The logistics sector in India has seen significant consolidation and restructuring, with many groups adopting complex holding structures involving multiple Special Purpose Vehicles (SPVs) to achieve operational efficiency, risk segregation, and tax optimisation. However, these structures are increasingly coming under the scrutiny of tax authorities under the General Anti-Avoidance Rule (GAAR) provisions introduced in Chapter XI of the Income-tax Act, 2025.
Understanding GAAR
GAAR is a set of rules introduced to prevent tax avoidance through arrangements that are deemed impermissible. Unlike specific anti-avoidance rules (SAAR) that target specific transactions, GAAR is a general provision designed to cover all arrangements where the main purpose is to obtain a tax benefit.
Applicability
GAAR applies to arrangements entered into on or after 1st April, 2017, but with important exceptions:
- Income accruing or arising from transfer of investments made before 1st April, 2017 is protected
- Grandfathering provisions protect certain arrangements
Key Provisions
Section 178 provides that an arrangement may be declared an impermissible avoidance arrangement, and the consequences in relation to tax may be determined subject to the provisions of Chapter XI.
Section 179 defines an impermissible avoidance arrangement as an arrangement whose main purpose is to obtain a tax benefit, and it:
- Creates rights or obligations not ordinarily created between arm's length parties
- Results in misuse or abuse of the provisions of the Act
- Lacks commercial substance
- Is entered into in a manner not ordinarily employed for bona fide purposes
GAAR Risk in Logistics Holding Structures
Common Logistics Holding Structures
Typical logistics holding structures with multiple SPVs may include:
Vertical Holding Structure
- Ultimate holding company (often offshore)
- Intermediate holding company
- Indian holding company
- Operating SPVs (warehousing, transport, logistics services)
- Project SPVs (specific infrastructure projects)
- Asset SPVs (land, building, vehicles, equipment)
- Service SPVs (IT, HR, shared services)
- Finance SPVs (treasury, investment, leasing)
Horizontal Holding Structure
- Multiple SPVs operating independently
- Common parent holding
- Shared services across SPVs
- Cross-holdings and inter-SPV transactions
Hybrid Structure
- Combination of vertical and horizontal structures
- Complex inter-SPV relationships
- Multiple jurisdictions
Potential GAAR Triggers
The following aspects of logistics holding structures may trigger GAAR scrutiny:
Absence of Commercial Substance
Under section 180, an arrangement is deemed to lack commercial substance if:
- Substance or effect is inconsistent with form
- It involves round-trip financing
- It includes accommodating parties
- It involves elements that offset or cancel each other
- It disguises the value, location, source, or ownership of funds
- It involves location of asset/transaction/party without commercial purpose
- It does not significantly affect business risks or net cash flows
Main Purpose Test
If the main purpose of the arrangement is to obtain a tax benefit, it is presumed to be an impermissible avoidance arrangement. This is a subjective test that requires careful analysis of the facts and circumstances.
Misuse or Abuse of Law
Arrangements that exploit loopholes or technicalities in the law may be considered misuse or abuse of the provisions of the Act.
Step Transaction Analysis
Under section 181, the consequences of an impermissible avoidance arrangement include disregarding, combining, or recharacterising any step in the arrangement. This means that individual steps cannot be viewed in isolation.
Specific GAAR Risks for Logistics Holding Structures
Foreign Holding Companies
Risk: Offshore holding companies established in tax-haven or low-tax jurisdictions with no substantial business operations may be considered conduits or shell companies.
Mitigation: Ensure economic substance in the foreign jurisdiction, including physical office, employees, and business activities. Consider jurisdictions with substance requirements and tax treaties.
Treaty Shopping
Risk: Using treaty jurisdictions to access favourable tax rates on dividends, interest, or royalties without genuine economic presence.
Mitigation: Limit of Benefits (LOB) clauses and Principal Purpose Test (PPT) provisions in treaties require substantive presence. Ensure the holding company has commercial substance and the treaty benefit is not the primary purpose.
Round-Trip Financing
Risk: Funds flowing from India to offshore entities and back through loans, investments, or services may constitute round-trip financing if the economic substance is absent.
Mitigation: Document commercial purpose for cross-border fund flows. Ensure intercompany transactions are at arm's length. Maintain proper transfer pricing documentation.
Accommodating Parties
Risk: Use of entities (including SPVs) that have no real economic function but are created solely to facilitate tax avoidance.
Mitigation: Ensure each SPV serves a genuine business purpose. Maintain proper governance, books, and accounts. Avoid creating entities without operational substance.
Recharacterisation of Income
Risk: Income that should be characterised as business income may be recharacterised as dividend, interest, royalty, or fees for technical services.
Mitigation: Properly characterise transactions based on substance rather than form. Ensure documentation supports the commercial purpose and economic substance.
Transfer of Assets
Risk: Transfer of assets between group entities at values that are not at arm's length, resulting in tax avoidance.
Mitigation: Value transfers at arm's length. Maintain valuation reports from registered valuers. Ensure proper transfer pricing documentation.
GAAR Procedure and Consequences
Reference and Approval Process
Under section 274, the GAAR process involves:
- Assessing Officer makes reference to Principal Commissioner/Commissioner
- Commissioner issues notice to assessee
- Assessee may submit objections
- Commissioner may refer to Approving Panel
- Approving Panel issues directions
The Approving Panel consists of three members:
- Chairperson (judge of High Court or former judge)
- One member (Indian Revenue Service not below rank of Principal Chief Commissioner/Chief Commissioner)
- One member (academic/scholar with special knowledge)
Consequences of GAAR Declaration
Under section 181, the consequences may include:
- Disregarding, combining, or recharacterising any step in the arrangement
- Treating the arrangement as if it had not been entered into
- Disregarding accommodating parties
- Reallocating income or expenditure
- Treating residence or location at a place other than as provided
- Considering or looking through any corporate structure
Time Limits
- Approving Panel to issue directions within six months
- Exclusion of certain periods in computation of time limits
- Binding nature of directions
Application to Logistics SPVs
Warehousing SPVs
- Substance: Actual warehousing operations, employees, contracts
- Risk: If SPV only holds land/building without operations
- Documentation: Lease agreements, service contracts, employee records
Transport SPVs
- Substance: Actual fleet operations, drivers, maintenance
- Risk: If SPV only owns vehicles without operations
- Documentation: Fleet records, maintenance logs, driver contracts
Project SPVs
- Substance: Project execution, EPC contracts, project management
- Risk: If SPV is only a financial vehicle
- Documentation: Project agreements, project finance documents, progress reports
Asset SPVs
- Substance: Asset ownership and management
- Risk: If SPV only holds assets without management
- Documentation: Asset registers, lease agreements, maintenance records
Finance SPVs
- Substance: Treasury operations, financing activities
- Risk: If SPV is only a financing conduit
- Documentation: Loan agreements, interest calculations, repayment schedules
GAAR and Transfer Pricing Interplay
Interrelationship
GAAR and transfer pricing provisions are complementary:
- Transfer pricing focuses on arm's length pricing
- GAAR focuses on impermissible avoidance arrangements
- Both can apply to the same transaction
Transfer Pricing Documentation
Robust transfer pricing documentation can support the commercial substance of the arrangement:
- FAR analysis
- Benchmarking studies
- Intercompany agreements
- Transfer pricing policy
Combined Risk
Arrangements that have both transfer pricing and GAAR risks face heightened scrutiny:
- Inappropriate pricing may indicate tax avoidance
- Absence of substance may indicate impermissible arrangement
- Documentation gaps may lead to adverse inferences
Mitigation Strategies
Ensure Commercial Substance
- Physical office in jurisdiction
- Employees with appropriate qualifications
- Business activities generating income
- Board meetings in jurisdiction
- Bank accounts in jurisdiction
- Separate books and records
Document Business Purpose
- Business plan
- Feasibility studies
- Investment analysis
- Risk assessment
- Market research
- Strategic rationale
Maintain Proper Governance
- Board meetings and minutes
- Director appointments
- Shareholder meetings
- Compliance with local laws
- Filing of returns and reports
Arm's Length Transactions
- Transfer pricing documentation
- Intercompany agreements
- Benchmarking studies
- FAR analysis
Regular Review
- Periodic review of structure
- Substance assessment
- Risk assessment
- Compliance review
- Update of documentation
Expert Advisory on GAAR Risk Management
Given the complexity and severity of GAAR risks in logistics holding structures, professional advisory is essential. Anuj Desai & Associates provides comprehensive GAAR risk management services, including:
- GAAR Risk Assessment: Comprehensive analysis of existing logistics holding structures for GAAR risks
- Structuring Advisory: Design and implementation of GAAR-compliant logistics holding structures
- Substance Enhancement: Assistance in establishing and maintaining economic substance in offshore jurisdictions
- Documentation: Preparation of business purpose documentation, minutes, and agreements
- Transfer Pricing Compliance: Ensuring arm's length pricing and robust documentation
- Representation: Representation before tax authorities, Approving Panel, and courts
- Compliance Review: Periodic review and update of structures and documentation
- Training: Training and awareness programmes on GAAR compliance
With deep expertise in GAAR provisions and thorough understanding of logistics sector structures, Anuj Desai & Associates ensures that your logistics holding structures are robust, compliant, and defensible.
Need expert assistance with GAAR risk management for your logistics holding structure? Contact Anuj Desai & Associates today for comprehensive advisory, implementation, and representation services. Our team of experienced tax professionals will help you identify and mitigate GAAR risks while ensuring optimal tax efficiency. [Contact Us] to schedule a consultation.