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1. When Income-tax Authorities ("ITA') disregard a court approved scheme say merger/demerger, what will be the consequential implications?

• Whether merger/demerger which is exempt u/s 47 will trigger capital gain tax in the hands of amalgamating co if ITA contend that the main purpose of the transaction is tax evasion in form of losses to be set off by amalgamated co? Even if this is court approved scheme? 

• What will be the sale consideration for amalgamating co in that case?

• What will be the cost of acquisition (cost step-up) and period of holding in the hands of amalgamated co?

• Whether the benefit of expenses incurred on this alleged transfer will be available as cost of acquisition or expenses incurred on sale?

• Can it be considered as slump sale or itemized sale?

• Benefits of capital losses available with amalgamating co to be set off with alleged capital gain? 

• Impact on future years?

From the clarification issued by CBDT over GAAR, it appears that ITA has the power to pierce the court approved scheme if the tax issues are not properly addressed.  If it is the case so, it would be well within the power of ITA to nullify the scheme and accordingly, they may restore the position or consider it as transfer resulting into capital gain.

Here following issues may be there with respect to alleged transfer:

•  No specific section to calculate the 'sale consideration' -; whether the stamp value or fair value or any other method 

• Considering it as transfer -; all other mechanical provision should follow accordingly i.e. expenses incurred on sale, set off of capital losses etc.

• In absence of any consideration flowing from amalgamating company and, therefore, inability to take the cost step-up would result in double whammy

Following argument and defences can be built:

• Disregard of the transaction should be limited to the tainted part of the scheme i.e. in this case b/f losses. Other consequential implications should not be modified. 

• Notional provision should not override the well-established mechanical provisions. 

• To have strong commercial rational behind the transaction for example: to create the synergies, list down the commercial benefits from the transaction, industry consolidation, IPRs, employees, etc

• To manage the media reporting accordingly to highlight the transaction as commercially viable and lucrative for shareholders

• To have deliberate discussion on minute of board meetings/ language of the resolution 

• Reports from external consultants, valuers, high-level experts to be obtained 

• In case of court schemes, to have a detailed discussion in the schemes over tax issues but it should be overshadowed by the other technical/ commercial reasons

2. Disregarding a transaction of sale at multiple level involving related party

A transfers shares of company Z to related party B at INR 100 at ALP

B again transfers shares of Company Z in near term to unrelated buyer C (i.e. in a very short term and also by offsetting its capital losses with gains) at INR 200

• In this scenario can ITA allege that transfer of shares by A to B is not at fair market value and consider the sale consideration at INR 200 in the hands of A (as related 

• Double taxation being sale consideration of INR 200 in the hands of A as B has already paid the taxes for its share of 

• Simultaneously, can IT disregard the setting off of the losses in the hands of B? Though, it should be supported by nullifying the capital gain for B.

3. Agreement entered before GAAR regime : Sale of business to related party

A CO sold it one of the businesses to its AE B CO (entity in a tax favorable jurisdiction) at fair value in Year 2013 by complying all the Transfer Pricing 

A Co is paying taxes at 30% while B Co will pay say 15% on the income of that business.  Further, the business was expected to grow exponentially and in year 2017 the income of the said business is multiple times than at the time of transfer. Here:

•  Can ITA consider the sale agreement executed in year 2013 as IAA considering that the tax benefits are flowing in year 2017 in form of lower taxable income in India

•  Whether the transactions complying the extant provisions can be subjected to GAAR as the benefits are occurring in post GAAR regime

4. GAAR applicable to domestic transactions as well: 

a. Debt restructuring like fresh loan to repay old loan and equity coloured as debt
b. Revaluations followed by business acquisitions
c. Circuitous routes like cross gifts, cross transfers, cross perquisites
d. JDAs and JVs may be under scanner
e. Both personal and corporate taxation

5. GAAR can nullify the effect of court rulings without carrying amendment to tax provisions -; 
Slump exchange under Bharat Bijli looks a remote possibility now to execute

6. In transfer pricing controlled transactions are benchmarked with uncontrolled transactions. However, in GAAR even uncontrolled transactions are required to be benchmarked with other uncontrolled transactions

7. Impact in compliances related to Foreign remittances:

If ITA revoke the GAAR provisions and accordingly there is change in deemed amount of foreign remittance pursuant to the transaction, whether there would be a need to revise the Form 15CA/CB?

Penalty consequences u/s 271-I for furnishing inaccurate information may also be imposed.

8. Withholding tax compliances:

When ITA disregard any transaction and increase the 'sum chargeable to tax' in the hands of recipient whether it would result in default for withholding tax provisions u/s 195 fo the Act followed by the interest and penalty.


Published by

Gaurav Jain
Category Income Tax   Report

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