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Section 97 of Income Tax Act

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June 21, 2022

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4 mins read

Section 97 of Income Tax Act – Circumstances in which arrangement would lack commercial substance

  • Section 97 of Income Tax Act provides that an arrangement shall be deemed to lack commercial substance, if —
  • 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
  • it involves or includes
    • round trip financing – It is an arrangement where, through a series of transactions, parties transfer funds amongst themselves and those transactions do not have any substantial commercial purpose other than obtaining the tax benefit ;
    • an accommodating party – An accommodating party is a party which has direct or indirect participation in arrangement, and the main purpose of participation is to obtain, direct or indirect tax benefit for the assessee. This would apply even if the accommodating party is a connected person in relation to any party to the arrangement.

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    • elements that have effect of offsetting or cancelling each other; or
    • 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; or
  • 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
  • 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).

Section 97 of Income Tax Act – Factors relevant for determining whether an arrangement lacks commercial substance : –

  1. the period for which arrangement (including operations therein) exists;
  2. payment of taxes, directly or indirectly, under the arrangement;
  3. the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement.

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Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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