What is Tax Litigation?
Tax Litigation under the Indian judicial system is time consuming. The adjudicating and quasi-judicial appellate authorities act as a fact finding body under the Income Tax Act, 1961 and the constitutional authority .i.e. High Courts and Supreme Court of India.
Currently tax litigation in India takes more than two decades to reach its decisiveness. As per recent report of CAG (Comptroller and Auditor General of India) there are Rs.2.2 lakh crore cases are locked up in appeal out of which in most of the cases the government is the appellant. As the tax authorities are getting more aggressive the number of cases appealing in the court are increasing.
Also most of the tax litigation cases pending at various forums are of multinationals
Tax Litigation often arises in the following areas
- Individual and Partnership matters
- Charitable and nonprofit making institutions
- Cross border transactions on permanent establishment and ascription
- Transfer Pricing Matters such as marketing intangibles, management expenses cross border, compensation for captive service , royalty payments , transfer pricing methods and comparable.
- Matters concerning withholding of taxes
- Corporate Restructuring
- Tax Liability related to Royalty Income
- Valuation issues under the Customs Act,1962
Categories of Tax Litigation
- Civil Tax litigation
- Criminal Tax Litigation
- Civil Tax Litigation are regulated and handled by following legislations:
- Income Tax Act 1961 (Chapters XIX-A, XIX-B and XX).
- Income Tax Rules 1962.
- The Constitution of India 1950.
- Double taxation avoidance agreements.
- Income Tax (Dispute Resolution Panel) Rules 2009.
- Income Tax (Appellate Tribunal) Rules 1963.
- Authority for Advance Rulings (Procedure) Rules 1993.
- Income Tax Settlement Commission (Procedure) Rules 1997.
- Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 (to be enforced from 1 April 2016
- Code of Civil Procedure 1908.
- Central Excise Act 1944.
- Customs Act 1962.
- Finance Act 1994 (Service Tax).
- State-level value added tax, sales tax, entry tax, and luxury tax and advertisement tax legislation.
- Goods and Services Tax Act, 2016 (likely to be implemented from 1 July 2017).
Given the lawful maze that taxpayers often face, u judicial cost benefit analysis is required to be done which can help to arrive at a decision of whether it is worthwhile to litigate or the issue is more viable to compromise.
Corporate Tax Litigation Update
1) Permanent Establishment
PE Taxation continues to occupy significant focus in India which indicate the following:
- Sequence of Ruling given by Judicial Authorities such as Authority for Advance Ruling, Tribunals and courts)
- Rulings indicate decisions which are fact specific. However sometimes diverse views are also taken
- Tax surveys is an important tool used by tax administration to extract facts
Key Issues faced in PE establishment based on the recent pronouncements are
(i) Sales and Distribution Activities
- X Co has a LO in India which is carrying out Sales and marketing activities on behalf of X Co.
- LO provides services of identification of customers, understanding their requirements, participating in negotiation.
- Indian Customer directly places order with X Co and directly gets the delivery
- LO assists in the logistics services
- Therefore the activity of B constitutes Agency PE of X Co.
- Case Law : Bangalore ITAT confirms that Korean Company’s LO is PE in India
(ii) Procurement activities
- X Co. is a wholesaler & retailer of goods carrying out operations worldwide. It also purchases manufactured goods from vendor of India.
- The procurement function on behalf of X Co. in India is carried out by LO.
- LO assists in vendor identification, collection of information, coordinating and acting as a communication channel
- Therefore activity of LO constitute PE of X Co. In India
- Case Law: Authority for Advance Ruling has held that Lo constitutes PE of X Co. In India
2) Other Issues
a) Implication on gift of shares of Indian company
The transfer of shares by Indian subsidiary by the applicant to its Singapore subsidiary subject to business re-organization scheme without consideration constitutes gift does not attract capital gain tax liability in India
b) Mauritius Treaty Implications
As per the Mauritian DTAA agreement the capital fain arising to the tax payer is not taxable in India
c) Taxability on Promissory notes
Discounting of bills does not result to any debtor or creditor relationship. Hence the discounting of bills is not taxable in India
d) Taxability of Data Processing Fees
As per the India-UK Treaty, there is no transfer of technical skill or know how while providing the services. It means that UK is not rendering any managerial or technical services therefore such payment received is not taxable
Key Services offered by us
- Helping in strategizing tax litigation
- Exploring alternative tax dispute resolution mechanisms
- Assistance in representation before Commissioner of Income tax (Appeals), Dispute Resolution Panel, Income Tax Appellate Tribunal
- Assistance in preparation of advance ruling application and representation before AAR
- Assisting, counseling, preparing, representing appeals and petitions before High Courts and Supreme Court