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;
• (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.

179(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 obtaining 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.

Explanation

Section Summary:

Section 179 of the Income Tax Act defines and addresses impermissible avoidance arrangements. These are transactions or arrangements primarily designed to obtain a tax benefit, which are considered abusive or artificial under the law. The section aims to prevent tax avoidance by identifying and disallowing arrangements that lack genuine commercial substance or are structured in a way that misuses tax provisions.

Key Changes:

1. Introduction of "Impermissible Avoidance Arrangement": This is a new concept introduced to specifically target arrangements that are primarily tax-driven and lack genuine economic or commercial purpose.
2. Presumption of Tax Avoidance: Under Section 179(2), if any step or part of an arrangement is found to have the main purpose of obtaining a tax benefit, the entire arrangement is presumed to be for tax avoidance unless the taxpayer proves otherwise. This shifts the burden of proof to the taxpayer.

Practical Implications:

• For Taxpayers: Taxpayers must ensure that their transactions or arrangements have a genuine commercial purpose and are not primarily designed to reduce tax liability artificially. If an arrangement is deemed impermissible, the tax benefit claimed may be disallowed, leading to additional tax liabilities and penalties.
• For Businesses: Companies must carefully structure their transactions to avoid being flagged as impermissible avoidance arrangements. This may require additional documentation to demonstrate the commercial substance of the arrangement.
• For Tax Authorities: This section empowers tax authorities to scrutinize and challenge arrangements that appear to be tax-driven, even if the overall arrangement has a legitimate business purpose.

Critical Concepts:

1. Tax Benefit: Refers to any reduction, avoidance, or deferral of tax liability under the Income Tax Act.
2. Arm’s Length: Transactions or arrangements between parties who are independent and act in their own self-interest, without any undue influence.
3. Commercial Substance: An arrangement has commercial substance if it is based on genuine economic or business considerations, not just tax benefits.
4. Presumption of Tax Avoidance: If any part of an arrangement is found to be tax-driven, the entire arrangement is presumed to be for tax avoidance unless proven otherwise by the taxpayer.

Compliance Steps:

1. Document Commercial Purpose: Maintain detailed records and documentation to demonstrate the genuine business or economic purpose of the arrangement.
2. Avoid Artificial Structures: Ensure that transactions are structured in a manner consistent with arm’s length principles and ordinary business practices.
3. Review Existing Arrangements: Assess existing arrangements to ensure they do not fall under the definition of impermissible avoidance arrangements.
4. Be Prepared to Justify: If challenged by tax authorities, be ready to provide evidence to prove that the arrangement is not primarily for tax avoidance.

Examples:

1. Scenario 1: A company sets up a subsidiary in a tax-friendly jurisdiction solely to shift profits and reduce its overall tax liability. If the subsidiary has no real business operations or economic activity, this arrangement may be deemed an impermissible avoidance arrangement.
2. Scenario 2: Two related entities enter into a transaction at a price significantly different from market rates, resulting in a tax benefit. If the transaction lacks commercial substance or is not at arm’s length, it may be challenged under this section.

This section reinforces the need for transparency and genuine business purpose in tax planning, discouraging artificial or abusive tax avoidance strategies.