Income Tax Act

Official PDF pages 241–245

SOURCE PDF PAGE 241
then such sum shall be deemed to be the income of the assessee for that tax year.
(5) Irrespective of anything to the contrary in this Act, if any person located in a
notified jurisdictional area is entitled to receive any sum or income or amount
on which tax is deductible under Chapter XIX-B, the tax shall be deducted at the
highest of the following rates—
( a )   at the rate or rates in force;
( b )   at the rate specified in the relevant provisions of this Act;
( c )   at the rate of 30%.
(6) For the purposes of this section,—
( a )   “person located in a notified jurisdictional area” shall include,—
( i )   a person who is resident of the notified jurisdictional area;
( ii )   a person, not being an individual, which is established in the notified
jurisdictional area; or
( iii )   a permanent establishment of a person not falling in sub-clause ( i )
or ( ii ), in the notified jurisdictional area;
( b )   “permanent establishment” shall have the meaning assigned to it in
section 173( c );
( c )   “transaction” shall have meaning assigned to it in section 173( e ).
Limitation on interest deduction in certain cases.
177.   (1) Irrespective of anything contrary in this Act, any expenditure by way
of interest or similar payment in respect of excess interest, as specified in
sub-section (4), shall not be deductible in computation of income chargeable under
the head “Profits and gains of business or profession”, if,—
( a )   it is paid or payable by an Indian company or a permanent establish -
ment of a foreign company in India, in respect of any debt issued by an
associated enterprise which is a non-resident; and
( b )   the sum of such expenditure in a tax year exceeds one crore rupees.
(2) Where a lender, not being an associated enterprise, has issued a debt referred to
in sub-section (1), such debt shall be deemed to have been issued by an associated
enterprise if an associated enterprise has—
( a )   provided an implicit or explicit guarantee to the lender in respect of such
debt; or
( b )   deposited a corresponding and matching funds with such lender.
(3) The provisions of this section shall not apply to—
( a )   interest paid in respect of a debt issued by a lender which is a perma -
nent establishment in India of a non-resident engaged in the business
of banking;
( b )   an Indian company or a permanent establishment of a foreign company
which is engaged in the business of banking or insurance or a Finance
Company located in any International Financial Services Centre, or
such class of non-banking financial companies as may be notified by
the Central Government in this behalf.

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(4) For the purposes of sub-section (1), the expression “excess interest” means the
total interest paid or payable in excess of 30% of earnings before interest, taxes,
depreciation and amortisation of the borrower in the tax year or the interest paid
or payable to associated enterprises for that tax year, whichever is less.
(5) Interest expenditure not wholly deducted against income under the head “Profits
and gains of business or profession” for any tax year shall be—
( a )   carried forward to the following tax year or years; and
( b )   allowed as a deduction against the profits and gains, if any, of any busi -
ness or profession carried on by it and assessable for such tax year, to
the extent of maximum allowable interest expenditure as per sub-section
(4).
(6) The interest expenditure referred to in sub-section (5) shall not be carried for -
ward for more than eight tax years immediately succeeding the tax year for which
the excess interest expenditure was first computed.
(7) For the purposes of this section,—
( a )   “debt” means any loan, financial instrument, finance lease, financial
derivative, or any arrangement that gives rise to interest, discounts or
other finance charges that are deductible in the computation of income
chargeable under the head “Profits and gains of business or profession”;
( b )   “Finance Company” means a finance company as defined in regulation
2(1)( e ) of the International Financial Services Centres Authority (Finance
Company) Regulations, 2021 made under the International Financial
Services Centres Authority Act, 2019 (50 of 2019) and which satisfies
such conditions and carries on such activities, as may be prescribed;
( c )   “permanent establishment” shall have the meaning assigned to it in
section 173( c ).
CHAPTER XI
GENERAL ANTI-AVOIDANCE RULE
Applicability of General Anti-Avoidance Rule.
178.   (1) Irrespective of anything contained in this Act, an arrangement entered
into by an assessee may be declared to be an impermissible avoidance ar -
rangement and the consequence in relation to tax arising from it may be determined
subject to the provisions of this Chapter.
(2) The provisions of this Chapter may be applied to any step in, or a part of, the
arrangement as they are applicable to the arrangement.
Impermissible avoidance arrangement.
179.   (1) 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;

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( 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 180, 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.
(2) An arrangement shall be presumed, unless it is proved to the contrary by the
assessee, to have been entered into, or carried out, for the main purpose of obtain -
ing a tax benefit, if the main purpose of a step in, or a part of, the arrangement is
to obtain a tax benefit, irrespective of the fact that the main purpose of the whole
arrangement is not to obtain a tax benefit.
Arrangement to lack commercial substance.
180.   (1) An arrangement shall be deemed to lack commercial substance, if—
( a )   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; or
( b )   it involves or includes—
( i )   round trip financing;
( ii )   an accommodating party;
( iii )   elements that have effect of offsetting or cancelling each other;
( 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;
( c )   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 (but for the provisions of this
Chapter) for a party; or
( d )   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 (but for the provisions of this
Chapter).
(2) In sub-section (1), 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 (but for the provisions of this Chapter),
without having any regard to—
( 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;

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( 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.
(3) The following may be relevant but shall not be sufficient for determining whether
an arrangement lacks commercial substance or not:—
( a )   the period or time for which the arrangement (including operations
therein) exists;
( b )   the fact of payment of taxes, directly or indirectly, under the arrange-
ment;
( c )   the fact that an exit route (including transfer of any activity or business
or operations) is provided by the arrangement.
Consequences of impermissible avoidance arrangement.   [ S. 98 of the 1961 Act ]
181.   (1)   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 the manner as deemed appropriate in the circumstances of the case.
(2) The consequences of an arrangement declared to be an impermissible avoidance
arrangement as referred to in sub-section (1) shall include but shall not be limited
to the following:—
( a )   disregarding, combining or recharacterising any step in, or a part or
whole of, the impermissible avoidance arrangement;
( b )   treating the impermissible avoidance arrangement as if it had not been
entered into or carried out;
( c )   disregarding any accommodating party or treating any accommodating
party and any other party as one and the same person;
( d )   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;
( e )   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;
( f )   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
( g )   considering or looking through any arrangement by disregarding any
corporate structure.

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(3) In this section,—
( a )   any equity may be treated as debt or   vice versa ;
( b )   any accrual, or receipt, of a capital nature may be treated as of revenue
nature or   vice versa ; or
( c )   any expenditure, deduction, relief or rebate may be recharacterised.
Treatment of connected person and accommodating party.
182.   In this Chapter, in determining whether a tax benefit exists,—
( a )   the parties who are connected persons in relation to each other may be
treated as one and the same person;
( b )   any accommodating party may be disregarded;
( c )   the accommodating party and any other party may be treated as one and
the same person;
( d )   the arrangement may be considered or looked through by disregarding
any corporate structure.
Application of this Chapter.
183.   The provisions of this Chapter shall apply—
( a )   in addition to, or   in lieu   of, any other basis for determination of tax
liability;
( b )   as per such guidelines and subject to such conditions, as may be pre -
scribed.
Interpretation.
184.   For the purposes of this Chapter, unless the context otherwise requires,—
( 1 )   “accommodating party” means a party to an arrangement, 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 (but for the provisions of this Chapter) for the assessee whether
or not the party is a connected person in relation to any party to the
arrangement;
( 2 )   “arrangement” means any step in, or a part or whole of, any transaction,
operation, scheme, agreement or understanding, whether enforceable
or not, and includes the alienation of any property in such transaction,
operation, scheme, agreement or understanding;
( 3 )   “asset” includes property, or right, of any kind;
( 4 )   “benefit” includes a payment of any kind whether in tangible or intangible
form;
( 5 )   “connected person” means any person who is connected directly or
indirectly to another person and includes,—
( a )   any relative of the person, if such person is an individual;
( b )   any director of the company or any relative of such director, if the
person is a company;