The Tax Disputes and Litigation Review: India

Introduction

In India, income tax is exclusively a federal tax levied under the Income Tax Act, 1961. On the indirect tax front, the recently introduced goods and services tax provides for a shared jurisdiction between the federal government and the states. There are separate provisions pertaining to stamp duties (e.g., under the Indian Stamp Act, 1899 and similar state legislation).

Indian tax laws have long been subject to amendments and changes relating to the rate, the subject of tax and procedures. Depending on the type of tax, there are minor differences in the procedure to be followed for dispute resolution. Be that as it may, the overall structure of the dispute redressal system is similar (i.e., a three-tiered appellate system, advance ruling mechanism and settlement commissions). However, recently the dispute resolution system for income tax has been reformed, with a view to reduce human interface and obtain quicker disposals by introduction of faceless and electronic proceedings. In terms of dispute resolution, the sheer number of cases faced by the Indian judiciary makes timely disposals a big challenge. Insofar as appellate tribunals are concerned, the rate of disposals is fairly quick: a dispute may well be decided finally by an appellate tribunal within a year or so of initiation before the tribunal. However, insofar as the High Courts are concerned, the time periods vary considerably. Writ petitions are generally decided more quickly than appeals. Even at the level of administrative appeals, in the absence of a stringent timeline and the ever-increasing number of disputes, the system is overloaded with almost 460,000 cases pending before the departmental appellate authority.2 The pandemic has caused further delays in the disposal of disputed matters. In order to address this pendency of disputes before the different forums, the 'Faceless Appeal Scheme' and several amnesty schemes have been introduced to reduce the cost and quantum of litigation. During the trying times caused by covid-19, the tax authorities, tribunals and courts alike have embraced technology and have been carrying out proceedings through virtual conferencing facilities.

Commencing disputes

India has implemented a self-assessment procedure, wherein the taxpayers assess the taxes for themselves and file returns. Taxpayers having turnovers or receipt over certain limits are also required to get their books audited and file tax audit reports.

Under the Income Tax Law, returns of income are required to be filed in respect of income chargeable to tax.3 The accounting year runs from 1 April to 31 March: income of an accounting year (the previous year) is brought to tax as the income of the next assessment year. Thus, the income of the financial year 2020–2021 will be chargeable to tax in assessment year 2021–2022; and the question of chargeability in general turns on the law as on the first day of the relevant assessment year (i.e., 1 April of the relevant assessment year). Returns of income are to be filed within a specified period from the end of the relevant previous year. The income tax law allows a further period for the taxpayer to revise the return to correct any bona fide errors.4 The assessee cannot raise additional claims for deductions or benefits before the assessing officer unless this is done through a revised return. This does not, barring express provisions,5 prevent fresh claims being raised before the appellate authorities.6

The assessing officer is empowered to take up the returns filed and scrutinise the same. In practice, only a fraction of the returns are taken up for scrutiny. The assessing officer is entitled to pass an order of assessment either accepting the returned income, or making variations to the returned income. Time limits for completing assessments are specified. The general rule for assessment years commencing on or after 1 April 2021 is that orders of assessment cannot be passed after the expiry of nine months from the end of the relevant assessment year.7 Thus, an assessment for assessment year 2021–2022 (which relates to income earned in the previous year 2020–2021) cannot be made after nine months from the end of the assessment year 2021–2022 (i.e., the assessment must be completed before 31 December 2022). In September 2019, a system of e-assessment was brought into force by the government,8 under which there is no personal interaction between the assessee and the tax officer, with all communication routed through an online portal designated for this purpose. Compliance with the shorter limitation period of nine months (compared to the previous 21 months) has become possible due to the 'faceless assessment' system, where proceedings are conducted virtually without need for physical interaction between taxpayers and tax authorities.

Even after the assessment has been completed in the above terms, the tax authorities have the power to reopen the assessment if the assessee's income has escaped assessment.9 This power could be exercised if the assessing officer has information which suggests that income chargeable to tax has escaped assessment;10 but the procedure has now been streamlined further. The system of reassessment has undergone a change in the Finance Act, 2020, with the statute (through the newly introduced Section 148A of the Income Tax Act, 1961) contemplating a hearing even prior to the recording of reasons for issuing notices for reopening assessments. The powers to reopen can be exercised only after issuance of a show cause notice, considering the reply thereto and following the procedure prescribed.11 A notice to reopen an assessment shall not be issued beyond the period of three years from the end of the relevant assessment year. If income in the form of an asset has escaped assessment amounting to 5,000 Indian rupees or more, the limitation period of 10 years is provided.12 These new provisions are yet to be judicially tested. The courts have considered controversies about which year or years this new scheme will apply from, but have not considered the scheme's substantive provisions yet.

In addition to the powers of the assessing officer to reopen assessments, assessments can also be revised by the Commissioner of Income Tax (an officer of higher rank than the assessing officer), if the Commissioner is satisfied that an assessment order is erroneous and prejudicial to the interests of the revenue. The Commissioner cannot exercise this power where the assessing officer has taken a possible view on a debatable question;13 however, the revisionary jurisdiction can be exercised if the assessing officer has taken a clearly erroneous view, or has entirely failed to examine an issue.14

The Indian goods and services tax laws also provides for a self-assessment procedure, where the assessee is required to assess the goods and services tax payable on the transactions it undertakes and file a return in respect of the same, on a monthly or quarterly basis, as the case may be. The assessee has to give details of the input tax credit availed in the said returns. If the zonal tax officer is of the opinion that there is a lapse on the assessee's part in respect of the payment of the goods and services tax, customs duty or the availing of input tax credit, the officer is bound to issue a show cause notice to the assessee. The show cause notice is the foundation of disputes under the Central Goods and Services Tax Act, 2017. After giving an opportunity to be heard, the adjudicating authority may then pass an order demanding payment of tax not paid or the input tax credit available if excess tax was paid.

It is worth noting that as a part of relaxation measures in response to the covid-19 pandemic, time limits, in respect of certain proceedings, including filing of appeals and applications under tax laws and issuance of notices by the income tax authorities, falling during the period from 20 March 2020 to 31 December 2020 were extended to 31 March 2021 and 30 September 2021, depending on the type of proceedings.15

The courts and tribunals

Central tax laws provide for a three-tiered appellate mechanism. A person aggrieved by the tax officer's assessment order may approach the first appellate authority, who is generally a designated senior officer of the department. The first appeal is essentially an administrative appeal to the Commissioner (Appeals), with the appellate authority having powers concomitant to the powers of the tax officers. With a view of expediting the first appeal process, the Faceless Appeal Scheme has been introduced as an extension to the e-assessment scheme. Under this scheme, all filings and appeal proceedings before the first appellate authority are to be concluded through a designated online portal, thereby minimising any personal interactions between taxpayers and the tax authority.16 Certain appeals relating to serious fraud, major tax evasion and international tax matters are kept out of this scheme, for now. Further, the Faceless Appeal Scheme also contemplates internal peer reviews of appellate orders before the orders are finalised, and further appears to remove the statutory right to a personal hearing (which, under the Scheme, is made discretionary). The Faceless Assessment Scheme itself has been challenged as being an excessive delegation of legislative powers, and as being arbitrary and in breach of fundamental tenets of natural justice. The challenge is presently pending before the Bombay High Court. In January 2022, a Revised Scheme was introduced to address some of these problems.

An appeal from the appellate authority's order goes to the appellate tribunal.17 The appeal may go before a single-member or a two-member bench, depending on the complexity of issue and the tax effect involved. In general, if the appellant pays 20 per cent of the disputed demand, the revenue authorities themselves may not insist on further recoveries pending the first appeal before the commissioner.18 However, the pendency of an appeal does not in itself stay the recovery of the demand appealed against, but administrative authorities as well as appellate authorities have powers to grant a conditional or unconditional stay. The factors relevant include the prima facie strength of the appellant's case and the balance of convenience. Provisions have now been included to enable introduction of faceless and electronic procedures in tribunal proceedings with the objective of eliminating physical interaction between tribunals and taxpayer.19

In matters involving transfer pricing adjustments, a slightly different procedure is available. In such matters, the assessing officer is required to make a reference to the transfer pricing officer for determining the proper arm's-length price in respect of transactions covered under transfer pricing regulations, and is then required to pass a draft assessment order. Objections against the draft assessment order can be filed by the taxpayer to the dispute resolution panel (a panel consisting of three commissioner-level officers). The assessing officer is required to pass the final assessment order giving effect to the directions of the dispute resolution panel. In such cases, an appeal can be filed directly to the appellate tribunal bypassing the first appeal before the Commissioner (Appeals).

Appeals from the appellate tribunal, generally, go to the jurisdictional high court limited only to substantial questions of law.20 An assessee may approach the Supreme Court of India on appeal from the decisions of the High Courts, subject to the special leave of the Supreme Court21 (which is granted at the discretion of the court in matters involving substantial questions of law of general public importance) or (even more exceptionally) subject to a certificate of fitness from the high court.22

The right to appeal under the Indian tax laws is, of course, subject to certain limitation periods, although the authorities do have the power to condone reasonable delays. Even the tax authority (the Revenue) has the right to refer appeals against orders of the appellate authorities. However, the Revenue's right to file appeals is subject to limits put up by the litigation policy issued by the government, under which the Revenue does not appeal if the tax effect involved is less than the monetary limits specified.23

Certain indirect tax disputes can be directly appealed to the Supreme Court (from orders of the appellate tribunal). The right to appeal under Central Goods and Services Tax Act, 2017 is encumbered with a burden to deposit certain percentage of the taxes under dispute. In case of excise duties, the appellant pays 7.5 per cent of the disputed demand or 100 million rupees, whichever is less. Under the Central Goods and Services Tax Act, 2017, the appellant pays 10 per cent of the disputed tax plus the full amount of tax admitted by him or her. The goods and services tax appellate tribunal is yet to commence functioning as the Central Goods and Services Tax Act, 2017 is a recent introduction to the tax laws. An impediment for the goods and services tax appellate tribunal is a recent decision by the Madras High Court24 striking down the constitution of the tribunal as being ultra vires the Constitution of India. The Supreme Court25 has also recently struck down recent amendments in the mode of appointment and conditions of service of the members of various tribunals. These decisions appear to be premised on the need to have a tribunal that is truly independent and not simply an extension of the revenue authorities. Subsequently, new rules have been notified for effective appointments of independent members to the various tribunals.26 Since the goods and services tax appellate tribunal is yet to be constituted, a blanket stay has been granted in respect of demand notices against which taxpayers wish to approach the tribunal.

Apart from the statutory appellate remedies, taxpayers may also approach the jurisdictional high court or the Supreme Court by invoking their respective writ jurisdiction as envisaged by Articles 32, 226 and 227 of the Constitution. The writ jurisdiction may be invoked in cases where the conduct of the tax authorities or appellate authorities is ultra vires the statute or procedure or where it is violative of the principles of natural justice. In practice, the courts do not entertain writs where an efficacious alternate remedy in the form of an appeal is available. However, there are exceptions: thus, the existence of an alternative remedy may not bar the exercise of writ jurisdiction in cases where the challenged measure is wholly without jurisdiction, or has arisen from an egregious breach of the principles of natural justice.

Writ remedies are potent, particularly in challenging reopening proceedings: once a notice for reopening is received, the taxpayer is required to file a return in response to the notice, and is entitled to seek the reasons for the reopening. On receipt of the reasons, the taxpayer can file objections to the proposed reopening. Those objections are required to be decided by the assessing officer through a speaking order.27 That speaking order is itself not appealable: an appeal would lie only against a final re-assessment order itself. Hence, a writ petition can be filed challenging the notice for reopening and the order on objections, even prior to the ultimate re-assessment order being passed. Of course, the writ court would consider only the jurisdictional objections.

Penalties and remedies

As a part of taxation mechanisms, Indian tax authorities have also been empowered to impose penalties on taxpayers for violations ranging from non-filing of returns to non-disclosure of income or non-payment of tax. Penalties for procedural violations are generally quantified in direct amounts whereas penalties towards non-payment of tax or non-disclosure of incomes or transactions are quantified as percentages of the tax or amounts involved (generally, 100 to 300 per cent). From assessment year 2017–2018, penalties can be imposed for 'under-reporting' or 'misreporting' income,28 while for earlier years, the penalty was stated to be for the furnishing of inaccurate particulars or for the concealment of income.29 There has been a large amount of litigation on the question of whether penalties for non-payment of taxes can be imposed only when such non-payment is wilful.30 This is essentially on account of statutory presumptions as to mens rea. However, penalty cannot be levied merely because a claim is made that is not acceptable to the Revenue: if the claim is demonstrably bona fide, the fact that it ultimately turns out to be wrong would not be sufficient to levy penalty.31

Under the income tax law, penalty proceedings are not a part of the assessment proceedings. Section 274 of the Income Tax Act, 1961 provides for the procedure to be followed by the tax authorities to impose penalties on the assessee. In particular, the procedure gives due regard to the principles of natural justice (i.e., due notice and hearing to be given to the assessee prior to impost). Further, Section 273AA also provides an opportunity to approach senior tax officers for reduction in the penalties. If an order has been passed against an assessee imposing penalties, the assessee may approach the appellate authorities for setting aside the said order. On the other hand, under both goods and services tax and customs laws, tax officers issuing show cause notices have the power to impose penalties on assesses during the same proceedings. In such cases, the tax officer must include in the show cause notice an averment as to the penalties sought to be imposed with specific reference to the sections under which the penalties are sought to be imposed.

Apart from the above, Indian tax laws also provide for criminal prosecution of taxpayers in respect of certain offences, such as wilful evasion of tax, non-payment of indirect taxes already collected, etc. The punishment for such offences includes imprisonment as well as fines. The tax evader is then tried as per the provisions of the Code of Criminal Procedure. Accordingly, taxpayers may then avail the remedies provided for in the said Code. Certain offences can be 'compounded' by payment of compounding fees.

Tax claims

i Recovering overpaid tax

In India, as far as income tax is concerned, the taxpayer is not required to make a separate claim for recovery of overpaid taxes: disclosure of such overpayment in the return itself is treated to be sufficient claim for the said recovery. Further, tax authorities are also required to pay interest on delayed disbursal of the refund for which the assessee is eligible. For such a claim to be made, the return must be filed within the time limits specified; though the Central Board of Direct Taxes retains the power to extend time limits in cases of genuine hardships.32

Even if the assessee may be entitled to such a refund, the tax authorities have the power to retain the said amount and utilise the same against any dues outstanding from the assessee. For instance, if the taxpayer is entitled to a refund in respect of one assessment year (say, because there was an overpayment of advance taxes or excess tax was deducted at source), the assessing officer may be entitled to adjust that refund against an outstanding demand for a different assessment year.33 However, prior to such setting-off of the refund, the tax authorities are required to intimate the taxpayer regarding the same.

ii Challenging administrative decisions

Administrative decisions can be challenged in writ courts.34 Article 14 of the Constitution of India guarantees the right to equality; this has been broadly interpreted to provide a guarantee against arbitrariness in state action. Traditional administrative law remedies are also available. The concept of legitimate expectations or promissory estoppel may not be available as against legislative enactments; however, the concepts have been applied in the context of administrative measures. The Indian Supreme Court has rejected the argument that the concept of legitimate expectations or promissory estoppel cannot apply to administrative measures dealing with taxation only because taxation is part of the sovereign activities of the state. It has expressly held that the concepts can be applied to all administrative actions (including those in the domain of taxation), and is not restricted to the trading or commercial activities of governments.35

iii Claimants and related parties

The standing to make claims for refunds is with the taxpayer themselves. This is essentially because the procedure for refunds in direct tax matters involves making a claim in the return of income itself. Under the goods and services tax regime, a separate application must be made by the taxpayer for the refund of any excess tax paid or excess input tax credit available with the assessee. The limitation for filing the said application is two years under the Central Goods and Services Tax Act, 2017. A peculiar prerequisite for claiming refund of indirect taxes is the concept of unjust enrichment. This concept is used not in the sense of a claim for unjust enrichment against the government, but is rather used to deny refunds if the taxpayer is 'unjustly enriched' by the refund claim. This is perhaps similar to the defence of passing on familiar to English restitution lawyers. Accordingly, the taxpayer has to prove that the ultimate burden of the amount claimed was not passed on to the buyers but was retained by the taxpayer. The claims are adjudged and orders are passed either allowing or rejecting the refund claims.36

Costs

Costs as to litigation before the courts and tribunals of the country generally have to be borne by the appellants themselves. However, under exceptional circumstances the courts may award costs to the appellants. In practice, cost awards by courts are extremely rare as regards tax litigation. Accordingly, the costs of the litigation ultimately fall on the particular party. Even if successful, the chances of recovering the costs from the other party are minimal.

Alternative dispute resolution

Indian tax treaties contain provisions relating to Mutual Agreement Procedures (MAP), and resolutions under MAP provisions have also been recognised by Indian courts.37 However, in general, revenue authorities in India have been averse to introduction of alternative dispute resolution mechanisms, such as arbitration. In fact, in various claims arising under bilateral investment treaties (because the effect of a tax measure is considered by investors to be against provisions guaranteeing fair and equitable treatment to investments), arbitration has been invoked by investors. The Revenue authorities have taken an objection that tax matters are not 'arbitrable' under such bilateral investment treaties.38 India has also not accepted the mandatory binding arbitration provisions in the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting).39 In that background, expecting a formal arbitration mechanism under tax laws in India presently does not seem to be realistic.

i Advance ruling

The advance ruling mechanism under the Indian tax laws allowed the assessee to obtain a ruling on a prospective transaction as to whether any and what quantum of tax would be payable on the said transaction. However, given the delays in disposal of applications, the actual effectiveness of the mechanism was open to debate. For an application for advance ruling to be entertained, it was essential that the proposed transactions not be seen as a device for tax avoidance: in cases of tax avoidance, applications for advance rulings may not be maintainable. The ruling given by the Authority for Advance Ruling40 was binding on the assessee as well as the tax authorities: there was no right to appeal, though it was possible to question the correctness in judicial review proceedings before the High Courts.41 The Authority for Advance Rulings in direct tax matters has now been replaced by a new board for advance rulings. The board consists of two members, both being Revenue officers not below the rank of chief commissioner. The advance ruling authority under the Central Goods and Services Tax Act, 2017 also consists of two officer members. The lack of a judicial members in the advance ruling board may cause further concern about the effectiveness of the advance ruling mechanism.

ii Settlement commission

Earlier, the Indian tax laws provided for a settlement commission that had powers to put an end to disputes in lieu of payment by the assessee of a portion of the amounts involved. The settlement procedure allowed the assessee to accept all the demands and pay a portion without entering into any protracted litigation. The Income Tax Settlement Commission ceased to operate with effect from 1 February 2021.42 An Interim Board for Settlement has been instituted for applications pending as on 1 February 2021.43 Initially no applications were to be filed on or after 1 February 2021. However, in order to provide relief to tax payers the date of filing such applications before the Interim Board was extended to 30 September 2021.44

iii Amnesty schemes

To reduce litigation, the government has, from time to time, announced amnesty schemes under which the taxpayers have an option to pay off confirmed tax liabilities without entering into any litigation. Recently, the government announced the Direct Tax (Vivaad Se Vishwas) Scheme Act, 2020, whereunder assessees were given an opportunity to pay 100 per cent of their income tax arrears in lieu of waiver of interest and penalties thereon. Further, with the introduction of the goods and services tax, the government has also announced the Legacy Dispute Resolution Scheme in 2019 to put an end to the litigation under erstwhile laws replaced by the Central Goods and Services Tax Act, 2017.

Anti-avoidance

i Judicial anti-avoidance approaches

The battle between substance and form is familiar to all persons interested in taxation all across the world, and the Indian judiciary has had to confront these issues in several cases. The present approach in this regard found in Vodafone,45 where the Supreme Court considered the various positions taken by the courts on the point. The court appears to have adopted a sliding-scale approach; form is important, but the form may yield if there is no business purpose in a given structure. The court ultimately held:

. . . at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke the 'substance over form' principle or 'piercing the corporate veil' test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant . . .

It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the 'look at' test to ascertain its true legal nature . . .

. . . the onus will be on the Revenue to identify the scheme and its dominant purpose . . .

The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device . . .

ii General anti-avoidance rules

General anti-avoidance rules (GAAR) were officially inserted into the Indian income tax law by the Finance Act, 2013 with the introduction of Chapter X-A in the Income Tax Act, 1961. The rules as introduced by the Finance Act, 2013 were originally to take effect from 1 April 2016. However, the operation of GAAR was postponed to 1 April 2017.

Under the Indian GAAR, the tax officer has been empowered to declare a transaction or a set of transactions to be an 'impermissible avoidance agreement' (i.e., an arrangement, the main purpose of which is to obtain a tax benefit, which inter alia lacks commercial substance). Section 97 of the Income Tax Act, 1961 specifies the type of arrangements may be said to lack commercial substance, enumerating therein several arrangements such as round-trip financing, accommodation entries, offsetting entries, employment of tax havens, etc. Once any transaction has been so declared as an impermissible avoidance agreement by the tax officer, he or she may tax the said transaction on its substance rather than the form (i.e., by disregarding the steps in the transaction undertaken to avoid taxes). Section 100 of the Act specifically provides that provisions of Chapter X-A may be applied in addition to any other basis for determination of the assessee's tax liability. Prior to invocation of the GAAR provisions, an approving panel (consisting of several senior tax officers) has to provide an opportunity of being heard to the assessee and further allow the assessee to file objections against such invocation. It is only after following due procedure that the approving panel may declare the transaction or transactions to be an impermissible avoidance arrangement and refer the matter back to the jurisdictional tax officer for determining the tax payable thereon.

The terms of the GAAR are rather broad and there is presently no clear judicial guidance on the interpretation of these terms. It is possible (subject, of course, to the underlying language) that decisions of other countries in interpreting GAAR provisions may be considered by Indian courts while interpreting the Indian GAAR provisions.

iii Significant economic presence and equalisation levy

India has been at the forefront in addressing tax challenges arising due to digitalisation of its economy, with the recently introduced concepts of significant economic presence and the equalisation levy. The concept of significant economic presence has been introduced by way of Explanation 2A to Section 9(1) of the Income Tax Act, 1961, which is to take effect from 1 April 2022. With the significant economic presence concept, India has sought to create an additional nexus point for non-residents entering into transactions with any person in India, including provision of download of data or software, and soliciting of business activities over and above the de minimis threshold. India has also introduced an equalisation levy of six per cent on services provided by certain non-resident businesses. An expanded equalisation levy of 2 per cent on the e-commerce supply of goods or services made by an e-commerce operator to a person in India.46 Pending the implementation of Pillar One of the OECD's Two-Pillar Solution, India has entered into a bilateral agreement with the United States to continue the levy.47

iv Transfer pricing and other specific anti-avoidance measures

Sections 92 to 92F of the Income Tax Act, 1961 contain the transfer pricing provisions as applicable to intra-group cross-border transactions and certain specified domestic transactions. Under the said provisions, the transactions have to be conducted at an arm's-length price as defined under Section 92F of the Act. The law further provides for a compulsory filing of an accountant's report in respect of all international transactions between associated enterprises. A certain percentage of returns is selected for audit by the transfer pricing officer who then evaluates whether the said transactions were at arm's-length price and passes an order on his or her findings. The law also provides for stringent penalties for violation of the transfer pricing provisions. A person aggrieved by a transfer pricing officer's order may pursue the appeal mechanism under the law (discussed in Section III). Under the present law, transfer pricing provisions are attracted without a requirement on the Revenue to demonstrate any tax avoidance on the facts; indeed, a motive of tax avoidance also has been held to be unnecessary. Indian law also contains other anti-avoidance mechanisms including restrictions on expenses in the case of domestic related-party transactions,48 measures to combat dividend stripping,49 etc.

India has been fairly actively involved in the OECD's base erosion and profit shifting (BEPS) project. The Finance Bill, 2016, considered the introduction of several measures including patent box regime, country-by-country reporting etc. Further, India has introduced thin capitalisation rules with effect from assessment year 2018–2019: although motivated by the BEPS project, the Indian approach prefers a fixed ratio rule rather than a group ratio rule.50

Double taxation treaties

As of December 2019, India has entered into several double-tax avoidance agreements that have legal effect in terms of Section 90 of the Income Tax Act, 1961.

Article 253 of the Indian Constitution empowers the parliament to make laws for giving effect to international agreements. Accordingly, Chapter IX of the Constitution has been included in the Income Tax Act, 1961 to give effect to any double-tax avoidance agreement entered into by India.

Section 90(2) of the Income Tax Act, 1961 explicitly provides that the provisions of double-tax avoidance agreements shall prevail over the provisions of the domestic law to the extent they are beneficial for the assessee.

The courts have also time and again held that a double-tax avoidance agreement shall override the provisions of the Income Tax Act where beneficial.51

Although India is not a signatory to the Vienna Convention on the Law of Treaties, it would be permissible to have recourse to the principles in that treaty (as reflective of customary international law) in interpreting double-tax avoidance agreements. Explanation 4 to Section 90, which was inserted by the Finance Act, 2017, provides that if a term is used in a double-tax avoidance agreement but is not defined under a double-tax avoidance agreement, then, if the same term is defined under the Income Tax Act, 1961 the meaning assigned under the Act will prevail. If a term is defined in the treaty itself then, of course, an amendment to the definition under the Act would not alter the protections granted under the treaty.52 A recent amendment to Section 90 makes entering into any double-tax avoidance agreement subject to the condition of non-creation of any opportunities for non-taxation or reduced taxation through tax evasion or avoidance, in line with the changes in preamble prescribed by the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting.53

In view of the covid-19 pandemic, where a particular taxpayer is facing double taxation due to the forced stay in India, clarification has been issued to remedy double taxation issues not envisaged by the existing double-tax avoidance agreements.54

Areas of focus

Recent years have seen several tax-related claims against India under bilateral investment treaties; these claims include both direct55 as well as indirect56 taxation. Leaving these claims aside, Revenue authorities have been focusing on BEPS-related measures. The ratification of the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting by India marked an important change, and several Indian tax treaties have been modified because of this.

Transfer pricing issues including the transfer pricing treatment of intangibles remains a controversial area. In a recent judgment, the Supreme Court ruled that software sales cannot be characterised as royalties under tax treaty law. Consequently, the Indian withholding tax provisions will not be triggered in case of software sales in the absence of a permanent establishment.57

Important recent changes to the law have been made very recently, and in the next few years disputes involving these new provisions are likely to be focused on the GAAR and thin capitalisation rules, inter alia. There has been much controversy in India over the 'clarificatory' amendments introduced into the Income Tax Act, 1961 by the Finance Act, 2021 relating to the taxation of indirect transfers. The provisions led to several bilateral investment treaty claims against India, including by Vodafone and Cairn (where awards were passed against India). That controversy has been set at rest with the provisions now being given prospective effect, which has also paved the way for settlement of the investment treaty disputes in this regard.

Outlook and conclusions

Recent amendments made to Indian tax laws have sought to rationalise corporate tax rates. Although indirect tax has been reformed through the introduction of the goods and services tax,58 difficulties in implementation are yet to be fully ironed out. In terms of direct taxes, the introduction of electronic-based procedure to the dispute resolution system up to the tribunal stage clearly demonstrates the intent of the government to expedite dispute resolution. However, the sudden and complete removal of any human interaction, together with other concerns about the working of the Faceless Assessment Scheme, has met with constitutional challenges to this electronic-based procedure. In terms of tax disputes, the government appears to have adopted a policy of concentrating on high-value disputes; this is evident from its circulars on monetary thresholds, where the thresholds for filing appeals against decisions favourable to taxpayers have been progressively increased. Certainty, stability and quick resolution of disputes remain essential points of concern.

Footnotes

1 Mihir Naniwadekar, Suyog Bhave and Rucha Vaidya are advocates at The Chambers of Mihir Naniwadekar.

3 Section 139, Income Tax Act, 1961. Foreign companies deriving Indian-sourced income would be required to file returns in India, unless their Indian-sourced income comprises only of certain specified dividends and interest receipts and tax has been deducted at source on these payments (Section 115A(5), Income Tax Act, 1961).

4 Section 139(5), Income Tax Act, 1961. Similarly, a defect pointed out by the Assessing Officer can also be rectified (Section 139(9), Income Tax Act, 1961).

5 For instance, Sections 80A(5) and 80AC, Income Tax Act, 1961 mandate that certain claims for exemptions or deductions must be made in the original return of income itself.

6 CIT v. Pruthvi Brokers & Shareholders (2012) 349 ITR 336 (Bom).

7 Section 153, Income Tax Act, 1961. The earlier limit was 21 months, but this was initially lowered to 12 months and is now nine months.

8 E-assessment Scheme, 2019, was brought into the Income Tax, Act, 1961 (Section 144B): Act 38 of 2020 w.e.f 1 April 2021.

9 Vide Sections 40-43, Finance Act, 2021. Sections 147–149, Income Tax Act, 1961 were completely replaced and a new Section 148A was introduced. Thus, the entire procedure for reassessment has undergone material change.

10 Explanations to Section 148, Income Tax Act, 1961 (as substituted vide Finance Act, 2021) prescribes the kind of information suggestive of income escaping assessment and circumstances where the assessing officer is deemed to have information which suggests that income has escaped assessment.

11 Section 148A, Income Tax Act, 1961 prescribes a detailed procedure to be followed prior to issuance of a reopening notice.

12 Section 149, ibid.

13 CIT v. Max India (2009) 295 ITR 282 (SC).

14 Section 263, Income Tax Act, 1961.

15 Section 3, Taxation And Other Laws (Relaxation And Amendment Of Certain Provisions) Act, 2020. The scope of this provision is the subject of much controversy with numerous reopening notices being issued under the prior scheme of Section 148, Income Tax Act, 1961 relying on this provision. Numerous taxpayers have sought judicial review of these actions of the Indian Revenue Service. The proceedings have been concluded in favour of the taxpayers in some cases before High Courts, and in favour of the Indian Revenue Servicein others.

16 Faceless Appeal Scheme, 2020, Notification No. 76 of 2020, issued by the Central Board of Direct Taxes.

17 Income Tax Appellate Tribunal (for income tax; the Goods and Services Tax Appellate Tribunal) for the good and services tax; and Customs, Excise, and Service Tax Appellate Tribunal for customs and certain taxes replaced by the good and services tax.

18 Central Board of Direct Taxes Office Memorandum dated 31 July 2017.

19 Section 255, Income Tax Act, 1961.

20 Section 260A, ibid.

21 Article 136, Constitution of India, 1950.

22 See Section 261, Income Tax Act, 1961.

23 The present monetary limits below which the Indian Revenue Service's appeals would not be maintainable are set out in Circular No. 17 of 2019 issued by the Central Board of Direct Taxes. The present monetary limits for Central Excise and Service tax appeals by the Revenue are set out in Instruction F.No. 390/Misc/116/2017 issued by Central Board of Excise and Customs.

24 Revenue Bar Association v. Union of India, 2019 SCC OnLine Mad 8910.

25 Rojer Mathew v. South India Bank Ltd, 2019 SCC OnLine SC 1456.

26 Tribunal, Appellate Tribunal and Other Authorities (Qualifications, Experience and Other Conditions of Service) Rules, 2020; upheld by the Supreme Court (with some modifications) in Madras Bar Association v. Union of India, WP(C) No. 804/2020 (judgment dated 27 November 2020).

27 GKN Driveshafts v. Income Tax Officer (2003) 259 ITR 19.

28 Section 270A, Income Tax Act, 1961.

29 Section 271(1)(c), ibid.

30 See Union of India v. Dharmendra Textile Processors (2008) 306 ITR 277 (SC), holding that 'wilful' default was not a requirement for imposition of penalty. The proposition must however be read in light of further case law.

31 CIT v. Reliance Petroproducts (2010) 322 ITR 158.

32 Section 119, Income Tax Act, 1961.

33 Section 245, ibid.

34 Article 226, Constitution of India, 1950.

35 Manuelsons Hotels v. Kerala (2016) 6 SCC 766.

36 See Mafatlal Industries v. Union of India (1997) 5 SCC 536.

37 See Turner Broadcasting Systems v. DDIT (2016) 380 ITR 412.

38 See, for example, Cairn Energy plc v. Republic of India, Decision on the Respondent's Bifurcation Application (19 April 2017), Para 39(b) [recording India's stand that tax disputes are not arbitrable], available at www.italaw.com/sites/default/files/case-documents/italaw8842.pdf.

39 Part VI of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting 2017.

40 The Board for Advance Ruling has substituted the Authority for Advance ruling w.e.f 1 September 2021. (See Central Board of Direct Taxes Notification No. 96/2021 & Notification No. 97/2021, dated 1 September 2021.)

41 Columbia Sportswear Co v. DIT (2012) 346 ITR 161.

42 The provisions of Section 245B, Income Tax Act, 1961 are amended vide Finance Act, 2021 (Section 64, Finance Act, 2021).

43 Section 245 AA is added to Income Tax Act, 1961 vide Section 63, Finance Act, 2021.

44 Central Board of Direct Taxes Order F. No. 299/22/2021-DIR (INV. III)/174 dated 28 September 2021.

45 Vodafone International Holdings v. Union of India (2012) 341 ITR 1 (SC).

46 w.e.f. 1 April 2020.

48 Section 40A, Income Tax Act, 1961.

49 Section 94, ibid.

50 Section 94B, ibid.

51 Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC).

52 See ACIT v. Reliance Jio Infocomm [2019] 111 taxmann.com 371 (ITAT Mumbai).

53 See Section 90(1)(b), Income Tax Act, 1961.

54 Central Board of Direct Taxes Circular No. 2 of 2021.

55 Illustratively, Cairn Energy plc initiated arbitration under the India–UK Bilateral Investment Treaty against India on account of the taxation of indirect transfers (www.italaw.com/cases/5709). A US$1.2 billion award was issued in its favour. Another example is the case of Vodafone Group plc, where an arbitral tribunal in an investment treaty arbitration issued an award in favour of Vodafone. India had challenged the arbitration awards in both cases, but in view of the recent amendments removing the retrospective effect of the relevant provisions, these disputes appear to be close to resolution.

56 Nissan Motor Co. had initiated investment treaty arbitration in respect of certain incentives under the Central Goods and Services Tax Act, 2017. Whether this case involves a 'taxation measure' or not is disputed. See Nissan Motor Co v. Republic of India, Decision on Jurisdiction (29 April 2019) (www.italaw.com/sites/default/files/case-documents/italaw10875.pdf).

57 Engineering Analysis Centre of Excellence Private Limited v. CIT 2021 SCC OnLine 159.

58 See Sections I, III and V.

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