S.R. Wadhwa, Advocate 1 TAX CONTROVERSIES AND LITIGATION IN INDIA - AVOIDANCE AND THE SOLUTIONS

S.R. Wadhwa, AdvocateS.R. Wadhwa, Advocate 11

TAX TAX CONTROVERSIES CONTROVERSIES

AND LITIGATION IN AND LITIGATION IN INDIA - AVOIDANCE INDIA - AVOIDANCE

AND THE AND THE SOLUTIONSSOLUTIONS


BY:BY:

S.R. Wadhwa S.R. Wadhwa Ph. No. 9810414433Ph. No. 9810414433

Email: Email: [email protected]:Website: wadhwataxconsultant.com wadhwataxconsultant.com


While presenting the Budget for the Financial While presenting the Budget for the Financial Year 2014-15, the Finance Minister in his Year 2014-15, the Finance Minister in his budget speech mentioned that tax demand of budget speech mentioned that tax demand of more than Rs 4 lakh crores is under dispute more than Rs 4 lakh crores is under dispute and litigation. He further stated that the and litigation. He further stated that the Government is committed to provide a stable Government is committed to provide a stable and predictable tax regime that will be investor and predictable tax regime that will be investor friendly and spur growth. The Finance Act, friendly and spur growth. The Finance Act, 2014 has, therefore, provided several 2014 has, therefore, provided several measures to avoid tax controversies and measures to avoid tax controversies and litigation. The important ones are the litigation. The important ones are the following:-following:-


(i)(i) All fresh cases arising out of the All fresh cases arising out of the retrospective amendments of 2012 in retrospective amendments of 2012 in respect of indirect transfers and coming to respect of indirect transfers and coming to the notice of Assessing Officer will be the notice of Assessing Officer will be scrutinized by a High Level Committee to be scrutinized by a High Level Committee to be constituted by the CBDT before any addition constituted by the CBDT before any addition is made. The Committee has since been is made. The Committee has since been constituted. It will consist of four members, constituted. It will consist of four members, namely; the (1)Joint Secretary Foreign Tax & namely; the (1)Joint Secretary Foreign Tax & Research I as Chairman and (2) the CIT Research I as Chairman and (2) the CIT (Appeals) (3) Joint Secretary (Tax Planning (Appeals) (3) Joint Secretary (Tax Planning and Legislation-I) and (4) Director, Foreign and Legislation-I) and (4) Director, Foreign Tax & Research I as its members. The Tax & Research I as its members. The Committee will give its decision after Committee will give its decision after hearing the assessee and within a period of hearing the assessee and within a period of 60days or earlier if the assessment will be 60days or earlier if the assessment will be getting time-barred.getting time-barred.


(ii)(ii) The facility of obtaining an Advance Ruling The facility of obtaining an Advance Ruling has been extended to resident tax payers of has been extended to resident tax payers of specified categories as also for specified categories as also for determination of an impermissible tax determination of an impermissible tax avoidance arrangement within the meaning avoidance arrangement within the meaning of Chapter X-A of the Act. of Chapter X-A of the Act.

(iii)(iii) Authority for Advance Rulings has been Authority for Advance Rulings has been strengthened by constituting additional strengthened by constituting additional benches to consist of a Vice-Chairman- a benches to consist of a Vice-Chairman- a retired Judge of the High Court, a Revenue retired Judge of the High Court, a Revenue Member from the IRS of the rank of Member from the IRS of the rank of Principal/CCIT and a law Member from the Principal/CCIT and a law Member from the Indian Legal Service of the rank of Additional Indian Legal Service of the rank of Additional Secretary to the Government of India.Secretary to the Government of India.


(iv)(iv) The scope of Settlement Commission has been The scope of Settlement Commission has been enlarged so that more tax payers can approach the enlarged so that more tax payers can approach the Commission for settlement of their tax disputes. The Commission for settlement of their tax disputes. The definition of “case” under clause (b) of section 245A definition of “case” under clause (b) of section 245A has been amended to provide the facility to the has been amended to provide the facility to the following type of cases:-following type of cases:-

(a)(a) Cases where a notice u/s 148 for assessment or re-Cases where a notice u/s 148 for assessment or re-assessment has been issuedassessment has been issued

(b)(b) Pending proceedings for making fresh assessment Pending proceedings for making fresh assessment in pursuance of an order u/s 254, 263 and 264 of in pursuance of an order u/s 254, 263 and 264 of the Income-tax Act, 1961 the Income-tax Act, 1961

(c)(c) Pending search and seizure cases where notice u/s Pending search and seizure cases where notice u/s 153A or 153C have been issued153A or 153C have been issued

(d)(d) Regular assessments pending before the Assessing Regular assessments pending before the Assessing Officer Officer

(e)(e) New cases where assessments not made.New cases where assessments not made.

Situations not coveredSituations not covered• Cases pending in appeals before the CIT (Appeals)Cases pending in appeals before the CIT (Appeals)• Completed assessments where no notice u/s 148 Completed assessments where no notice u/s 148

issued issued


(v)(v) Setting up of a High Level Committee to Setting up of a High Level Committee to interact with trade and industry on a interact with trade and industry on a regular basis ascertaining areas where regular basis ascertaining areas where clarity in tax laws is required. Based on clarity in tax laws is required. Based on the recommendation of the Committee, the recommendation of the Committee, the CBDT and CBEC shall issue the CBDT and CBEC shall issue appropriate clarification wherever appropriate clarification wherever considered necessary on the tax issues considered necessary on the tax issues within a period of two months. within a period of two months.


Transfer pricing Transfer pricing

(vi)(vi) Strengthening the administrative set up of Strengthening the administrative set up of Advance pricing Agreements to expedite the Advance pricing Agreements to expedite the disposal of applications.disposal of applications.

(vii)(vii) The Finance Act, 2014 has inserted sub-The Finance Act, 2014 has inserted sub-section (9A) in section 92CC w.e.f. section (9A) in section 92CC w.e.f. 01.10.2014 to provide “roll back” in the 01.10.2014 to provide “roll back” in the Advance pricing agreement scheme so that Advance pricing agreement scheme so that an advance pricing agreement entered into an advance pricing agreement entered into for future transaction may also be applied to for future transaction may also be applied to the international transaction in previous four the international transaction in previous four years in special circumstances. years in special circumstances.


The sub-section reads as follows:-The sub-section reads as follows:-

““(9A) The agreement referred to in sub-section (9A) The agreement referred to in sub-section (1), may, subject to such conditions, (1), may, subject to such conditions, procedure and manner as may be procedure and manner as may be prescribed, provide for determining the prescribed, provide for determining the arm’s length price or specify the manner in arm’s length price or specify the manner in which arm’s length price shall be which arm’s length price shall be determined in relation to the international determined in relation to the international transaction entered into by the person transaction entered into by the person during any period not exceeding four during any period not exceeding four previous years preceding the first of the previous years preceding the first of the previous years referred to in sub-section (4), previous years referred to in sub-section (4), and the arm’s length price of such and the arm’s length price of such international transaction shall be determined international transaction shall be determined in accordance with the said agreementin accordance with the said agreement”.”.


(viii)(viii) Introduction of “range concept” for Introduction of “range concept” for determining the arm's length price. The determining the arm's length price. The Finance Act, 2014,the has inserted third Finance Act, 2014,the has inserted third proviso to sub-section (2) of section 92C proviso to sub-section (2) of section 92C w.e.f. 01.04.2015 which reads as follows:-w.e.f. 01.04.2015 which reads as follows:-

““Provided also that where more than one Provided also that where more than one price is determined by the most appropriate price is determined by the most appropriate method, the arm’s length price in relation to method, the arm’s length price in relation to an international transaction or specified an international transaction or specified domestic transaction undertaken on or after domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed the 1st day of April, 2014, shall be computed in such manner as may be prescribed and in such manner as may be prescribed and accordingly the first and second proviso accordingly the first and second proviso shall not applyshall not apply”.”.


(ix)(ix) Transfer pricing regulations amended to Transfer pricing regulations amended to allow multiple year data allow multiple year data

(x)(x) Safe harbor rules - For determination of Safe harbor rules - For determination of arm's length price u/s 92C or 92CA, the arm's length price u/s 92C or 92CA, the CBDT has issued rules for safe harbor to CBDT has issued rules for safe harbor to eligible assessees by the Income-tax eligible assessees by the Income-tax (Sixteenth Amendment) Rules, 2013 w.e.f (Sixteenth Amendment) Rules, 2013 w.e.f 18th September, 2013. “Safe harbor” 18th September, 2013. “Safe harbor” means circumstances in which income-tax means circumstances in which income-tax authorities shall accept the transfer price authorities shall accept the transfer price declared by the assessee. The ‘Safe Harbor” declared by the assessee. The ‘Safe Harbor” rules are contained in rule 10TA to 10TG of rules are contained in rule 10TA to 10TG of Income-tax Rules, 1962 and the application Income-tax Rules, 1962 and the application for opting safe harbor is to be applied to the for opting safe harbor is to be applied to the AO in Form No. 3CFA. AO in Form No. 3CFA.


The safe harbor rule is applicable to the following types of The safe harbor rule is applicable to the following types of international transactions:-international transactions:-(1)(1) Provision of software development servicesProvision of software development services(2)(2) Provision of information technology enabled servicesProvision of information technology enabled services(3)(3) Provision of knowledge processes outsourcing Provision of knowledge processes outsourcing

servicesservices(4)(4) Advance intra group loansAdvance intra group loans(5)(5) Corporate guaranteeCorporate guarantee(6)(6) Contract research and development services wholly Contract research and development services wholly

or partly relating to software development services or partly relating to software development services (7)(7) Contract research and development services wholly Contract research and development services wholly

or partly relating to generic pharmaceuticals drugs or partly relating to generic pharmaceuticals drugs (8)(8) Manufacturing and export of core auto componentsManufacturing and export of core auto components(9)(9) Manufacturing and export of non-core auto Manufacturing and export of non-core auto

components.components.

Presumptive rates of profitability have been Presumptive rates of profitability have been prescribed whose acceptance by the tax payers will prescribed whose acceptance by the tax payers will absolve them of the responsibility of proving that the absolve them of the responsibility of proving that the related party transactions are at arm’s length.related party transactions are at arm’s length.


(xi)(xi) The CBDT has, from time to time, issued instructions The CBDT has, from time to time, issued instructions to the income-tax authorities fixing the monetary to the income-tax authorities fixing the monetary limits for filing appeals before the Tribunals, High limits for filing appeals before the Tribunals, High Courts and the Supreme Court. The latest Instruction Courts and the Supreme Court. The latest Instruction No. 5 of 2014 dated 10.07.2014 has fixed the No. 5 of 2014 dated 10.07.2014 has fixed the following monetary limits of tax effect for filing following monetary limits of tax effect for filing appeals:-appeals:-

(i)(i) Appeal to the Tribunal – Rs. 4,00,000/-Appeal to the Tribunal – Rs. 4,00,000/-(ii)(ii) Appeal u/s 260 before the High Court – Appeal u/s 260 before the High Court –

Rs. 10,00,000/-Rs. 10,00,000/-(iii)(iii) Appeal before the Supreme Court – Rs. Appeal before the Supreme Court – Rs.

25,00,000/-25,00,000/-

Not the only factor. Appeal to be filed strictly on Not the only factor. Appeal to be filed strictly on merits. (Instruction No. 279/Misc-142/2007-IT(Pt) merits. (Instruction No. 279/Misc-142/2007-IT(Pt) dated 10.07.2014)dated 10.07.2014)


Reference to Dispute Resolution Panel Reference to Dispute Resolution Panel (section 144C of the Act) (section 144C of the Act)

(xii)(xii) An “eligible assessee” namely, any person in An “eligible assessee” namely, any person in whose case variation has been made by whose case variation has been made by Transfer Pricing Officer and any foreign Transfer Pricing Officer and any foreign company can file objection against the draft of company can file objection against the draft of proposed assessment order before the Dispute proposed assessment order before the Dispute Resolution Panel constitute by the Board. The Resolution Panel constitute by the Board. The panel comprises of three Principal panel comprises of three Principal Commissioners or Commissioner of Income-tax Commissioners or Commissioner of Income-tax who hear the objection and issue directions to who hear the objection and issue directions to the Assessing Officer for passing final order.the Assessing Officer for passing final order.


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S.R. Wadhwa, Advocate 1 TAX CONTROVERSIES AND LITIGATION IN INDIA - AVOIDANCE AND THE SOLUTIONS