Taxation

Important cases that have shaped the tax landscape in the country

The tax landscape has been changing drastically, together with assessees and tax authorities looking ahead for more advancement and innovation in the field of the taxation system, which is basically used for making the taxation process more effective and relevant. The advancement in the various dimensions of the taxation process has led to a great impact and influence and can be considered the next wave in business transformation. The present article shall discuss the Important cases that have shaped the tax landscape in the country.

The Vodafone Case 2012 (Cross Border M&A Transactions)

This was a landmark case with regard to cross-border M&A Transactions. The important aspects of the same are discussed below –

In 2007, Hutchinson Essar, an Indian telecom company, was acquired by the Vodafone Group Plc for $11 billion. The transaction resulted in a dispute with the Indian tax authorities, who considered Vodafone to be liable for capital gains tax in India. Vodafone, however, argued that the transaction was not taxable in India as it was a transfer of shares between two non-Indian entities.

Court rulings and appeals

Bombay High Court:

In the Vodafone tax case, recovery notices were sent by the Income Tax Department of India to Vodafone, which prompted the company to seek refuge in the Bombay High Court. The court’s ruling on September 8, 2010, favoured the Income Tax Department holding that the purpose of the agreements between the two foreign companies was to gain control over the Indian company. Therefore, the transaction attracts Indian municipal law, including the Indian Income-tax Act. The court referred to this case as a matter of tax evasion rather than tax avoidance.

Supreme Court of India: 

Vodafone filed an appeal against the Bombay High Court ruling to the Supreme Court of India, which ruled in Vodafone’s favour on January 20, 2012. The Supreme Court observed that the transaction occurred between two non-resident entities and was executed outside India and thus doesn’t come under the Indian tax jurisdiction, leading to the quashing of the order of the Indian tax authorities for tax payment. A review petition was filed by the government of India  \against the Supreme Court’s ruling on February 17, 2012, but on March 20, 2012, it was rejected by the Apex Court, marking a significant setback for the government.

An Unprecedented Move: 

The decision of the Apex Couty in 2012 was disapproved by the Indian government, which ruled in favour of Vodafone. In an unexpected move to get around the Supreme Court’s ruling, the then-finance minister, Mr Pranab Mukherjee, introduced a retroactive amendment to the Income Tax Act of 1961 which confirmed the validity of the tax levied against Vodafone. According to the government, the amendment was created for the removal of any uncertainty and to provide clarity. However, this action diminished India’s standing as a desirable investment location.

Maruti Suzuki vs Commissioner of Income Tax 2015 (Transfer Pricing)

The Hon’ble Delhi High Court (HC) on 11^th December 2015 pronounced a landmark judgement in the case titled Maruti Suzuki India Limited Vs Commissioner of Income Tax^[,  with regard to the transfer pricing (TP) adjustment on account of advertisement, marketing and sales promotion (AMP) expenditure incurred by Maruti Suzuki India Limited (MSIL). Certain TP adjustments were made by the tax authorities by alleging the creation of marketing intangible for its associated enterprise (AE) Suzuki Motors Corporation (SMC) through the excess AMP expenditure incurred by MSIL vis-à-vis the comparable companies for which it should have received arm’s length compensation from SMC.

It was held by the Hon’ble Delhi High Court (HC) that the alleged excess AMP expenditure incurred by MSIL couldn’t be regarded as an international transaction in the absence of any agreement or arrangement between the company and its AE. It was also held by the HC that the AMP expenditure incurred by MSIL benefited the enterprise itself in the manner of increased market share in India and year-on-year growth of its turnover.

The HC further held that the quantitative approach adopted by the tax authorities for the assertion of the existence of an international transaction on the basis of the excess AMP expenditure wasn’t as per the regulations of transfer pricing in India The receipt of any benefits by the SMC is only incidental. Further, the extent to which AMP spent on MSIL has arisen the benefit of the “Suzuki” brand is a complex exercise and can’t be ascertained in the absence of clear guidelines by the statute.

Dwarkadish Spinners Limited Vs. DCIT (2019)  – Approach of ITAT towards Section 68 of the Income Tax Act

It was held that the receipt of the alleged funds by the assessee company is through companies listed in the stock exchange (SE), which are very much in the public domain. The tribunal also  examined the relevant pages of the paper book, which reflects that sufficient documentary evidence was filed by the assessee company  before the appropriate authorities like the acknowledgement of return of income, and balance sheet as on 31st March .2012 for the impugned A.Y. 2012-13, bank statements, PAN etc., of both the companies thereby discharging its initial onus of proving  the transaction’s genuineness and creditworthiness in the matter and have met the prerequisites of Section 68 of the I.T. Act, 1961

The tribunal further observed that it is already a settled law that in case the assessee has successfully proved the genuineness and creditworthiness of the lenders, the said transaction won’t be subject to any additions as per section 68 of the IT Act.

 The tribunal declined to accept the reasoning recorded by the Ld. CIT(A), and confirmed the part addition made by the assessee with regard to 2 creditors totalling Rs. 32,67,859/-and, allowing the grounds of the assessee, directing the A.O. for the deletion of the entire addition confirmed by the Ld. CIT(A)

Union of India Vs Ashish Aggarwal – Section 148 0f IT Act 1961 (2021)

The Supreme Court pronounced a landmark judgement, namely Union of India Vs Ashish Aggarwal, concerning the issue of assessment and re-assessment under Section 148 of the IT Act, which is discussed below –

 The issue, in this case, was whether old provisions for re-assessment were being substituted byFinance Act 2021 and whether such old provisions were not applicable on or after 01.04.2021.

• The Apex Court had held that the respective High Courts were right in holding that the benefit of new provisions should be made available  in the event of the issuance of a  re-assessment notice under Section 148 of the IT Act   on or after 1st April 2021
• The Supreme Court completely agreed with the opinion of the various High Courts in pronouncing the same. 
• These judgments wouldn’t lead to re-assessment proceedings. Thus, some freedom should be given in this respect which the High Courts could have done so. The Revenue can’t be remedied, and the object and purpose of re-assessment proceedings can’t be frustrated.
• The Apex Court supported the view of different High Courts that the notice under section 148 of the IT Act as per the old law couldn’t be issued after 1st April 2021, i.e., the date of enforcement of the new law of re-assessment. 
• The notice issued under section 148 of the IT Act in accordance with the old law during the period between 1-4-2021 to 30-6-2021 shall be considered as a notice issued under section 148A (b) of the newly enforced law in this regard.
• The Assessing Officer is obligated to provide the reasons recorded and other material in his possession within 1 month to the assessee on whose basis the officer has issued the notice to the assessee.
• Upon receiving the material/reasons, the assessee must furnish the objections/reply to such reasons within 15 days.
• After the receipt of the objections, the Assessing Officer shall dispose of the same by passing an order as per section 148A(d) after stating if the case is still relevant for issuing a notice under section 148
• If it is not a fit case for issuing a notice under section 148, the assessee shall be informed accordingly. 
• Where it is deemed as a fit case for issuing a notice under section 148, such notice shall be issued together  with the order under section 148A(d)
• All the rights and defences available to the assessee under section 149(1) would be available in respect of these proceedings.
• This judgment shall apply in respect of the cases, irrespective of being pending before the apex court in the event of an issuance  of notice under section 148 under old law has been issued during the period between 1st April 2021 to 30 June 2021 

PCIT Vs Soorajmul Nagarmull (2022)  ( Validity of Cessation  of Liability)

The court didn’t persuade the revenue’s submission as the entire aspect regarding cessation of liability was analysed by a 5 -judge bench of the Hon’ble Apex Court, holding that the limitation doesn’t extinguish the debt or precludes its enforcement until and unless the debtor chooses to avail himself of the defence along with specifically pleading for the same. Therefore, the Bombay Dyeing decision was correctly referred to in Sugauli Sugar Works for the aforesaid legal proposition.

The court had appreciated the fact that the AO examined the creditors upon them appearing in response to summon and acknowledged the liability, and if this principle is applicable, merely an entry in the books of account made unilaterally in the absence of any information by the creditor can’t provide the entitlement to the debtor for saying about the extinguishment of liability The court also distinguished b/w receipt on capital account and other receipts and dismissed the department’s appeal.

The tribunal had rightly noted the undisputed factual position, noting that there wasn’t any dispute regarding the assessee carrying forward the impugned liability in its books of account for a time period of almost 30yrs without any question being raised by the department in all the intervening assessment years (AY)  in question.

The ld tribunal also noted that the creditors had provided written replies in response to the summons that retaliated their liability and also the fact that the appellant had settled some creditors even post  31st March 2001, thereby fulfilling their duty of giving evidence with regard to the existence of the liability at the end of the year.

There was a miserable failure on the part of the assessing officer towards establishing and proving the existence of cessation of liability Though there has been the insertion of  Explanation 1 -4 Sec- 41(1)  for treating the remission or cessation of any liability or by a unilateral act on the debtor, the issue must continue to be litigated.

Mansarovar Commercial Pvt Ltd vs Commissioner of Income Tax, Delhi, April 2023

The Supreme Court has ruled that as per the Income Tax Act, 1961¹, the domicile or the registration of the company isn’t at all relevant, and the determinate test is the place where the sole right of management of the company and the control of the company lies. The place where the “head and seat” and the control of the company lie. The place where the “head and seat” and the “directing power” of the affairs of the company and the control and management is shown must not merely be theoretical control and power, i.e., not de jure control and power. Instead of holding that a non-Indian company is a resident in India during any previous year, it must be established that such a company de facto controls and manages its affairs in India.

Conclusion

Because of the taxation advancements, there is undoubtedly a good quality change in audits and the manner of the taxation process. Also, the government helps in getting digitalised platforms for accessing the assessee’s data by analysing and sharing the information with other sources. The traditional tax function operating models have changed a lot and need to be changed rapidly for tackling the inquiries and obstacles of audits.

In India, taxation reforms have played a vital and positive role in the field of both direct and indirect taxes. Also, due to the IT database, there has been increased collaboration between various agencies. These important case laws have indeed helped in shaping the tax landscape of the country.

Read Our Article: Deductions Available Under the Income Tax Act, 1961

1. https://en.wikipedia.org/wiki/The_Income-tax_Act,_1961