EDITORIAL NOTE — VOLS X + XI Volume X covers Chapter X (1961 ss. 92-94B) — Special Provisions Relating to Avoidance of Tax / Transfer Pricing. Volume XI covers Chapter X-A (ss. 95-102) — General Anti-Avoidance Rules (GAAR), introduced by FA 2012, operational from 1-4-2017. VOLUME X — TRANSFER…
ITA 1961 regimeVolume X–XI7 min read
1961 Treatise — Vols X–XI: TP GAAR
Vols X–XI — TP GAAR
EDITORIAL NOTE — VOLS X + XI
Volume X covers Chapter X (1961 ss. 92-94B) — Special Provisions Relating to Avoidance of Tax / Transfer Pricing. Volume XI covers Chapter X-A (ss. 95-102) — General Anti-Avoidance Rules (GAAR), introduced by FA 2012, operational from 1-4-2017.
VOLUME X — TRANSFER PRICING | Sections 92-94B
Section 92 — Computation of Income from International Transaction at ALP
(1) Any income arising from an international transaction shall be computed having regard to the arm's length price.
Explanation.—For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price.
(2) Where in an international transaction, or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.
(2A) [FA 2012] — applies arm's length principle to specified domestic transactions u/s 92BA.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into.
Sections 92A-92F — Architecture
JUDICIAL EVOLUTION — Capital-Account Issuance NOT TP Transaction
The leading authority is Vodafone India Services (P.) Ltd. v. UOI, (2014) 368 ITR 1 (Bom HC). The Bombay HC (Mohit Shah, C.J. and S.C. Gupte, J.) held that issuance of share capital is NOT an international transaction within the meaning of 1961 s. 92B. SC dismissed the SLP, leaving the Bom HC ratio operative.
HELD: The issue of shares by an Indian company to its foreign parent in primary issuance is not a transaction giving rise to income chargeable to tax under the Income-tax Act. Such transactions are on the capital account and outside the ambit of section 92(1). Consequently, transfer-pricing provisions do not apply. (per Vodafone India Services ¶ 53).
JUDICIAL EVOLUTION — Non-Existent Assessee Post-Amalgamation
CIT v. Maruti Suzuki India Ltd., (2019) 416 ITR 613 (SC) — DRP / AO cannot direct assessment of a non-existent entity post-amalgamation; jurisdictional fact. The amalgamation extinguishes the entity; subsequent notice / order is void.
HELD: The basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceased to exist upon the approved scheme of amalgamation. Despite the fact that the Assessing Officer was informed of the amalgamated company, the proceedings were continued in the name of the amalgamated company. This was a substantive illegality and not a mere procedural violation. (per Maruti Suzuki ¶ 33).
RULES 1962 CROSS-REFERENCE
Rule 10A — definitions. Rule 10B — methods of ALP determination (CUP, RPM, CPM, PSM, TNMM). Rule 10AB — 'Other Method' for ALP determination. Rule 10C — selection of most appropriate method. Rule 10D — TP documentation requirements (Master File / Local File). Rule 10DA — Master File (Form 3CEAA) — entities with international group consolidated revenue ≥ ₹500 crore. Rule 10DB — Country-by-Country Report (Form 3CEAC / 3CEAD) — international group consolidated revenue ≥ ₹6,400 crore. Rule 10E — Form 3CEB (CA report). Rules 10TA-10TG — safe harbour rules for IT/ITES, KPO, financial transactions, contract R&D. Rules 10F-10T — Advance Pricing Agreement (APA) framework.
Section 94B — Limitation on Interest Deduction (Thin Capitalisation, FA 2017)
Where an Indian borrower (or its PE) deducts interest > ₹1 crore on borrowings from a non-resident AE (or AE's guaranteed loan), interest deduction is capped at 30% of EBITDA. Excess is c/f for 8 years against future EBITDA-headroom. Implements BEPS Action 4.
PLANNING NOTES
(i) For all international transactions, maintain Form 3CEB (CA-certified) — mandatory by 30 November (audit cases). (ii) Choose ALP method strategically — TNMM is the most common; document selection rationale through benchmarking analysis. (iii) For high-value transactions (≥ ₹100 crore aggregate), evaluate APA route — bilateral preferred for treaty-protected certainty. (iv) For amalgamation-merger scenarios, file in writing with Department immediately on scheme-sanction; cite Maruti Suzuki to defeat any non-existent-assessee notices. (v) For specified domestic transactions u/s 92BA, the post-FA-2017 ₹20 crore threshold provides relief for smaller entities.
VOLUME XI — GAAR | Sections 95-102
Section 95 — Applicability
Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter.
Section 96 — Impermissible Avoidance Arrangement
(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 not normally created between persons dealing at arm's length;
(b) results, directly or indirectly, in misuse, or abuse, of the provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial substance under section 97, 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.
Sections 97-101 — Architecture
JUDICIAL EVOLUTION — McDowell Doctrine
The seminal pre-GAAR authority is McDowell & Co. Ltd. v. CTO, (1985) 154 ITR 148 (SC) (Constitution Bench). Justice Chinnappa Reddy's separate judgment laid down the substance-over-form principle which survives in the codified GAAR regime.
HELD: Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. (per Chinnappa Reddy, J., McDowell ¶ 45).
"We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation, and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation." (¶ 45)
JUDICIAL EVOLUTION — Treaty Shopping Pre-GAAR
Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) — DTAA shopping was upheld as legitimate tax planning under the 1961 Act framework; the position post 2025 Act / GAAR is materially altered — Limitation of Benefits provisions and Principal Purpose Test now apply via DTAA protocols and GAAR.
DEPARTMENTAL PRACTICE — GAAR Threshold + Approving Panel
GAAR applies only where the tax benefit ≥ ₹3 crore (Income-tax Rules, 1962 Rule 10U). Approving Panel (Rule 10UB) — three members (one from above the rank of CCIT) — review GAAR-applicability before final determination. CBDT Circular 7/2017 dated 27-01-2017 prescribes the GAAR procedural framework — pre-conditions, panel constitution, time-limits.
RULES 1962 CROSS-REFERENCE
Rule 10U — GAAR applicability conditions (₹3 crore threshold, etc.). Rule 10UA — Form 3CEFA — application by assessee for advance ruling on GAAR applicability. Rule 10UB — Approving Panel composition + procedure. Rule 10UC — time-limit for proceedings.
PLANNING NOTES & LITIGATION DEFENCE
(i) For all material transactions, document COMMERCIAL SUBSTANCE — board resolutions, business rationale, projected commercial benefit beyond tax. The McDowell test is the analytical anchor. (ii) For DTAA-relief structures, ensure substantive presence in the treaty-jurisdiction (employee count, board residency, business operations). Mauritius / Singapore route requires Tax Residency Certificate + commercial substance + economic activity. (iii) For ₹3-crore+ transactions, prepare a GAAR-defensibility memorandum AT THE TRANSACTION DESIGN STAGE — not after the fact. (iv) Where GAAR is invoked, the Approving Panel route under Rule 10UB is the safeguard — leverage panel's power to disagree with AO/Commissioner. (v) Section 90(2A) [FA 2017] explicitly overrides DTAA via GAAR — the treaty-shopping defence under Azadi Bachao is no longer available for high-value transactions.
CLOSING NOTE — VOLS X + XI
Volumes X and XI cover the transfer pricing + GAAR framework. Authorities — Vodafone India Services, Maruti Suzuki, McDowell, Azadi Bachao Andolan — are verified.