split 

between Circulars and the Rules.Page 3 of 3

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Proposals for inclusion in the guidelines

A)  Guidelines u/s 101 

Section 101 of the Finance Act, 2012, provides that “the provisions of this 

Chapter shall be applied in accordance with such guidelines and subject to such 

conditions and the manner as may be prescribed”. The Committee makes the 

following recommendations to be incorporated in the guidelines. 

a)  Monetary threshold

The committee feels that in order to avoid the indiscriminate application of the 

GAAR provisions and to provide relief to small taxpayers, there should be 

monetary threshold for invoking the GAAR provisions. In this regard, the 

following recommendation is made by the committee. 

Only an arrangement or arrangements where the tax benefit through the 

arrangement(s) in a year to an assessee is above  Rs. ___ lacs will be 

covered by GAAR provisions.  

b)  Prescription of statutory forms

The committee feels that consistency of approach is essential in the procedures 

for invoking the GAAR provisions. It also feels that adequate safeguards should Page 4 of 4

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be provided to ensure that principles of natural justice were not violated and 

there is transparency in the procedures. Therefore, the committee is of the 

opinion that there should be prescribed statutory forms for the following:- 

i)  For the Assessing Officer to make a reference to the Commissioner u/s 

144BA(1) (Annexure-A) 

ii)  For the Commissioner to make a reference to the Approving Panel u/s 

144BA(4) (Annexure-B) 

iii)  For the Commissioner to return the reference to the Assessing Officer 

u/s 144BA(5) (Annexure-C) 

(The drafts thereof have been prepared and enclosed as above)

c)  Prescribing the time limits 

The committee feels that there should be absolute certainty about the time limits 

during which the various actions under the GAAR provisions are to be 

completed. Some of these time lines have been prescribed under the act under 

sections 144BA(1) and 144BA(13). For the remaining actions the following time 

lines are suggested by the committee :- 

It may be prescribed that in terms of section 144BA(4), the CIT should make 

a reference to the Approving Panel within 60 days of the receipt of the 

objection from the assessee and in case of the CIT  accepting the Page 5 of 5

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assessee’s objection and being satisfied that provision of chapter X-A are 

not applicable, the CIT shall communicate his decision to the AO within 60 

days of the receipt of the assessee’s objection as prescribed under section 

144BA(4) r.w.s. 144BA(5). No action u/s 144BA(4) or (5) shall be taken by 

the Commissioner after the period of six months from the end of the month 

in which the reference under sub-section 144BA(1) was received by the 

Commissioner. 

B)  Recommendations regarding setting up of the Approving Panel u/s 144(BA)

Section 144BA(14) has empowered the CBDT to constitute Approving Panel 

consisting of not less than 3 members, out of which one member of the panel 

would be an officer of the level of Joint Secretary or above from the Ministry of 

Law and the others being the Income Tax Authorities of the rank of 

Commissioner and above. The committee deliberated on the constitution of this 

committee for efficient output and has made the following recommendations :- 

(a) To begin with, there should be one Approving Panel, which shall be 

situated at Delhi. Subsequently, the CBDT should review the number of 

Approving Panels required on the basis of the workload in the                   

FY 2014-15. Page 6 of 6

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(b) The Approving Panel should comprise of three members, out of which, 

two members should be of the level of Chief Commissioners of Income 

Tax and the third member should be an officer of the level of Joint 

Secretary or above from the Ministry of Law. All the members should be 

full time members. 

(c) The Approving Panel should be provided the secretariat staff along with 

appropriate budgetary and infrastructure support by the CBDT. The 

secretariat should be headed by an officer of the level of 

Joint/Additional Commissioner of Income Tax.  

C)  Recommendations for the Circular on GAAR 

a)  Explaining the provisions of GAAR

For the purpose of explaining the provisions of GAAR and better understanding 

thereof, the Committee suggests a detailed note to be included in the circular, 

which is enclosed as Annexure- D. Page 7 of 7

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b)  Special provisions for Foreign Institutional Investors (FII’s) 

Foreign Institutional Investors have expressed certain concerns regarding GAAR 

provisions. The committee met the representatives of Asia Securities Industry & 

Finance Markets Association and Capital Markets Tax Committee of Asia. After 

discussions, the representatives of these bodies gave following suggestions to 

resolve their apprehensions. 

1. To exempt Capital Market transactions entirely from the GAAR provisions

2. A flat tax on FII’s gains without any distinction between various transactions 

could be considered.

3. The tax authorities could attempt to clarify the details of each provision in the 

GAAR. For this, they gave comments on how the relevant provision may be 

clarified.  

The committee considered the suggestions of the representatives. Option No. 

(1) & (2) above are not viable options as it is not permitted under the 

provisions of the Income Tax Act. However option (3) could be considered. 

For this purpose, safe harbour could be provided to the FII’s subject to the 

payment of taxes as per domestic law. Accordingly,  the committee 

recommends the following. 

   

Where a Foreign Institutional Investor (FII) chooses not to take any 

benefit under an agreement entered into by India under section 90 or 

90A of the Act and subjects itself to tax in accordance with the domestic Page 8 of 8

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law provisions, then, the provisions of Chapter X-A shall not apply to 

such FII or to the non-resident investors of the FII. 

Where an FII chooses to take a treaty benefit, GAAR provisions may be 

invoked in the case of the FII, but would not in any case be invoked in 

the case of the non-resident investors of the FII. 

c)  Clarity regarding retrospective/prospective operations of the GAAR provisions

      

Certain apprehensions have been raised regarding the 

retrospective/prospective operation of the GAAR provisions. It may therefore 

be clarified that :- 

The provisions of GAAR will apply to the income accruing or arising to 

the   taxpayers on or after 01.04.2013.  

d)  Interplay between Specific Anti-Avoidance Rules (SAAR) and General AntiAvoidance Rules (GAAR).

Concerns have been raised that there could be interplay between the SAAR 

and GAAR. The committee examined this issue and the recommendation of 

the committee is as below:- 

While SAARs are promulgated to counter a specific abusive behavior, 

GAARs are used to support SAARs and to cover transactions that are Page 9 of 9

 GAAR Committee Report 

not covered by SAARs. Under normal circumstances, where specific 

SAAR is applicable, GAAR will not be invoked. However, in an 

exceptional case of abusive behavior on the part of a taxpayer that 

might defeat a SAAR, as illustrated in Example No. 16 in Annexure E (or 

similar cases), GAAR could also be invoked. 

e)  Definition of “connected person” 

Concerns have been raised that the definition of “connected person” u/s 102 

(5) is too broad and ambiguous. The committee recommends that it may be 

clarified that:- 

“Connected person” would include the definition of  “associated 

enterprise” given in section 92A, the definition of ‘relative’ in section 56 

and the “persons” covered u/s 40A(2)(b).

f)  Concern regarding application of section 96(2)  

Concerns have been raised in various fora that section 96(2) provides that an 

arrangement shall be presumed to have been entered into, or carried out, for 

the main purpose of obtaining a tax benefit, if the main purpose of a step in, 

or a part of the arrangement is to obtain a tax benefit, notwithstanding the fact 

that the main purpose of the whole arrangement is not to obtain a tax benefit. 

In view of this provision where only a part of the arrangement is to obtain a 

tax benefit, the tax authorities will treat the whole arrangement as an 

impermissible arrangement. Page 10 of 10

 GAAR Committee Report 

In order to allay the apprehensions of the taxpayers in this regard, the 

committee recommends that it must be clarified in the Rules that :- 

Where only a part of the arrangement is impermissible, the tax 

consequences of “Impermissible Avoidance Arrangement” will be 

limited to only that part of the arrangement. 

g)  Illustrative cases under GAAR

The committee felt that terms like, “Misuse or abuse”, “bona fide purpose” and 

“lacks commercial substance” may be explained by illustrations.  However it 

may be clarified that it should be only an indicative list and not an exhaustive 

list. The committee has recommended a few illustrative cases, which are 

given in Annexure-E.   The guidelines provided through examples are based 

on specific facts in the particular example. Whether GAAR may be invoked in 

any particular case would depend on the specific facts of that case.  

  Page 11 of 11

 GAAR Committee Report 

******************************** 

Annexure-A 

FORM FOR MAKING THE REFERENCE TO THE COMMISSIONER BY THE ASSESSING 

OFFICER FOR INITIATING THE PROCEEDINGS U/S 144BA(1) rws 95 OF THE INCOME 

TAX ACT, 1961

1 Name and Address of the Assessee  

2 PAN Page 12 of 12

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3 Status 

4 Particulars of Assessing Officer  

5 Assessment year(s) in respect of which the proceedings u/s 

144BA (1) are proposed to be invoked : 

(a) Assessment Years pending in scrutiny 

(b) Other assessment years proposed to be covered 

6 Provide a factual matrix of the  “arrangement” entered into by 

the assessee 

7 Is there any “Tax Benefit” as defined in section 102(11) ?  

8 If yes, provide the approximate quantum thereof assessment 

year wise. 

9  Is “Tax Benefit” the “main purpose” or one of the “main 

purposes” of the “arrangement” ? 

10 Brief facts of the “Tax Benefit”  

11 Has the assessee been confronted with the details of the “Tax 

Benefit”? If yes, provide the gist of the reply furnished by the 

assessee on “Tax Benefit” 

12 If “Tax Benefit” is the “main purpose” or one of the “main 

purposes” specify which other condition, out of the following is 

satisfied giving details how the conclusion has been arrived at: 

(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 manner, 

which are not ordinarily employed for bona fide purposes. 

13 Has the assessee been confronted with the findings given in 

column 12 ? If yes, provide the gist of the reply furnished by 

the assessee.  

14 Detailed reasons for treating the arrangement as 

“Impermissible Avoidance arrangement”. 

15 Consequences likely to arise if arrangement is declared as 

“Impermissible Avoidance arrangement”  

16 Specify the time barring dates of original assessment or 

reassessment 

Date:          Name & Designation of 

Place:          Assessing Officer 

Annexure-B 

FORM FOR RECORDING THE SATISFACTION BY THE COMMISSIONER OF 

INCOME TAX FOR REFERRING THE PROCEEDINGS U/S 144BA(4) rws 95 OF THE 

INCOME TAX ACT, 1961 TO THE APPROVING PANELPage 13 of 13

 GAAR Committee Report 

1 Name and Address of the Assessee  

2 PAN 

3 Status  

4 Particulars of Assessing Officer  

5 Particular of Commissioner of Income 

Tax 

6 Assessment year(s) in respect of which 

the proceedings u/s 144BA (1) are 

proposed to be invoked : 

(a) Assessment Years pending in 

scrutiny 

(b) Other assessment years 

proposed to be covered 

7 Date of receipt of reference from the AO 

u/s 144BA (1) 

8 Date of issuance of notice, setting out 

reasons, by the CIT to the assessee 

(copy thereof to be enclosed) 

9 Date of receipt of reply from the 

assessee and date of hearing provided 

to the assessee (copy of reply of the 

assessee to be enclosed) 

10  Provide a factual matrix of the  

“arrangement” entered into by the 

assessee 

11 Is there any “Tax Benefit” as defined in 

section 102(11) ? 

12 If yes, provide the approximate quantum 

thereof assessment year wise. 

13  Is “Tax Benefit” the “main purpose” or 

one of the “main purposes” of the 

“arrangement” ? 

14 Brief facts of the “Tax Benefit”  

15 Has the assessee been confronted with 

the details of the “Tax Benefit” ? If yes, 

provide the gist of the reply furnished by 

the assessee on “Tax Benefit” 

16 If “Tax Benefit” is the “main purpose” or 

one of the “main purposes” specify 

which other condition, out of the 

following is satisfied giving details how 

the conclusion has been arrived at: 

(a) Creates rights, or obligations, 

which are not ordinarily created 

between persons dealing at 

arm’s length; Page 14 of 14

 GAAR Committee Report 

(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 manner, which are 

not ordinarily employed for bona 

fide purposes. 

17 Has the assessee been confronted with 

the findings given in column 16? If yes, 

provide the gist of the reply furnished by 

the assessee.  

18 Detailed reasons for treating the 

arrangement as “Impermissible 

Avoidance arrangement”. 

19 Consequences likely to arise if 

arrangement is declared as 

“Impermissible Avoidance arrangement” 

20 Specify the time barring dates of original 

assessment or reassessment 

Date:          Name & Designation of 

Place:        Commissioner of Income Tax 

      

Annexure-C 

FORM FOR RETURNING THE REFERENCE U/S 144BA(5) rws SECTION 95 IN 

CASES OF REFERENCES MADE U/S 144BA(4) rws 95 OF THE INCOME TAX ACT, 

1961 TO THE ASSESSING OFFICERPage 15 of 15

 GAAR Committee Report 

1 Name and Address of the Assessee  

2 PAN 

3 Status 

4 Particulars of Assessing Officer  

5 Assessment year(s) in respect of which 

the proceedings u/s 144BA (1) are 

proposed to be invoked. 

6 Date of receipt of reference from the AO 

u/s 144BA (1) 

7 Reasons for not agreeing with the 

reference from the AO u/s 144BA (1) 

Date:          Name & Designation of 

Place:        Commissioner of Income Tax 

Annexure-D 

GAAR – Note for Guidelines

1.0 While introducing the provisions of General Anti Avoidance Rule (GAAR) in the 

Income-tax Act, it was mentioned in the Explanatory Memorandum to the Finance Bill, 

2012 that the question of substance over form has consistently arisen in the Page 16 of 16

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implementation of taxation laws. In the Indian context, judicial decisions have varied. 

While some courts in certain circumstances had held that legal form of transactions can 

be dispensed with and the real substance of transaction can be considered while 

applying the taxation laws, others have held that the form is to be given sanctity. There 

are some specific anti-avoidance provisions, but, prior to introduction of GAAR, general 

anti-avoidance has been dealt in specific cases only through judicial decisions. In an 

environment of moderate rates of tax, it is necessary that the correct tax base be 

subject to tax in the face of aggressive tax planning. Internationally, several countries 

have codified the “substance over form” doctrine in the form of General Anti Avoidance 

Rule (GAAR) and are administering statutory GAAR provisions. 

1.1 The General Anti Avoidance Rule (GAAR) is a codification of the proposition that 

while interpreting the tax legislation, substance should be preferred over the legal form.  

Transactions have to be real and are not to be looked at in isolation. The fact that they 

are legal does not mean that they are acceptable with reference to the meaning in the 

fiscal statute.  Where there is no business purpose, except to obtain a tax benefit, the 

GAAR provisions would not allow such a tax benefit  to be availed through the tax 

statute.  These propositions have otherwise been part of jurisprudence in direct tax laws 

as reflected in various judicial decisions.  The GAAR provisions codify this ‘substance’ 

over ‘form’ rule.   

1.2 The basic criticism of a statutory GAAR which is raised worldwide is that it 

provides a wide discretion and authority to the tax administration which can cast an 

excessive tax and compliance burden on the taxpayer without commensurate remedies. 

One of the methods by which this can be addressed is to provide guidance on what the 

provisions entail and how they would be administered.  These guidelines are meant to 

provide explanations and clarity regarding the GAAR provisions.  

2. Tax avoidance vs Tax Evasion 

2.1 Tax evasion is generally the result of illegality, suppression, misrepresentation 

and fraud.  Tax avoidance is the result of actions taken by the assessee, none of which 

or no combination of which is illegal or forbidden by the law itself.  The 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.   

3. Tax avoidance vs Tax mitigation  

3.1 ‘Tax mitigation’ is a situation where the taxpayer takes advantage of a fiscal 

incentive afforded to him by the tax legislation by actually submitting to the conditions 

and economic consequences that the particular tax legislation entails.  An example of 

tax mitigation is the setting up of a business undertaking by a taxpayer in a specified 

area such as a Special Economic Zone (SEZ).  In such a case the taxpayer is taking Page 17 of 17

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advantage of a fiscal incentive offered to him by submitting to the conditions and 

economic consequences of the SEZ provisions in the Income-tax Act e.g., setting up the 

business only in the SEZ areas and export from the  SEZ area.  Tax mitigation, as 

distinct from tax avoidance, is allowed under the tax statute.  The GAAR provisions also 

do not deal with case of tax mitigation.   

4. Analysis of the GAAR provisions  

4.1 The provisions relating to GAAR appear in Chapter X-A (sections 95 to 102) of 

the Act. The provisions allow the tax authority to, notwithstanding anything contained in 

the Act, declare an ‘arrangement’ which the assessee has entered into, as an 

‘impermissible avoidance arrangement’. Once an ‘arrangement’ has been declared as 

an ‘impermissible avoidance arrangement’, the consequence as regards the tax liability 

would also be determined.   

4.2 The provisions give a wide definition of the term ‘arrangement’. An ‘arrangement’ 

means any step in or a part or whole of any transaction, operation, scheme, agreement 

or understanding, whether enforceable or not.  It also includes the alienation of any 

property in such a transaction etc.   The onus of proving that there is an 

impermissible avoidance arrangement is on the Revenue.

4.3 An ‘arrangement’ would be an ‘impermissible avoidance arrangement’ if, 

(a) its main purpose is to obtain a ‘tax benefit’, and,  

(b) it also has one of the following characteristics:  

(i) it creates rights and obligations, which are not normally created 

between parties dealing at arm’s length; 

(ii) it results in misuse or abuse of the provisions of the tax law; 

(iii) it lacks commercial substance; 

(iv) it is carried out by means or in a manner which is normally not 

employed for an authentic (bona fide) purpose. 

 A ‘tax benefit’ has been defined to mean  

(i) a reduction or avoidance or deferral of tax or other amount payable under 

the Act or as a result of a tax treaty; 

(ii) an increase in a refund of tax or other amount that would be payable 

under the Act or as a result of tax treaty; or Page 18 of 18

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              Second condition

                    Third condition

(iii) a reduction in total income including an increase in loss. 

The term “tax benefit” would be the benefit, quantified in terms of tax liability, arising to 

any party to the arrangement on account of such arrangement.  

4.4  The onus of proving that  

(A) there is an arrangement, 

(B) the arrangement leads to a ‘tax benefit’,  

(C) the main purpose or one of the main purposes of the ‘arrangement’ 

is to obtain a ‘tax benefit’, and  

(D) the arrangement has one of the characteristics listed at (i) to (iv) at 

(b) of 4.3 above  

is on the revenue.   

5. Flow chart of GAAR provisions  

            First 

condition   

                  

   

OR                         OR                         OR                               

There is an ‘arrangement’ (Onus:Revenue) 

There is a ‘tax benefit’ (Onus:Revenue)

The main purpose or one of the main purposes of the arrangement is 

to obtain a tax benefit (Onus:Revenue) 

Not at

arm’s-length

Misuse / 

abuse of tax 

provisions

Lacks 

commercial 

substance

Not ordinarily 

employed for bona 

fide purposes Page 19 of 19

 GAAR Committee Report 

Fourth condition 

(Onus : Revenue) 

          

  

                           

   

* For this purpose equity, debt, expenses, accrual or receipt, relief or rebate may be recharacterised. 

Annexure-E        

Illustrative cases where GAAR provisions will be considered 

applicable or not applicable

Impermissible Avoidance Arrangement 

Consequences may be determined by* 

Looking 

through  

an 

arrange

ment by 

disregarding  

corporate 

structure 

Reallocating 

accruals, 

expenses 

etc. 

Treating 

place of 

residence, 

situs of 

assets or 

of transac-  

tion 

different 

from that 

provided in 

the 

arrangeTreating 

connecte

d parties 

as one 

and the 

same 

person 

Disregarding/

Combining/

recharacte 

rising 

whole/ 

part of the 

impermissible  

Treating 

the 

impermissible 

arrange 

ment as if 

it  had not 

been 

carried 

out 

Disregarding 

any 

accommo

dating 

party or 

treating 

them and 

any other 

party  as 

one and 

the same Page 20 of 20

 GAAR Committee Report 

Example 1: 

Facts: 

A business sets up an undertaking in an under developed area by putting in substantial 

investment of capital, carries out manufacturing activities therein and claims a tax 

deduction on sale of such production/manufacturing. Is GAAR applicable in such a  

case ? 

Interpretation:  

There is an arrangement and one of the main purposes is a tax benefit. However, this is 

a case of tax mitigation where the tax payer is taking advantage of a fiscal incentive 

offered to him by submitting to the conditions and  economic consequences of the 

provisions in the legislation e.g., setting up the business only in the under developed 

area. Revenue would not invoke GAAR as regards this arrangement. 

Example 2: 

Facts: 

A business sets up a factory for manufacturing in an under developed tax exempt area. 

It then diverts its production from other connected manufacturing units and shows the 

same as manufactured in the tax exempt unit (while doing only process of packaging 

there). Is GAAR applicable in such a case ? 

Interpretation: 

There is an arrangement and there is a tax benefit, the main purpose or one of the main 

purposes of this arrangement is to obtain a tax benefit. The transaction lacks 

commercial substance and there is misuse of the tax provisions. Revenue would invoke 

GAAR as regards this arrangement. 

Example -3 : 

Facts: 

A foreign investor has invested in India through  a holding company situated in a low tax 

jurisdiction ‘X’.  The holding company is doing business in the country of incorporation, Page 21 of 21

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i.e. ‘X’, has a Board of Directors that meets in that country and carries out business with  

adequate manpower, capital and infrastructure of its own  and therefore, has substantial 

commercial substance  in the  said country ‘X’. Would GAAR be invocable or would the 

arrangement be permissible ? 

Interpretation:  

In view of the factual substantive commercial substance of the arrangement, Revenue 

would not invoke the GAAR provisions.  

Example -4: 

Facts: 

An Indian company has set up a holding company in a low tax jurisdiction outside India 

which has set up further subsidiary companies which pay dividends to the holding 

company and such dividends are not repatriated to the Indian company. Would the 

deemed dividend be treated as income using GAAR? 

Interpretation: 

Declaration/repatriation of dividend is a business choice of the companies and GAAR 

provisions would not apply. Based on further facts  such as the degree of Indian 

Ownership, the location of the subsidiaries (in low tax jurisdictions) and the nature of 

income (most of the income being passive income like interest, dividend etc.), many 

jurisdictions have anti-deferral and avoidance provisions in the form of Controlled 

Foreign Company (CFC) provisions. Specific anti-deferral/anti-avoidance provisions is 

proposed in the Direct Taxes Code Bill, 2010. Accordingly, GAAR would not be invoked 

in such a case. 

Example -5: 

Facts: 

The merger of a loss making company into a profit making one results in losses off 

setting profits, a lower net profit and lower tax liability for the merged company. Would 

the losses be disallowed under GAAR ? 

Interpretation: Page 22 of 22

 GAAR Committee Report 

As regards setting off of losses, the provisions relating to merger and amalgamation 

already contain specific anti-avoidance safeguards and therefore, GAAR would not be 

invoked. 

Example -6: 

Facts: 

A choice made by a company between leasing an asset and purchasing the same 

asset.  The company would claim deduction for leasing rentals rather than depreciation 

if it had their own asset. Would the lease rent payment be disallowed as expense under 

GAAR ? 

Interpretation: 

GAAR provisions, would not, prima facie, apply to a decision of leasing (as against 

purchase of an asset).  However, if it is a case of circular leasing, i.e. the taxpayer 

leases out an asset and through various sub-leases, takes it back on lease, thus 

creating a tax benefit without any change in economic substance, Revenue would 

examine the matter for invoking GAAR provisions. 

Example -7: 

Facts: 

A company has raised funds from an unconnected party through borrowings, when it 

could have issued equity. Would the interest be denied as an expense deduction under  

GAAR ? 

Interpretation:  

A number of jurisdictions have specific thin capitalization rules to deter erosion of the 

tax base through excessive interest payments. There is no specific provision dealing 

with this (thin-capitalization) in the I.T. Act. An evaluation of whether a business should 

have raised funds through equity instead of as a loan should generally be left to 

commercial judgment and GAAR would not be attracted. Interest payments to 

connected parties would be subject to transfer pricing provisions. However, based on 

whether the payments are made to connected parties, the source of funds in the case of 

the connected parties and the location of these connected parties in low tax 

jurisdictions, the arrangement could be examined under GAAR provisions.  

Example -8: 

Facts: Page 23 of 23

 GAAR Committee Report 

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. 

Interpretation:  

There are specific anti avoidance provisions through transfer pricing as regards 

transactions among related parties. GAAR will not be invoked. 

Example -9: 

Facts: 

 A company sets off losses in the stock market against gains which is aimed at 

balancing the portfolio.   

Interpretation:  

Sale/purchase through stock market transactions where the buyer and seller are 

anonymous to each other would not come under GAAR provisions.  GAAR provisions 

could be invoked based on specific facts where transactions are not anonymous i.e. 

parties are related to each other or a transaction has been entered into through a prearrangement between unrelated parties who have been brought together by an 

intermediary like a broker in order to adjust profit and losses between themselves.  

Example -10: 

Facts

‘Y’ company, a non- resident, and ‘Z’ company, a resident of India, form a joint venture 

company ‘X’ in India. ‘Y’, incorporates a 100%subsidiary ‘A’ in country ABC of which ‘Y’ 

is not a resident. The India-ABC tax treaty provides for non-taxation of capital gains in 

the source country and country ABC charges a minimal capital gains tax in its domestic 

law. ‘A’ is also designated as a “permitted transferee” of Y. “Permitted transferee” 

means that though shares are held by ‘A’, all rights of voting, management, right to sell 

etc., are vested in ‘Y’. As provided by the joint venture agreement, 49% of X`s equity is 

allotted to company ‘A’ (being 100% subsidiary and “permitted transferee” of ‘Y’) and 

the remaining 51% is allotted to the ‘Z’ company. Thereafter, the shares of ‘X’ held by 

‘A’ are sold by ‘A’ to ‘C’ (connected to the ‘Z’ group). 

Interpretation Page 24 of 24

 GAAR Committee Report 

The controlling rights of company ‘A’ were with ‘Y’. A direct transfer of these shares by 

company ‘Y’ to company ‘C’ would have attracted capital gains tax in India read with the 

relevant treaty of Y’s country of residence. The company ‘A’ was interposed with main 

purpose of taking advantage of India-ABC treaty. The arrangement results in misuse or 

abuse of tax provisions. Revenue would invoke GAAR as regards this arrangement. 

Example -11: 

Facts:  

Company ‘A’, is incorporated in country ABC as a wholly owned subsidiary of company 

‘B’ which is not a resident of ABC or of India. The India-ABC tax treaty provides for nontaxation of capital gains in the source country and country ABC charges a minimal 

capital gains tax in its domestic law. Some shares  of an Indian Company ‘C’ were 

acquired by ‘A’. The entire funding for investment by ‘A’ in ‘C’ was done by ‘B’. ‘A’ has 

not made any other transaction. These shares were subsequently disposed of by ‘A’, 

thus resulting in capital gains which ‘A’ claims as not being taxable in India by virtue of 

the India- ABC tax treaty. 

Interpretation:  

The beneficial ownership vests with the connected company ‘B’ which had played a 

crucial role in the transaction conducted by ‘A’. Though the legal ownership ostensibly 

resides with the ‘A’, the real and beneficial owner of the capital gains is the ‘B’ Company 

which controls the connected company ‘A’. This is an arrangement which has been 

created with the main purpose of   avoiding capital gains tax in India through misuse or 

abuse of tax provisions. Hence it is impermissible arrangement. Revenue would invoke 

GAAR as regards this arrangement. 

Example -12: 

Facts: 

An Indian Company ‘A’, is a closely held company and its major shareholders are 

connected companies ‘B’ ,’C’ and ‘D’. ‘A’ was regularly distributing dividends but 

stopped distributing dividends from 1.4.2003, the date when Dividend Distribution Tax 

(DDT) was introduced in India. ‘A’ allowed its reserves to grow by not paying out 

dividends. As a result no DDT was paid by the company. Subsequently, all its 

shareholders buyback of shares was offered by the Indian Company ‘A’ to its 

shareholder company ‘B’ based in country ABC and the other shareholders C and D 

who are not resident of ABC. The India-ABC tax treaty provides for non-taxation of Page 25 of 25

 GAAR Committee Report 

capital gains in the source country and country ABC charges very low capital gains tax 

in its domestic law. The buyback offer was only accepted by the entity B. The 

accumulated reserves of A were used to buyback the shares from the B entity. 

Interpretation: 

The arrangement is a colourable device designed to avoid tax in India. No dividends 

were distributed by A since 1.4.2003, the day the Dividend Distribution Tax was 

implemented for non bona fide purpose. Thus ‘A’ obtained tax benefit by not declaring 

dividend and passing this on as exempt capital gain in the hands of connected company 

B. The buyback of shares was accepted onlyby connected company B and not by the  

connected companies C and D as they would have invited capital gains tax by 

accepting such offer. Revenue would invoke GAAR as regards this arrangement. 

Example -13: 

Fact:s  

The Shares of ‘V’, an asset owning Indian company, was held by an Indian Company  

‘X’. ‘X’ was in turn held by two companies ‘E’ and ‘C’, incorporated in country ABC. The 

India-ABC tax treaty provides for non-taxation of capital gains in the source country and 

country ABC charges very low capital gains tax in its domestic law. The Company ‘X’ 

was liquidated by consent and without any Court Decree. This resulted in transfer of the 

asset/shares from company ‘X’, to companies ‘E’ and ‘C’. Subsequently companies ‘E’ 

and ‘C’ sold the shares to ‘A’ which was incorporated in country ABC. The companies 

‘E’ and ‘C’ claimed benefit of tax treaty and the resultant gain of the transaction was 

claimed not to be taxable.

Interpretation:  

The chain of events bring out the fact that the asset that was situated in  India and held 

by an Indian Company was transferred by liquidation of the Indian Company by an 

arrangement so as to misuse or abuse the tax provisions . Revenue would invoke 

GAAR as regards this arrangement.  Page 26 of 26

 GAAR Committee Report 

Example -14: 

Facts 

A foreign bank ‘F’s branch in India arranges loan for Indian borrower from ‘F’ bank’s 

branch located in a third country. The loan is later assigned to ‘F’ bank’s branch in XYZ 

country to take benefit of withholding provisions of India-XYZ treaty (India-XYZ Treaty 

provides no source based withholding tax on interest to a bank carrying out bona-fide 

business.) 

Interpretation 

Since there is no withholding provision on interest earned by XYZ residents under the 

India-XYZ treaty, the above arrangement of finalizing the loan from one country and 

assigning it to another country has been made to avoid withholding provisions. This is a 

misuse of tax treaty and thus will be treated as an “impermissible avoidance 

arrangement”. Revenue would invoke GAAR with regard to this arrangement. 

Example -15: 

Facts 

Under the provisions of a tax treaty between India and country XYZ, any capital gains 

arising from the sale of shares of an Indian company would be taxable only in XYZ, if 

the transferor is a resident of XYZ. There is further provision condition under the treaty 

that gains from alienation of shares issued by an Indian company wherein for more than 

an interest of XYZ in the capital stock of that Indian company can be taxed in India. A 

company resident in XYZ owns more than X % shareholding in an Indian Company. It 

sells shares of that Indian Company (being less than X % interest each at short intervals 

thus, cumulatively transferring more than “X”%. It thus escapes liability for capital gains 

tax in India even though it owns more than X% interest in the Indian company.  

Interpretation 

The above arrangement of splitting the same transaction into many transactions at short 

intervals below the threshold limit could amount to abuse of tax laws and deemed to be 

lacking commercial substance and hence would be an  “impermissible avoidance 

arrangement”. Revenue would invoke GAAR with regard to this arrangement. Page 27 of 27

 GAAR Committee Report 

Example -16: 

Facts:  

Company ‘A’ is a non resident company in country R and is wholly owned by company 

‘X’ in country T. Company ‘X’ is a financial company with substantial reserves and 

looking for investments in India. Company ‘X uses its subsidiary company ‘A’ to route its 

investment in an Indian company ‘B’ whereby company ‘A’ purchases the shares of 

company ‘B’. After sometime, company ‘A’ sells the shares of company ‘B’ to another 

company ‘C’ and realizes capital gains. As per the provisions of relevant DTAA Protocol 

between country R and India, a shell/conduit company is not eligible for capital gains 

exemption in India. However, a company shall not be deemed to a shell/conduit 

company if its total annual expenditure on operations in country R is equal to or more 

than Rs. 1,00,00,000/- in the immediately preceding period of 24 months from the date 

the gains arise. Company ‘A’ claims that capital gains are not taxable in India as it is not 

a shell company as per the relevant DTAA Protocol and that it incurred                                

Rs. 1,20,00,000/- (Rs. 40,00,000/- as license fees and local office expenses,                      

Rs. 80,00,000/- as interest payments to ‘X’ company, its parent holding company) as 

business expenses as per P&L A/C to show its economic presence in country ‘R’ as it 

claimed expenditure exceeding the limit prescribed  therein and for it not to be 

shell/conduit company.  

Interpretation: 

Company ‘A’ has incurred only Rs. 40,00,000/- on operations in country ‘R’. Interest 

payments of Rs. 80,00,000/- outside country ‘R’ cannot be taken into account for the 

purposes of computation of Rs. 1,00,00,000/- limit of expenses incurred on operations 

in country ‘R’. Company ‘A’ will be deemed to be a shell/conduit company. The treaty 

benefit may be denied under LOB clause of the treaty itself. As it is an arrangement for 

claiming benefits of DTAA and it lacks economic substance, therefore, Revenue may 

also invoke GAAR with regard to this arrangement.  

Example -17: 

Facts: 

An Indian company is in the business of import and  export of certain goods. It 

purchases goods from Country A and sells the same in country B. It sets up a 

subsidiary in Country X - a zero/ low tax jurisdiction. The director of the Indian company 

finalizes the contracts in India but shows the documentation of the purchase and sale in 

Country X. The day to day management operations are carried out in India. The goods 

move from A directly to B. The transactions are recorded in the books of subsidiary in 

country X, where the profits are tax exempt. Page 28 of 28

 GAAR Committee Report 

Interpretation: 

A company is camouflaging the sale and purchase transactions as X country based 

transactions. By this arrangement, the Indian company has obtained a tax benefit. The 

substance or effect of the arrangement as a whole is inconsistent with, or differs 

significantly from, the forms of its individual steps and hence, lacks commercial 

substance. Revenue would invoke GAAR with regard to this arrangement. 

Example -18: 

Facts: 

A company ‘A’ in country ‘X’ invests in a company ‘B’ situated in country ‘R’. Country ‘R’ 

has a provision of residence based taxation of capital gains in its tax treaty with India. 

‘B’ further invests the funds in equities in India  and earns capital gains. ‘B’ does not 

have substantive commercial substance in country ‘R’.   

Interpretation: 

If ‘A’ invests directly in India, it does not get benefit of treaty and has to pay capital gains 

tax in India. By routing the funds through ‘B’ in country ‘R’, the payment of capital gains 

tax in India has been avoided. This is an impermissible avoidance arrangement and 

revenue would invoke GAAR with regard to this arrangement.  

Example -19: 

Facts 

An employee of a private limited company ‘A’ is to  receive a bonus or salary.  The 

employee subscribes for preferential shares of the  employer. The preferential shares 

are purchased by a connected company of ‘A’, or are redeemable at a premium that 

reflects a portion of the employee’s annual salary or bonus, after a period of one year. 

In this manner, the employee receives the income as capital gain.  

Interpretation 

The acquisition of the preferential shares is part of an arrangement designed to avoid 

the tax that would have been required to be paid on salary. By this arrangement, there 

is a tax benefit and there is a misuse of the tax provisions. The Revenue would invoke 

GAAR with regard to this arrangement. Page 29 of 29

 GAAR Committee Report 

Example -20: 

Facts: 

‘A’ company had a disputed claim with ‘Z’ company. ‘A’ transferred its actionable claims 

against ‘Z’ for an amount which was low, say, for example 10 % of the value of the 

actionable claim against ‘Z’ to a connected concern ‘B’ by way of a transfer instrument. 

‘B’ transferred such claim to ‘C’ company and ‘C’ further gifted it to ‘D’ company, 

another connected concern of ‘A’. Upon redemption of such actionable claims, ‘D’ 

showed it as a capital receipt and claimed exemption.  

Interpretation: 

The transfer of actionable claims in the manner as  detailed above to a connected 

concern is a colourable device which lacks commercial substance. The income in the 

instant case belongs to A. Revenue would invoke GAAR as regards this arrangement. 

Example -21: 

Facts: 

`A` company borrowed money from a company `B` and used that to buy shares in three 

100% subsidiary companies of `A`. Though the fair market value of the shares was             

Rs. Y, `A` paid Rs. 6Y for each share. The amount received by the said subsidiary 

companies was transferred back to another company connected to `B`. The said shares 

were sold by ‘A’ for Rs. Y/5 each and a short-term capital loss was claimed and this was 

set-off against other long-term capital gains.  

  

Interpretation: 

By the above arrangement, the tax payer has obtained a tax benefit and created rights 

or obligations which are not ordinarily created between persons dealing at arm’s length. 

Revenue would invoke GAAR with regard to this arrangement. 

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