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".
