Section 102

Section 102 — the law in short

What the courts have decided on section 102, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Statutory position — section 9A: an offshore fund managed from India has no business connection here, but only if every condition in section 9A(3) is met CBDT Circulars & InstructionsCuts both ways
  My client is an offshore fund that has moved its portfolio manager to Mumbai. The Assessing Officer says the manager is a business connection and the whole fund is now taxable in India. Is there a safe harbour?
  Yes, but it is a conditional one. Section 9A(1) provides that, notwithstanding section 9(1), the fund management activity carried out through an eligible fund manager acting on behalf of an eligible investment fund shall not constitute a business connection in India of that fund, and section 9A(2) provides that, notwithstanding section 6, the fund shall not be said to be resident in India merely because the manager undertaking fund management activities on its behalf is situated in India. The protection is available only where the fund answers the definition in section 9A(3), which carries thirteen lettered conditions, (a) to (m), every one of which has to be satisfied.
• Statutory position — Chapter X-A applies only from AY 2018-19, and Rule 10U's three-crore threshold and the grandfathering of investments made before 1 April 2017 CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says my client's 2015 restructuring is an impermissible avoidance arrangement. Can GAAR reach an arrangement entered into before it came into force, and is there a monetary floor below which it simply does not apply?
  Chapter X-A applies in respect of any assessment year beginning on or after 1 April 2018 — that is, from AY 2018-19 — under s.95(2). Rule 10U(2) then makes the Chapter apply to an arrangement irrespective of when it was entered into, so long as the tax benefit is obtained on or after 1 April 2017; but Rule 10U(1)(a) takes out any arrangement where the tax benefit in the relevant assessment year, in aggregate to all parties, does not exceed three crore rupees, and Rule 10U(1)(d) read with the exception in Rule 10U(2) takes out income from the transfer of investments made before 1 April 2017.
• Statutory position — section 98 and Rule 10UA: what the department may actually do once an arrangement is declared impermissible CBDT Circulars & InstructionsCuts both ways
  If the Approving Panel declares my client's arrangement impermissible, what consequences can the Assessing Officer impose, and can he recast the whole structure or only the offending part?
  Section 98(1) lets the consequences be determined 'in such manner as is deemed appropriate' and gives a non-exhaustive list of seven powers, including disregarding, combining or recharacterising any step; treating the arrangement as if it had not been entered into; disregarding an accommodating party; treating connected persons as one person; reallocating receipts and expenditure among the parties; relocating the residence of a party or the situs of an asset or transaction; and looking through any corporate structure. Section 98(2) adds that equity may be treated as debt or vice versa, capital may be treated as revenue or vice versa, and any expenditure, deduction, relief or rebate may be recharacterised — but Rule 10UA confines the consequences to the offending part where only a part of the arrangement is declared impermissible.
• Statutory position — section 99, section 97(3) and section 102: connected persons and the accommodating party, and how they are collapsed into one taxpayer CBDT Circulars & InstructionsCuts both ways
  The GAAR notice says a Mauritius company in my client's structure is an 'accommodating party' and that two group companies are 'connected persons'. What do those words actually mean and what follows if they are made out?
  Section 99 says that in determining whether a tax benefit exists, connected persons may be treated as one and the same person, an accommodating party may be disregarded, an accommodating party and any other party may be treated as one and the same person, and the arrangement may be considered or looked through by disregarding any corporate structure. 'Accommodating party' is defined in section 97(3) — a party whose main purpose in participating, directly or indirectly and in whole or in part, is to obtain a tax benefit for the assessee, whether or not it is a connected person; 'connected person' is defined at length in section 102(4), with a twenty per cent 'substantial interest' test in section 102(8).
• Statutory position — s.95: the gateway into Chapter X-A, the years it reaches, and the Explanation that lets the department attack one STEP of an otherwise genuine transaction CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer has written that he proposes to invoke Chapter X-A. Which provision actually gives him that power, from which assessment year does it bite, and can he pick on a single step of a transaction that as a whole was done for real commercial reasons?
  Section 95(1) is the gateway, and it does two things: it opens with "Notwithstanding anything contained in the Act", so Chapter X-A overrides the rest of the Act, and it allows an arrangement to be "declared to be an impermissible avoidance arrangement" with the tax consequences then determined under the Chapter. Section 95(2) confines the whole Chapter to "any assessment year beginning on or after the 1st day of April, 2018" — that is AY 2018-19 onwards, and nothing earlier. The Explanation is the sting: the Chapter "may be applied to any step in, or a part of, the arrangement as they are applicable to the arrangement", so the officer does not have to condemn your whole transaction; he can isolate one step inside it.
• Statutory position — s.96: what makes an arrangement impermissible — the main-purpose test, the four tainted elements, and the s.96(2) presumption that shifts the burden onto you CBDT Circulars & InstructionsCuts both ways
  The Commissioner's notice under s.144BA(2) says my arrangement is an impermissible avoidance arrangement. What exactly does the Revenue have to establish, and who has to prove what?
  Section 96(1) is a two-limb test and BOTH limbs must be satisfied. The arrangement must be one "the main purpose of which is to obtain a tax benefit", AND it must additionally have at least one of four tainted elements — rights or obligations not ordinarily created between persons dealing at arm's length; misuse or abuse of the provisions of the Act; lacking or deemed to lack commercial substance under s.97, in whole or in part; or being entered into or carried out by means or in a manner not ordinarily employed for bona fide purposes. Section 96(2) then supplies a presumption that works against you: if the main purpose of a STEP in, or a part of, the arrangement is to obtain a tax benefit, the whole arrangement is presumed to have been entered into for that main purpose — "unless it is proved to the contrary by the assessee" — even though the main purpose of the whole arrangement was not a tax benefit.
• Statutory position — s.97: when an arrangement is DEEMED to lack commercial substance, what round trip financing means, and the three facts that s.97(4) says are never sufficient CBDT Circulars & InstructionsCuts both ways
  The Commissioner says my structure "lacks commercial substance". What does that phrase actually mean in the Act, and does it help me that the structure has been in place for years, has paid tax, and has a normal exit route?
  Lack of commercial substance is not an open-ended commercial judgment; s.97(1) is a closed list of four deeming limbs. An arrangement is DEEMED to lack commercial substance if (a) its substance or effect 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 round trip financing, an accommodating party, elements that have the effect of offsetting or cancelling each other, or a transaction conducted through one or more persons that disguises the value, location, source, ownership or control of the funds; or (c) it involves the location of an asset, of a transaction or of the place of residence of a party without any substantial commercial purpose other than obtaining a tax benefit; or (d) it does not have a significant effect on the business risks or net cash flows of any party apart from the effect attributable to the tax benefit. Section 97(4) then says in terms that three matters — how long the arrangement has existed, the fact that taxes were paid under it, and the fact that it provides an exit route — "may be relevant but shall not be sufficient".
• Statutory position — s.102: "tax benefit", "arrangement", "step", "party" and "benefit" — the definitions that decide whether Chapter X-A can start at all CBDT Circulars & InstructionsCuts both ways
  The department says I obtained a "tax benefit" from an "arrangement". Where are those words defined, how wide are they, and does an increase in my carried-forward loss count?
  Section 102 is the definition section for the whole Chapter, and its two most important entries are drafted as wide as they could be. "Tax benefit" in s.102(10) is an INCLUSIVE definition — the section says "includes" — and its six sub-clauses cover a reduction, avoidance or deferral of tax or other amount payable under the Act; an increase in a refund; the same two things where they arise as a result of a tax treaty; a reduction in total income; and an increase in loss — each of them "in the relevant previous year or any other previous year". An increase in loss therefore is a tax benefit even in a year in which no tax was payable at all. "Arrangement" in s.102(1) 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 property in it, and "step" in s.102(9) includes "a measure or an action, particularly one of a series taken in order to deal with or achieve a particular thing or object in the arrangement".
• Statutory position — Rule 10U: the exclusions a cross-border case must clear first — the Foreign Institutional Investor and offshore-derivative carve-outs, and how the three crore rupee tax benefit is actually computed CBDT Circulars & InstructionsCuts both ways
  Before I argue the merits of a GAAR notice for a foreign investor, which exclusions in Rule 10U do I have to run, and how is the three crore rupee tax benefit figure arrived at?
  Rule 10U(1) takes four classes of case outside Chapter X-A altogether. Clause (a) is the monetary floor: the Chapter does not apply to an arrangement where the tax benefit in the relevant assessment year arising "in aggregate, to all the parties to the arrangement" does not exceed three crore rupees. Clause (b) excludes a Foreign Institutional Investor that is an assessee under the Act, that "has not taken benefit of an agreement referred to in section 90 or section 90A", and that has invested in listed or unlisted securities in accordance with the SEBI (Foreign Institutional Investors) Regulations, 1995. Clause (c) excludes a non-resident in relation to an investment made by him "by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor". Clause (d) grandfathers income from the transfer of investments made before 1 April 2017. Rule 10U(3)(iv) then tells you how to quantify the tax benefit for the clause (a) threshold: for sub-clauses (a) to (e) of s.102(10) it is "the amount of tax", and for sub-clause (f), an increase in loss, it is "the tax that would have been chargeable had the increase in loss referred to therein been the total income".
• Statutory position — s.90(2A): the treaty does not save you from GAAR, because Chapter X-A applies "even if such provisions are not beneficial" to the assessee CBDT Circulars & InstructionsCuts both ways
  My client is a treaty resident and the treaty plainly gives him the better of it. The department is invoking Chapter X-A anyway. Can it, when s.90(2) says the more beneficial provision applies?
  It can, and s.90(2A) is the provision that says so. Section 90(2) is the ordinary rule that where India has a treaty, the provisions of the Act apply "to the extent they are more beneficial to that assessee". Section 90(2A) then reads: "Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him." So the treaty override that normally protects a non-resident is expressly switched off for Chapter X-A, and the fact that a Chapter X-A determination leaves the taxpayer worse off than the treaty is not an answer to it.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.