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For private circulation only

MUMBAI SILICON VALLEY BANGALORE SINGAPORE MUMBAI BKC NEW DELHI MUNICH

www. nishithdesai.com

For private circulation only

DESTINATION INDIA: SOLVING TAX PUZZLES & DISPUTES

AT HANNOVER MESSE

Germany| April 13, 2014

Speakers

Ruchi Biyani: Head – European Office

Sahil Kanuga: Senior Member, International Dispute Resolution Practice

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For private circulation only

Indian Tax System

� India has a five-tier appellate hierarchy for resolving

conflicts between the revenue department and

taxpayers.

� Lack of reforms in tax administration also resulted in

unprecedented increase in litigation and backlog of

cases.

� Tax controversies, most notably the Vodafone case

attracted lot of global attention to India's tax

litigation system.

� Tax demand of more than USD 73 billion was under

dispute and litigation before various Courts and

Appellate authorities.

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Supreme Court

High Court

Income Tax Appellate

Tribunal

Income Tax

Commissioner (Appeal)

Assessing/ Transfer

Pricing Officer

For private circulation only

Tax system under India’s New Management

� In a span of a year, India has moved from a castaway market to investor friendly

jurisdiction.

� Reforms in tax policy and administration contributed substantially in re-establishing

credibility of the Indian economy:

• Round-the-clock, round-the-year Government

• Focus on low cost and higher yield tax

• Minimum government and maximum governance

• Avoid sudden surprises and instability in tax policy

• Provide improved and non-adversarial tax administration

• Improved certainty in taxation of cross border transactions

� The existence of an independent judiciary puts India on a different pedestal as

compared to several other countries.

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Tax Puzzle – Cross border Transactions

What is India’s position on taxation of Indirect Transfers?

As per Budget 2015, Indirect Transfer tax applicable only when value of India assets

exceeds INR 10 million AND constitute 50% of value of global assets. It also provides certain

exemptions in case of business reorganisation.

Emphasis on disclosure: Indian companies required to report all indirect transfers – no

minimum threshold

Does transfer pricing provisions apply in case of issue of shares?

Bombay High Court in the case of Vodafone ruled that no transfer pricing to apply in such

cases. Further, Government has decided not to appeal.

Relief to 20 other companies which were involved in similar tax-related dispute with the

Indian Revenue Authorities.

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Tax Puzzle - GAAR

What is GAAR?

GAAR is a broad general anti-avoidance rule to tax ‘impermissible avoidance arrangements’.

Why is GAAR a matter of concern?

GAAR is likely to create significant tax risks for investors and MNCs doing business in India.

GAAR entails wide powers to disregard several conventional tax planning / avoidance

structures, entities and transactions, re-characterize and re-allocate income, shift residence

of entities, and deny tax benefits or even treaty relief. The ambiguities in the statutory

provisions creates significant uncertainty with respect to application of GAAR.

When does GAAR come into force?

GAAR shall come into force from April 1, 2017 (deferred from April 1, 2015).

However, GAAR is relevant to present transactions, arrangements and structures that may

generate income subsequent to April 1, 2017.

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Tax Puzzle – PAN

How much tax will be withheld if PAN is not furnished

by the non-resident recipient of money?

Finance Act, 2009: Provision introduced prescribing that

if PAN is not furnished by non-resident, tax shall be

withheld at 20%

Tax notices issued where tax withheld under treaty

rates- short deduction of tax- interest and penalty.

� Pune Tribunal: Treaty benefits should be allowed to

taxpayers to the extent that they are more

beneficial than the provisions of the ITA.

� Withholding provisions are merely procedural and

cannot trump treaty benefits. Tax should be

withheld at rates under treaty.

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Should treaty benefits be available to

taxpayers that do not file returns but

claim NIL tax under treaty based on TRC?

• Requirement to file returns is only

procedural - should not impact treaty

benefits, so long as TRC is available.

• But non-compliance may result in

penalties (even up to 3 times the

demand amount) under the ITA.

For private circulation only

Risk Mitigation Measures

� Industry and business model based risk identification;

� Strategic plan based on worst case scenario to address legal, regulatory and tax perspectives

� Integrating documentation, disclosures, filings, website, etc. with strategic plan and maintaining consistency between them.

� Advance Ruling

� Bilateral investment treaties (BITs)

� Client attorney - Privileged Communication

� Training and education to employees to

comply with applicable law.

� Gross-ups, indemnities, insurance, or escrow carefully drafted to cover varied risks

� Contractual representations: Parties may include clear representations with respect to various

facts which may be relevant to any potential claim raised by the tax authorities in the relevant

agreements

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Arbitration in Joint Venture & M&A Disputes

� Arbitration Versus Litigation

� Arbitration has evolved as the preferred dispute resolution mechanism

� Neutral seat

� Enforceability

� Confidentiality

� Ad-hoc Vs. Institutional

� Arbitration in Joint Ventures (“JV”) and Mergers and Acquisitions (“M&A”)

predominantly revolve around shareholder disputes

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Statutory remedies

� Oppression and Mismanagement

� Bombay High Court in Rakesh Malhotra v. Rajinder Kumar

Malhotra - oppression and mismanagement claims fall outside

the purview of arbitration proceeding

� Court carved an exception to this rule - if such claims have

been ‘dressed-up’ to avoid arbitration, then it can be referred

to arbitration

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Joinder

� Supreme Court of India - in case of several agreements constituting a

composite transaction, may refer non-signatory parties to arbitration

� Typical JV / M&A transaction has SPA/SSA/SHA/Employment

Agreement(s)/Technology Transfer Agreements and more!

� Single forum to resolve disputes possible: exception and not the rule

� Supreme Court: erstwhile Director of a signatory can be impleaded

to arbitration proceedings if they have perpetrated fraud upon the

parties

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Director’s liability & Indemnity

� Is your nominee director exposed to liabilities in India under Indian law?

� How does indemnity work in the cross border context?

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Arbitration: the law as it stands

� Bhatia International v Bulk Trading SA (”Bhatia”) - Part I of the Arbitration and

Conciliation Act, 1996 is applicable to even foreign seated arbitrations, unless

expressly or impliedly excluded by the parties – resulted in increased judicial

interference

� Bharat Aluminium v Kaiser Aluminium (“BALCO”) overruled Bhatia - adopted the

territoriality principle - the law governing the arbitration would be determined by

the seat of the arbitration

� BALCO - prospectively applicable - only applicable to arbitration agreements entered

into after September 06, 2012

� Two parallel streams of law – developing concurrently

� Of late, we see a pro-arbitration stance of minimal/reduced judicial interference in

arbitration related matters

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THANK YOU!

To know more about the firm

visit our knowledge site

www.nishithdesai.com

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