Tax Dispute Resolution

e
=oO ODE
rf i eH trial balance Ast oe
_D oe, COST’ + 2 5 common share roe Forel le asing
LO 2 wes = & future wale y
¢ tm proprietorship v BE
eka, taxes: °account §U transfer tang land SF = business
ates eee inventory Ccassets money
ou aC a ese payable. und
© receivable |benchmarking
TAX DISPUTE RESOLUTION

Challenges and Opportunities for India
[Derived from Challenges of Indian Tax Administration]
ookkeeping profi > finances4 budger balance

ookKeeping MFOTIt. = assests “capital debit
ap te
Oe 4|
a) a
A v itis allocation
D
oe dD)
preferred share
Y a Spy
$= oO : value Ey; CO trialbalance £9 CO) deposit market
a , ae, Oo © common share YY manger BF S
S v investment O OQ. oO proprietors h Ip Xp 5 a number © Fe >
oS transfer ea pr D 5s
= 3 Sh as
c C) 35 oe, mEE
Mukesh Butani
Foreword by
Arun Jaitley
Minister of Finance
Corporate Affairs and Information & Broadcasting
Government of India
Dr Isher Judge Ahluwalia

Chairperson, ICRIER
@ LexisNexis’ ba gee
a CREF
SS
Akout the Book
This book provides a holistic view of how
tax policies have shaped in India, the
importance of dealing with tax disputes
and suggestions to improve, to tax
payers, tax practitioners, tax
administrators and tax administrative
and judicial forums. It’s meant to serve
as a guide to tax policy makers to choose
the practices adopted by nations and
consider adopting them as India’s
changing landscape will necessitate
implementation of ‘out of box’ ideas to
address the situation and make our tax
system modern and responsive to
change. Global tax systems of the world
will converge over a period of time and
the convergence would be far more
rapid, given that India is now active in
shaping G20 tax policies as part of the
OECD lead Base Erosion and Profit
Shifting (BEPS) project. This will necessi-
tate India not just to embrace polices on
transparency and information exchange
and protection of its tax base, but equally
contribute in timely resolution of treaty-
related disputes and gear up its policies
to first avoid disputes and if disputes are
inevitable, to seek timely resolution.
Digitized by the Internet Archive
In 2022 with funding from
Kahle/Austin Foundation
https://archive.org/details/taxdisputeresolu0000unse
Tax Dispute Resolution
54045000860262
Norton Rose Fulbright

} More London Riverside
London
era OANH
‘Tax Dispute Resolution
Mukesh Butani
B Com, LL.B, FCA.
Foreword by
Arun Jaitley
Minister of Finance
Corporate Affairs and Information & Broadcasting
Government of India
Dr Isher Judge Ahluwalia

Chairperson, ICRIER
@ LexisNex
EXISINEXIS* Exes
SSS
@ LexisNexis:
This book is a publication of LexisNexis
(A Division of RELX India Pvt Ltd)
14th floor, Building No 10, Tower-B, DLF Cyber City, Phase-lII,
Gurgaon-122002, Haryana, India.
Tel : + 91 124 4774444 Fax: + 91 124 4774100
Website : www.lexisnexis.co.in / E-mail : help.in@lexisnexis.com
© ICRIER
The publishing rights are reserved and vested exclusively with LexisNexis (A Division of RELX India Pvt
Ltd). No part of this publication may be reproduced or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, or stored in any retrieval system of any nature without
the written permission of the copyright owner and the Publisher.
Tax Dispute Resolution-Challenges and Opportunities for India [Derived from Challenges of Indian Tax
Administration], First Edition, 2016
ISBN: 978-93-5035-672-2
Printed by: Sai Printo Packs Pvt. Ltd., A-102/4, Okhla Industrial Area, Phase-II, New Delhi-110 020
This book can be exported from India only by the publisher. Infringement of this condition of sale will lead
to civil and criminal prosecution.
Note: Due care has been taken while editing and printing this book. Neither the author nor the publisher of
the book hold any responsibility for any mistake that may have inadvertently crept in.
The publisher has taken all care and effort to ensure that the legislative provisions reproduced here are
accurate and up to date. However, the publisher takes no responsibility for any inaccuracy or omission
contained herein for advice, action or inaction based hereupon. Reference must be made to the Official
Gazette issued by the Government of India for the authoritative text of any Act, Rule, Regulation, Notification
or Order.
The publisher shall not be liable for any direct, consequential, or incidental damages arising out of the use
of this book.
In case of binding mistake, misprints, or missing pages etc., the publisher’s entire liability, and your
exclusive remedy, is replacement of this book within one month of purchase by similar edition/reprint of
the book.
Printed and bound in India.

. ah Arun Jaitley
wi us a wat Minister of Finance, Corporate Affairs
NEU Bhd and Information & Broadcasting
India
9" June, 2016
Foreword
I have reiterated on several instances that Tax Policy, administration and its certainty
have been the most important priority for our Government. It is a necessity to
promote domestic and foreign investment. Since our Government came to power, we
have come a long way in addressing this critical need at the policy and administrative
level. Our Government has initiated several policy reforms aimed at improving the
ease of doing business leading to a jump of 16 places for India to 55" position among
140 countries in the World Economic Forum’s Global Competitiveness Index. India’s
tax to GDP ratio is amongst the lowest in emerging markets, a point succinctly made
by the author and it is imperative for a country of our size to materially improve tax
compliance so that we are able to meet our financing commitments for infrastructural
and developmental needs. To reduce tax litigation, we have introduced a host of
actions including addressing the backlog of cases, accepting several recommendations
of Tax Administrative Reforms Commission (TARC), deferment of GAAR, expanding
the reach of Authority for Advance Ruling (AAR) among others. Our Government is
committed to tax reforms, in general, and implementing GST, in particular, and I am
confident that we shall be able to get the constitutional amendment, which shall pave
the way for a landmark tax reform.
It is interesting to read the research findings of the author on history of tax
reforms, its significance in shaping economic policies, importance of enhancing tax
collections, compliance, and taxpayer experience. The author with three decades
of experience in the tax profession has not just brought key data points on need to
grow taxpayer base in India and revenue foregone, but also agrees that phasing of tax
exemptions is the way forward. His findings to enhance effectiveness of the existing
dispute resolution framework and its effectiveness is noteworthy as he dwells upon
the importance of alternate dispute resolution. He has also brought out the future of
Tax policy and howit is likely to take shape in the context of new laws such as GST and
Contd...2/-
Ministry of Finance : 134, North Block, New Delhi-110001, Tel. : 23092810, 23092510 Fax : 23092828
Ministry of Information & Broadcasting : Room No. 560, A Wing, Shastri Bhawan, New Delhi-110001,
Tel. : 23386892, 23384340 Fax : 23384286
Residence : 2, Krishna Menon Marg, New Delhi-110011, Tel. : 23794990, 23794556 Fax : 23794543
sen cecil Arun Jaitley
faa, Minister of Finance, Corporate Affairs
Ua GAT FT FAT wat and Information & Broadcasting
aR India
pivotal role that India shall play in its engagement with the world as part of the G20
lead Base Erosion and Profit Shifting (BEPS) project. The author has drawn from his
research and experience in reviewing the global best practices and experiences India
can draw upon to improve its impact. The author with his domain knowledge has given
a 360 degree view of tax legislation, administration and legal framework bringing out
interesting findings on experiences of Advanced nations and large Emerging Markets.
In conclusion, I would like to say that the book presents a holistic view of how
tax policies have shaped in India, the importance of dealing with tax disputes and
suggestions to improve. The publishers, researchers and author have done a splendid
job in bringing to fore an important topic with their intense research and non-partisan
analysis. The book is a must read for revenue officials, policy makers, academic
researchers, judicial officers, tax lawyers and Chartered Accountants. I congratulate
the author for rendering yeomen service to the tax profession and to the publishers
and editors for having delivered a treatise which will serve as timeless reference for
years to come.
(Arun Jai
Ministry of Finance : 134, North Block, New Delhi-110001, Tel. : 23092810, 23092510 Fax : 23092828
Ministry of Information & Broadcasting : Room No. 560, A Wing, Shastri Bhawan, New Delhi-110001,
Tel. : 23386892, 23384340 Fax : 23384286
Residence : 2, Krishna Menon Marg, New Delhi-110011, Tel. : 23794990, 23794556 Fax : 23794543
Foreword to Challenges of
Indian Tax Administration
BC IE IEE DS SS NE ee
Challenges of Indian Tax Administration comes at an opportune time when much

of the current government’s focus is rightly towards revenue mobilisation while
attempting to craft non-adversarial tax regime for domestic as well as international
transactions. This book is a result of research work that falls under ICRIER’s thrust area
of ‘Macroeconomic Management, Financial Liberalisation and Regulation’ It brings
together the perspectives of authors from varied backgrounds - current and former
tax officials, professionals from the private sector and scholars from academia.
This edited volume covers all the broad areas of tax administration and provides a
bridge between tax policy and tax administration. Ground realities in India and other
select countries have been carefully documented. The authors have also painstakingly
collected evidence of successful tax administrations in these areas and mapped best
practices. These have been offered as recommendations on ‘what is to be done’ and
‘how it is to be done; from an Indian perspective keeping in view our ambition to fash-
ion a predictable, stable and non-adversarial tax regime.
A common thread that binds the chapters is the centrality of the taxpayer and
the challenges to designing a non-intrusive and non-adversarial system based on the
local context. The use of technology, big data, data analytics, efficient compliance and
taxpayer services are justifiably highlighted as instruments to achieve the goal. Mr.
Rajiva Ranjan Singh, the editor of this volume, has brought to bear his vast experience
on the quality of this very readable collection. The many years he spent working in the
Indian tax administration, in computerisation and in research besides in Nepal, Africa
and Central Asia are reflected in the balance the volume achieves in regard to theory
and practice, with more emphasis on the latter. That the taxpayer is a ‘customer’ of the
department who must be presented a trustworthy, predictable and a non-intrusive
tax administration is emphasised while recognising that the administration needs to
be modernised in the use of technology. Capacity building and empowerment of the
tax administration are parallel themes that together with modern technology are key
to success.
This important and timely study will appeal to a variety of audiences including
policy makers, public administrators, tax analysts, tax practitioners, and researchers
and students of tax administration. Using examples to explain complex and demand-
ing concepts, data analysis and insightful international comparisons, the book is a
must read for anyone interested in the modern view of tax administration.
June 2, 2016 Dr Isher Judge Ahluwalia
vii
noattezinimbA xeT neibni
pinks! ae Pas Welle to pbs in oe Map GES thh wae ap past ni Ge G70.
eAagivesy ine nie ctihbw ade ey hace bel Le

rath Gio wilent 0 18 onith, ole ray
fad ete Waal hala
weiicreyetieg
Paes oe Sratparae lctervbt-noc baaalderadsl
bine seyeegen wal) Te voiiever salt ahererqads oft ebiid tert) belt aoc
wef oe tel crtep henvie-nae
bes ovierun com 6getegleb ot eogaolladsod
bos samihper: weteitis warytnne etal etal yld gqolendoat to seu od
A Ape ab eerie et ceerragwntoe bhi! ain eo
mere thes itl mere. i geet east sinulov etd te vatibe aft ahyrtet prijal
odd aahgirttraws tees wtrosy ree wal otnglloysidohew
yrsy aie ylang ofl ao
eA Jaoral! af ealiegd as) at) bee colaakestty ai oBertetiothszat pelbal.
gow
av tees ul perelstd 5! mauens eh eocnaled sakalbattalion aval egies foes
RATS “Patairy » © weypejen* orl! deg? sage? fp alauiqcue stor siw elton hom
sviwsGiatyr: « tere altletiiioy: ytngwmunt varia dattenti sel wi
of sheen nite, sad ctbaniys aff)ie1k selnitqoier elistw
fit Tetanereteern gre bee prclt Gotaebeceyn® ‘pplonsiont o pauattHleseaaleatna
qed sen qpokwisog somboss ten wept taal mined: tallerey oon cottons je.
recoOF
gnitrstinl smanibus bo yrohier s or sage thievou yieaxt! bas tnahogmi 2ift
erie Ok wretwtiizens 20) anoles 208 enmmnaliciobs aiding’ fdas qliag
hermrred bees elgg Mhalijas of eslyenoee oerigt? ohereliinthe aatoucetamn ue
6.0 dood a ane@ingaes loeeeuian Wii hyjand fina dbgledan- aah
EINES 7) ee 4ae
Hij
2A. p= ae
i a” 4 » > |ee
Preface
In early 2015, when Indian Council for Research on International Economic Relations
(ICRIER) approached me to author a research paper on Tax Dispute Resolution’ as
part of a series of research papers on - ‘Challenges of Indian Tax Administration’
The Tax Administrative Reforms Commission (TARC) was in midst of winding down
having completed its assigned task. Being a member of the focussed group on ‘Dispute
Management’ (First report of TARC released on May 2014) of TARC, key learnings
were fresh in my mind. In addition, a lot of research material that we had gathered was
either not put to use or didn’t feature in the final report. Without realising constraints
on my time, I accepted the ICRIER offer to author the research paper with a rider that
we shall approach a publishing house to make our research findings public. ICRIER
immediately consented to my desire and then began our journey without realising the
dynamic nature of assignment I walked into.
Typically, for professionals like us, it’s an onerous task to accept and fulfil such
academic pursuits. I however felt that given the subject, which I am passionate about,
it would be worth penning down my experiences as an avid follower of international
tax policy and a tax dispute practitioner. More importantly, I honestly feel that
occurrence and (timely) resolution of tax disputes in India has been an impediment for
investments in the past decade. I don’t think political parties ever made this subject as
part of their election manifesto, but incoming Prime Minister Narendra Modi decided
to ‘hold the bull by the horn’! It was so evident in the first NITI Aayog Meeting that
he chaired in February 2015. Neither the Prime Minister nor Finance Minister Arun
Jaitley miss an opportunity to reiterate their administration’s commitment to make
mention about their resolve on tax reforms. The timing of ICRIER commissioning a
research on the topic highlights the economic relevance of the subject. Interestingly,
as we traversed the journey of presenting this treatise, in the past 15 months, the
new government’s approach coupled with Finance Act of 2015, 2016, and a host of
administrative announcements, made the revision of chapters an interesting and
continuing exercise. I guess, the changes gave us more time to overcome delays on
our part.
The focus of this treatise has been primarily to analyse how historically tax policy
has shaped in India, its changing landscape post economic reforms, impact of tax
revenues on India’s fiscal situation, reasons as to why Tax disputes have been on the
rise, etc. The later chapters focus upon the need to review our administrative and
assessment practices to prevent such mass scale disputes drawing upon experiences
of other jurisdictions, primarily from common law countries and select emerging
economies. Arguably, each jurisdiction’s tax and Court systems vary and hence, the
x @ Preface
findings should not be viewed as prescriptive. Having said that, my belief is that global
tax systems will converge over a period of time and the convergence would be far more
rapid, given that India is now active in shaping G20 tax policies as part of the OECD
lead Base Erosion and Profit Shifting (BEPS) project. This will necessitate India not
just to embrace polices on transparency and information exchange and protection
of its tax base, but equally timely resolution of treaty-related disputes and gear up its
policies to first avoid disputes and if disputes are inevitable, to seek timely resolution.
The later chapters highlight a series of steps taken by the Government to address the
challenge on tax disputes. I have attempted to give a futuristic view of how directional
changes in the Tax policies such as GST law and post BEPS action steps, resolution of
tax disputes shall assume greater significance and hence the need to reform faster.
The purpose of this treatise is to give a holistic view of the subject to tax payers, tax
practitioners, tax administrators and tax administrative and judicial forums. It’s
meant to serve as a guide to tax policy makers to choose the practices adopted by
nations and consider adopting them as India’s changing landscape will necessitate
implementation of ‘out of box’ ideas to address the situation and make our tax system
modern, responsive to change and welcoming foreign investment.
There are several people towards whom I wish to express my gratitude and
without whom this treatise would not have seen the light of the day. Let me first
start with contributors who assisted in the research. Sumit Singhania, in particular,
led the research team supported by Vishwendra Singh for Direct tax laws, Saurabh
Kanchan and Tarun Jain for Indirect tax laws and their teams comprising Gaurav
Barchha, Rupal Maheshwari, Ramya Arora and Kapil Khanna. I wish to express my
gratitude to Ashutosh Dikshit, Advocate also a former IRS official who contributed to
select chapters of the book and lent his wisdom. The entire team comprising trained
Lawyers and Chartered Accountants pulled together practical skills in dealing with
tax administrators, clients and judicial bodies, besides researching each chapter
threadbare. Given pressing client commitments of all contributors, the project could
not have been completed without putting efforts on late evenings and weekends. I
can’t stop thanking Dr Parthasarathi Shome from whom I (still continue to) learn
the art of tax policy research and his invitation to induct me into the TARC focused
group, which helped a lot in gaining a balanced perspective on challenges faced by
tax administrators. I wish to thank tax practitioners, CA Padamchand Khincha and
Ajay Vohra Senior Advocate in sharing their perspectives and practical challenges
they encounter in a tax trial. Iwish to thank former and serving IRS officials, former
Tribunal members for sharing their perspectives - for sake of confidentiality - I have
refrained from naming them.
I wish to thank Mr. NK Singh, former Revenue Secretary and former BJP Member
of Parliament, also associated with ICRIER, the late (Retd) Chief Justice SH Kapadia
for encouraging me to embark on this project. Dr. Bibek Debroy, permanent member
of NITI Aayog who before assuming responsibility in the Government encouraged me
to pursue with the treatise. The treatise contains a lot of data-charts, which entailed
accessing data from websites of the Ministry of Finance, Parliamentary standing
committees, Comptroller and Auditor General of India. To an extent additional and
updated analysis was required, we resorted to Right to information Act, which I must
confess we partly succeeded.
Preface @ xi
I wish to thank the firm, BMR Advisors, for giving me the liberty to pursue the
project and making available infrastructure and resources to complete the project.
I wish to express my gratitude to the publishers, LexisNexis India, Shreesh Chandra,
the Publishing Director, his team members, Shadan Perween and in particular
Aastha Dua, Assistant Managing Editor, whose meticulous editing skills are difficult
to challenge. I wish to thank ICRIER for giving me this opportunity to present my
research and to Rajiva Ranjan Singh and Anandita Bagchi for pursuing with me and
being so patient with me.
Last but not the least, I am indebted to Mr. Arun Jaitley, Minister of Finance and
Corporate Affairs and Minister of Information and Broadcasting, for agreeing to do
a foreword. Despite his busy travel schedule, he acceded to my request and I shall
remain eternally grateful.
These academic pursuits are never complete without the sacrifice of family
members and I would commit a grave mistake by not thanking my wife Gayatrie, my
sons, Arjun and Ranjit for their patience and sacrifice. Thanks and this book equally
belongs to you.
June 9, 2016 Mukesh Butani
| a ee eee n
| ig ligne dehy notienic prt che ire y
aang Cet welcrsilrg eselge, iqveatmort,

Seeds wtcon | wich co onan: :
int ae (He
ae4 oot bree veen he Wyle of thay, Lae ——-
eas Reel Gers tears & Bre crerarch, Suh, Rages, @ pertiieie
+ ee eee ae peered by Viton den Sings cs Dower pet lowe See
See et Seren Fate, Cee aterm ters ter ots how Craters ¢mmugyed (gee
Pets Ges A Ds Aire ahd Cond Vhannd Tear =
-o= © ides SO eheste clic a (ner IPE Mica) whs Con wimie@ &
Os a Oe OPOSS a ewelom. The extire tea: conipheaes Pied
Vass on Sie ees meek aes gartind toe her octal tklils i> eating wth
i hea wu. Gna oral Mas bot, Dod sretitning aS
Seon Cm aeeeiinrnts S 23) contribuiare the poses ung:
oS 0-0 '« ho! ORAM goth Miers: 20 dele ve ee) oe ;
> ey wee "woe? Goa bax efiam | (ell cemtnia nm ae
oy a —_ ha? 0 Seri \ induct the lhto ie TASC Reed 7
ae : a 6° tego priwcective 40. Potent cel
> ie - ) eerie, CA Pedomctend Kinch. aad .
{pe » ee : + Senet end Puede’ Salas =. |
Oe ee > renal 2 hace Gries eed Oring 115 aide Ste
aaa & = eyeonyrree~tey tha af mnideaiey- 1 Sank ;
Saar? «,* —— ; - 7 be
hea arty | : >. om=p Pewwones Seapeer ons frurser GES $
2 ee eS tee eee
2 a9 ae otis a8 Dyteyp, parm
a - - se a aany y
Acknowledgments
The author wishes to thank

Sumit Singhania, CA
Vishwendra Singh, CA
Gaurav Barchha, CA
Rupal Maheshwari, CA
Saurabh Kanchan, CA
Tarun Jain, Advocate
Ramya Arora, CA
Kapil Khanna, B.Com (Hons)
Rajiva Ranjan Singh, IRS (Retd)
xiii
Contents
eee
ee ee ae a
Foreword by Arun Jaitley Vv

Foreword by Dr Isher Judge Ahluwalia vii
Preface ix
Acknowledgments xiii
Glossary xxi
Introduction 1
Chapter 1 Tax Disputes in India 3

Overview of the Indian Tax System : S
Significance of Tax Collections 3
Significance of Tax Policy 4
Tax-law Making in India 9
Retrospective Legislation 11
Is Inadequate Law-making Root Cause of Tax Dispute? 12
India’s Tax Demographics - A Glance at Key Data Points 13
Taxpayer Base 13
Tax Collections 15
Revenue Foregone 16
Uncollected Demands 18
Key Administrative and Procedural Aspects of Direct and
Indirect Tax Law 20
Governing Legislation/Subordinate Legislation 20
Administrative Boards and Officers 21
CBDT 21
Overview of Procedural Aspects Zi
Direct Tax 27
Indirect Tax 28
Adjudication in Indirect Taxes 30
History of Tax Reforms 31
Policy Focus 32
Gearing up Tax Administration and Dispute Resolution
Framework 32
Amnesty and Felicitation Schemes 34
Overview of Dispute Resolution Framework 37
Traditional Appellate Forums for Tax Matters 38
Commissioner (Appeals) 38
XV
xvi @ Contents
ITAT/CESTAT 38
Alternate Dispute Resolution and Avoidance Forums 40
AAR 40
Settlement Commission 42
DRP 43
44
45
Judiciary (State HCs and SC) 45
High Court 45
Supreme Court 46
Tax Controversies in Past Decade - A Mixed Bag! 46
Taxability of ‘Indirect Transfer’ of Capital Assets 47
(i) Vodafone International Holdings BV 47
(ii) Sanofi Pasteur Holding SA 48
Applicability of TP Regulations to ‘Share Issue’ 49
(iii) Shell-India 49
(iv) Sony Ericsson and Maruti Suzuki India ltd 49
(v) Nokia 50
Payment for Purchase of Software - Royalty? 51
(vi) IBM 51
Indirect Tax Controversies 52
(i) E-Commerce (Dimri, R 2015) 52
(ii) Valuation of Transactions Between Related Parties
(Dimri, R 2015) 53
(iii) Taxation of Intangibles (Dimri, R 2015) 54
Government to be ‘Efficient and Responsible Litigant’ - A Case for
Cost-benefit Trade-off? 55
Impact of Tax Disputes on Ease of Doing Business in India 59
Importance of Foreign Capital 59
Investor Confidence 60
Competitiveness of Business Environment in India 62
Chapter 2 Dispute Identification and Prevention 65

Introduction 65
Reasons for Protracted Tax Disputes 67
(i) Inherent Impediments in ‘Law Making’ Process 67
(ii) Retrospective Amendments 68
(iii) Quality of Assessment 69
(iv) Inadequate Judicial Guidance 70
(v) Non Mandatory Timelines 70
(vi) Inefficient Refund Mechanism 70
(vii) Ever Increasing Need for Rectifications 2
(viii) Extended Period of Limitation UZ
(ix) Accountability of Tax Officer UE
(x) Inefficient Valuation Mechanism Under Customs 73
(xi) Frequent and Rotational Transfers of Tax Officials 73
Contents @ xvii
(xii) Failure of LTU 73

(xiii) Reasonable and Fair Assessments - Target Driven Approach 74
(xiv) Differences in Central and State Level Authorities 75
(xv) Recognition of ‘Taxpayer Services’ Approach 75
Illustrative International Practices - Summary 76
United Kingdom 76
Australia 78
Canada 79
US 80
South Africa 81
Brazil 81
Key Recommendations for India 82
Law Making - Engaging Stakeholders and Ironing out Ambiguities 82
Taxpayer Services 85
Gearing Up the Tax Administration 86
Making Assessment Procedure More Objective 88
Role of ‘IT’ In Combating Tax Disputes 89
Other Reforms 91
Recent Developments - Thrust on Reduction of Disputes and Enhancing
Taxpayers’ Faith 91
Chapter 3 Dispute Resolution 95

Introduction 5
Traditional Forums - Review of Performance 96
Direct Tax Dispute Resolution Scheme, 2016 98
Indirect Tax Dispute Settlement Scheme Introduced by
Finance Act, 2016 98
ITAT/CESTAT ao
SC and HC 101
Select International Practices for Dispute Resolution 104
Australia 104
Brazil 105
Canada 105
United Kingdom 105
Key Recommendations for Dispute Resolution Forums in India 106
Tribunals (ITAT/CESTAT) 107
SC and HC 108
Case for NTT - An Alternate for Expeditious Resolution of
Tax Disputes 110
Build-Up to Enactment of NTT Act 110
Challenge to Constitutionality of NTT 111
Way Forward 112
xviii ® Contents
Chapter 4 ADR Framework 113

Introduction 113
Forms of ADR 113
Key Advantages of ADR 114
ADR - Indian Landscape 114
Pre-1996 Position 115
Post 1996 Position 115
Arbitration and Conciliation Act, 1996 - Framework 116
Salient features of the 1996 Act 116
Recent Developments 116
ADR Framework for Tax Matters 118
AAR 118
DRP 123
APA 125
MAP 127
Select International Practices - Summary 128
United Kingdom 128
New Zealand 129
Australia 130
Canada 131
United States of America 131
Brazil 133
South Africa 133
European Union’s Arbitration Convention 134
Key Recommendations for India 134
AAR 135
DRP 137
APA 137
MAP 138
Legislative Framework for Sophisticated ADR Mechanism
(i.e. Arbitration, Mediation, Conciliation, Negotiation) 139
Other Measures 140
Bilateral Investment Promotion and Protection Agreement/Bilateral
Investment Treaty (BIT) 141
Relevance of BIT 142
Recently Notified Model Indian BIT 142
Chapter5 Key Tax Policy Reforms 145

International Landscape 145
BEPS Package - A Comprehensive Recipe 147
Monitoring Implementation and Impact 151
Timing 151
Methodology 155
Contents @ xix
Political Expectation is Very High from BEPS Works of OECD 152

Role of Exchange of Information in Combating Tax Evasion/Avoidance 152
Resolving Cross Border Disputes 153
OECD’S Final Report on BEPS Works 154
Developments in Domestic Tax Policy Wasi
GST - An Overview 158
Lead Time Before Implementing New Law or Amendment 162
Explanatory Notes Accompanying the New Law or Amendment 163
Review of Representations on New Law or Amendment 163
Common Views of Central Government & State Government 163
Provision of Reasonable Limitation Period 164
Proceedings to be Dropped if No Order Passed in Prescribed Time 164
Review of SCN Beyond Certain Monetary Limits 164
Avoid Calling Same Information Repeatedly 164
Adhere to Clarifications of Expert Guidance Cell 165
References 167
Subject Index 169

ea 3 > ; 7 a
caliegt: + tm sa ;
pple i
i7a
Ht
tt
‘
¥
s
~‘a
-.‘us-
c .‘a
”*a
E
a
—[--
6 p©=
oi
7 ——
7 ~;-7
=~,
eal 134
is
y
¥
<»-On
ores! ace)
=)
a
-_ ww
oa ty?
<9 _ ih
ina®s "=esemnd be iopusiqne)
(Sl lect
Cs) Seater, (rafiletini)
Nap tection! ‘my
an ‘oe
Che. me=e-6 ee ee ee
new Fam @'
iste . : — an
ae ; a oe,
=
Lrqnet ee ee ee = ow
' | ale rate
ee =e — = :
@)"\ (etiwe aw ene Gee _ ioe

Awe i lea <1 eed ate \e i
———,
«2 <a
Glossary
AAR Authority for Advance Rulings

ACA Annual Compliance Arrangements
ACES Automation of Central Excise and Service Tax
ACsIT Assistant Commissioners of Income-tax
ADR Alternate Dispute Resolution
ALP Arm’s Length Price
AMP Advertising, Marketing and Promotional Expenses
AO Assessing Officer
APA Advance Pricing Agreement
APs Action Plans
ATO Australian Taxation Office
ATR Advance Tax Rulings
BEPS Base Erosion and Profit Shifting
BIT Bilateral Investment Treaty
BoD Board of Directors
BoE Bill of Entry
BRICS Acronym for an association of five major emerging national
economies: Brazil, Russia, India, China and South Africa
CAG Comptroller and Auditor General of India
CAP Compliance Assurance Process
CARF Brazilian Administrative Council of Tax Appeals
CAs Competent Authorities
CASS Computer Aided Scrutiny Selection
CbC Country-By-Country
CBCR Country-By-Country Reporting
CBDT Central Board of Direct Taxes
CBEC Central Board of Excise and Customs
CC Chief Commissioner
CCIT Chief Commissioner of Income tax
xxi
xxii ®& Glossary
CDR Collaborative Dispute Resolution

CES SC Customs, Central Excise and Service Tax Settlement Commission
CESTAT Central Excise and Service Tax Appellate Tribunal
CFA Committee on Fiscal Affairs
CFC Rules Controlled Foreign Company Rules
Cini Commissioner of Income Tax
CIT(A) Commissioner of Income Tax (Appeals)
CPC Central Processing Centre
CRA Canada Revenue Agency
CRM Customer Relationship Manager
CVC Central Vigilance Commission
DEPR Department of Economic and Policy Research
DGIT Directorate General of Income Tax
DIS Decision Impact Statements
DBJ Delegacia Regional de Julgamento
DRP Dispute Resolution Panel
DTC Direct Tax Code
e-process Electronic Process
EU European Union
FATCA Foreign Account Tax Compliance Act
FBT Fringe Benefit Tax
FDI Foreign Direct Investment
FI Foreign Institutional Investor
FIPB Foreign Investment Promotion Board
FM Finance Minister
Foreign Portfolio Investment
Fiscal Responsibility and Budget Management
Forum on Tax Administration
Financial Year
The Group of Twenty is an international forum for the governments
and central bank governors from 20 major economies. The members
include 19 individual countries—Argentina, Australia, Brazil,
Canada, China, France, Germany, India, Indonesia, Italy, Japan,
South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the
United Kingdom and the United States—along with the European
Union
Glossary @ xxiii
G8 Group of Eight (currently known as Group of Seven), G8 is a

governmental political forum having Canada, France, Germany,
Italy, Japan, United Kingdom and United States as member
countries
GAAR General Anti Avoidance Rules
GST Goods and Service Tax
GSTDSA Goods and Service Tax Dispute Settlement Authority
HC High Court
HMRC Her Majesty’s Revenue and Customs
HRCP High Risk Corporates Programme
HSN Harmonic System of Nomenclature
IAA Impermissible Avoidance Arrangement
ICC Award Indian Chamber of Commerce Award
ICEGATE Indian Customs Electronic Commerce/Electronic Data
interchange (EC/EDI) Gateway
ICES Indian Customs Electronic Data Interchange System
ID Interpretative Decisions
IIR Industry Issue Resolution
IP Intellectual Property
IPC Indian Penal Code
IPR Intellectual Property Rights
IRB Internal Revenue Bulletin
IRC Internal Revenue Code
IRS Internal Revenue Service
ISDS Investor State Dispute Settlement
yy Information Technology
IT Act Income-tax Act, 1961
ITAT Income Tax Appellate Tribunal
ITBA Income Tax Business Application
ITD Income Tax Department
ITeS Information Technology Enabled Service
ITO Income Tax Officer
ITRD Income Tax Ruling Directorate
ITSC Income Tax Settlement Commission
ITTN Income Tax Technical News
LAPS Law Administration Practice Statements
LB&l Large Business and International
xxiv ® Glossary
LBS Large Business Services

LOB Limitation of Benefit
LTU Large Taxpayer Units
MAP Mutual Agreement Procedure
MAT Minimum Alternate Tax
MBIE Ministry of Business, Innovation and Employment
MEMAP Manual on Effective Mutual Agreement Procedures
MEN Most Favored Nation
MIGA Multilateral Investment Guarantee Agency
MNC Multi National Company
MNEs Multi National Enterprises
MoU Memorandum of Understanding
NDA National Democratic Alliance
NJRS National Judicial Reference System
NLP National Litigation Policy
NOD Notice of Deficiency
NRI Non Resident Indian
NTT National Tax Tribunal
OECD Organization for Economic Co-operation and Development
OECD MC Organization for Economic Co-operation and Development Model
Convention
PAN Permanent Account Number
PBT Profit Before Taxes
PCC Principal Chief Commissioner
PCCV Post-Clearance Compliance Verification
PE Permanent Establishment
PM Prime Minister
POEM Place of Effective Management
POM Place of Management
Per Principle Purpose Test
PSU Public Sector Undertakings
R&D Research and Development
RBI Reserve Bank of India
RFB Brazilian Tax Authority
RMS Risk Management System
RNR Revenue Neutral Rate
Glossary XXV
SAAR Specific Anti-Avoidance Rules

SARS South African Revenue Service
SB Small Business
SC Supreme Court
SCN Show Cause Notice
SE Self Employed
SEZ Special Economic Zone
SLP Special Leave Petition
SMEI SMEs and Individuals
SOP Standard Operating Procedures
TAAR Targeted Anti-Avoidance Rules
TARC Tax Administration Reform Commission
TCRU Taxpayers’ Charter Review Unit
TCS Tax Collected at Source
TDS Tax Deducted at Source
TIEA Tax Information Exchange Agreement
ANe Transfer Pricing
TPO Transfer Pricing Officer
TRACES TDS Reconciliation, Accounting and Correction Enabling System
TUAC Trade Union Advisory Committee
UN United Nations
UN MC United Nations Model Convention
UNCITRAL United Nations Commission on International Trade Law
VAT Value Added Tax
VDP Voluntary Disclosure Programme
yepaay
i=
otf Ma beeceadbespwreyorn i mat ae
Br a ithe | fever
=
> =
isavehs tom Benne
—
toain
wv >
z er
% > fee
ee
- ope i)
Laser
jesarin ”
onnitave davis’
oh! ancien tee
ne avtel ing) alieabiieanall
¢°4( esenm (angie)
Sutene ee qn Seelradt aniline?
‘Lae ee
a SOutiesse
ee
(=m ee Pein 1a)
5 howe Upton benal

Ben me 4 asnd laregtggesc, | :
_ >: mol Cee
peveaas -
Os 8411,
3) a ereey
004t10 ‘ieee |
*@ 4%
Introduction
SS ——=“NNN ss cc cL he
A lot has changed since India began embracing economic liberalization more than
two decades ago. Successive governments have rolled out measures to improve India’s
attractiveness as a preferred investment destination. Over these years, India’s fiscal
statutes have undergone comprehensive reforms too, although the pace of reforms
has been rather tardy and often trailed in keeping up with rapidly emerging business
landscape.
Effective tax administration and efficient dispute resolution are two elements at
the core of ease of doing business in any jurisdiction. ‘Ease of tax compliance’ features
prominently in the list of relevant parameters for determining global ‘ease of doing
business’ rankings published by the World Bank. The latest World Bank report (of
2015) puts India at 130th place, twelve notches higher than the previous rating (142nd
place); albeit, we as a country continue to fare poorly on certain key indices including
ease of tax compliance and dispute resolution. The process of tax compliance in India
has been historically cumbersome. At last count, there are 33 tax payments that a
business is required to comply with, and it takes close to 250 hours a year towards
ensuring mere compliances. Onerous tax litigation procedure and frivolous tax
demands in some cases add to taxpayers’ plight. A majority of reasons can be ascribed
to the present state of tax administration and disappointing pace of dispute resolution
across different forums.
This book, further divided into five chapters, is premised on the research under-
taken to understand the functioning of tax administration and dispute resolution
forums in India, and select international practices across the globe.
Our research in this book is duly supplemented by experiences in dealing with
administration, dispute resolution forums, and useful precedences emerging from
understanding best practices. Each of the chapter culminates into a broad range of
recommendations on measures which could be considered towards enhancing the
efficacy of ‘service delivery’ to taxpayers.
The broad architecture of this book is summarized below:
Chapter 1 presents statistical highlights for tax to gross domestic production data,
which underlines the significance of tax revenues for Government exchequer. The
chapter also traces the evolution of Indian tax system, providing insights on nuances
of tax policy making in India, along with an overview of dispute resolution forums
for tax matters. Another part in this chapter reasons the sub optimal performance
of administration and how shortcomings of dispute resolution system has adversely
2 ® Introduction
impacted investment flows into the country, though in recent past the government tax
policies have attempted to salvage the situation.
Chapter 2 focuses on reasons contributing to rising instances of tax disputes
in India. The significance of 3Cs (Certainty, Clarity and Consistency) in tax policy
landscape needs to be absorbed by both administration and judiciary, for creating a
positive investment climate. In this chapter, we have also summarized ideas to draw
upon global best practices in addressing challenges of Indian tax administration and
tax dispute forums.
In chapter 3, we have attempted to analyze the functioning of traditional forums
available for tax dispute resolution [i.e., Commissioner (Appeals), Appellate Tribunals,
HC, and SC] and come up with a set of recommendations towards evolving a more
effective approach to tax dispute resolution. There is a strong case for evaluating best
practices emerging from the review of tax policies/administration of select economies
and draw upon some of these best practices. This chapter also touches upon the
relevance of National Tax Tribunal as an alternate forum for efficacious resolution
of tax disputes, particularly in the wake of staggering statistics of tax disputes, even
though the constitutionality of NTT (in its proposed format) is no longer an open
debate following the Apex Court’s ruling.
In chapter 4, the focus is on policy and practices towards evolving effective
Alternate Dispute Resolution forums. Many countries, such as the US, Australia, and
the UK, have successfully implemented ADR mechanism to deal with tax disputes,
and it is important for a dispute-ridden country like India to leverage learnings of such
countries and evolve a more robust dispute resolution machinery.
Lastly, chapter 5 presents a snapshot on emerging tax policy landscape—both
in international and Indian context. While embracing the progressive era of tax
policies, it is inescapable for policymakers to take into account challenges of such
transition and adequately equip tax administration and taxpayers to enable the shift
at administrative level.
Tax Disputes in India
Overview of the Indian Tax System

Significance of Tax Collections
Indian economy has undergone several stages of transition in the past couple of
decades since onset of liberalisation programme of 1991. In early 90’s, Indian econ-
omy was seized with high fiscal deficit [8.3 percent of the GDP in the year 1990-1991],
minuscule foreign exchange reserves, high inflation, excessive rate of income tax and
custom duty, besides the significant barriers to doing business in India created by
licensing raj and rigid regulations. The New Economic and Industrial Policy of 1991
was at best a first brush in opening the economy to FDI and permitting free trade.
Undoubtedly, reforms agenda pursued throughout the last decade of 20" century
helped in building the momentum for significant macro-economic, fiscal and regula-
tory reforms which were to follow in the next decade.
During 2002 to 2006, the Government embarked on second generation reforms
of fiscal and regulatory regime to provide push to FDI flows; several economic sectors
were opened for FDI and domestic investment including aviation, defence, power,
telecom, etc. Amongst key tax policy reforms were introduction of State Value Added
Tax to replace archaic sales tax regime, rationalisation of custom and excise duty,
broad basing of Service tax net, moderation of corporate income tax and personal tax
rates and introduction of SEZ.
In 2003, the NDA Government introduced the Fiscal Responsibility and Budget
Management Bill (subsequently legislated and put to implementation in 2004) which
laid the path, ambitious though, for institutionalizing financial discipline, taming
fiscal deficits, improving macro-economic management and rationalizing overall
management of public funds signaling a move towards a balanced budgetary exercise.
Whilst, the Fiscal Responsibility and Budget Management did achieve targeted levels
of fiscal and current account deficit (see Table 1.1 below), after the 2008 global crisis,
which led India to announce host of fiscal incentives by way of reduction of indirect
tax rates, the law outlived its tenure until the budget of 2013, as reflected in worsening
trend of deficits. The Fiscal Responsibility and Budget Management legislation
4 ® Tax Disputes in India
underlined the importance of achieving fiscal discipline by way of external-debt

management, tax base expansion through enhanced voluntary compliance and
curtailment of non-plan expenditure.
Table 1.1: Trends in Deficits of Central Government Post Enactment of FRBM

> RevenueDeficit’ © FiscalDefictt’ —_- Primary Deficit ©
Year _ (as percent of GDP) (aspercent of GDP) _ (aspercent ofGDP)
2003-04 3.5 4.3 0.0
2004-05 2.4 3.9 0.0
2005-06 2.5 4.0 0.4
2006-07 1.9 33 (-) 0.2
2007-08 Vi 2.5 (-) 0.9
2008-09 4.5 6.0 2.6
2009-10 5.2 6.5 3.2
2010-11 32 4.8 1.8
2011-12 4.4 5.7 ot
2012-13 3.6 4.8 1.8
2013-14 3.2 4.5 1.2
2014-15 (RE) 2.9 4.1 0.8
2015-16 (RE)! 2.5 3.9 0.7
2016-17 (BE) 2.3 3.5 NA?
Source: Chapter on ‘Public Finance’ in: Economic Survey 2015-16.
Significance of Tax Policy

Statement made by the then Finance Minister, P Chidambaram, while presenting the
Vote on Account for 2014-15 sums it extremely well -
“Revenues are of paramount importance. The best source of revenue is taxes and
for that we need modern tax laws...”
Amidst the deterring macro-economic landscape, the Government's tax policies
play an intricate role in defining as well as sustaining the growth curve of the economy.
1 Ministry of Finance 2015, Budget at a glance, Available at: http://indiabudget.nic.in/ub2015-16/

bag/bagll.pdf, accessed in May 2016.
2 The budget estimate figure for primary deficit statistics for FY 2016-17 is not reported in the
Economic Survey 2015-16.
Overview of the Indian Tax System @ 5
Historically, the Government has been hugely dependent on tax revenues for sustained
funding of the revenue expenditure as well as overall fiscal management in India. In
1999-2000, the combined fiscal deficit (of the Central and State Governments) stood
at 9.84 percent’, whereas the fiscal deficit of the Centre alone was at 5.64 percent’.
Recognizing an urgent need for tax reforms to mobilize incremental revenues,
an Advisory Group on Tax Policies and Tax Administration for the Tenth Plan was
constituted® in 2000. The report of the Advisory Group observed that a concerted
effort was required to improve the overall tax to GDP ratio standing at 14.18 per-
cent® in FY’ 1999-2000 (out of which 8.8 percent® pertained to tax collections of the
Central Government). The report further emphasized on the need for reforms to
expand taxpayer base, scaling back tax incentives, simplification of complex tax
structures, reducing tax burden to encourage compliance and improving efficiency
of tax administration. The tax to GDP ratio in relation to Central Government tax
collections for the period 2001-2006 was averaging 9.3 percent®. Significant fiscal
consolidation was achieved by FY 2007-2008 (before the onset of 2008 global reces-
sion), with the fiscal deficit of the Central Government declining to 2.5 percent (see
Table 1.2). The performance was even better than the projected fiscal deficit target
of 3.13 percent set by the Fiscal Responsibility and Budget Management Task Force,
which had emphasized that fiscal consolidation should be revenue-led”. That year,
predictably the Central Government’s tax (gross) to GDP ratio touched a peak of
11.9 percent, whilst Central Government's tax (net of State’s shares) to GDP ratio
was 8.8 percent.
Government’s commitment to reinforce fiscal discipline witnessed a setback in
FY 2008-2009, when the Government consciously chose to introduce fiscal stimulus
3 Planning Commission, Government of India, A Macro Perspective and Scope of Tax Revenue:
2000-01 to 2006-07 in: Report of The Advisory Group on Tax Policy and Tax Administration for the
Tenth Plan, pp. 27-52.
4 Planning Commission, Government of India, A Macro Perspective and Scope of Tax Revenue:
2000-01 to 2006-07 in: Report of The Advisory Group on Tax Policy and Tax Administration for the
Tenth Plan, pp. 27-52.
5 Constituted by the Planning Commission, Government of India; Advisory Group submitted its
report in May 2001.
6 Planning Commission, Government of India, Tax/GDP Trends in the 1990s and Future Prospects
in: Report of The Advisory Group on Tax Policy and Tax Administration for the Tenth Plan, pp.
53-72.
7 Atwelve months period commencing from April 1“ and ending on the following March 31*.
8 Planning Commission, Government of India, Tax/GDP Trends in the 1990s and Future Prospects’
in: Report of The Advisory Group on Tax Policy and Tax Administration for the Tenth Plan, pp.
53-72.
9 Table 1.2, TaxShastra - Administrative Reforms in India, UK and Brazil authored by Dr. Par-
thasarathi Shome (Chairman International Tax Research and Analysis Foundation and Former
Advisor to the Finance Minister).
10 A Task Force was set up under chairmanship of Dr. Vijay L. Kelkar (then advisor to the Finance
Minister) on Implementation of the Fiscal Responsibility and Budget Management Act, 2003.
The Task Force submitted its report on 16 July 2004.
package in response to the global financial crisis. Since then, it is seen that while Cen-
tre’s fiscal deficit declined marginally to 5.7 percent in FY 2011-2012, the Central Gov-
ernment’s tax (gross) to GDP ratio still remains low at 9.87 percent; with a mere 6.99
percent of Central Government’s tax (net of State’s shares) to GDP ratio. Successive
annual Economic Surveys call for achieving a higher tax to GDP ratio for fiscal consol-
idation by broadening the tax base rather than increasing the tax rates.
Table 1.2: Recent Trends in Fiscal Deficit and Tax to GDP Ratio
Fiscal Tax to GDP TaxtoGDP — Tax to Growth in

Year deficit ratio-Central ratio-State’s GDPratio total tax
(as percent taxes, net of total tax - Total to GDP
of GDP) State’s share revenue taxes — ratio
(in percent)
2003-04 4.3 6.59 8.00 14.59 -
2004-05 39 6.93 8.31 15.25 4.52
2005-06 4.0 7.32 8.59 15.91 4.33
2006-07 3.3, 8.18 8.98 17.15 C19
2007-08 25 8.81 8.64 17.45 175
2008-09 6.0 7.87 8.39 16.26 -6.82
2009-10 6.5 7.05 8.40 15.45 -4,98
2010-11 4.8 Lok 9.00 16.31 5.57
2011-12 57 6.99 931 16.29 -0.12
2012-13 4.8 7.34 9.63 16.97 417
22013-14 (PA) 4.5 7.36 S73 17.09 0.71
22014-15 (BE) 4.1 Teas) 9.83 17.38 1.70
Source: Chapter on ‘Public Finance’ in: Economic Survey 2014-15 & Indian Public Finance Statistics
2014-15.
Table 1.3: Recent Trends in Central Tax to GDP Ratio
Your Tax to GDP ratio - Tax to GDP ratio - See :f

Central Direct taxes Central Indirect taxes ;
State’s shares
(in percent)
2003-04 2.7 3.89 6.59
2004-05 2.94 3.99 6.93
2005-06 S19 4.13 Tose,
2006-07 3.83 4.34 8.18
2007-08 4.64 4.17 8.81
2008-09 4.16 S71 7.87
2009-10 4.04 3.01 7.05
2010-11 3.94 3:37 (od

Overview of the Indian Tax System ® 7
Year —Ss-—saXtoGDPratio- —Tax to GDP ratio - pg Ae ee .

Central Direct taxes Central Indirect taxes es neto
ss
. State’s shares
(in percent)
2011-12 3.73 3.26 6.99
2012-13 3.88 3.46 7.34
2013-14 (PA) 3.92 3.45 7.36

2014-15 (BE) 4 3.56 7.55
Source: Indian Public Finance Statistics 2014-15.
Table 1.4: Recent Trends in Tax Revenues and GDP Growth Rate
a ral tax revenue (net) State’s total tax revenue GDP
ect taxes Direct taxes ee spied a
. prices
_ (in per-
aN) OB INEMe) OINtMa) rs
2005-06 1,178,260 1,524,380 498,090 2,676,150 9.285
2006-07 1,645,910 1,865,910 667,850 3,187,400 9.264
2007-08 2,315,700 2,079,770 872,690 3,435,130 9.801
2008-09 2,342,180 2,091,010 937,630 3,783,680 3.891
2009-10 2,616,840 1,948,510 1,153,110 4,289,970 8.480
2010-11 3,071,210 2,627,470 1,437,010 5,580,960 10.260
2011-12 3,358,900 2,935,960 1,655,050 6,728,990 6.638
2012-13 3,919,900 3,498,880 1,767,280 7,975,120 5.081
2013-14 (RE) 4,447,270 3,912,980 2,021,800 9,022,410 6.899
2014-15 (BE) 5,149,860 4,578,170 2,336,570 10,316,540 7.168
Source: (International Monetary Fund 2015)": Indian Public Finance Statistics 2014-15, Ministry of
Finance, Department of Economic Affairs, Economic Division and World Economic Outlook Database
(International Monetary Fund).
Reviewing India’s tax to GDP ratio in the backdrop of OECD countries, it is seen
that India does not match up with the benchmark of OECD member countries. For FY
2013-14, India’s total tax to GDP ratio was 17.09 percent (Ministry of Finance, Depart-
ment of Economic Affairs, Economic Division 2015)”, relatively lower than the aver-
age recorded by OECD countries (~ >30 percent).
11 International Monetary Fund 2015, World Economic Outlook Database, Available at:
http://www.imf.org/external/pubs/ft/weo/2015/01/weodata/weorept.aspx?pr.x=52&pr.
y=11&sy=1980&ey=2020&ssd=1 &sort=country&ds=.&br=1 &c=534&s=NGDP_RPCH&grp=0&a,
accessed in May 2016.
12 Ministry of Finance, Department of Economic Affairs, Economic Division 2015, Indian Public
Finance Statistics 2014-15, Available at: http://finmin..in/reports/IPFStat201415.pdf, accessed
in May 2016.
8 @ Tax Disputes in India
Figure 1.1: Tax GDP Ratio - A Comparative Analysis
°
S
i)
—_
a
a)
Oo
x
oO
es
OECD Average India United States United Kingdom

Countries
Source: (Ministry of Finance, Department of Economic Affairs, Economic Division 2015)": Indian
Public Finance Statistics 2014-15, Government of India and OECD Revenue Statistic, 1965-2011.
India’s central tax to GDP ratio compared to BRICS economies in emerging coun-
tries’ leagues as stated below:
Figure 1.2: Tax to GDP Ratio —- BRICS Economies
2
o &\ 2005
& & 2008
© 2011
<
t3)
—
Brazil Russia India China South Africa
BRICS Economies
= ||
Source!!: The World Bank Database.
13 Ministry of Finance, Department of Economic Affairs, Economic Division 2015, Indian Public
Finance Statistics 2014-15, Available at: <http://finmin.nic.in/reports/IPFStat201415.pdf, ac-
cessed in May 2016.
14 The World Bank, Tax revenue (% of GDP), Available at: http://data.worldbank.org/indicator/
GC.TAX.TOTL.GD.ZS?page=1, accessed in May 2016.
Whilst it is evident that economic slowdown is a key reason for lower than average
tax collections, factors such as low tax base, lack of voluntary compliance, protracted
disputes have lead to locking up of tax demands, tax abusive practices, etc. contribut-
ing to below-par performance. As per the Press Release (CBDT 2012)" (of 2012), the
number of income tax assessees was around 33 Mn, accounting for roughly 3 percent
of India’s population.
Another measure of an efficient tax policy was discussed in the Report of the Task
Force on GST. For estimating the tax base under the proposed GST regime, the study
adopts the concept of VAT Revenue Ratio as indication of efficiency of VAT regime.
It is argued that VAT Revenue Ratios dependent on the ‘Policy Efficiency Ratio’ and
the ‘Compliance Ratio’ ‘Policy Efficiency Ratio’ represents potential tax revenue esti-
mates from an existing tax law (after making allowances for legal provisions diminish-
ing the tax base and tax rates, for instance, tax rates lower the standard rates, exemp-
tions, thresholds) when compared to tax revenue estimates under an ideal tax regime.
Policy Efficiency Ratio represents gaps in the design of the taxation regime at the
policy implementation level. ‘Compliance Ratio’ represents actual tax revenues when
compared to the potential tax revenue estimates from an existing tax law. At some
level, Compliance Ratio is suggestive of extent of tax evasion in the taxation system.
For the Indian federal level taxes on goods and services, the ‘Policy Efficiency Ratio’
has been pegged at 0.27, the ‘Compliance Ratio’ (based on anecdotal information)
at 0.84 and consequently, the VAT Revenue Ratio at 0.23. Internationally, it has been
noted that 5 countries (i.e. Korea, Japan, Switzerland, Luxemburg and New Zealand)
from amongst 29 OECD countries have a VAT Revenue Ratio exceeding 0.7; another
17 countries have a VAT Revenue Ratio ranging between 0.5 and 0.7 and the balance
7 countries have a VAT Revenue Ratio of less than 0.5. Above data reflects that there is
considerable scope for improvement in the design of indirect tax regime at the policy
level. This can be achieved only if the GST design is implemented with minimal tax
exemptions. Equally important would be to develop a GST design that minimizes
incentive and ability to evade tax and therefore ensures a better Compliance Ratio.
Tax-law Making in India

India has a federal polity. Article 245 of the Constitution empowers the Parliament to
make laws for the whole of India, including laws having extra-territorial jurisdiction;
legislature of a state is empowered to enact laws for whole of any part of the state. The
law making process in India for fiscal matters falling under the Union List and the
Concurrent List of the Constitution (i.e. direct taxes and majority of indirect taxes)
consists of the Ministry of Finance making amends to respective statutes", tradition-
ally as part of annual Finance Bill.
15 CBDT 2012, PIB Release/DL/226, May 15, 2012.

16 Department of Revenue administers the following fiscal statutes, namely, Income Tax Act, 1961;
Wealth Tax Act, 1958; Chapter V of Finance Act 1994 (relating to Service Tax); Central Excise Act,
1944 and related matters; Customs Act, 1962 and related matters; Central Sales Tax Act, 1956.
Available at: http://dor.gov.in/functions, accessed in May 2016.
Tax legislation for the Union of India is drafted by civil servants in the Ministry of
Finance. Similarly, tax legislation for State Governments is drafted by civil servants
with the respective State Finance Ministries. Once primary legislation is drafted in
the relevant Ministry of Finance, it gets vetted by civil servants in the Ministry of Law
and Justice and then presented in the lower house of the Parliament (Lok Sabha) as
the Finance Bill (also referred to as Money Bill); once approved, this Bill is moved to
Upper House (i.e. Rajya Sabha) for approval before being referred for the Presidential
assent. Following the Presidential assent, the Bill is promulgated as the Finance Act,
vide notification in the Official Gazette. The respective fiscal statutes stand amended
with effect from the date of notification of the Finance Act in the Gazette.
In addition, the Parliament is within its powers to enact a new levy by providing
for, even if such levy doesn’t form part of any identified/existing tax statute. For exam-
ple, Service Tax was legislated for the first time vide the Finance Act 1994, and contin-
ues to be administered as such without the Parliament enacting a distinct statute as in
the case with most of other federal statute (such as Income-tax Act; Central Excise Act,
1944; Central Customs Act, 1962, etc.).
Insofar fiscal matters falling in the state list (e.g., State VAT), tax legislation are
promulgated by the state legislature, approved by the State assembly and notified after
the assent of the Governor. A rather complex case may be presented to the Parliament
in enacting a country wide legislation which subsumes powers of state legislatures
to levy tax in their respective state territories. A case in point is - legislating the GST.
Such law-making requires a prior constitutional amendment” conferring powers on
the Parliament and State Legislatures to legislate in matters falling outside the Union
and State Lists.
Regardless of the law-making agency, each of the federal level fiscal statutes carry
inherent provisions empowering the Department of Revenue to lay down supplemen-
tary legislations through the two Boards of Taxes - CBDT in the matters pertaining
to direct taxes and CBEC in matters pertaining to indirect taxes viz., customs, excise
and service tax. Supplementary legislations can take form of Rules/Notifications/
Circulars/Instructions issued by these two apex bodies of tax administration. Each of
the Boards is headed by a Chairperson with members”. The two Boards report to the
Finance Minister of India through the Secretary (Revenue). The powers and functions
of the Boards emanate from the Central Board of Revenue Act, 1963. The structure
and functioning of two boards are discussed in the subsequent section of this Chapter.
Where the legislature or the administrative machinery are unable to provide guid-
ance, the judiciary play a vital role in interpreting the legal provisions and establish
17 The Constitution (122"") Amendment Bill, 2014 provides for insertion of new Article 246A to the
Constitution of India, inter alia, amendments to other Articles. The full text of the Constitutional
Amendments proposed in this behalfisavailable on the link - Available at: http://www. prsindia.
org/uploads/media/Constitution%20122nd/Constitution%20%28122nd%29%20%28A %29%20
bill.pdf, accessed in May 2016.
18 At present CBDT has six members; CBEC has seven members. The members are ex-officio
Special Secretaries to the Government of India as per information Available at: persmin.gov.
in/AIS1/Docs/ServiceProfile_IRS.pdf, accessed in May 2016 and <http://www.cbec.gov.in/ht-
docs-cbec/info-act/cbec/cbec, accessed in May 2016.
Overview of the Indian Tax System ™ 11
precedents with respect to ambiguous matters of law. As per Article 141 of the Consti-
tution of India, any decision by the Apex Court becomes law of the land and is there-
after binding on all HCs/subordinate courts and on the tax administration. On the
other hand, HC decisions have territorial application. Accordingly, the SC has held
that judgments by HCs have a persuasive value and is not binding on non-jurisdiction
Court. The situation worsens in case conflicting judgments are pronounced by qua-
si-judicial forums, such as Tribunal or by State HCs. Further, on certainty and predict-
ability of tax law and its application, perhaps the most critique is Government’s action
in past decade to resort to retrospective amendments that overturn judicial decisions
which favour taxpayers.
Retrospective Legislation"?
The Parliament has within its power to legislate; the judiciary” in the past have upheld
that the power to legislate subsumes prospective as well as retrospective legislation;
this holds for retrospective amendments carried out to tax legislations as well?!. In
the past, the successive Finance Acts have introduced retrospective legislations to
tax statutes, some of which have courted controversy” too, particularly in instances
where such amendments were solely intentioned to assail the law laid down by Courts
including the Apex Court. There are three aspects of the constitutional validity of a
retrospective amendments; viz., validity of the retrospective character of the amend-
ments; validity of amendment vis-a-vis Article 14° of the Constitution of India; and an
extra-territorial operation of the substantive levy of charge.
On principle, when the legislature introduces retrospective amendments with
substantial changes in law under the garb of ‘clarificatory’ amendments, which are
in fact meant to reverse the judiciary’s verdict(s) on existing law, it simply under-
mines the powers ofthe judiciary. Since the Indian Constitution calls for ‘separation
of powers’ between the legislature, executive and the judiciary, in order for them
to function independently and harmoniously, a recurrent practice of overriding
judicial decisions disturbs the critical balance between the two organs of the state.
19 The author has expressed his views on retrospective amendments in news articles: Butani, M
2008, ‘Fairness of Retrospective Amendment, Business Standard March 10, 2008 Butani, M 2009,
‘Menace of retrospective amendments, Business Standard August 10, 2009.
20 The Apex Court Ram Krishna v. State of Bihar [1963] 50 ITR 171 (SC) has upheld that the legisla-
ture can make valid law for prospective as well as retrospective operation; similar view has been
upheld subsequently by other Courts.
21 National Agriculture Cooperative Federation v. UOI (2003) 260 ITR 548 (SC).
22 Whilst discussing the legislative competence for enacting retrospective legislation(s) parame-
ters within which such laws must be enacted, the author in an article tilted, ‘Does Retrospective
Legislation Compromise Judicial Independence? The Constitutionality of the Vodafone Legisla-
tion, India Law News dated March 1, 2013; opined that the retrospective amendment of taxation
of indirect transfer could not be held to be ‘clarifying’ the intent of the IT Act, so as to include the
off-shore sale of shares by one foreign company to another foreign company (such as Vodafone)
within the ambit of section 9 of the IT Act. Such amendments ought to be regarded as substan-
tive amendments causing levy of new charge of tax and thus, could not be given a retrospective
operation as per settled legal principles.
23 Article 14 of the Constitution recognises the ‘right to equality’ before law and prohibits discrim-
ination on basis of religion, race, caste, sex or place of birth.
12 ® Tax Disputesin India
It raises doubts over potential overreach of constitutional powers entrusted to the

legislature, and invites challenges to constitutional validity of such retrospective
amendments.
The foremost presumption while examining its constitutionality of a statute is a
presumption in favour of its constitutionality; such presumption can be displaced
by ‘only the clearest and weightiest evidence™. Such presumption hypothesis is even
stronger while interpreting the constitutionality of fiscal laws. The interference of
the Court in such matters must not happen unless ‘the exercise of legislative judg-
ment appears to be palpably arbitrary’® or ‘the view reflected in the legislation is not
possible’
However, where it is proved beyond doubt that certain Acts of the legislature is
palpably arbitrary, the Courts strike down such legislation as unconstitutional. One
such instance of arbitrariness would be where a law violates, Article 14 which provides
that laws of the country will not deny equality before the law. Another instance could
be where an act of legislature gives an extra-territorial application to a law which is
intended to apply exclusively within the country”.
Is Inadequate Law-making Root Cause of Tax Dispute?

The constitutional framework for law-making is relatively simpler; yet, mounting
statistics of tax disputes particularly in the last decade, ought to be recognized as an
area of significant concern for the Legislature and Executive besides impacting ease
of doing business and hampering domestic and foreign investment. To a large extent,
reasons for rapidly increasing pile of tax dispute and growing ageing of tax disputes
can be attributed to -
1) Inadequate and meaningful stakeholder participation at the time of shaping
the law;
2) Limited brainstorming at the stage of legal drafting leading to lacunae in law;
3) Ambiguity and inconsistency in application of law among tax administrators
regarding scope and applicability of the law resulting in ineffective implemen-
tation;
4) Inadequate guidance to tax administration at field level;
5) Tendency of the government to file repetitive appeals against taxpayers.
The ambiguities embedded in legislative provisions lead to alternate
interpretations by taxpayers and the tax administration. Inadequate supplementary
24 R.C. Tobacco v. Union of India (2005) 7 SCC 725.

25 R.K. Garg v. Union of India (1981) 4 SCC 675.
26 Article 246 of the Constitution gives Parliament an authority to make laws which are extra-ter-
ritorial in application. Article 245(2) says that no law made by the Parliament shall be deemed
to be invalid on the ground that it would have extra territorial operation. The Apex Court in the
case of Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC), obitered that
it is trite that laws made by a country are intended to be applicable to its own territory, unless it
is shown that the intention was to make the law applicable extra territorially. In the case of GVK
Inds. ltd. & anr. appellants v. The Income Tax Officer &Anr. Civil Appeal no. 7796 of 1997, the
Apex Court upheld legislative competence of the Parliament to enact laws with extra-territorial
jurisdiction subject to nexus with India.
Overview of the Indian
Tax System ® 13
legislation in the form of timely administrative guidelines adds to woes of taxpayers. On

several instances taxpayers and the tax administration have filed cross appeals merely
because the provisions are capable of multiple interpretations. In the absence of clear
administrative guidelines in the context of such interpretative issues, tax officials at
field level inherently exercise individual discretion in addressing matters. This gap
outlines the pivotal role of the administration not only in the law-making exercise
but also in timely resolution of conflicts either by way of subordinate legislation or by
exercise of administrative powers, including power not to appeal.
India’s Tax Demographics - A Glance at Key Data Points
Taxpayer Base
‘Taxpayer base’ is the focal point of any tax regime and typically bears a direct rela-
tionship with tax revenues. The data available for direct tax indicates that there has
been constant addition to the taxpayer base. From FY 2006-07 to FY 2009-10, there has
been an overall growth of 6.84 percent in the taxpayer base. In FY 2010-11, however,
the growth was arrested, with the taxpayer base declining from ~34.08 Mn (in FY 2009-
10) to ~33.74 Mn (in FY 2010-11). The concerned Ministry in its reply to the Public
Accounts Committee indicated that slide in taxpayer base was on account of increase
in income exemption slab.
Table 1.5: Growth of Taxpayers (Direct Taxes)
: Number of Corporate :Number of non-corpo- Total taxpayers

EY. taxpayers rate taxpayers
(in Mn) (in Mn) (in Mn)
2006-07 0.398 31.505 31.903
2007-08 0.498 33.164 33.662
2008-09 0.327 32.322 32.649
2009-10 0.367 ais fas1 34.084
2010-11 0.376 33.242 33.738
2011-12 0.585 35.761 36.346
2012-13 0.590 36.787 Sol
2013-14 0.636 30.403 31.039
2014-15 0.675 36.055 36.73
Source: Eighty Seventh Report of the Public Accounts Committee (2013-14) and the Report of
Comptroller and Auditor General of India for the year ended March 2015 [Report No. 3 of 2016 (Direct
Taxes)].
Since FY 2010-11 CBDT has taken multiple steps for widening of taxpayer base,
spanning from compulsory quoting of PAN to collecting/analyzing information from
the Directorate (Intelligence), the cornerstone for the objective has been - encourage
voluntary compliance through simplification of tax law and associated compliances.

The CBDT’s Central Action Plan (2015-16) proposes host of strategies to promote vol-
untary compliance amongst taxpayers.
Data available with respect to registered taxpayers under the excise and service
tax laws suggests an increasing trend and a consequent increase in the tax base.
Table 1.6: Growth of Taxpayers (Indirect Taxes)
Number of registered taxpayers Number of registered taxpayers

FY under excise under service tax
(in Mn) (in Mn)
2010-11 0.351 1.552
2011-12 0.382 1.752
2012-13 0.409 1.982
2013-14 0.436 2.259
2014-15 0.467 2.511
Source: Report No. 2of 2016 (Indirect Taxes-Central Excise) and CAG Report No. lof 2016 (Indirect
Taxes-Service Tax) of the Comptroller and Auditor General of India.
The CAG report’’ observes that there is a steady growth in number of registered
assesses under the central excise law. The top 100 taxpayers (in terms of revenue con-
tribution), comprising oil sector companies, tobacco products, automobile, cement,
steel and tyre manufacturers, contribute 70 percent of central excise revenues. But
broadening of tax base is necessary to ensure further growth of revenue. With increas-
ing reliance on voluntary compliance, it becomes important for the department to put
in place an effective mechanism to collect information from various sources to iden-
tify persons who are liable to pay but have avoided payment and bring them in the tax
net. A robust data analysis should form the backbone of such a mechanism. Having
identified potential taxpayers, efforts to collect the tax by the department should
be devoid of harassment; instead, such effort should be in the form of assistance to
taxpayers to comply with law. This approach would promote voluntary compliance
(Ministry of Finance 2014)”.
For the service tax registrations, it was observed in the CAG report” that though
number of registered persons had decreased by about 32 percent during FY 2014,
there was an increase in the number of assessees who filed returns compared to FY
2013. The Director General of Service Tax prepared and circulated a Plan of Action to
the Chief Commissioners on May 26, 2003. The plan required the field formations to
obtain information on unregistered service providers from different sources such as
Yellow Pages, newspaper advertisements, regional registration authorities and web-
27 Report No. 7 of 2015 (Indirect Taxes-Central Excise).

28 Ministry of Finance 2014, ‘Third Report of the Tax Administration Reform Commission:
29 Report No. 4 of 2015 (Indirect Taxes-Service Tax).
sites, information from municipal corporations and major taxpayers including PSUs
and private sector organisations regarding various services being availed by them.
Subsequently, CBEC issued instructions to create a special cell in each Commis-
sionerate to identify potential taxpayers (Ministry of Finance 2014)”.
The recent CAG reports” note that under the excise law, there is a steady growth
in number of registered assessees. However, only ~40 percent assessees are filing
returns. Similarly under the service tax law, number of registered persons as also the
number of assesses filing returns are increasing steadily. However, the percentage of
registered assessees filing returns has not significantly increased (at around 41 to 43
percent).
Tax Collections
Predictably, the gross tax collections have shown a positive trend over last few years,
with direct tax collections accounting for the majority share of the pie. Consistent with
the upward trend in number of taxpayers, the direct tax collections have grown at a
healthy rate of 10 percent or more. Table 1.7 below reflects the increase in direct tax
collection as a percent to gross tax collections (including all direct and indirect taxes).
Table 1.7: Increase in Direct Tax Collections
Direct Taxes Increase in

; Gross Tax :
FY Direct Taxes Revewic (as a percent direct tax
(in INR Mn) to Gross Tax collections
(in INR Mn) :
Revenue) (in percent)
2009-10 3,775,940 6,245,270 60.46 --
2010-11 4,459,950 7,933,070 56.22 18.11
2011-12 4,939,870 8,891,180 55.56 10.76
2012-13 5,589,890 10,364,600 OS:93 13.16
2013-14 6,385,960 11,389,960 56.07 14,24
2014-15 6,957,920 12,451,350 55.88 8.96
Source: Report of Comptroller and Auditor General of India for the year ended March 2014 and Report
No. 3 of 2016 (Direct taxes).
There has been an increasing trend in the collection of central indirect taxes i.e.
customs, excise and service tax. In fact, the tax collection as doubled over the five year
period from 2009-10 through 2014-15.
30 Ibid.
31 Report No. 2 of 2016 (Indirect Taxes-Central Excise) and Report No. 1 of 2016 (Indirect Taxes-
Service Tax).
Table 1.8: Increase in Central Indirect Tax Collections
: : Indirect tax collections

Customs Central Excise Service Tax
FY (in Mn) (in Mn) (in Mn) (as percent of Gross
yee Tax Revenue)
2009-10 833,240 1,029,910 584,220 39.29
2010-11 1,358,130 1,377,010 710,160 43.54
2011-12 1,493,280 1,449,010 975,090 44.16
2012-13 1,653,460 1,758,450 1,326,010 45.80
2013-14 1,720,330 1,694,550 1,547,800 43.67
2014-15 1,880,160 1,890,380 1,679,690 43.87
Source: Report No. 2 of 2016 (Indirect Taxes-Central Excise), CAG Report No. lof 2016 (Indirect Tax-
es-Service Tax) and CAG Report No. 5 of 2016 (Indirect Taxes-Customs) of the Comptroller and Auditor
General of India.
Increasing trend is also visible in the State indirect tax revenues. The growth how-
ever does not appear as robust over the five year period as in the case of central taxes.
The key differentiator in the growth rates could be attributed to taxation of services
which is the exclusive domain of the central government. Value added tax constituted
around 61 percent of aggregate own tax revenues of the States, remaining almost
unchanged throughout the period 2004-05 to 2012-13. On the other hand, royalty
earnings, as a percentage of aggregate own non-tax revenues rose from 11.6 percent
in 2004-05 to 21.8 percent in 2012-13 (Finance Commission, India 2015).*
Table 1.9: Increase in State Tax Revenue Collections
i. State indirect tax

Total State indi-
: collections
Sales Tax rect taxes includ- :
FY (as percent in-
(in Mn) ing sales tax
e crease over last
(in Mn)
year)
2011-12 3,450,600 5,574,000 21.0
2012-13 4,038,500 6,545,500 174
2013-14 (revised estimates) 4,815,300 7,528,600 15.0
2014-15 (budget estimates) 5,367,900 8,398,700 11.6
Source: Reserve Bank of India, State Finances: A Study of Budgets of 2014-15, May 2015.
Revenue Foregone
One of the key underlying objective of tax policy framework is to garner revenue for
Government exchequer, so as to fund Government’s annual budgetary spend. The
amount of revenue raised is largely dependent on the dimensions of taxpayer base
and applicable tax rates. India being an emerging economy, the Government largely
32 Finance Commission, India 2015, Report of the Fourteenth Finance Commission, Available at:
http://fincomindia.nic.in/ShowContentOne.aspx?id=9&Section=1, accessed in May 2016.
shoulders the burden for inducing investment and growth activity in the country,
which is often supported through incentives and subsidies, particularly, within the tax
laws. The task for Government is cut out as on one hand the requirement is to shore
up adequate revenues for funding the budgetary spend, whilst on the other hand, the
industry, especially the developing segments, expects a financial cushion.
The Income-tax Act (the Act) houses multiple exemptions, deductions, rebates
etc., which go on to reduce the effective tax rate. The trend in Revenue foregone for
corporate and non-corporate taxpayers is tabulated below -
Table 1.10 Revenue Foregone (Amount in INR Mn)
Taxpayer
category
4996-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Corporate 450,340 621,990 669,010 728,810 579,120 617,653 687,200
Non- 321,430 380,570 375,700 451,420 368,260 393,754 335,350

corporate
Total 771,770 ~=—-1,002,560 1,044,710 1,180,230 947,380 1,011,407 1,022,550
Source: Eighty Seventh Report of the Public Accounts Committee (2013-14).
It is clearly evident that the revenue foregone for corporate taxpayers is more than
that of non-corporate taxpayers. Such a trend has been in place by virtue of plethora
of tax incentives provided in the Act to companies for promoting activities in specific
sectors. A case in point is the break-up of effective tax rate in the Revenue Forgone
Statement for FY 2013-14, which indicates that effective tax rate of smaller companies
(i.e. companies with PBT < INR 10 Mn) is 26.89 percent, whilst effective tax rate of
companies with PBT > INR 5 billion is 20.68 percent.
As India moves towards alignment with tax rates applicable in OECD countries,
the present FM, Mr Arun Jaitley, in his budget speech for 2015-16 promised a phased
reduction in corporate tax rates from 30 percent to 25 percent over a four year period,
beginning from FY 2016-17. Subsequently in the Budget 2016-17, the FM has released
the roadmap for phasingout of direct tax incentives. Whilst the Budget 2016 didn’t
propose corporate tax rate reduction, a reduced tax rate of 25 percent and 29 percent,
respectively have been proposed for manufacturing companies (not claiming income
tax holiday/incentives) and specified category of corporate taxpayers (i.e. small com-
panies with turnover/gross receipts not exceeding INR 50 Mn).
On the indirect tax front, the CAG report notes that revenue forgone as percentage
of customs receipts during the last five years ranged from 179 to 295 percent. During
the FY 13, 86 percent of the Revenue forgone was on the commodities, crude and
mineral oils, diamond and gold, machinery, vegetable oils and cereals, chemicals and
plastics. The revenue forgone under Export Promotion schemes accounts for 44 per-
cent of the customs receipts during the FY 13. It was also observed that the Revenue
forgone for FY 14 in respect of Excise duties was 1,956,790 Mn (1,776,800 Mn as gen-
eral exemptions and INR 179,990 Mn as area based exemptions) which is 115 percent
of revenue from Central Excise.
Table 1.11: Indirect Tax Revenue Foregone (Amount in Mn)
FY ey _ Central Excise
(in Mn) ae)
2009-10 2,454,783 1,691,210
2010-11 2,426,061 1,922,270
2011-12 3,011,714 1,955,900
2012-13 3,184,804 2,099,400
2013-14 3,494,050 1,962,230
2014-15 4,979,450 1,847,640
Source: Report No. 2 of 2016 (Indirect Taxes-Central Excise) and CAG Report No. 5 of 2016 (Indirect
Taxes-Customs) of the Comptroller and Auditor General of India.
However, estimates of revenue forgone are not available for service tax. TARC,
in its third report observed that revenue foregone figures are not available mainly
due to absence of adequate data. This, as observed by the CAG, would imply that
the department would not be in a position to do a gap analysis. In respect of cen-
tral excise, the approach of the department has been to extrapolate data from ACES
(duty forgone due to area-based exemptions scheme has been obtained separately
from the concerned Central Excise zones). Similarly, for Service Tax, the depart-
ment should consider ways to estimate revenue foregone figures and do a gap anal-
ysis (CAG 2015).*
As part of recommending revenue neutral rates for GST, it was noted that given
the historic opportunity afforded by the GST, the aim should be to clean up an Indian
tax system that has effectively become an “exemptions raj” with serious consequences
for revenues but also governance. According to the government’s own figures, excise
tax exemptions (and taxing goods at low rates) result in foregone revenues of INR
1,800 Bn or nearly 80 percent of actual collections. Tentative estimates suggest that
the comparable figure for the States is about INR 1,500 Bn. Together, India loses about
2.7 percent of GDP because of exemptions (Ministry of Finance 2015)™.
Uncollected Demands
Every year, CBDT formulates Central Action Plan which, inter alia, lays down strat-
egies for streamlining collection and recovery of taxes. Despite such administrative
guidance, there are huge arrears in the collection of tax demands.
33 CAG 2015, CAG Report No. 4 of 2015 (Indirect Taxes-Service Tax).

34 Ministry of Finance 2015, Report on the Revenue Neutral Rate and Structure of Rates for the
Goods and Service Tax (GST).
Table 1.12: Statistics for Uncollected Demand
ArrearDemand CurrentDe- _—‘Total Demand — Growth

FY Pending = mand Pending Pending
(in Mn) (in Mn) (in Mn) _ (in percent)
2006-07 853,350 311,190 1,164,540 =
2007-08 868,590 374,150 1,242,740 6.72
2008-09 933,340 1,079,320 2,012,760 61.96
2009-10 1,816,120 474,200 2,290,320 13:79
2010-11 2,028,590 887,700 2,916,290 233
2011-12 2,650,400 1,433,780 4,084,180 40.05
2012-13 4,094,560 767,240 4,861,800 19.04
2013-14 4,800,660 952,740 5,753,400 18.34
2014-15 5,687,240 1,314,240 7,001,480 21.69
Source: Eighty Seventh Report of the Public Accounts Committee (2013-14), the Report of Comptroller
and Auditor General of India for the year ended March 2014 and Report No. 3 of 2016 (Direct taxes)
(Modified).
A glance at above statistics reveals that during FY 2006-07 to FY 2013-14, the total
demand pending has increased approximately four times the actual amount. In a
written reply to the Standing Committee on Finance, CBDT indicated following rea-
sons for the uncollected demand:
e Untraceable taxpayers;
e Stay of demands by the Court/ITAT;
e Pendency of case already before the Board for Industrial and Financial Recon-
struction/Competent Authorities for MAP/Settlement Commission; and
e Inadequacy of the (attached) assets with the taxpayers, etc.
Arrears of central indirect taxes have been subject matter of CAG audits. In the
recent audit reports*, it was observed with respect to excise duty that the collection
during FY 14 had fallen drastically to 2.59 percent compared to 4.34 percent in FY 13 and
that there was a need to strengthen the recovery mechanism of the department. Excise
amount in arrears as at the commencement of the fiscal year 2013-14 was INR 454,630
Mn with a collection of INR 11,780 Mn. In the context of service tax it was observed as
matter of concern that the collection as ratio of arrears during FY 14 had fallen drasti-
cally to 3.12 percent compared to 11.40 percent in FY 13 and that there was a need to
strengthen the recovery mechanism of the department. Service tax amount in arrears as
at the commencement of the fiscal year 2013-14 was INR 395,370 Mn with a collection of
INR 12,320 Mn. Similarly, customs revenue of INR 118,359 Mn demanded up to March
2013 was not realised by the department at the end of the FY 13. Of this, INR 24,680 Mn
was undisputed. However, INR 12,539 Mn (51 percent) of the undisputed amount had
not been recovered for a period of over five years. Ministry stated (March 2014) that in
order to boost the tax arrears recovery various measures have been chalked out which
35 Department of Revenue 2015, Report No. 7 of 2015 (Indirect Taxes-Central Excise) Department of
Revenue 2015, Report No. 4 of 2015 (Indirect Taxes-Service Tax) and CAG 2014, CAG Report No.
12 of 2014 (Indirect Taxes-Customs).
included creation of computerized database of arrears and regular updating/review

by the field formations, regular inspection of arrears and advising field formations for
suitable action. Field formations have been directed to create a dedicated team of offi-
cers for recovery of arrears beside a Handbook on Recovery of arrears of Revenue of
Customs, Excise and Service Tax has been published and circulated to all formations to
provide first-hand information of arrears.
Key Administrative and Procedural Aspects of Direct and

Indirect Tax Law
Governing Legislation/Subordinate Legislation
As discussed, whilst tax legislations are enacted by the Parliament and/or the state
legislature, the delegated powers have been conferred upon on the finance ministries
at the centre or in the respective states. Ministry of Finance frame subordinate legis-
lation in the form of rules, regulations, notifications (for example, eligible persons/
schemes for tax benefits), circulars (containing the tax department’s interpretation
of provisions), instructions (for example, guidelines to field authorities regarding tax
refunds), etc. At the Centre, such delegated powers are exercised by the respective
boards under the aegis of the Department of Revenue, Ministry of Finance, viz., CBDT
and CBEC for direct and indirect taxes, respectively.
Primary tax legislations normally contain enabling provisions [to CBDT and
CBEC] to make rules and regulations, giving the right to the executive to issue circulars
to articulate the Revenue’s position on interpretive aspects of tax legislations and
instructions to guide field formations. For instance, Section 119 of the Act empowers
CBDT to issue orders, instructions and directions to income-tax authorities for
administration of the Act. These rules, regulations, circulars and notifications form
the supplementary legislation, and aid in administration of tax laws legislated by the
Parliament or the State legislatures; they constitute an important element in day to
day administration.
The exercise of drafting subordinate legislation is undertaken at the Central level
by the Department of Revenue in the Ministry of Finance through the two boards -
CBDT and CBEC. At State Government level, officials in State Finance Ministry under-
take these functions. The process of subordinate legislation making has received flak
in the past, for limited or no participation from stakeholders. There are instances in
which stakeholders have expressed dissatisfaction with the outcome. In more recent
past, circulars (CBDT 2013)* on transfer pricing issues relating to taxation of R&D cen-
ters set up by multinational software companies received significant push back from
stakeholders, before being rescinded (CBDT 2013)*’ and reissued (CBDT 2013)* follow-
ing multiple representations from the respective industries. The scenario is slowly and
gradually changing given the overarching emphasis transparency as one of the pillars of
36 CBDT 2013, Circular 2 of 2013, “Circular on application of profit split method”, March 26, 2013.
CBDT 2013, Circular 3 of 2013, “Circular on conditions relevant to identify development centres
engaged in contract R&D services with insignificant risk; March 26, 2013.
37 CBDT 2013, Circular No 5, June 29, 2013.
38 CBDT 2013, Circular No 6, June 29, 2013.
Overview ofthe Indian Tax System @ 21
tax administration, increasingly, the two Boards have begun to seek wider stakeholder
participations by seeking public comments on draft circulars and guidelines.
Indian Courts” have held that subordinate legislation in form of circulars, rules
etc. are binding on the tax department and not taxpayers. Also, taxpayers may chal-
lenge subordinate legislation in Courts on the grounds of it being arbitrary or contrary
to the provisions of the primary legislation. To avoid any inherent conflict vis-a-vis
Courts, CBEC has recently released a Circular (CBEC 2015)” stating that Board circu-
lars contrary to subsequent judgements of the SC would become non-est in law and
should not be followed.
It has been recommended in a report by the Standing Committee of Parliament
for the Ministry of Finance that reliance on subordinate legislation should be mini-
mized and attempts should be made to design tax legislation in a way as to provide
more certainty to taxpayers (Ministry of Finance (Department of Revenue) 2012)".
This also raises a debate on whether Boards responsible for tax administration and
achievement of revenue targets should indeed solely be vested with the function of
carrying forward legislative changes to the Act and formulating rules or whether a
single body holding these responsibilities entails an inherent conflict.
Administrative Boards and Officers
Historically, the administration of taxes was orchestrated by the Central Board of
Revenue (set up under the Central Board of Revenue Act, 1924), until January 1, 1964
when this Board was split (Ministry of Finance (Department of Revenue) 2012, s 3)”
into two separate Boards viz., the CBDT for direct taxes and CBEC for indirect taxes.
CBDT
CBDT is headed by a Chairperson and six members, viz.,
(i) Member (Income-tax);
(ii) Member (Legislation & Computerisation);
(iii) Member (Personnel & Vigilance);
(iv) Member (Investigation);
(v) Member (Revenue); and
(vi) Member (Audit & Judicial).
The work allocation amongst the Chairperson and the above-mentioned Mem-
bers is based on their respective responsibility; for instance, the Chairperson is
responsible for overall administrative planning, foreign training, supervision and
control over Director General of Income Tax (International Taxation), matters related
to Grievance Cell and Inspection Division, coordination and overall supervision of
Board’s work, etc. The Member (Income-tax) is responsible for all matters pertaining
to the Act, inter alia, assessments, recovery of taxes, appeals, etc.
39 State Of Kerala v. K. M. Charia Abdullah & Co (1965) 1 SCR 601 (SC); ACIT v. Tusnial Trading Co
(1998) 66 ITD 286 (Gauhati ITAT).
40 CBEC 2015, Circular No 1006, September 21, 2015.
41 Ministry of Finance (Department of Revenue) 2012, Report of Standing Committee on Direct Tax
Code Bill, 2010, pp. 59-60.
42 Central Board of Revenue Act, 1963.
A diagrammatic organization structure of CBDT is presented below -
Figure 1.3: Organization Structure of CBDT
Chairperson
CBDT
Member Member Member Member

Member : os Member
osag [investigation] [Audit and § [Legislation & | [Personnel & [Revenue]
Judicial] [|Computerisation] § Vigilance}
CIT CIT
[Income Tax uy [Audit &
[Investigation]
Appeals} Judicial]
cr
(Coordination &
System]
Source: First Report of the Tax Administration Reform Commission (TARC) dated May 30, 2014.
CBDT is further supported by Divisions and Directorates for its policy, opera-
tional, support and monitoring functions.
(i) The divisions are headed by Joint Secretaries/Commissioners and support
the Board, reporting through different Board members based on the work
allocation of the members.
(ii) The Directorates are separate subordinate offices of the CBDT who inter-
face with it through the different Board members, again based on their work
allocation.
The work allocation is currently divided in the following DGIT in the CBDT:
e DGIT (International Taxation);
e DGIT (intelligence & Criminal Investigation);
e DGIT (Logistics);
e DGIT (Training);
e DGIT (Administration);
e DGIT (Systems);
e DGIT (Vigilance);
e DGIT (Legal & Research);
e DGIT (Human Resource Development);
e DGIT (Exemption);
e DGIT (Investigation).
These Directorates have offices which are either located only in Delhi or
across the country (Directorate of Investigation, Directorate of International
Taxation). The Directorates are assigned specific tasks such as Investigation

(Directorate of Investigation), Computerization (Directorate of Systems), etc.
(iii) Currently, CBDT is supported on the field by Directorates. The direct interface
with taxpayers, scrutiny of tax returns, the raising of tax demands, dispute
resolution and tax collection is mainly done by the field offices of the CBDT
which are located across the country. In the field formations, tax officers
i.e. ACs IT/ITOs (whose jurisdictions are called ‘circles/wards’), working in
‘ranges’ supervised by Joint Commissioners/Additional Commissioners under
a ‘city’ charge supervised by a Principal Commissioner of Income-tax. A ‘city’
charge is in turn supervised by Chief Commissioner of Income-tax. In high
tax revenue collection cities/areas (like the cities of Mumbai, Delhi, Chennai,
Kolkata, Bangalore, Hyderabad, Ahmedabad, Pune etc.), there are multiple
member Chief Commissioners and also a Principal Chief Commissioner. The
Principal Chief Commissioner also has additional administrative functions for
the metropolitan area. The different members of CBDT are also allocated field
formation in specific geographical areas (‘zones’) for supervision and interface
with and controlling with the field authorities of their respective regions. A
pictorial presentation of the field formations has been produced below-
Figure 1.4: Field Formation Under Member CBDT
Member CBDT
[Zonal Member]
Principal
CCIT
Principal Principal Principal iam ameL aan

CCIT CCIT cot § i Charge }
lym bh, aha \
See
| Additional Additional Additional
l
Circle P--4 Additiona
To facilitate operational effectiveness, tax officers are allocated jurisdiction over

taxpayers on particular criterion; for instance, there is segmentation between corpo-
rate taxpayers and other taxpayers. Further, the jurisdiction of tax officer over corpo-
rate taxpayers is classified alphabetically; on the other hand, non-corporate taxpay-
43 Available at: http://office.incometaxindia.gov.in/delhi/Documents/Jurisdiction/jurisdiction-

details.pdf, accessed in May 2016.
ers are generally categorized on the basis of taxpayers’ residential area. Moreover tax-
payers are allocated to particular levels of tax officers (i.e. Additional Commissioner/
Joint Commissioner/Deputy Commissioner/Assistant Commissioner/Income Tax
Officer) on the basis of complexity of the case or quantum of turnover/taxable profits
of the taxpayer.
CBEC
The apex body in India governing the indirect tax related matters is the CBEC. It is sub-
ordinate to the Department of Revenue under the Ministry of Finance, Government
of India. CBEC is statutorily empowered to issue instructions to the revenue officers
administering the Customs, Central Excise and Service Tax laws. In terms of administra-
tive delegation of functions by the Department of Revenue, CBEC deals with the tasks
of formulation of policy concerning levy and collection of customs and central excise
duties, service tax, prevention of smuggling and evasion of duties and all administrative
matters relating to Customs, Central Excise, Service Tax and Narcotics formations.
CBEC is the administrative authority for its subordinate organizations includ-
ing customs houses, central excise and service tax commissionerates. It reports to
the Ministry of Finance through the Revenue Secretary appointed by Government
of India. CBEC is headed by a Chairperson and six members representing functional
verticals. The Chairperson and the members are currently of the rank of ex-officio
Special Secretaries of the Government of India.
Figure 1.5: Organization Structure of CBEC
Member Member
Member [P&
[Customs & [Comp. & ST
V] & Budget
Export] & L&J]
: Director ——
[CX-6/8] _ JS
Js ma [Review] iS
[Customs] Commissioner _[Admin)
[P&C] Director
Director :
[Customs] DS [DBX]
Director
[CX-9/3]
Review!
Director Lf Director (Legal]

[LC] {PAC] |
Director —
[AD-4 4 & A}
The functions” of chairperson and all the members of CBEC are pre-defined in
terms of functions:
(i) To be performed by the Board as a whole,
(ii) To be performed by the Chairperson alone and
(iii) To be performed by the individual members of the Board.
The functions which are considered by the Board as a whole are:
e General policies related to:
a. Tax planning and statutory changes
b. Organization of field formations
c. Personnel management and training
d. Methods and procedures of work
e. Performance budgeting
e Legislative proposals;
e Decisions on recommendation of committees;
e Write off or abandonment of revenue;
e Any other matter brought to notice of board by chairperson or member.
The assessment and tax recovery function are executed by the field functionaries
or the executive officers of CBEC, headed by Chief Commissioners. All the three taxes
- Customs duty, Central excise and Service tax are administered separately by respec-
tive field functionaries. For administrative convenience the country has been divided
into several zones. There are 23 central excise zones, 11 custom zones and 4 service
tax zones in the country. CCs or PCCs are the administrative in charge of each zone.
Below these zonal offices there are 119 Central Excise Commissionerates, 22 Service
Tax Commissionerates, 60 Customs Commissionerates, 60 Appellate Commissioner-
ates and 8 LTUs. The jurisdiction of Commissionerates has been divided into Divi-
sions. The area of a Division depends upon the density of the industry, complexities of
the commodities being dealt by the division and quantum of revenue receipts. Each
Division is headed by a Deputy Commissioner/Assistant Commissioner. The jurisdic-
tional area of a Division is divided into Ranges. Each Range is headed by a Superin-
tendent designated as a ‘Range Officer: Each Range officer has two or three inspector
under his charge. A new concept of the Audit Commissionerates has been introduced
in the recent cadre restructuring whereby 45 Audit Commissionerates have been set
up across the country.
44 CBEC. Available at: http://www.cbec.gov.in/, accessed in May 2016.

Figure 1.6: Structure of Directorate in CBEC
Chief Commissioner
Commissioner Commissioner
Commissioner
[Adjudication] [Appeals] _
Additional
Commissioner
Joint
Commissioner
Deputy
Commissioner
Assistant
Commissioner
Superintendent/
Appraising Officer
CBEC is separately supported by directorates which work as attached offices

of CBEC and carry out operational functions, support functions and monitoring
functions in specific areas allocated to them. Attached and subordinate offices of
CBEC include:
e Directorate general of inspection;
e Directorate general of revenue intelligence;
e Directorate general of anti-evasion;
e Directorate general of vigilance;
e Directorate general of goods and service tax;
e Central revenue control laboratory;
e Directorate of organization and management;
e Directorate statistics and intelligence;
e Directorate of preventive operations;
e Directorate of publicity and public relations;
e Directorate of valuation;
e Directorate of systems;
e Directorate general of audit; and
e National academy of customs, excise and narcotics.
In the case of state legislations related to VAT, central sales tax and other taxes
which are governed by state laws, the structure of administrative authorities varies
from state to state. Every state has designed separate legislation to specify the powers
and duties of its officials. The administrative structure is however, more or less similar
in most states. The finance department is led by the principal secretary and a rev-
enue secretary. The principal secretary is supported by officers in the Commercial
Tax Department of the state, who oversee state’s indirect tax system. The Commercial
Tax Department is headed by a State level Commissioner. There are officials working
below the Commissioner level who assist in the overall control and management of
indirect tax system in the state. Other than the administrative officers, there are appel-
late officers such as the Commissioner (Appeals) and a separate tribunal which is the
last fact finding authority in the state for tax disputes.
Overview of Procedural Aspects

Direct Tax
Administration of direct taxes is driven by self-declaration principle; i.e. taxpayers
undertake self-assessment of income accrued/received during the year and furnish
such particulars to the income tax department in the return form*’. Further, provi-
sions of the Act provide for payments of taxes in advance i.e. ‘pay as you earn’ prin-
ciple; however, liability to taxes on income crystallizes on completion of FY. If after
such determination, taxpayer is required to pay tax over and above advance tax and
TDS, the balance tax is paid as self-assessment tax. Tax returns, once furnished, are
first processed by CPC* for rectification of errors; inter alia, arithmetical errors, and
mistakes apparent from records.
Taxpayers’ case may be selected for detailed scrutiny by the Revenue authorities.
Selection of such cases would be selected under CASS, on the basis of certain selec-
tion filters, and later apprised to the jurisdictional authorities. Apart from this, every
year CBDT issues internal Instruction (CBDT 2015)” re procedure and criteria for
risk based selection of cases for compulsory scrutiny. In October, 2015, the risk based
scrutiny procedure has been extended to TP assessments (CBDT 2015)* as well. In its
endeavour to revamp the scrutiny selection process, CBDT has issued instructions/
circulars from time to time. Recent additions to the series of instructions for selection
of scrutiny assessment by CASS are the instructions (CBDT 2015)* issued on Decem-
ber 29, 2015. The Instruction 19/2015, proposes to run CASS system in advance, giving
sufficient time to the Revenue authorities to go through the tax returns for identifying
issues which require examination. Further, the said instruction directed the Revenue
authorities to ask for specific information/document in the questionnaire to avoid
ambiguity and undue hardship on the taxpayers.
45 There are separate forms prescribed for various categories of taxpayer (i.e. ITR 1, ITR 4S, ITR 2,
ITR 2A, ITR 3, ITR 4, ITR 5, ITR 6 and ITR 7).
46 CPC is the processing centre established in Bengaluru (Karnataka) in the year 2009, for bulk
processing ofe-filed and paper returns.
47 Most recent instruction at the time of compilation being Instruction 8/2015 dated August 31,
2015.
48 CBDT 2015, Instruction No 15/2015, October 16, 2015.
49 CBDT 2015, Instruction No 19/2015, December 29, 2015 and CBDT 2015, Instruction No 20/2015,
December 29, 2015.
On the other hand, to expedite the assessment process a new CASS system has
been proposed by CBDT in its Instruction 20/2015. Under the new system, taxpayers’
returns would be selected either for ‘Limited Scrutiny’ or ‘Complete Scrutiny’ (to be
intimated to the taxpayers at the time of service of assessment notice). Whilst, ‘Lim-
ited Scrutiny’ matters would confine the information to be sought from taxpayers,
however, during the course of scrutiny, if potential income escapement” comes to the
notice of the tax officer, the case may be taken up for ‘Complete Scrutiny, subject to
the approval Principal CIT/CIT.
Once a case is selected by jurisdictional tax officer for ‘Complete Scrutiny, com-
prehensive questionnaire is issued to examine taxpayer’s case, and the tax officer is
within his jurisdiction to call for additional information to frame the assessment. The
timelines for completion of assessment and passing of assessment order may vary on
particulars. If a taxpayer is aggrieved with the order of the jurisdictional tax officer,
he may choose to appeal the same to higher appellate authority, detail appellate pro-
ceedings for which are discussed in the subsequent section.
Indirect Tax
Three major indirect taxes, viz., Central Excise, Service Tax and Customs are admin-
istered by a single administration i.e. CBEC under Ministry of Finance, Government
of India. Final fact finding appellate authority i.e. CESTAT is common for all three
levies. It is, therefore, natural that basic thinking and approach on procedural aspects
is similar under these three taxes. Provisions related to adjudication in all the three
legislations are more or less similar except in case of few specific issues where the law
expressly prescribe a different course of action.
The Customs, Central excise and Service tax laws work under a self-assessment
mechanism. Under the self-assessment mechanism under the central excise and
service tax laws, the taxpayer assesses the liability of tax payment on his own and
submits the information to the tax authorities by way of returns. An assessment
under Central Excise is essentially an invoice based self-assessment, except in case of
cigarettes. Rule 6 of Central Excise Rules provides that the taxpayer shall himself assess
the duty payable on excisable goods, except in case of cigarettes, the Superintendent
or Inspector of Central Excise shall assess the duty payable before removal of goods.
The taxpayer has to submit monthly return in the prescribed form*!. The return
has to be along with self-assessment memorandum, where taxpayer declares that
the particulars in the return are correctly stated. In case of service tax also, section
70(1) of Finance Act, 1994 provides that every person liable to pay service tax shall
himself assess the tax due and file the return. The return filed by taxpayer contains a
self-assessment memorandum. After submission of return by taxpayer the first level
scrutiny is completed by an online system which validates the information filed in
return in terms of completeness and accuracy of data. At the second level the returns
are selected on the basis of predefined parameters which are scrutinized in detail
50 Monetary limit for potential income escapement is INR 1 Mn for metro cities of Delhi, Mumbai,
Chennai, Kolkata, Bengaluru, Hyderabad and Ahmedabad) and INR 0.5 Mn for other cities.
51 Form ER-1/ER-2/ER-3.
by the authorized officers of the department. The authorized officer scrutinizes the
return on the basis of information contained in the return and further enquiry as
considered necessary. Taxpayer has to make available all documents and records for
verification as and when required by such officer. If the officer is of opinion that there
is short payment, SCN cum demand is issued to the assessee. Based on evaluation
of the defence put up by the taxpayer, the officer concerned thereafter makes an
adjudication and issue an order.
Under Customs laws, the import/export customs clearance process is han-
dled in an automated environment through the ICES, which works in conjunction
with the e-Commerce portal of the CBEC, ICEGATE, and the customs’ RMS. The
importer is required to file electronically a bill of entry containing a declaration
of goods imported. Similarly, for export of goods, the exporter is required to file a
shipping bill. On filing of bill of entry or shipping bill and self-assessment by the
importer/exporter, the documents are transmitted to the RMS. The RMS processes
the data through a series of steps and produces an electronic output for the ICES
to determine whether a particular bill of entry or shipping bill will be taken up for
verification of assessment or examination or both by customs or be cleared with-
out any customs intervention after payment of duty, if any. Also wherever required,
RMS provides instructions to appraising/examining officers to help them discharge
their functions. The accredited clients are given assured facilitation and their con-
signments are interdicted for verification of assessment or examination by customs
only rarely on a random basis. PCCV is done to confirm the correctness of the duty
assessments. The objective of the PCCV is to monitor, maintain and enhance com-
pliance levels, while reducing the dwell time of cargo. The bills of entry are selected
for audit by RMS after clearance of the goods and directed to the audit officers for
scrutiny. The number of bills of entry taken up for PCCV may be adjusted locally in
the custom house in tune with available manpower resources. Normally, it is kept
at 20-30 percent of total import consignments. In respect of accredited clients, an
onsite post-clearance audit program has been launched under which the audits are
to be done by the central excise/service tax officers in the premises of these import-
ers, along with central excise/service tax audit”.
Under the state indirect tax laws such as VAT and central sales tax, the assess-
ment procedure is more or less similar to central level indirect taxes whereby the
taxpayer files the return on the basis of self-assessment of tax liability. Officers of
state tax department scrutinize the return and information filed by the taxpayer.
On the basis of such scrutiny, if the authorities are of the view that tax obligations
are not met by the taxpayer, SCN is issued to provide other information for com-
pleting the tax assessment. The tax officer passes an assessment order after con-
sidering the legislative provisions and may impose additional tax as per the law
and also validate the benefits (availed by the taxpayer) in terms of exemptions,
notifications etc. However as matter of practice, yearly assessments for large tax-
payers are still the norm.
52 Ministry of Finance, Government of India, Second Report of the TARC.

Adjudication in Indirect Taxes

To adjudicate means to hear or try and decide judicially and adjudication means
giving a decision. Any authority competent to pass any order or decision under the
legislation is termed as an adjudicating authority. Commissioner (Appeals) and CBEC
are not covered under the definition of adjudication authorities. Various adjudicating
authorities are defined in the customs, excise and service tax legislations on the basis
of monetary limits of issue under consideration.
As discussed before, in case the declaration or self-assessment of tax is not
acceptable to the department or there are other legal deficiencies with the documen-
tation, the appropriate officer issues a SCN spelling out such deficiencies. Taxpayers
can reply to such SCN, submit the documents relied upon to explain the position and
insist on a personal hearing to explain its case. The concerned officer in turn is duty
bound to provide a hearing and consider the submissions filed in the reply, keeping in
mind first principles of natural justice. The notice which is adjudicated by an appro-
priate officer leads to an adjudication order. This order can accept the position of the
taxpayer and drop the proceedings or confirm the objections pointed out in the SCN.
In the latter case, depending upon the nature of dispute, the officer may pass an order
imposing additional tax liability, which may be accompanied by interest for non-pay-
ment or late payment. The officer can also impose penalty in case it is found that the
deficiency is in violation of law and liable to penalty. The officer can, in certain spec-
ified cases and subject to administrative safeguards prescribed under the legislation,
also lodge a complaint with the criminal court for an alleged offence. A complaint
before the criminal court is not governed by the provisions of the legislation and is
instead addressed under the Code of Criminal Procedure, 1973.
The tables below depict the limits defined for adjudication under various central
laws.
Table 1.13: Limits Defined for Adjudication Under Central Excise and Service Tax
Desiguation Powers of Adjudication

(Amount of duty involved)
Superintendent Up to INR 0.1 Mn (excluding cases involving determination of rate

of duty or valuation and cases involving extended period of lim-
itation)
Deputy/Assistant Up to INR 0.5 Mn (except cases where Superintendents are

Commissioner empowered to adjudicate however all valuation and classification
cases are decided by Deputy/Assistant Commissioner, irrespec-
tive of amount of duty involved)
Joint/Additional All cases upto INR 5 Mn

Commissioner
Commissioner Without limit
Source: First Report of TARC.

Table 1.14: Limits Defined for Adjudication Under Customs (Cases Other than Baggage)
ae :
Designation
- Powers of Adjudication
a (Amount of duty involved)
Deputy/Assistant All cases up to INR 0.5 Mn
Commissioner
Joint/Additional Without limit for all cases involving erroneously paid drawback,
Commissioner collusion, wilful misstatement or suppression of facts etc. and up
to INR 5 Mn for other cases
Commissioner Without limit
Revenue authorities under the Customs, Excise and Service tax laws are empow-
ered to determine classification, valuation, refund claims and the tax/duty payable.
They are also empowered to grant various permissions under rules and impose fines,
penalties and confiscation where deemed appropriate. They are required to follow
‘principles of natural justice’ Their adjudicating powers are prescribed under respec-
tive Acts and departmental circulars and the orders passed by these authorities are
appealable at higher level.
At state level, the assessment process is initiated by the authorized officers in
appropriate cases. The assessment order issued by the tax officer may be challenged
by the taxpayer at higher dispute resolution forums.
History of Tax Reforms

It was stated that:
He (the King) should take from the kingdom, fruits as they ripen, as from a garden,
avoiding taking unripe fruits, for that will beself-destructive, and cause an uprising
against him (Kautilya 5.2.70)°.
India’s first tryst with tax laws dates back to ancient times. Manu, an ancient sage
stated in his script ‘manusmriti’ that the king could levy taxes and taxes should be
related to the income and expenditure of the subject. He cautioned the king against
both extremes, i.e. complete absence of taxes and exorbitant taxation.
In 300 BC, Kautilya penned the Arthashastra™, which delves into finer aspects of
taxation and provides insights to be followed by an ‘ideal’ king -
It was stated that:
Just like a leech, calf and bee draw only small-but-very-small quantities from their
respective feeds (i.e., blood, milk and honey); similarly a King should, by his orders,
take from his subjects, very small amounts of taxes (Manu Smriti 7.129).*
The evolution of modern tax laws in India started in 1860. 19" and 20" century,
the Indian tax system witnessed multiple modifications, key milestone being the year
53 Kautiliya’s Arthashastra Book 5, Chapter 2, Sloka 70.

54 The treatise on statecraft, economics and military strategy.
55 Manu Smriti Chapter 7, Sloka 129.
1922, when Income-tax Act, 1922, was implemented. Post-independence, the 1922
Act was replaced in 1961 by the Act.
Policy Focus
In addition to garnering revenue for financing budgetary spend, the Government has
leveraged on tax policy to induce savings-investments pattern and address regional
inequalities. In the last few decades the policy emphasis has been towards rationalisa-
tion of tax rates and broadening of the tax base. Based on recommendations of multi-
ple expert committees”, tax rates were consolidated and reduced over three decades.
The corporate tax rate for domestic companies which stood at 50 percent in 1985-86
was reduced to 40 percent in 1994-95, to 35 percent in 1997-98 and eventually to 30
percent in 2005-06. Whilst the tax rate has remained unchanged since 1997-1998, the
overall tax cost has increased on account of surcharge and cess levied in addition to
the base rate of corporate tax; at present the corporate tax rate, taking into account
(maximum) surcharge and cess is 34.608 percent*’. For individual taxpayers, the high-
est tax slab rate stood at 50 percent in 1985-86, which was reduced to 40 percent in
1992-93 and to 30 percent in 1997-98. Currently, the maximum tax slab for individual
taxpayers, after factoring (maximum) surcharge and cess, is 34.608 percent.
Moderating tax rates along with weeding out tax exemptions has been one of
the key focus areas of the direct tax reforms in past couple of decades. Potential tax
revenue forgone by the Central Government on account of various tax exemptions is
annually estimated since 2007-08 and reported in the Budget documents tabled in the
Parliament. In February 2015, Finance Minister Arun Jaitley announced the next phase
of rationalisation in corporate tax rates, by announcing the new governments plan to
bring down the tax rate to 25 percent over next 3 to 4 years, whilst simultaneously
weeding out direct tax exemptions/concessions. Considering that the effective tax
rate (i.e. after taking into account various exemptions/concessions) on corporates
has gradually increased from ~19.2 percent in 2005-06 to ~23.2 percent in 2013-
14°, Finance Minister’s announcement has certainly enthused taxpayers which are
currently not availing tax exemption/concessions.
Gearing up Tax Administration and Dispute Resolution Framework

Acknowledging that mere policy changes may not be adequate, successive
Governments have attempted changes in the tax administration to gear up India’s
direct tax regime to attract foreign investments and address the issues emerging
as a result of increased cross border participation in the economy. From time to
56 Planning Commission 2001, Report of Advisory Group on Advisory Group on Tax Policies and
Tax Administration for the Tenth Plan, headed by Dr Parathasarathi Shome; Ministry of Finance
2002, Report of the Task Force on Direct Taxes, headed by Dr Vijay L Kelkar and other expert
committee reports.
57 Applicable for domestic companies as amended by Finance Act 2015. For foreign companies the
same is 43.26 percent.
58 As amended by Finance Act 2015. The Finance Act 2016 has increased this rate to 35.535 percent.
59 Ministry of Finance, Statement of Revenue Impact of Tax Incentives under the Central Tax System:
FYs 2013-14 and 2014-15.
time, the CBDT has undertaken cadre structuring” to establish a fair and objective
administrative framework for implementing direct tax laws. In 2006, Income Tax
Ombudsman was institutionalised in 12 cities throughout the country to address
grievances of taxpayers.
Key milestones re administrative and tax policy changes in the last 25 years have been
tabulated below.
Table 1.15: Initiatives by the Government in Administering Dispute Resolution

Year(s) . Milestone
1990s ¢ Creation of the post of Deputy Commissioner of Income Tax for better admin-
istration of taxpayers
1993 e Advance Rulings on specified cross borders tax matters institutionalized
1994 e New PAN system introduced
e Income tax cadre review and creation of > 2,000 additional posts
e Regional Computer Centres were set up in Chennai, Delhi and Mumbai to
promote swift usage of information technology by the income tax department
1995 - 1997 e Infrastructure for operational needs of CBDT strengthened
Voluntary Disclosure Scheme 1997 introduced
1998 - 2000 e Introduction of section 260A to enable direct appeals to HC
e Introduction of Kar Vivad Samadhan Scheme 1998
e Introduction of Samman Scheme 1999 to honour deserving taxpayers
2001 e Introduction of TP Regulations for augmenting tax revenues by preventing
taxpayers from shifting profits outside India
2002 to 2008 e Online processing of returns propelled throughout the country
e Introduction of the concept of Large Taxpayers Unit
e National website of income tax department launched
Setup of Cyber Forensic Labs
2009 e Dispute Resolution Panel to expedite the resolution of TP disputes
Centralized Processing Centre in Bengaluru for bulk processing of e-filed and
paper returns facilitate
2011 to date e TIEA signed with 16” countries
2012 - 2013 e APA introduced to bring certainty and avoid transfer pricing disputes
e Safe Harbour Rules announced
2014 e New National Website of the Income Tax Department launched with
enhanced features and new content
e Special Investigation Team to investigate Offshore Black Money
e TARC submitted its report of reviewing the applicability of tax policies and tax
laws in the context of global best practices and recommending measures for
reforms to enhance its effectiveness and efficiency
60 Such as, creation of the post of Deputy Commissioner of Income Tax in the year 1990, new posts
for Commissioners of Income-tax in the year 1996, new posts at the level of Directorate General
and Director of Income Tax in the areas of Research, International Taxation and Infrastructure
in the year 2001, creation of additional benches DRPs in the year 2015, etc.
61 As on January 8, 2016.
Year(s) Milestone ~ —
2015 Implementation of GAAR provisions under the Income-tax Act postponed to
April 2017
AAR’s reach expanded to include certain resident taxpayers; capacity build-
ing by setting up new benches of AAR
Clarifications issued on ‘indirect transfer’ rules
Committee under Justice RV. Easwar to look into the provisions of the
Income-tax Act which cause litigation and are impacting the ease of doing
business in India.
January - The Easwar Committee submitted its first report in January 2016 dealing with
March 2016 simpler issues; more complex issues to be taken up in subsequent reports.
Recommendations in the first report deal with both, suggested legislative
changes and implementation through administrative measures, inter alia,
re-audits of concluded assessments, recovery of disputed demands, transpar-
ency in tax administration, etc. The report was put up in public domain.
Union Budget 2016
e The EM during the Budget speech for 2016-2017 acknowledged the recom-
mendations made by the Easwar Committee and accepted some of these in
the proposals made by the Budget
Further, some of the proposals in the area of dispute resoluticn as introduced
by the Finance Act 2016 are -
— Introduction of ‘The Direct Tax Dispute Resolution Scheme, 2016} providing
an opportunity to declarant to pay the ‘tax arrears’ in dispute and thereby
reducing the huge backlog of cases.
- Rationalising time limit for assessment, reassessment, etc.
- Provision for automation of paperless assessment.
Provisions for settlement of past cases impacted by 2012 retrospective law on
‘Indirect taxation!
To enhance ease of compliance, traditional procedures for tax filings and

payments have been revamped with intensive use of IT. From electronic e-filing
facility to e-payment of taxes, web based facility for taxpayers to track the status of
refunds, setting up of Cyber Forensic Labs to identify relevant digital data during
search and survey operations, launching TRACES™, etc., served as stepping stones to
enhance stakeholders’ confidence in the tax system of the country, whilst at the same
time supporting creation of taxpayer data based on pan India basis.
Amnesty and Felicitation Schemes

Historically, efficiency of the indirect tax system and compliance levels was distorted
with high rates of tax, large number of exemptions and a ‘Command and Control’ vig-
ilance approach. To achieve higher level of economic growth the government through
various reform committees took a step forward in direction of indirect tax reforms.
Major tax reforms in indirect taxes include -
62 TDS Reconciliation, Accounting and Correction Enabling System.

Tax Systern @ 35
* ‘Transition from single point taxation with limited or no set-off mechanism to a

multi-tiered, value added and input credit based system. For the central taxes,
this was done in the year 2004 when input credit chain for customs, excise and
service tax was integrated. At the State level, ‘value added tax’ was introduced
across States from the period from the years 2003 through 2008
* ‘The above transition also enabled a move towards self-assessment in con-
junction with a risk based review and audits by the Revenue authorities. This
approach has been adopted under the various central laws such as the excise
and service tax law with the customs law being the most recent in this regard,
having moved to a self-assessment mechanism in the year 2011. State level VAT
laws introduced during the years 2003 through 2008 are also self-assessment
based.
¢ Service tax regime was historically a regime under which specified and defined
services were subject to tax. This resulted in massive number of disputes
around classification and taxability of various services. This dispute area has
been substantially trimmed town with introduction of comprehensive basis of
taxation of services in the year 2012. Under this regime, all services other than
a smaller ‘negative list’ and ‘exempted list’ of services are excluded from tax-
ation.
¢ Certain other areas have been addressed over a period of time under the cen-
tral laws. For instance, appeals against the order passed by CESTAT in mat-
ters related to valuation and classification can be appealed directly to SC. The
mechanisms of appeal to HCs have been abolished in cases of classification
and valuation related disputes to minimize the time frame of dispute reso-
lution and to bring in the uniformity. The nomenclature for classification of
goods under excise and customs laws has been aligned with the HSN. It has
helped to a large extent in reducing the disputes related to classification of
goods. There has been a reduction in number of exemption notifications and
end-use exemption notifications over the period of time. Scope of ADR forums
such as the advance ruling authority and settlement commission have been
progressively expanded, even though these forums have, so far, had a very lim-
ited effect in reduction of tax disputes
¢ The Government of India had announced its National Litigation Policy (NLP)
in 2010 specifically “based on the recognition that Government and its various
agencies are the pre-dominant litigants in courts and Tribunals in the country”.
In the context of tax disputes, the NLP inter alia stated that “appeals in Revenue
matters will not be filed if the stakes are not high and are less than that amount
to be fixed by the Revenue Authorities” Following the mandate of the NLP, the
tax-boards have issued instructions” to their officers against pursuing litiga-
tion in matters involving revenue up to specified thresholds. These thresholds
See (2010) 6 SCC (Journal) 17. It is understood that the Government of India is actively consid-
ering a revision of this Policy to substantially expand its contours.
64 Ibid. Para V(G)(a).
65 CBEC 2010, Circular F.No.390/Misc./163/2010-JC, October 20, 2010; CBEC 2011, Circular
F.No.390/Misc./163/2010-JC, August 17, 2011in the context of Central Indirect Taxes.
have been periodically revised upwards and directions have been issued to
diligently observe these limits in filing appeals excepting cases “(a) where the
constitutional validity of the provisions of an Act or Rule is under challenge; (b)
where notification/instruction/order or Circular has been held illegal or ultra
vires; and (c) where audit objection on the issue involved in a case has been
accepted by the Department.’
e The Law Ministry has further unveiled a comprehensive ‘Legal Information
Management and Briefing System (LIMBS) to ensure time-bound and effective
litigation management. In his letter to fellow Secretaries (Secretary, Ministry of
Law & Justice, Government of India 2015)*’, the Law Secretary explained the
synergies available from efficient deployment of LIMBS to state that it “has the
potential to capture information pertaining to different courts/tribunals and
categorize them into various sets of customized MIS reports through friendly
dropdown menus for aiding the various levels of administration, i.e. right from
the dealing clerk to the apex level and provides for information sharing on
areas of common legal interest and has a reminder back up through SMS to
provide timely alerts for catalyzing action by concerned functionaries in a par-
ticular case.”
On similar lines, the CDBT has launched the ‘National Judicial Reference
System’ (NJRS) which is “a computerized repository of all judgments and
pending appeals related to Direct Tax cases at the ITATs, High Courts and the
Supreme Court” targeted towards providing “intelligent search facilities and
work flows for officers of the department engaged in litigation work to enable
the department to closely monitor appeals as well as to carry out research
and analysis on various issues” (CBDT 2015). Besides other administrative
advantages NJRS offers to the Income Tax Department, it permits its officers
to strategically target key issues leading to litigation and provide support for
expedited decision-making. It is understood that the CBEC is actively working
on a similar technological platform for achieving this end in the context of
indirect tax cases.
e The most ambitious indirect tax initiative undertaken in the last decade, which
will have a far reaching effect in unifying the Indian economy and facilitating
business within the country, is the proposed introduction of a countrywide
GST. Separate taxation powers to the Centre and the States as mandated in the
Indian Constitution has led to multiplicity of indirect taxes besides the Excise
duty and Service tax levy by the Centre and VAT by the states. These include
state excise on alcoholic liquor, entry tax, octroi, entertainment tax, taxes on
lotteries and gambling, luxury tax, electricity duty and taxes on transportation
of goods and passengers levied in different states of the country. These are
compounded by specific cess(es) and surcharges on the tax rate to generate
resources for a specific purpose. All have led to cascading of taxes and double
66 Ibid.
67 Secretary, Ministry of Law & Justice, Government of India 2015, D.O. Letter No. A-60011/14/2014-
Admn.IV(A), August 14, 2015.
68 CBDT 2015, Circular ENo. DIT(L&R)-I/NJRS/XV/2014-15/439, March 19, 2015.
taxation at many points in the value chain for production and marketing of
goods and services in India besides leakages. Separate administrative and
compliance regimes are also in for administering separate taxes. This severely
impacts the efficiency and ease of doing business in a unified market which
India as a country should ideally be. The proposed GST will be a major move-
ment to such a unified market because it will integrate the tax base for both
goods and services across the value addition in the production and distribu-
tion of these goods. The nation-wide GST however requires a number of politi-
cal, administrative, legislative and Constitutional changes as it entails redistri-
bution of taxation powers between the Centre and the states from that which
is currently laid out in the Constitution. The Central Government introduced
the legislation in Parliament on December 18, 2014, for amending the Consti-
tution of India to empower both the Centre and the States to levy and admin-
ister acommon GST. The said legislation was passed by the Lower House (Lok
Sabha) on May 6, 2015, and was transmitted to the Upper House (Rajya Sabha)
for its approval. The Rajya Sabha constituted a special Committee with mem-
bers drawn from all prominent political parties to examine the legislation. This
Committee submitted its report on July 22, 2015, endorsing the legislation with
minor changes. The said legislation now awaits the approval of the Rajya Sabha.
Introduction of tax amnesty schemes of Voluntary Disclosure of Income Scheme
1997° by Finance Minister P Chidambaram, and Kar Vivad Samadhan Scheme 1998”
by Finance Minister Yashwant Sinha were one of the first steps of their kind, wherein
the Government sought to expedite liquidation of tax arrears by encouraging volun-
tary disclosure in return of protection from penalties and prosecution. Thereafter, to
felicitate honest taxpayers”, Finance Ministry brought in action the Samman Scheme
1999, by recognising taxpayers’ contribution to the national exchequer and instil a
sense of pride among such honest taxpayers. Guided by the overarching macro-eco-
nomic objective to step up tax collections, the FM, vide Finance Act, 2016 introduced
‘The Income Declaration Scheme, 2016; to provide one-time opportunity to taxpayers
to declare (past) undisclosed income. Such undisclosed income would be subject to
tax at a rate of 30 percent plus surcharge at the rate of 7.5 percent plus penalty at the
rate of 7.5 - aggregating to 45 percent of undisclosed income. The compliance window
for making disclosure under the scheme will be available till September 30, 2016. Pay-
ment of taxes within the compliance window would entail immunity from prosecu-
tion, scrutiny, enquiry in respect of such income.
Overview of Dispute Resolution Framework

The stringent tax collection targets set as part of the budgetary exercise further act
as catalyst for aggressive approach of the administration and resulting difference in
opinion between taxpayers and tax officers.
69 Introduced vide Budget speech of 1997-98.

70 Introduced vide Finance Act 1998.
71 Eligible taxpayers, fulfilling the respective criterion laid down were awarded ‘Rashtriya Sam-
man’ /‘Aaykar Ratna’ /‘Samman Patras:
Broadly, the present tax dispute resolution framework can be put in three cate-
gories-
(i) Traditional appellate forums for tax matters
(ii) ADR forums
(iii) Judiciary (State HCs and SC)
In subsequent paragraphs, an overview of the aforesaid appellate forums/judi-
ciary is provided.
Traditional Appellate Forums for Tax Matters

Commissioner (Appeals)
The Commissioner (Appeals) cadre is the first appellate authority under the direct
tax and indirect tax statutes. Whilst the Commissioner (Appeals) functions under the
control of Ministry of Finance, it is expected to serve as an independent fair adju-
dicator. Insofar as direct tax matters are concerned, the Commissioner (Appeals) is
empowered to confirm, enhance, reduce or annul the impugned order (ITA s 251)”.
It is worthy to note that the Commissioner (Appeals) cannot issue directions to set
aside the assessment and refer it back to the tax officer for the purpose of making a
fresh assessment”. The law provides for a recommendatory time limit of disposing the
appeals within one year (ITA s 250)”.
Under indirect tax regime, an appeal can be preferred to Commissioner (Appeals)
against the order passed by adjudicating authorities below the level of Commissioner.
The appeal filing time is prescribed under the legislations which normally ranges from
sixty to ninety days from the date of original order of adjudicating authority. The Com-
missioner (Appeals) may pass the order judiciously after hearing the contentions of
assessee as well as the tax authorities. The Commissioner (Appeals) passes the order
called as ‘Order in Appeal: New grounds can be taken with the leave of Commissioner
(Appeals) during the period case is pending with him. The Commissioner (Appeals)
has no power to remand back the matter to the adjudicating authorities. The Commis-
sioner (Appeals), where it is possible to do so, hear and decide every appeal within a
period of six months from the date on which it is filed.
ITAT/CESTAT
The ITAT was constituted in 1941. The idea of setting up a quasi-judicial appellate
forum for resolution of tax disputes was first mooted in the Income-tax Enquiry
Report, 1936, by the committee comprising of C. W. Ayres and S R Chambers of the
Board of Inland Revenue of the United Kingdom and Khan Bahadur J.B. Vachha Com-
missioner of Income-tax, Bombay and Income-tax Enquiry Report, 1936”.
The ITAT functions under the Ministry of Law & Justice and thus, is sought to be
independent of the tax administration. Under the current provisions of the Income-
tax Act (the Act), both taxpayer and tax officer are eligible to submit appeal before the
Wy Nil Bes
73 Power deleted from June 1,2001 vide Finance Act, 2001.
74 ITAct.
75 ITAT. Available at: http://itat.nic.in/ accessed in May 2016.
Tax System ® 39
ITAT against order of the Commissioner (Appeals) [IT Act s 253(1) (a)]’*. Similarly, in
case where the taxpayer opts for DRP route for first level income assessment [instead
of Commissioner (Appeals)], and the taxpayer or administration do not agree with
final assessment order framed pursuant to the directions of the DRP, an appeal can be
submitted to the ITAT [ITAct s 253(1) (d)]”. The ITAT is regarded as the final factfind-
ing authority for income-tax purposes as appeals solely on ‘question of fact’ cannot be
submitted to HC. The IT Act prescribes a time limit of four years [ITAct s 254(2A)]” for
disposal of appeal by the ITAT.
CESTAT may accept an appeal in cases where the Order-in-Appeal is passed by
Commissioner (Appeals) or an Order-in-Original is passed by the Commissioner.
Similar to ITAT, CESTAT acts as the highest fact finding authority. CESTAT may, after
giving the parties to the appeal an opportunity of being heard, pass such orders as it
thinks fit, confirming, modifying or annulling the decision or order appealed against.
CESTAT may refer the case back to the authority which passed such decision or order
with such directions, for a fresh adjudication or decision after taking additional evi-
dence. CESTAT is mandated, where it is possible to do so, hear and decide every
appeal within a period of three year from the date on which such appeal is filed.
Figure 1.7: Timeline for Disposal of a Matter by Appellate Forums/Judiciary

Direct Tax
Supreme Court 5 to 8 years
dl
at
High Court 3 to 5 years (*)
Income-tax Appellate
Tribunal aoe
Commissioner of
Income-tax (Appeals) 3 to 4 years (*)
Assessing Officer \JITISF

(*) In certain jurisdictions, the time taken for adjudication of appeals has been observed as follows:
* By the Commissioner of Income-tax (Appeals) - 6—8 years.
¢ By High Court - 8-10 years.
Source: Discussion Paper on Dispute Resolution in Tax Matters, March 2013, published by the Federa-
tion of Indian Chambers of Commerce and Industry.
(On WICACK
(ee IRACE
78 IT Act, s 254(2A) provides that in every appeal, the ITAT, where it is possible, may hear and de-
cide such appeal within a period of four years from the end of the financial year in which such
appeal is filed.
40 ® Tax Disputesin India
Figure 1.8: Indirect Taxes
Supreme Court
(5-8 years)
Direct appeal to Supreme Court

High Court in case of disputes relating to
(4-5 years) classification and valuation of
goods.
CESTAT
(3-4 years)
Commissioner Commissioner (Appeals)

(1-2 years) (1-2 years)
Assistant/Deputy/Joint/
Additional Commissioner
(1-2 years)
Source: Discussion Paper on Dispute Resolution in Tax Matters, March 2013, published by the Federa-
tion of Indian Chambers of Commerce and Industry.
Alternate Dispute Resolution and Avoidance Forums

The present direct tax and indirect tax statutes provide for the following framework for
resolution of tax disputes-
AAR
The office of AAR was created by the Finance Act, 1993 under the Act. However, in
India, the need for such a system was recognised and conceptualized since 1970s by
certain committees viz. The Wanchoo Committee, the Choksi Committee and the
Chelliah Committee, as appointed by the Government from time to time”. The AAR is
a quasi-judicial authority housed under the Ministry of Finance and caters to issues
pertaining to, income tax, Customs, Central Excise, Central Sales tax, Service tax. The
AAR is presided by the Chairman who is a retired judge of the SC, with two members,
one each from the Indian Revenue Service (Income-tax) and the Indian Legal Ser-
vice. The AAR has been set up with its headquarters at New Delhi and pursuant to
Finance Act (No 2) 2014, two additional benches in National Capital Region (NCR)
and Mumbai are being established (Ministry of Finance (Department of Revenue)
2015)
The rulings are issued after granting a hearing to the applicant and the tax depart-
ment is permitted to submit its understanding on the issues raised in the application.
An advance ruling pronounced by the Authority is binding on the applicant in respect
79 Handbook on Advance Rulings.

80 Ministry of Finance (Department of Revenue) 2015, Notification No. 01/2015-SO 812(E), 20
March, 2015.
of the questions raised in the application and the concerned Commissioner(s), and
the authorities subordinate to him. The advance ruling remains binding as aforesaid
unless there is a change in law or facts on the basis of which it was pronounced. In
effect, it lends certainty to tax liability under the above laws. Further, no question can
be raised in the application where the matter is -
(i) Already pending in the applicants case before any department authority,
Appellate Tribunal or any Court; or
(ii) Same as in a matter already decided by the Appellate Tribunal or any Court.
The ruling is not appealable under provisions of the Act and (respective) indirect
tax laws. The aggrieved party, although, could seek to apply for constitutional remedy
by way of a Writ or SLP under Article 226 or 136 of the Constitution of India, respec-
tively.
Direct Tax
As per provisions of the IT Act, non-resident taxpayers and certain specified catego-
ries®! of resident taxpayers can file application with the AAR to seek determination of
tax outcomes of a transaction/proposed transaction. The AAR is mandated to pro-
nounce ruling within 6 months of receipt of application.
Indirect Tax*®”
From an indirect taxes perspective, the following classes of persons can seek rulings
from AAR:
(i) Non-resident setting up a joint venture in India in collaboration with a
non-resident or a resident; or
(ii) Resident setting up a joint venture in India in collaboration with a non-res-
ident; or
(iii) Wholly owned subsidiary Indian company, of which the holding company
is a foreign company; or
(iv) Joint venture in India, whereby two or more persons undertake an economic
activity which is subject to joint control and one or more of the participants
or partners or equity holders is a non-resident having substantial interest in
such arrangement; or
(v) Resident falling within any such class or category of persons as the Central
Government may by notification in the official gazette specify in this behalf.
Rulings can be sought in relation to proposed transaction, on following aspects:
(i) Determination of liability to pay taxes;
(ii) Classification related issues;
81 The provisions of the IT Act provide that residents having transactions with non-residents can
also seek ruling in relation to the tax liability of a non-resident. Public Sector Undertakings can
also apply to the AAR for a ruling. Further, the scope of the Authority has been extended further
vide notification dated November 28, 2014 and now a resident tax payer can also obtain advance
rulings in relation of his income tax liability arising out of one or more transactions valuing ru-
pees one billion or more in total.
82 National Academy of Customs, Excise and Narcotics, ‘Detailed Study Report on Authority for
Advance Rulings; NACEN, India.
(iii) Principles to determine of value of goods and services;

(iv) Applicability of notifications;
(v) Admissibility of credits;
(vi) Determination of origin of goods.
Settlement Commission
Settlement Commission functions under the Ministry of Finance and allows applicant
‘once in life time’ opportunity to undisclosed income and settle its cases. Taxpayer can
approach the Settlement Commission when his case is pending before the tax officer.
The taxpayer is required to make ‘full and true’ disclosure of relevant particulars and
pay duty/taxes before approaching the forum. The idea is to lure the tax payer to ‘come
clean’? The key motivator for taxpayers to approach Settlement Commission is the Set-
tlement Commission’s power to grant immunity from penalties and prosecutions.
Settlement Commission has its principal bench at New Delhi and three addi-
tional benches at Chennai, Kolkata and Mumbai. Under the legislative framework, the
Settlement Commission consists of one Chairman and two Members in the principal
bench in New Delhi and one Vice Chairman and two Members in each of the three
additional benches.
Direct Tax
The ITSC was constituted in 1976 under section 245B of the Act. Taxpayer can approach
the ITSC for settlement if its case is pending at any stage for assessment before the
tax officer (IT Act s 245C)*. Through Finance Act 2014 the ambit of ITSC has been
extended to include reopened cases under Section 148 of the Act as well as to the cases
where orders assessment in pursuance of under Section 254 ITAT or Sections 263 and
264 (by the CIT) have been set aside to make the fresh assessment are also included.
The complex search and seizure cases, besides the other cases having undisclosed
income of substantial amount continue to be within the ambit of ITSC.
Taxpayer can approach the ITSC at any stage of the proceedings for assessment,
subject to certain prescribed conditions, such as, additional tax payable on the
income disclosed in the application must be more than INR 1 Mn (JTAct s 245C(1))*.
The applicant has to pay full amount of additional income tax® and interest thereon
before filing the application (IT Act s 245C)*’. The ITSC is required to pass the settle-
83 ITAct.
84 Finance Act 2014.
85 ITAct, Proviso to s 245C(1) of the IT Act provides for additional tax amounts in certain cases.
86 Additional income tax where the application pertains to one year only and (i) the return has
been furnished by the assesse shall be tax on total income disclosed in the application to the
ITSC. (ii)Where return has not been furnished, tax calculated on the aggregate of the income
disclosed in the application along with returned income and tax on returned income shall be
reduced by the tax on returned income to calculate the tax on additional income. Where the in-
come disclosed in the application relates to more than one previous year, the additional amount
of income-tax payable in respect of the income disclosed for each of the years shall first be cal-
culated in the manner given in (i) and (ii).
87 ITAct.
ment order within eighteen months of filling of the application (JT Act s 245D)*®. It
has wide power of granting immunity from penalty and prosecution, which are major
sources of litigation. The order passed by the ITSC is conclusive as to the matters
stated therein and no appeal lies to any authority against the order passed by the ITSC
(ITA s 245-I)*°. However, such estoppel for appellate process does not encroach upon
the writ/SLP*° remedy under provisions of Constitution.
Indirect Tax
A separate Settlement Commission was set up to deal with the various indirect tax
laws in the year 1999. The Customs Act *! provides for a mechanism wherein a person
against whom a dispute is pending can seek settlement of the case. Chapter XIV A
(consisting of 14 sections from Section 127A to 127N) of the Customs Act, 1962, deals
with the rules for settlement of cases. The corresponding provisions under Central
Excise Act, 1944 are in Chapter V and consist of eighteen sections -from Section 31 to
Section 32 P). Vide Finance Act, 2012, the above said provisions of Central Excise Act,
1944, have been made applicable to Service tax cases under Section 83 of the Finance
Act, 1994.
To implement the provisions relating to settlement of cases, the CES SC has been
constituted in year 1999°.
The proceedings before the CES SC are declared “judicial proceedings” within the
meaning of sections 193 & 228 of the IPC and for the purposes of section 196 of the
IPC. In any case, where any proceeding under Customs Act, 1962/Central Excise Act,
1944/Finance Act, 1994, for the levy, assessment and collection of Customs duty/Cen-
tral Excise duty/Service Tax is pending before an adjudicating authority, an applica-
tion can be filed with CES SC. However, where any proceeding is referred back in any
appeal/revision, by any court, Appellate Tribunal or any other authority, to the adju-
dicating authority for a fresh adjudication/decision, such application of settlement of
such proceeding cannot be filed.
An application is not allowed to be withdrawn by the applicant. When any pro-
ceeding is referred back in any appeal/revision, by any court, Appellate Tribunal or
any other authority, to the adjudicating authority for a fresh adjudication/decision,
then application of settlement of such proceeding cannot be filed before the CES SC.
Further, settlement of a case should be within nine months from the last day of the
month in which the application was made.
DRP
One of the latest additions to ADR mechanism under the IT Act is the DRP forum. DRP
is under the control of Department of Revenue, Ministry of Finance. The Finance (No
88 ITAct.
89 IT Act.
90 N. Krishnan v. Settlement Commission (1989) 180 ITR 585, 595 (Karn), referring to Hari Vish-
nu Kamath v. Ahmad Ishaque AIR 1955 SC 233; CIT v. B.N. Bhattachargee (1979) 118 ITR 461,
480-82 (SC).
91 National Academy of Customs, Excise and Narcotics, ‘Detailed Study Report on Settlement Com-
mission; NACEN, India.
92 Vide Notification No.40/99-CE (NT) & 41/99-CE (NT) dated 09.06.1999.
2) Act 2009, introduced the DRP [vide section 144C in the IT Act] as an ADR forum to
provide speedy disposal of first stage tax disputes emerging from the assessment pro-
posed by the Assessing officer in the case of non-residents, and taxpayers who have
TP adjustments.
DRP, a collegium of three Commissioners/Directors of Income-tax, adjudicates
objections raised by taxpayers with respect to adjustments proposed by the admin-
istrator in the draft assessment order. The strict timeline of nine months provided to
pass its order clearly indicates that the intent is to fast-track resolution of disputes. The
tax officer passes the final assessment order taking into account the directions issued
by the DRP. Both taxpayer and tax officer are eligible to appeal before the ITAT against
the final assessment order (effectively, DRP directions) (ITAct s 144C).°° Vide Finance
Act 2016; the FM has amended the IT Act to exclude the tax authority’s powers to chal-
lenge the assessment order passed pursuant to directions of the DRP.
APA
APA framework provides a means by which taxpayers can voluntarily enter
into a ‘ahead of time’ agreement with the tax administration to mutually agree
(in advance) the ALP, or the manner of determination of ALP. Typically, an APA seeks
to offer multiple benefits - greater certainty on TP method adopted, mitigating pos-
sibility of disputes, facilitating financial reporting of potential tax liabilities, a tool to
reduce incidence of double taxation.
Acknowledging that TP disputes increasingly accounted for material share of liti-
gation under the IT Act, the Government, vide the Finance Act 2012, introduced APA
provisions to provide certainty to taxpayers with regard to the determination of ALP.
The APA team, though under the supervision of the Ministry of Finance, is indepen-
dent in the sense that it does not have targets for collections of taxes.
As per the rules (JT Act s 92CC)™, an APA can be entered into between CBDT and
any person (after approval of the Central Government) for determining the ALP or
specifying the manner for determining the ALP in relation to an international transac-
tion to be entered into by such person. APAs can be valid for a maximum period of five
years and can be renewed; there is an option to roll-back for four years. A ‘rollback’
enables taxpayers to retrospectively apply the APA agreed upon for a period of past
four years. The upper ceiling for the term of an APA is five years. Therefore, in essence,
the APA program now provides certainty to a tax payer for a period of nine years i.e.
certainty on ALP for future five years and past four years. Further, the terms of APA,
may have a persuasive value on the on-going litigation for past years (not covered
under the roll back). Further, the IT Act provides for Unilateral, Bilateral and Multi-
lateral APAs.
The APA process is divided into four distinct phases:
SSR isAch
94 IT Act.
Figure 1.9: APA Process - Phases
Pre-filing Preliminary
APA Negotiation and
processing of the
meeting application finalization
APA application
The Indian APA rules allow for all the three types of APAs - unilateral, bilateral or
multilateral:
(i) Unilateral: APA entered into between a taxpayer and the tax administration
of the country where it is subject to taxation
(ii) Bilateral: APA entered into between the taxpayers, the tax administration of
the host country and the foreign tax administration.
(iii) Multilateral: APA entered between the taxpayers, the tax administration of
the host country and more than one foreign tax administrations.
APAs can be executed for a continuing international transaction, or for a proposed
international transaction; whilst the outcome of a signed APA is binding on the tax-
payer and the Revenue authorities, the taxpayer has the option of withdrawing from
the process before an APA is executed.
MAP
MAP framework is provided in Article 25 of the UN Model Double Taxation Conven-
tion and OECD Model Tax Convention on Income and Capital. MAP allows represen-
tatives (i.e. Competent Authorities) of Contracting States, which enter into a bilateral
tax treaty, to resolve disputes, difficulties or doubts arising in relation to the interpreta-
tion or application of the relevant tax treaty which may otherwise result in taxation not
in accordance with the tax treaties. Ordinarily, therefore, MAP serves as an ADR forum
within the framework of bilateral tax treaties, and qualifying taxpayer may access MAP
notwithstanding remedies available under the domestic laws of the respective coun-
try where the disputes may have arisen. Most of the Indian tax treaties are negotiated
on UN Model and ordinarily contain Article 25 on MAP procedure. Article 25 of the
UN Model sets out two broad areas in which the Contracting States shall endeavour to
resolve their differences by MAP-
(i) Cases in which a taxpayer considers that the acts of one or both of the Con-
tracting States result or will result for the taxpayer in taxation not in accor-
dance with the provisions of the treaty (covered by paragraphs 1 and 2 of
Article 25); and
(ii) Cases in which there are difficulties or doubts as to the interpretation or
application of the treaty (covered by paragraph 3 of Article 25).
Judiciary (State HCs and SC)

High Court
Under the Indian judicial system, the HC stands at the head of a State’s judicial
administration. There are twenty four HCs in India, three having jurisdiction over
more than one State. Six Union Territories come under the jurisdiction of different
State HCs. Each HC comprises of a Chief Justice and other Judges as the President may
appoint. The Chief Justice of a HC is appointed by the President in consultation with
the Chief Justice of India and the Governor of the State. Each HC has power to issue to
any person within its jurisdiction directions, orders, or writs including writs which are
in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari
for enforcement of fundamental rights (under Indian constitution) and for any other
purpose’. The order passed by HC is binding on the tax authorities as well as all the
taxpayers falling in the jurisdiction of the said HC unless the order is reversed by the
SC or the legislation is amended by retrospective effect.
Further, as per provisions of the IT Act, appeal against the order of the ITAT can be
submitted to the jurisdictional HC. HC would entertain an appeal only if it involves a
‘substantial question of law: Similarly, under indirect taxes, appeal in HC can be filed
only in issues involving ‘substantial question of law: All the issues relating to classifi-
cation and valuation are directly referred to the SC.
Supreme Court
Under Article 141 of the Constitution of India, a decision rendered by the SC of India
is the law of the land and binding on all Courts and tribunals functioning in the coun-
try. In other words, dispute resolution is final at the level of the SC unless legislative
changes are made to reverse the decision of the SC. The SC, also referred to as Apex
Court of India, has original appellate and advisory jurisdiction. It is empowered to
issue directions, orders or writs, including writs in the nature of habeas corpus, man-
damus, prohibition, quo warranto and certiorari to enforce them. Under the Arbitra-
tion and Conciliation Act, 1996, International Commercial Arbitration can also be
initiated in the SC. The powers of judicial review under Article 32 provide powers to
the citizens to approach the SC for seeking remedies in case of encroachment on fun-
damental rights.
The SC has very wide appellate jurisdiction over all Courts and Tribunals in India
in as much as it may, in its discretion, grant special leave to appeal under Article 136
of the Constitution from any judgment, decree, determination, sentence or order in
any Cause or matter passed or made by any Court or Tribunal in the territory of India®.
Under Articles 129 and 142 of the Constitution, the SC has been vested with power to
punish for contempt of Court including the power to punish for contempt of itself.
Tax Controversies in Past Decade - A Mixed Bag!

Indian tax jurisprudence has evolved over the years; though never in the past have
rulings coming out of Indian courts grabbed media headlines as witnessed in recent
years. Several high profile and high stake tax disputes find their way to the Courts;
outcome of which have made news.
In some instances, outcomes of these rulings have received appreciation for
upholding the Rule of law. A case in point is the Apex Court ruling in the Vodafone
95 Indian Courts, Available at: http://indiancourts.nic.in/, accessed in May 2016.

96 Indian Courts, Available at: http://indiancourts.nic.in/, accessed in May 2016. °
Overview ofthe Indian Tax System & 47
case (2012). Although the Apex Court ruled in favour of taxpayer (i.e. Vodafone), the
legislature’s action to resort to retrospective legislation vide Finance Act, 2012 has
been widely criticised. This singular legislative move received incessant negative
press and acted as huge dampener to overall image of India as one of the most attrac-
tive investment destination in global scenario!. What followed was push and shove,
which prompted government to allay investor’s fraying nerves by clarifying that cases
of completed assessment/reassessment shall not be re-opened.
In other instances where dispute were resolved in favour of taxpayers, it took
political intervention to keep the Revenue from preferring an appeal in the higher
court. Vodafone and Shell TP ruling by the Bombay HC are two such instances?.
A quick snapshot of international headlines media coverage that select reported
tax disputes has caused is presented below -
UW WORLD ASIA INDIA NEWS
India Offers to Negotiate Setflement

inVodafoneTax Case India Won't Make Retrospective Changes toTax Laws
- Wall Street Journal "xisling cases under retroactive-tax wontbedropped
- Wall Street Journal
India: and Nokiat in :

ToxDispute 4
Before Microsoft Indian
Deal Ich An taxOm See
authorities
Sh askdecor
Supremeond
-New York Times reconsider Vodafone

- International Tax Review
India’s Vodafone decision lowers tax worries for Shell, IBM

and others
-International Business Times
nergy investors backs company in£bn
- Herald Scotland
Summary of major tax controversies witnessed in India have been summarized

below:
Taxability of ‘Indirect Transfer’ of Capital Assets

(i) Vodafone International Holdings BV’
In all fairness, Vodafone seems to be India’s most controversial cross border tax dis-
pute regarding taxability of offshore transfer of shares with underlying value of assets
in India.
1 Butani, M 2012, ‘Are taxpayers paying the price ofa turf battle?’, Business Standard [April 2, 2012]
urged the FM to re-examine the proposals enacting retrospective laws.
2 Butani M 2014, ‘A perfect-10 verdict for investment, Financial Express [October 13, 2014].
3 Vodafone International Holdings BV v. Union ofIndia (2012) 341 ITR 1 (SC).
The subject matter dispute being transfer of shares of CGP, a Cayman based sub-
sidiary of HTIL, owned by the Hutchison group, to Vodafone, a company incorporated
in the Netherlands. HTIL owned Hutchison’s operations in India though a series of
companies incorporated in Mauritius.
The Revenue authorities issued a notice to Vodafone, holding it in default for fail-
ure to withhold taxes on gains arising to HTIL on the transfer of shares of CGP, con-
tending that the sale transaction resulted in the sale of business assets located in India
from Hutchison group to Vodafone group.
Whilst adjudicating taxpayer’s appeal, the SC applied the doctrine of ‘substance
over form’ and prescribed tests for determination of existence of tax abuse. The SC
held that gains arising from the said transaction were not liable to tax (in India), and
thus there was no obligation on Vodafone to deduct tax at source.
Whilst the SC’s order in the case of Vodafone had put to rest the debate around
taxability of ‘indirect transfer; the Government subsequently enacted a series of retro-
spective amendments in the Finance Act, 2012, and reopened the debate.
To settle the dispute with Indian Government, Vodafone opted for a three member
international Arbitration panel to challenge the tax demand in accordance with its
rights under the Bilateral Investment Promotion and Protection Agreement. Media
news suggest indicated Government’s offer to settle the dispute via mediation pro-
cess (BS Reporters 2015)’. A statutory framework introduced by the Finance Act 2016,
authorizes the Government to settle cases impacted by the retrospective amendment,
with immunity from interest and penalties. The arbitration process remained largely
static due to lack of consensus on appointment of the third member to team of arbi-
trators. Recent news reports suggest that Vodafone has now approached Hague based
International Court of Justice seeking appointment of the third arbitrator (ET Bureau
2016)°. Vodafone’s move to pursue with international arbitral tribunal indicates
implied rejection of the one-time settlement offer’ announced by Indian Government
vide Finance Act, 2016.
(ii) Sanofi Pasteur Holding SA’
Similar to Vodafone, the issue involved in Sanofi was taxability of gains arising from
offshore transfer of shares ofa French company holding substantial shares in an Indian
company. Interestingly, the AP HC ruling in the case of Sanofi was pronounced sub-
sequent to the Vodafone SC judgement and retrospective amendments vide Finance
Act 2012.
4 BS Reporters 2015, ‘Vodafone for conciliation on tax dispute) Business Standard, Available
at: http://www.business-standard.com/article/economy-policy/vodafone-for-concilia-
tion-on-tax-dispute-115111900061_1.html [November 19, 2015], accessed in May 2016.
5 ET Bureau 2016 ‘Vodafone moves to International Court of Justice over tax row with India’ Eco-
nomic Times, Available at: <http://economictimes.indiatimes.com/industry/telecom/voda-
fone-moves-to-international-court-of-justice-over-tax-row-with-india/articleshow/51608333.
cms [March 30, 2016], accessed in May 2016.
6 Under Direct Tax Dispute Resolution Scheme, 2016, introduced by the Finance Act, 2016, one-
time settlement opportunity is sought to be offered for settlement of disputes emanating from
retrospective amendments. The scheme is discussed in details in subsequent section.
7 Sanofi Pasteur Holding SA v. Department of Revenue [2013] 354 ITR 316 (AP HC).
The transaction involved sale of shares of a French company (i.e. ShanH) holding
substantial shares (~eighty percent) in an Indian company (Shanta Biotechnics Ltd).
The Revenue authorities asserted that such transaction attracted capital gains tax in
India on the basis that the transfer of shares resulted in transfer of assets of the Indian
company.
AP HC held that a company (in instant case, ShanH) cannot be disregarded as a
sham merely on the ground of being an intermediate or holding entity. The conclusion
that the gain is not chargeable to income tax in India is also based on the explicit lan-
guage used in India-France tax treaty which gives the taxing right of such transactions
to France (and not India). This decision reaffirming the principles articulated by the SC
in the Vodafone case on legitimacy of holding company structures highlighted primacy
of tax treaty over domestic law. The HC upheld the proposition that an amendment (in
2012) to the IT Act does not influence the outcome in the context of a tax treaty.
Challenging the HC ruling, the Revenue authorities have filed a SLP before SC
and the final verdict is awaited.
Applicability of TP Regulations to ‘Share Issue’

(iii) Shell-India®
The controversy here was whether any income arising from an international transac-
tion is a pre-condition for invoking the TP provisions and whether the same could be
applicable to transaction of issue of shares by an Indian company to its foreign related
parent (associated enterprise).
In the present case, Shell India issued shares to its foreign associated enterprise
at INR 10 per share, whereas the tax department alleged a valuation of INR 183.44 per
share and treated the difference as income in the hands of the Shell-India.
Following the precedent set in judgement of Vodafone India’, the Bombay HC
revalidated and clarified that the transaction of issue of shares by an Indian entity to
its foreign associated enterprise does not partake the character of income in hands of
the Indian entity and as such is not subject to the TP regulations.
The HC held that the existence of income from an international transaction is a
pre-condition for invoking TP provisions under the IT Act. Income, in its normal par-
lance, would not include share proceeds, being capital receipt.
Marketing intangibles
(iv) Sony Ericsson’? and Maruti Suzuki India ltd"
The verdict surrounding TP adjustments for AMP expenses was rendered by the Delhi
HC in the landmark decisions of Maruti Suzuki India Ltd (representing manufacturers
and distributors) and Sony Ericsson (representing import distributors).
8 Ms Shell India Markets Put Ltd v. ACIT LTU and Ors (2014) 369 ITR 516 (Bombay HC).
9 Vodafone India Services Put Ltd v. Union of India |2014 | 368 ITR 1 (Bombay HC).
10 Sony Ericsson Mobile Communications India Put Ltd and others v. CIT (ITA 16 of 2014 with CA
155 of 2014) (Delhi HC).
11 Maruti Suzuki India Ltd. v. CIT ITA No 110 of 2014 and 710 of 2015 (Delhi HC).
In Sony’s case, TP adjustments were made on account of incurrence of substantial

AMP expenses by the taxpayers in their capacity as limited risk or full risk distributors.
The tax administration argued that marketing intangibles (in such excessive amount),
were in the nature of services for creation or improvement brand name of the foreign
associated enterprise, etc. and, for the benefit of foreign associated enterprises which
should have been compensated by the Indian company.
The HC in Sony’s case held that the AMP expenditure incurred by Indian dis-
tribution arm of taxpayers qualifies as an international transaction (being the
admitted position), however, the taxpayer cannot be insisted to receive separate
and exclusive reimbursement for such excessive AMP expenses from the legal
owner/licensor of the brand, particularly when Indian distributor has paid arm’s
length price for such imports having regard to their functions vis-a-vis the com-
parables. The judgment rejected application of bright line test (i.e. segregation
of routine and non-routine expenses) as it has no statutory mandate under the
Indian statute.
The HC held that if bundled transactions are concluded to be at arm’s length by
applying Transactional Net Margin Method or Resale Price Method, there is no need
to bifurcate and treat AMP as a separate transaction.
Taking a more liberal approach the Delhi HC in a subsequent ruling, rendered in
the context of Maruti, a manufacturer held that the provisions of Chapter X of the Act
does not envisage such transaction being characterized as an international transac-
tion and hence, the question of transfer pricing does not arise.
The taxpayer and tax administration has filed an SLP” in the SC against the first
set of judgements rendered in the case of Sony. The SC on January 8, 2016 has granted
leave in the matters.
Aggressive Administrative Action for Recovery of Tax
(v) Nokia’?
The case involved a vexed issue whether payments by Indian entity to foreign associ-
ated enterprise should be liable for withholding tax, being in the nature of Royalty as
alleged by the Revenue. The tax administration exercising its powers under Section
281B of the Act ordered for attachment/freezing of assets with an intent to protect the
Revenue’s interest against potential tax dues.
Nokia India, subsidiary of Nokia Finland, was engaged in manufacture and sale
of mobile devices. During the survey, the Revenue authorities discovered that from
FYs 2006-07 to 2011-12, Nokia India had made payments to Nokia Finland for use
of software in manufacturing operations and alleged that such payments constituted
‘royalty: Nokia India was thus an ‘assessee in default’ under provisions of Section 201
of the Act for failure to deduct and deposit tax. Revenue authorities passed an order
under Section 281B of the Act for provisional attachment of Nokia India’s assets, prop-
erties and bank account.
12 Canon India Private Limited v. DCIT SLP(C) No. 21367/2015.

13 Nokia India Private Limited v. ACIT & Anr (2014) 264 CTR (Delhi HC).
Nokia India filed a writ petition before the Delhi HC challenging the provisional
attachment stating that attachment of assets, etc., would bring operations to a halt
and damage its goodwill. The Delhi HC passed an interim order-
(a) Restraining Nokia India from transferring immovable and movable property;
and
(b) Issuing directions for operation of bank accounts.
Subsequently, Nokia India filed an application seeking modification of interim
court directions citing the proposed sale of Nokia Finland‘s substantial portion of
devices and services business to Microsoft International. The Delhi HC allowed the
sale of assets by Nokia India to Microsoft International, subject to -
(a) Binding statement from Nokia Finland to be jointly liable to pay tax demand, if
any, under the Act (along with furnishing of guarantee/undertaking letter.
(b) Depositing > INR 22.5 billion in an escrow account by Nokia India/Finland to
be sought.
(c) The HC allowed Nokia India/Finland to contest the income tax proceedings
and demands in appellate proceedings which is yet to be decided
Payment for Purchase of Software - Royalty?

(vi) IBM"
IBM India engaged in the business of import and sale of software products under a
distribution arrangement with IBM Singapore. IBM India made certain payments to
non-resident entities viz., IBM Singapore, a tax resident of Singapore for purchase of
software.
The revenue authorities alleged that IBM India had defaulted in not deducting
tax at source (i.e. TDS) on payments to IBM Singapore. IBM India submitted that pay-
ments made to IBM Singapore were not liable to tax withholding under the provisions
of section 195 of the Act. The primary debate on whether withholding tax shall apply
to all forms of payments to non-resident companies was settled by the SC in the case
of GE India Technology’. In the said case, the Apex court held that for withholding tax
to apply the payment should be chargeable to tax in India. If the resident taxpayer
feels that the income per se is not chargeable to tax, there is no question of applicabil-
ity of withholding tax. The SC, however, did not dwell upon the merits of the case and
make any determination on chargeability as such.
IBM contended to the revenue authorities that it had merely purchased a copy-
righted article (in the software) from IBM Singapore and the embedded copyright has
not been transferred to IBM India. By such purchase of a copy of the software for fur-
ther re-sale, one does not acquire any information concerning scientific knowledge,
experience or skill. Hence, the payment does not come within the scope of royalty as
laid down in Section 9(1)(vi) read with Explanation 2 of the Act.
The department rejected IBM India’s contention and passed orders treating it as
an assessee in default on account of non-deduction of TDS and held that as per terms
14 M/s IBM India Private Ltd v. ITO ITA Nos 520-531/2013.

15. GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456 (SC).
of the distribution agreement, there is a license to use software and hence the trans-
action was a license and not a sale particularly in light of the retrospective amend-
ment to Section 9(1)(vi) in 2012 which broadened the definition of the term royalty to
include ‘transfer of all or any right to use computer software (including grant of license)
irrespective of the medium of transfer’.
The Karnataka HC held that TDS ought to have been deducted placing reliance on
the Samsung ruling'®. The SC has admitted a Special Leave Petition in the case of JBM
together with several other cases where the payments for standardized software were
characterized as royalty.
Indirect Tax Controversies

The growing quantum of tax demand, consequential interest and possible penalties is
forcing the tax administration and taxpayers alike to pursue litigation upto the highest
forums of the system. In the following paras, trends in key disputes under indirect
taxes are discussed.
(i) E-Commerce (Dimri, R 2015)"”
The e-commerce sector requires special provisions for assessment and collection of
taxes given the constraints under the present law. A major concern for e-commerce is
the proposed implementation of state levied VAT on online marketplace companies
in certain states. The state tax administration frequently push e-commerce portals
to discharge VAT on goods sold through their websites. Though technically, the lia-
bility to pay VAT is on the vendors selling through websites, e-commerce portals are
made accountable for infractions. The challenge is compounded with sale in multiple
states. Further, VAT being a state subject, there is no provision for interstate credit
mechanism in place for adjustment of input VAT paid in one state against output VAT
in another. E-commerce portal operators have been locked in litigation pursued by
state level tax authorities on sale through online portals. Penalties have been levied for
non-payment of state VAT on products sold through online portals.
This issue has also been noted in the recent report of the Reserve Bank of India as
follows (RBI 2015).'* The point of sale in online trade i.e., where the sale is deemed to
have occurred, fixes the liability and incidence of tax. For intra-state sale, i.e., where
the seller and buyer are in the same state, the Value Added Tax (VAT) rate of that state
is applicable and collected from the seller. For inter-state trade i.e., where the seller
and buyer are located in different states, the Central Sales Tax (CST) is applicable and
is collected and kept by the state in which the sale originates and not by the destina-
tion state. In the case of online trading/selling in the business to customer model, the
seller is liable to pay both CST and VAT, depending on location of the seller. In respect
of transactions through e-retailers, there is considerable ambiguity regarding where
the sale is deemed to have occurred and hence, in the incidence of tax. This leads
to dual tax demand, both at the point of origin as well as at the point of destination.
16 CIT v. Samsung Electronics Ltd. 245 CTR 481 (Kar HC).

17 Dimri, R(Partner, BMR & Associates LLP) 2015, ‘Tax Complexities for e-commerce: will GST
bring relief; moneycontrol.com [October 28, 2015].
18 RBI 2015, ‘State Finances A Study of Budgets Of 2014-15; May 2015.
The second issue relates to who is responsible for the collection of tax. Large e-retail-
ers are of the view that they are providing an online marketplace to both buyers and
sellers. Under the marketplace model, e-commerce firms host third-party merchants
on their websites and customers buy goods on the sites from these merchants. Thus,
the third party vendor/seller is liable to collect the VAT and the online platforms only
need to pay service tax on the commission they charge the vendors listed with them.
However, state governments are of the view that these online platforms are invento-
ry-based models as many of the online traders set up warehouses and store goods
before any sale has been transacted. Hence, they contend that these online retailers
are liable for tax on the sales. Various state Value Added Tax Acts and the Central Sales
Tax Act, 1956 predate online retail activities and do not cover them specifically. Tax
rates and rules differ widely across states. Even the definition and treatment of dealers
and distributers differ. Further, if the vendor/third party is not registered under VAT in
the state of destination, monitoring compliance of collection of tax becomes difficult.
Conscious of the potential loss of revenue from burgeoning e-commerce, states
have been undertaking a variety of strategies. They include (i) treating these businesses
as inventory-based models and applying local state tax on transactions from local ware-
houses/distribution centers to buyer; (ii) calling for records of warehouses to verify if
appropriate taxes are being paid; (iii) exerting pressure on online sites that do not have
warehouses to establish warehouses and distribution centers in their states so that
online trades can be easily taxed; (iv) calling for details of sales made by major e-retailers
in their respective states; asking them to register themselves as dealers in the state and
file applicable returns; and (v) undertaking surveys to assess the loss of revenue from
online sales. Apart from these administrative measures, states have also been calling for
legislative measures such as amendment to the Central Sales Tax Act to make it easier
for them to tax online retail transactions. The Karnataka Government plans to amend
its Value Added Tax Act and bring e-commerce marketplace transactions under its
purview. It proposes to classify online marketplaces as ‘commission agents’ since they
charge a commission from third-party sellers for using their platform and their delivery
and warehousing services and make them liable to pay VAT to the state government.
In a recent ruling of Flipkart Internet Private Limited and others vs State of Kerala
and others" of the High Court of Kerala, the penalty levied by the state level tax author-
ities on the e-commerce operators has been quashed. However, the litigation on this
aspect continues in various VAT jurisdictions across the country.
(ii) Valuation of Transactions Between Related Parties (Dimri, R 2015)”

Valuation of goods under excise and customs has been a debatable subject in case of
transactions between related entities. Transaction value is considered for computing
liability under both, excise and customs. However, in case of transactions between
related entities, legislation has laid down special mechanisms for valuation, to ensure
that taxes are paid at ALPs. Given the complex provisions on valuation, disputes tend
to arise on determination of ‘assessable -value’ of transactions.
19 Flipkart Internet Private Limited and others v. State ofKerala and others (WP(C). No 5348 of 2015 (P)).
20 Dimri, R (Partner, BMR & Associates LLP) 2015, ‘Transfer Pricing issues under Excise & Customs
Laws; moneycontrol.com (June 26, 2015].
Under excise law, related party transactions are valued on the basis of price at
which goods are sold by related party to unrelated buyers.
Even though ‘interconnected undertakings’ are covered under the definition of
related persons, valuation methodology for ‘related persons’ does not apply to such inter-
connected undertakings where ‘mutuality of interest’ does not exist except in (the situa-
tion where the relationship is that of a holding and a subsidiary). This position is supported
by arecent ruling in Handy Wires Pvt Ltd vs Commissioner of Central Excise Nagpur” of the
Mumbai Tribunal where it has been held that excise duty is payable on the basis of ‘trans-
action value’ on sale to interconnected undertaking in absence of relationship.
Given the above, in case of interconnected undertakings, valuation disputes gen-
erally arise when excise authorities raise suspicions that apart from being intercon-
nected; such entities also have ‘mutuality of interest’ in the business of each other.
On the other hand, interconnected undertakings deny mutuality of interest and
desire valuation on the basis of transaction value. Excise law nowhere defines the
phrase ‘mutuality of interest? Although judicial authorities on several occasions have
interpreted the term ‘mutuality of interest; no clear principles have evolved.
In a landmark decision in case of Atic Industries (UOI vs Atic Industries Ltd’, the
SC laid down the principle that mere interest of taxpayer in the business of buyer is
not enough to establish mutuality of interest. Similar judgement was rendered by the
SC in case of Goodyear”.
In another landmark decision in the case of Flash Laboratories (Flash Laborato-
ries Ltd vs Collector of Central Excise, New Delhi™, the Supreme Court held that the
taxpayer and the purchaser have mutuality of interest as sixty percent of the products
were sold to holding company and remaining 40 percent to sister subsidiary and in
addition the purchaser was incurring marketing expenses for the products of the tax-
payer. Unlike in case of Atic Industries, the SC in the case of Flash Laboratories held
that mere shareholding, bulk purchases and incurrence of promotion expenses by
buyer are enough to establish interest between the taxpayer and the buyer.
The above rulings reflect that courts have reached different conclusions on ‘mutu-
ality of interest’ based on fact specific analysis in each case.
(iii) Taxation of Intangibles (Dimri, R 2015)”
Levy of service tax on provision of ‘services’ and value added tax (VAT) on sale of ‘goods’
is clearly demarcated. However, this simplistic differentiation regarding the nature
of levy becomes perplexing in the case of certain transactions. A perfect example
of this puzzle is the applicability of VAT or service tax on intangibles. Intangibles,
or incorporeal assets, in very basic terms, are assets like trademarks, copyrights,
patents, computer software, etc. that cannot be seen, touched or physically measured.
After a prolonged debate, fortunately, the characterization of intangibles as ‘goods’
21 Handy Wires Put Ltd v. Commissioner of Central Excise Nagpur TS 226 CESTAT 2015(Mum) EXC.
22 UOlIv. Atic Industries Ltd 1984 (17) ELT 323.
23 CCE, Aurangabad v. M/s Goodyear South Asia Tyres Pvt. Ltd. (2015 (322) E.L-T. 389 (S.C.).
24 Flash Laboratories Ltd v. Collector of Central Excise, New Delhi 2003 (151) ELT 241 (SC).
25 Dimri, R (Partner, BMR & Associates LLP) 2015, ‘The ambiguous case of taxing intangibles;
forbesindia.com [September 9, 2015}.
Overview ofthe Indian Tax System ™ 55
or ‘services’ has become more or less settled. Both the central and state authorities
are on the same page on the point that for indirect tax purposes, intangibles should
qualify as goods. However, there are certain borderline cases that continue to face
challenges. For instance, whether supply of software qualifies to be a supply of ‘goods’
or supply of ‘service’ Interestingly, while there is clear view that supply of packaged
software on tangible media is tantamount to sale of goods and attracts only VAT, issues
repeatedly arise with respect to taxability of customised software. Despite customised
software also being ‘goods, disputes around levy of service tax continue to arise on
such transactions, on account of the software development activities involved.
It is noteworthy that the Honourable Supreme Court in its decision in case of
Tata Consultancy Services”, which was rendered prior to the decision in BSNL, had
declared that “packaged software” is goods and therefore subject to sales tax/value
added tax under respective State legislations. This aspect gains prominence as the ser-
vice tax law also imposes service tax on various activities related to software, such as
development, upgradation, etc. This has led to a long-drawn dispute over the correct
tax-treatment of supply of software.
Another area of ambiguity in the present context relates to transactions involving
licensing of tangibles. Licensing and/or transfer of intellectual property rights such
as trademarks, patents, copyrights or transfer of right to use software for commer-
cial exploitation is common amongst business concerns these days. Generally, VAT
is applicable on permanent transfer or ‘transfer of right to use’ (transfer of effective
control). Further, service tax is applicable on temporary licensing or permission to use
intellectual property rights or licensing without transfer of right to use. Courts, on sev-
eral occasions, have held that ‘transfer of right to use’ would arise only in cases where
the effective legal right to use the goods lies with the transferee. Further, the transfer
should be to the exclusion of the transferor as well as to any other users.
In the case of Malabar Gold, initially the ruling was given in the favour of tax
authorities, which was reversed by Honourable Kerala High Court”* Holding that fran-
chise agreements were leviable to service tax, and not VAT. The Court relied on the
Supreme Court’s decision in case of BSNL” where it was held that a transaction shall
qualify as transfer of right to use if the ‘transfer of right to use’ is to the exclusion of
others, including the transferor.
Government to be ‘Efficient and Responsible Litigant’- A Case for

Cost-benefit Trade-off?
“Government must cease to be a compulsive litigant. The philosophy that matters should
be left to the courts for ultimate decision has to be discarded. The easy approach, ‘let the
court decide; must be eschewed and condemned.”
- National Litigation Policy, 2010
26 Tata Consultancy Services v. State ofAndhra Pradesh 2004 (178) ELT 22 (SC).
27 Malabar Gold Put Ltd v. Commercial Tax Officer, Kozhikode 2013 (29) S.T.R. 119 (Ker.).
28 Malabar Gold Put Ltd v. Commercial Tax Officer, Kozhikode 2013(32) S:1.R. 3 (Ker.).
29 BSNL v. UOI2006 (2) STR. 161 (S.C.).
Historically, in multiple instances, Indian Courts have expressed a critique on the

manner in which Government (and its departments) pursue litigation, posing a seri-
ous question towards the Government regarding whether they enjoy being the biggest
litigants®. A case in point is the case of Dilbagh Rai*', wherein Justice Krishna Iyer”
commented on the absence of a national litigation policy in India. The Government,
itself, in its 126" report ‘Government and Public Sector Undertaking Litigation Policy
and Strategies’ expressed the need for a Litigation Policy.
In wake of such concerns and need, the Government formulated NLP (Ministry
of Law and Justice 2010)* for providing broad guidance to its departments/agencies
for conduct of litigation. The NLP forms the basis of the national legal mission, i.e.
to reduce Government litigation in courts and reduce average pendency of litigation
from 15 years to 3 years. The NLP provides the definition for ‘Efficient Litigant’ to
mean, inter alia, ‘..ensuring that good cases are won and bad cases are not needlessly
persevered with...’ and the definition for ‘Responsible Litigant’ to mean ‘.That litiga-
tion will not be resorted to for the sake of litigating:
In cognizance of the above, from time to time CBDT has taken steps for improving
the state of tax dispute identification/resolution, for example, formulating Central
Action Plan™ directing the tax officers to map out timeline for speedy disposal of cases,
issuing instructions re SOP on filing of appeals to the ITAT, HCs and SC, etc. In relation
to the filing an appeal to the HC the CBDT has issued instruction (CBDT 2011)* stating
that as a standard procedure, the jurisdictional CCIT shall decide whether to contest
an order of the ITAT before the HC. The CCIT is to make the decision basis facts of
each case, the applicable statutory provisions and considering the recommendations
received from lower authorities. The screening process is initiated after the ITAT order
is passed, the tax officer and range head submits their comments in the scrutiny
report after analysing the ITAT order. The Standing Counsels are consulted to draft
(substantial) questions of law.
Similar SOPs are put in place for filing department appeal to the ITAT (CBDT
2011)*° as well as the SC (CBDT 2013)”, wherein pre-filing supervision is done by
30 State of Punjab v. Geeta Iron and Brass Works Ltd (1978) 1 SCC 68 (SC); Chief Conservator of
Forest v. Collector (2003) 3 SCC 472.
31 Dilbagh Rai v. VOI AIR 1974 SC 130.
32 Justice lyer noted that “..In this country the State is the largest litigant to-day and the huge ex-
penditure involved makes a big draft on the public exchequer. In the context of expanding di-
mensions of State activity and responsibility, is it unfair to expect finer sense and sensibility in
its litigation policy, the absence of which, in the present case, he led the Railway callously and
cantankerously to resist an action by its own employee, a small man, by urging a mere technical
plea which has been pursued right up to the summit court here...”
33 Ministry of Law and Justice 2010, Draft document, June 23, 2010 Available at: http://pib.nic.in/
newsite/erelease.aspx?relid=62745, accessed in May 2016.
34 Central Action Plan is CBDT report setting department’s KRAs, target activities along with dead-
lines including cash collections, assessments, international taxation, TDS. It also provides for
strategies in areas of quality of assessment work, widening of tax base, improving advance tax
collection, TDS and recovery, etc. CBDT released its latest report for FY 2015-16.
35 CBDT 2011, Instruction 7 of 2011, 24 May, 2011.
36 CBDT 2011, Instruction 8 of 2011, 11 August, 2011.
37 CBDT 2013, Instruction 8 of 2013, 16 July, 2013.
the relevant authorities, for example, the jurisdictional CIT is the deciding authority
regarding the whether order of the CIT (A) is to be contested before the ITAT.
Despite the above supervisory mechanism, the statistics (Ministry of Finance
2015) reveal that the department has filed more appeals before the ITAT/HC/SC
vis-a-vis the taxpayers. For instance, in the year 2013-14, the taxpayers filed 5,637
appeals in the ITAT, whereas the total number of appeals filed by the department
was 13,970 in the ITAT, amounting to more than 2.5 times that of the taxpayers. The
proportion re appeals filed in HCs and SC is even higher - for the year 2013-14, the
appeals filed by the department in the HCs are 4,029 which is ~8 times vis-a-vis
those filed by the taxpayers (547 cases). For the same year, in the SC, the depart-
ment filed 508 appeals whereas taxpayers filed a meagre 33 appeals. Such figures
when viewed alongside the low success rate of departmental appeals, points at
the inefficacy of aforesaid SOPs. This conjoint review reflects that the ‘appeal-fil-
ing’ approach of department is fanning the flames of pro-longed litigation. Such
behaviour of tax authorities also lurks dangerously close to fettering the principles
of ‘Right to speedy trial’ enshrined in Article 21 of the Constitution of India. The
Bombay HC in the case of Sairang Developers*®® and the Mumbai ITAT in the case
of Growel Energy” have passed severe strictures regarding the frivolous manner in
which appeals are filed by the department, resulting in undue harassment to the
taxpayers and clogging up of the ITAT and the judiciary.
Table 1.16: Analysis of Appeals Filed by Department as Decided at ITAT, HC & SC
mae
Forum Se ee Ar fe ee , sc
py 2011+ 2012- 2013- 2014- 2011- 2012- 2013- 2014- 2011- 2012- 2013- 2014-
a2. 8 OM Se CO A Clits
Infavourof 2595 2481 2432 1135 1364 681 748 #+493 94 «£455 99 84
Department (19%) (16%) (17%) (18%) (20%) (19%) (19%) (21%) (10%) (13%) (19%) (25%)
Against 7048 7648. 7404, 3724 4190 , 2262 2461 1384 378 272 306. 144
Department (52%) (50%) (53%) (58%) (62%) (63%) (61%) (59%) (39%) (64%) (60%) (43%)
Set aside 1195. 1055....1257.... 430... $57. =. 166... 295 .. 192..: 76 7 13 4
(9%) (7%) (9%) (7%) (6%) (5%) (7%) (8%) (8%) (2%) (3%) (1%)
Partially Doie. 2450 200.885. a8 2 06T. 8G 180. 86 Ok ads
allowed (17%) (16%) (14%) (13%) (5%) (7%) (6%) (5%) (9%) (5%) (9%) (7%)
Others Bi) | 4700 acB7l. 248) GAG. 105 5270.6) 166 «924 1. 0) 46 81
(4%) (11%) (6%) (4%) (8%) (6%) (7%) (7%) (34%) (16%) (9%) (24%)
Total 13656 15363 13970 6372 6795 3571 4029 2365 958 425 508 336
Source: Report of the Standing Committee on Finance (2014-15) Eleventh Report
38 Ministry of Finance 2015, Eleventh Report of Standing Committee on Finance, presented to the
Lok Sabha on April 24, 2015 and laid before the Rajya Sabha on the same date.
39 CIT v. Sairang Developers and Promoters (P) Ltd [2014] 364 ITR 593 (Bombay HC).
40 ITO v. Growel Energy Co Ltd ITA No. 338/Mum/2011 order dated 13-06-2014 (Mumbai ITAT).
58 @ Tax Disputes in India
Figure 1.10: Department Appeal: FY 2013-14
44+
+++
Ht HA
i
_ - -
——
——
SS
SS
SSS
SS
SSS
SS
+++
-
~~\eESS
————4
|=
oa HC
Appellate Forum
Decided in favour of Department m Decided against Department &SetAside a Partially Allowed m Others
Source: Compiled from the Report of the Standing Committee on Finance (2014-15) Eleventh Report.
If the Government intends to address the despairing litigation landscape, there is

an imminent need to usher in the approach for ‘a thorough and objective cost-benefit
analysis’ to validate department’s decision to pursue dispute before higher authori-
ties.
The NLP advocates principle of‘think before act (offiling appeal); wherein certain
parameters are expounded to be taken into consideration before filing and represent-
ing an appeal against any order. Some of these parameters are illustrated below -
e Monetary threshold (in cases where appeal to be filed by revenue authorities)
to be respected and appeal not to be filed if stakes are not high.
e Advocates on Record must play a meaningful role in Government litigations.
They cannot continue to be merely responsible for filing appearances in Court.
e Given that Tribunalisation is meant to remove the loads from Courts, challenge
to orders of Tribunals should be an exception and not a matter of routine.
e In Appellate Courts, ifthe paper books are complete, then adjournments must
not be sought in routine course. The matter must be dealt with at the first hear-
ing itself.
e Direct appeals to SC not to be filed. In cases of appeal to SC, appeal to be filed
when case involves question of law or the public finances are adversely affected
or there is substantial interference with public justice, likewise.
e ‘The resort to arbitration as an alternative dispute resolution mechanism must
be encouraged at every level.
Whilst the NLP of 2010 is currently being reviewed, it is apparent from the above
stated points that the largely the disputes pursued by tax authorities causes increase
in misery of the taxpayers as well work pressure of the authorities, than yielding any
tangible benefits. The taxpayers feel distressed on account of the blocked funds (with
negligible interest on refund), cost of legal advisors, besides the opportunity cost of
business decisions, market reputation, etc. On the other hand, whilst typically the
department does not bear significant monetary burden for pursuing appeals, if appo-
site administration is implemented, such monetary resources and, more importantly,
the manpower can be allocated for better delivery of taxpayer services. From dis-
traught (present and potential) investors to increased workload of department, the
heap of (senseless) cases is a loss-loss situation!
It thus become imperative to relook at the cost-benefit trade off before filing an
appeal to the higher level; mere drafting of NLP will not yield desired results unless the
administration embraces the spirit of NLP. In this regard, recent instruction (CBDT
2015)*' by CBDT to increase monetary threshold to file appeal by tax department is a
welcome step. Following such instructions, the ITATs across the country have lauded
CBDT for “Taxpayer Friendly’ measure and disposed of thousands of low tax effect
department appeals on war footing. Even the Courts have followed CBDT’s instruc-
tions (inter alia Bombay HC in the case of Sunny Sounds the Delhi HC in the case of
Telco Construction®, etc.). The CBDT has also constituted a Standing Committee“ to
deal with rising litigation with taxpayers; the Committee meets once in two months
to discuss litigious issues and probable solutions. A similar Committee (CBDT 2014)*
(headed by Chief CIT) was constituted to appraise the efficacy of existing system of
filing appeals and suggest suitable changes. Further, a limited edition of National Judi-
cial Reference System“ has been soft-launched in early 2015, to leverage technology
in providing management information system and knowledge database.
In today’s world, time is of utmost essence, it is needless to state that manhours
spent on review/approval process should be aimed at reducing the pendency of litiga-
tion and not add to the already growing heap!
Impact of Tax Disputes on Ease of Doing Business in India

Importance of Foreign Capital
Steady capital investment flows are critical for an emerging economy like India.
Typically, emerging economies tend to lean more on cross border investment than
domestic capital, possibly on account of the reason that cross border investment is
usually accompanied by technology inflows. In the context of cross border investment
decisions, the legal and administrative framework of investment destination assumes
importance, as investors meticulously assess ‘ease of doing business’ quotient before
deploying capital.
41 CBDT 2015, Instruction 21/2015, December 10, 2015.

42 CIT v. Sunny Sounds (P) Ltd, Income Tax Reference No 213 of 1997.
43 CIT v. Telco Construction Equipment Co Ltd, ITA No 144 of 2011.
44 Reply furnished by the CBDT, as appearing in the Eleventh Report of the Standing Committee
on Finance (2014-15).
45 CBDT 2014, CBDT Office Memorandum F No 279/Misc./M-84/2014-(IT]).
46 NJRSis an internet-based repository containing litigation history of all tax-payers in the country.
In the Indian landscape, the business/investors deal with host of laws and
administrations at the Central, State and Local level. Multiplicity of complex laws/
regulations and associated compliances often dampen the entrepreneurial spirit and
hence, it is imperative for the policy makers to carefully weigh consequences of each
legislative action from investment standpoint. The Government views tax policies as
a significant tool for mopping up tax revenues for its budgetary spend. On the other
hand, tax policies are a significant component of the legal framework for the investor
fraternity. One of the challenges governments across economies face is ensuring
that their tax systems remain competitive and do not act as a barrier to increased
productivity.
Though the new Government signalled has signalled and demonstrated its will
to pursue tax policy reforms, it is the audit and dispute identification/resolution
procedures which need significant administrative reformative measures to match
global best practices (detailed discussion on global best practices ensues in subsequent
chapters of this publication).
Investor Confidence
Given the emergence of tax disputes in past decade, it is apparent that on multiple
instances Indian law makers, particularly the tax administration received flak of
global investors (detailed discussion in preceding section). Be it the trend of retro-
spective changes to the Income-tax law, or aggressive application of TP regulation for
imputation of income in case of issuance of shares to associated enterprise (in 2013)
or introduction of draconian GAAR (in 2013), the Government’s overdrive to augment
tax collections has had global investors worried on certainty of the tax regime in India.
A glance at the trend of FDI statistics clearly underlines the impact of neg-
ative investor sentiment on FDI flows. The FDI flows were growing at a brisk
pace until FY 2006-07, however, since 2007-08 the momentum of FDI flows
has shown a consistent downward trend, plummeting to negative growth in
2012-13, despite the climb up in 2011-12 post the global economic crisis.
Table 1.17: Year-wise FDI Statistics
Financial year Amount of FDI Inflows Percentage growth over previ-

(April - March) (In USD Mn) ous years (in terms of USD)
2000-01 2,463 -
2001-02 4,065 (+) 65 percent

2002-03 2,705 (-) 33 percent
2003-04 2,188 (-) 19 percent
2004-05 3,219 (+) 47 percent
2005-06 5,540 (+) 72 percent
2006-07 12,492 (+) 125 percent
2007-08 24,575 (+) 97 percent
2008-09 31,396 (+) 28 percent
2009-10 25,834 (-) 18 percent
Financial year Amount of FDI Inflows Percentage growth over previ-

(April - March) (In USD Mn) ous years (in terms of USD)
2010-11# 21,383 (-) 17 percent
2011-12#/ 89,121 (+) 64 percent
2012-134 22,423 (-) 36 percent
2013-14# 24,299 (+) 8 percent

2014-15# 30,931 (+) 27 percent
2015-16# (Apr-Dec 2015) 29,443 -
Note:
(i) Including amount remitted through RBIs NRI Schemes (2000-02)
(ii) Foreign Exchange Dealers Association of India conversion rate from INR to USD applied on the basis
of monthly average rate provided by RBI (DEPR), Mumbai
# Figures for the year 2010-11 to 2015-16 are provisional subject to reconciliation with RBI
* Inflows for the month of March, 2012 are as reported by RBI, consequent to the adjustment made in the
figures of March ‘11, August ‘11 and October ‘11
Source’; FDI Factsheet released by Department of Industrial Policy & Promotion, Ministry of Com-
merce & Industry
Arguably, the new regime’s reformative measures in past 18 months have

contributed to revival of investor confidence. Tax policy decisions, such as, abstinence
from retrospective tax legislations as announced by the Finance Minister in 2014
Budget, Chairperson, CBDT accepting (CBDT 2015)* the Bombay HC decision on
share issuance transaction, appointment of Justice AP Shah committee” to address
applicability of MAT on FIs and FPIs and accepting the committee’s recommendation
(CBDT 2015)”, 2015 Budget amendment to defer the GAAR, enhanced consultation
with economists and experts by PM chaired NITI Aayog*! for formulating budget
proposals, etc., seem to have arrested the negativity to certain extent. In a move to
simplify the complex web of Company Law provisions, the Corporate Law Ministry
has also set up a high-level panel to suggest ways to further improve ease of doing
business. The Committee is already in advance stage of review of cumbersome
processes and is due to release its report soon. Amongst investment policy reforms the
key initiatives which stood out were, enhancing FDI in defence sector and insurance
47 DIPP 2015,Factsheet on FDI, Available at:http://dipp.nic.in/English/Publications/FDI_Statis-

tics/2015/FDI_FactSheet_OctoberNovemberDecember2015.pdf, accessed in May 2016.
48 CBDT 2015, Instruction No 2/2015 [ENO.500/15/2014-APA-I], January 29, 2015; Press release,
January 28, 2015.
49 Government of India formed a committee under the chairmanship of Justice AP Shah to address
the contentious issue of applicability of MAT on FII, genesis being contradictory decisions of the
AAR/Coutrts. In its report the Committee recommended that MAT provisions should not apply
to FIIs not having a place of business in India. For more details, refer article titled ‘Going beyond
MAT on FIls’ by the author, dated September 7, 2015 published in Financial Express, Available
at: http://www.financialexpress.com/article/fe-columnist/column-going-beyond-mat-on-fi-
is/131472/, accessed in May 2016.
50 CBDT 2015, Instruction No 9/2015, September 2, 2015.
51 Stands for ‘National Institution for Transforming India Aayog, NITI Aayog is a Government of
India policy think-tank established by Prime Minister to replace the Planning Commission.
sector, removing composite caps in FDI, efficient processing of investment proposals

by the FIPB. The Government's resolve to undertake significant tax policy reforms,
such as rationalization of corporate tax rates to bring in alignment with OECD and
Asian maximum marginal rates; pursuing constitutional amendment to facilitate
GST enactment, have also revitalized investors’ confidence in Indian economy. Till
December 2015, FDI flows recorded a growth of around 13 percent a year on year
basis.
Whilst it will be fair to applaud the Government for taking steps in the right direc-
tion and sticking to the 3Cs of tax policy - “certainty, clarity and consistency” (Butani,
M 2015)*, it is critical to assess the impact of these efforts on the ground realities, so
as to determine the future course more accurately.
Competitiveness of Business Environment in India

The World Investment Report 2015 (UN 2015)** released by the United Nations Con-
ference on Trade and Development lists India amongst the top five FDI destinations.
It further notes that the manufacturing sector is likely to gain momentum with the
Make in India programme. The World Bank Annual Publication (Doing Business
2016) report has ranked India at 130 (out of 189 countries) on the ‘ease of doing busi-
ness’ (World Bank Group 2015)™* parameter, which reflects an improvement of 12
places since last rankings. Interesting to note that whilst India’s overall ranking has
improved, the performance on parameter of ‘paying taxes’ has decreased; India ranks
157 (against 156 (World Bank Group 2014)* for last year). The parameter ‘paying taxes’
is based on certain assumptions and filters (such as limited liability taxable domestic
company, starting operations January 1, 2013 onwards, pre-tax gross margin of 20 per-
cent, incurred loss in first year of operations, etc.) and measures taxes/contributions
paid in a given year as well as the administrative burden in this context. The parameter
has three sub-indicators - the time to comply, number of tax payments and the total
tax rate.
Further, India has registered a jump of 16 places on World Economic Forum’s
global competitive index (World Economic Forum 2015)*. These rankings underline
recent spate of reforms which evidently, have come to bear fruits. Notwithstanding
52 Butani, M 2015, ‘A more certain tax regime, Business Standard Available at: http://
www. business-standard.com/article/opinion/mukesh-butani-a-more-certain-tax-re-
gime-115022801341_1.html [February 28, 2015], accessed in May 2016.
53 UN 2015, World Investment Report 2015, Available at: http://unctad.org/en/PublicationsLi-
brary/wir2015_en.pdf, accessed in May 2016.
54 World Bank Group 2015, Doing Business 2016 Going Beyond Efficiency, A World Bank Group
Flagship Report, 13" edition, Available at: http://www.doingbusiness.org/reports/global-re-
ports/doing-business-2016, accessed in May 2016.
55 World Bank Group 2014, Doing Business 2015 Going Beyond Efficiency, A World Bank Group
Flagship Report, 12" edition, Available at: http://www.doingbusiness.org/~/media/GIAWB/
Doing%20Business/Documents/Annual-Reports/English/DB15-Full-Report.pdf, accessed in
May 2016.
56 World Economic Forum 2015, The Global Competitiveness Report 2015-16,Available at: http://
reports.weforum.org/global-competitiveness-report-2015-2016/economies/#economy=IND, ac-
cessed in May 2016.
the debate whether push up in the ranking could have been better, the outcome is
encouraging and signals a trend reversal. Pertinent to highlight that the report ranks
‘tax rates’ as the 7" most problematic factor for doing business in India. The parameter
covers profit tax (i.e. profit tax), labor tax and contribution, and other taxes, and to the
extent of government subsidies distorting competition [1 = distort competition to a
great extent; 7 = do not distort competition at all].
In an effort to further boost ease of doing business in India, Government has
recently announced reforms for liberalization of FDI rules across 15 sectors includ-
ing Defence, Banking, Construction & Development, Broadcasting and Civil Aviation,
E-commerce, etc. The Government has explicitly stated that the crux of reforms is to
further ease, rationalize and simplify the process of foreign investments and to put
more FDI proposals under automatic route instead of Government route.
However, a lot is required for India to be amongst most preferred investment des-
tination and global manufacturing hub, particularly on the tax administration and
dispute resolution reforms front. Whilst the policy reforms have been unveiled par-
tially, the reform measures are far from percolating to the grass root, i.e. tax adminis-
tration and judicial reforms, which is quintessential for a clear, consistent and certain
tax regime.
In subsequent chapters, we have discussed and analyzed bottlenecks plaguing
Indian tax administration and dispute resolution framework and made out a case for
India to adopt global best practices to address its challenges.
rein tomy eeedadile ee: een 4
ibeseratiet? tibetnl et Yewm oA ae al»
iene
atuortaemirmveD to brasent enue
Tey Ong NOTA Ao Tal ow) perohadvansrel . |

Wade) regeny hve senda? feel et 10 fouofLY cowneetiae! 1 theres ofcarina
Griupdip ether tid teeing Dra bommavall wh ef,
oh seee-c-tud hanateersuoutntineta Aeorveuepbikahatomelipstta iat
roeayerl, Ge pe-focin aepedhtsattarit ban emtzentd ryabdlornitial
557 ingotert 154 [Wisi Bow Sieessp 30)1.47"
Ge leviSSeecr). The ee
6 heen! Ou Comal oer cage eed Mens iran Os Thon tht el ee :
art |= tiwiperuies ees avy A.20a (OM, Poy
es ye, PIO ihe
feem, © ed (os in Bo t pow! atoperations, ets} and canes ei fart Om aaa
OA Bs Sien' ar nawel = Si ehh édi
bicdo=
n Gils ce. Lie Que
DO Pete wal ivfigaeces ~ Gye ew SScomengiip, niohes 0! 7 percents ee ab
oe in
Rutter ies
tats (4 =z == 2 Famp 36.glue iu odd Semmencle
onion tive crits (ers Tien Sette 262%. pees Saas
SR Gee 6S erbeies <n iaitieniihihieintia inaanette.
= et i =
Dispute Identification and
Prevention
Introduction
Government and tax administrations in every jurisdiction have responsibility to col-
lect taxes, reduce income tax gap and provide resources for pursuing social programs
and infrastructure development. In the process of administering tax laws, review and
audit (scrutiny) of returns is undertaken to ensure correctness of declared income
and taxes paid. Instances of best global practices reveal that number of audit (scru-
tiny) of returns is growing less as majority of cases are settled at the administration
level, leaving few cases getting escalated to the appellate level; largely, this trend is
attributable to the principle of taxpayers’ service evolved by tax administration glob-
ally. However, statistics (in table below) suggests that India is lagging behind vis-a-vis
its counterparts, when it comes to the quality of audits and the frequency of the first
appeal filed by taxpayers as well as Revenue department.
Table 2.1: Global Trends: Number of Returns, Audit (Scrutiny) and Appeal Filed During
2011 in Select Jurisdictions
South
Australia Canada : UK USA India
Africa
Returns filed 14,921,490 17,429,010 5,596,779 31,300,000 180,752,000 35,548,000
Audits/assess- 898,000 2,857,000 1,169,000 679,000 7,822,000 3,55,000
ments (scrutiny) (6.02 (16.39 (20.89 (247 (4.33 (1.00
completed percent) percent) percent) percent) percent) percent)
(as a percent of
return filed)
First Appeal filed 4,300 17,771 (0.62 523 NA 2,36,999 90,125
(as a percent of (0.48 percent) (0.04 (3 percent) (25 percent)
audits) percent) percent)
Source: Statistical reports of various tax administrations and number of appeals filed are derived fig-
ures from OECD Report on Tax Administration 2013. Indian data is based on Annual Report ofMinis-
try of Finance for 2011-12.
65
66 ® Dispute Ideritification and Prevention
From the discussion in Chapter I, it is evident that the focal point of investors’
concerns are - protracted disputes, absence of effective means to prevent disputes
and lack of time bound mechanism to address disputes in India.
Table 2.2: Quantum of Tax Demands
FY Direct tax - outstanding demand

(in INR Mn)
2012-2013 5,803,260
2013-2014 6,749,150
2014-2015 8,276,800
Source: Central Action plan of the CBDT for respective years.
Table 2.3: Statistics for Number of Cases Pending as on March 31, 2015 (Direct Taxes)
Roca Number ofappeals _ Amount involved

- pending (in INR Mn)
SC 5,661 46,545
HCs 34,281 376,840
ITATs 37,506 1,455,347
Commissioner(Appeals) 232,000 3,837,970
Source: Report No. 3 of 2016 (Direct Taxes) of the CAG.
Table 2.4: Statistics for Number of Cases Pending (Union Indirect Taxes)
Indirect tax (as on Oct 2014)
Level at which case is pending pag hee San inteS_
Commissioner (Appeals) 37,256 105,776
Tribunal V7 52 1,313,803
He 15,134 200,459
Sc 3,490 119,231
Total 127,632 1,739,269
Source: Annual Report 2014-15 published by Ministry of Finance (Budget Division).

Reasons for Protracted Tax Disputes ™ 67
Figure 2.1: Chart Showing Trend in TP Disputes
TP DISPUTE GROWTH
800,000 7,000
700,000 700,160 6.000
600,000 @/ 596,020
22) : 5,000
cS
so)
s=
500,000 y y el464,660
QD
= nd 4,000
as)
©
400,000
(eu
=
—
° 3,000
@o 300,000
= of
Number
cases
o
> ®) 241,110
200,000 < v es :
100,000 @! 109,080
B®: 77,540
®; 12,200 | 228/09 cialai
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
tam Number of TP audits completed —@aattexx Number of adjustment cases

—©-- Amount of adjustment (in INR Mn)
Source: Statistics from the Annual Reports 2013-14 and 2014-15 published by the Ministry of Finance
(Budget Division).
The steady increase in tax demands (refer above tables) being computed by tax
officers, clearly hints at the growing volume of tax disputes between tax administra-
tion and taxpayers. Whilst at a macro level it appears that ‘divergent opinions’ between
taxpayers and tax administration result in disputes, a granular analysis of the situation
is necessitated in order to enable appropriate reformative measures. Accordingly, it is
imperative to understand the root cause of investors’ concerns and identify ‘trigger
points’ for protracted disputes.
Reasons for Protracted Tax Disputes
(i) Inherent Impediments in ‘Law Making’ Process

In the Indian context, the ‘law making’ process for central direct and indirect tax stat-
ues essentially comprises of the annual exercise of the Finance Minister presenting
proposals in the Finance Bill for amendments to fiscal statutes and the periodic circu-
lars/notifications from the administrative Boards (i.e. CBDT and CBEC). Insofar fiscal
matters falling in the state list (e.g. State VAT), tax legislation are promulgated by the
state legislature, approved by the State assembly and notified after the assent of the
state Governor.
68 ® Dispute Identification and Prevention
Whilst the law making process seems simple and straight forward, it is reasonable
to state the process itself contributes significantly to the number of tax disputes (rea-
sons highlighted in the previous chapter).
(ii) Retrospective Amendments'

It was stated that:
Every government has a right to levy taxes. But no government has the right, in
the process of extracting tax, to cause misery and harassment to the taxpayer and the
gnawing feeling that he is made a victim of palpable injustice (N.A Palkhivala 2014,
pg xx).
Whilst retrospective amendments may meet the test of constitutionality in certain
circumstances, still, extreme caution needs to be exercised by policy makers treading
this path. With the exception of budget amendments for 2014 and 2015, introducing
retrospective amendments had become a regular feature of annual Finance Bill exer-
cise. Retrospective amendments were resorted to counter the interpretation upheld
by the judiciary. The most famous being introduction of provisions for taxation of
‘indirect transfer’ with effect from April 1, 1961, to overrule the SC judgment in the
case of Vodafone International Holdings BV.
The trend of retroactive amendments introduced in the Finance Bills has been
graphically depicted below:
Figure 2.2: Trend of Retroactive Amendments

= Retroactive amendments in Finance Bill
2010 2011 2012 2013 2014 2015
It is constitutionally permitted that the Legislature has the power to enact legisla-
tion with retroactive effect.* However, it is the frequency and indiscretion with which
such power is resorted by the lawmakers which has caused disquiet amongst the tax-
payers, especially when such powers are used solely with a motive to override views
of Judiciary. ‘Heads I win and tails you lose’ seems to be approach of our law makers.
1 Note that vide Finance Act, 2016, The Dispute Resolution Scheme, 2016 has been introduced
whereby in case of disputes emanating from retrospective amendments the taxpayers may opt
to pay the amount of tax involved and withdraw appeals/claims for arbitration/conciliation. In
case the taxpayers opt for the scheme, the amount of penalty and interest is proposed to be
waived. The details of scheme have been discussed in subsequent section
2 Kanga & Palkhivala, 2014, The Law and Practice of Income Tax, 10 edn, India.
3 Maneka Gandhi v. Union of India (1978) 1 SCC 248.
Reasons for Protracted Tax Disputes ™ 69
A practice whereby the legislature, in an attempt to override the basis of a judg-

ment, invokes such powers for substantive (retrospective) amendments under the
garb of clarificatory or declaratory amendments, it is questionable whether such an
act could be regarded as a valid exercise of legislative power. Such attempt not only
undermines the independence of the judiciary but also disturbs the balance between
the three arms of our federal structure. A committee headed by Dr Parthasarathi
Shome, was tasked by the Prime Minister in July 2012. The committee was initially
constituted for the purpose of formulating guidelines for implementation of GAAR;
subsequently, the committee was mandated to examine the implications of the ret-
rospective amendments introduced in the Finance Act, 2012, relating to the taxation
of transfer of assets by non-residents where the underlying asset is in India, particu-
larly in the context of the FIIs. The terms of reference for the committee were further
expanded to examine applicability of the retrospective amendments in context of all
non-resident taxpayers. In its report on retrospective amendments the committee
observed that the provisions “should be applied prospectively” Noting that there are
number of pending tax disputes over indirect transfer, the panels said this is also a
matter that needs to be addressed. The committee also held that in no uncertain terms
that subject retroactive amendments were wrong, running counter to basic tenets of
law.
Whilst the incumbent Government has stuck to its resolve from legislating ret-
rospective amendments, little has been to undo the damage caused by retrospective
amendments of the predecessor Government.
(iii) Quality of Assessment

Apart from interpretational issues, quality of findings to support assessment, fram-
ing of orders by tax officials, inadequacy of time (to taxpayers) for complying with
requests, not dealing (adequately) with evidence on record have been significant con-
tributors in the first dispute resolution hierarchy. Mediocre quality of assessments
(whether in the form of non-speaking order, or non-judicious applicability of legisla-
tive provisions and disregard to judicial ratio of Courts’ ruling) is attributable to inade-
quate training, research capabilities and knowledge of business practices, particularly
technical nuances associated with new economy models and the practice to complete
assessments at the fag-end of statutory timelines. An illustrative statistics reveal that
between May and October 2012 tax officers committed errors in about eighty eight
assessments out of three hundred and twenty five high value cases pertaining to cor-
porate taxation with a tax effect of about INR 6,559 Mn‘.
The assessments are often mechanical as the first level officers routinely confirm
the proposals in the SCN for excise and service tax cases. The quality of assessment
requires to be revisited as often the key legal and interpretative issues are not ade-
quately dealt with. There is no qualitative assessment of disputed positions and the
issues get settled after years of protracted litigation. Quality of decisions made by the
field officer is distorted due to lack of administrative guidance and effective knowl-
4 Report of the CAG 2015, Department of Revenue - Direct Taxes, Report No 3 of 2015, India.
edge management system, inadequate research of case references etc. Assessment

approach is also often guided by revenue-collection targets.
SCN and assessment orders often suffer from weaknesses, particularly ambigu-
ous statements and charges, leading to frequent directions by the higher authorities
remanding the proceedings for fresh (re)consideration at assessment level.
CBDT has consistently been advising the field authorities to be fair, objective and
rational in framing scrutiny assessment orders. However, the taxpayers’ experience
indicates that the tendency to frame high-pitched and unreasonable assessment
orders still continues. The CBDT (CBDT 2015)° has asked Principal Chief Commis-
sioners of Income Tax to set up local committees to deal with grievances relating
to “high pitched and unreasonable” tax assessments. Whilst the initiative certainly
appears to be promising, it would be interesting to watch whether this initiative actu-
ally nurses taxpayers’ woes.
(iv) Inadequate Judicial Guidance

Ambiguities embedded in legislative provisions lead to multiple/alternate interpreta-
tion of position of law by taxpayers and the tax administration. Limited supplemen-
tary legislation in the form of administrative guidelines has further accentuated the
problem. In absence of administrative guidelines, the tax officials exercise discretion
in shaping assessments. Whilst the direct and indirect tax statute currently provide
powers to tax administration for issuance of circulars (as per section 119 of the IT Act),
the same are limited in scope and reach as such circulars are not binding on taxpayers
or courts. The other issue that arises in complying with these circulars is the presence
of high degree of subjectivity and lack of clarity.
(v) Non Mandatory Timelines

Whilst, the IT Act provides for mandatory timeframe within which the tax officers need
to pass assessment orders, time limits defined for the higher appellate authorities are
not mandatory and are merely directive in nature. Absence of mandatory timeline
thus, adds to the overall pendency of tax disputes at different forums.
A more recent instance of administrative instruction lacking a firm and binding
time frame was brought to the fore, vide Instruction ENo. 225/148/2015-ITA-II dated
June 5, 2015, wherein CBDT directed the tax officer to dispose of rectification applica-
tions at the earliest, without setting out a firm timeframe for disposal of cases.
(vi) Inefficient Refund Mechanism

The IT Act provides (ITAct 1961 s 240)° that where refund becomes due to the taxpayer
as a result of any appeal or any other proceeding under the IT Act, the tax officer shall
refund the amount to the taxpayer without the taxpayer having to make a claim for it.
However, there is no mandatory time limit prescribed within which refunds must be
issued to the taxpayer. As a consequence, refund proceedings are often delayed for an
5 CBDT, 2015, Instruction No. 17/2015 9 November., 2015.

6 IT Act.
Reasons for Protracted
Tax Disputes @ 71
indefinite period of time, sometimes on account of seeking vast information from the
taxpayer, and at other times, on account of sheer neglect. Due to this taxpayer is put
to undue hardship due to continued delay which is further aggravated by low rates of
interest for delayed disbursement of refund. The table below gives the trend of dis-
posal and pendency of direct refund claims during FY 2009-10 to FY 2013-14:
Table 2.5: Disposal of Direct Refund Claims
Direct refunds Direct refunds

lisposed off pending Pendency in
_ (umberin Mn) (number

inMn) (number inMn) Percentage
2009-10 4.80 2.86 1.94 40.4
2010-11 3.99 4.04 195 32.6
2011-12 5.28 4.03 125 ABT
2012-13 3.88 2.76 1.12 28.9
2013-14 3.45 2.01 0.88 25.5
2014-15 3.15 2.26 0.89 28.1
Source: Report of the Comptroller and Auditor General of India for the year ended March 2014 (Union
Government, Department of Revenue - Direct taxes) - Report No 3 of 2015, laid before the Parliament
on August 23, 2015and Report No 3 of 2016 (Direct taxes).
The provision introduced vide Section 143(1D)’ of the Income-tax Act (the Act),
provides that the processing of a return shall not be necessary, where a notice has
been issued to the taxpayer under Section 143(2). This has emerged as a roadblock in
timely issuance of refunds claimed by taxpayers in tax returns.
Following developments/initiatives from recent time seek to address the situa-
tion; the degree of implementation at grass root level will need to be measured before
commenting on efficacy of initiatives:
(a) CBDT in pursuance to Revenue Secretary’s direction, instructed expeditious
issue of refunds below INR 50,000 in non-CASS cases for AYs 2013-14 and
2014-15. However, the instruction provides for no time frame within which
these refunds must be issued.
(b) Justice Easwer’s committee exposure draft report® on tax simplification recom-
mended that Section 143(1D) of the Act should be deleted with effect from July
1, 2016 and also recommended payment of higher interest in case of delayed
refund under Section 244A of the Act’.
7 With effect from 1-7-2012.

8 Press Release dated January 18, 2016, available on http://www.incometaxindia.gov.in/Lists/
Press%20Releases/Attachments/435/Draft-Report-of-simplification-committee-18-01-2016.
pdf, accessed in May 2016.
9 Note, vide Finance Act, 2016, the FM has amended Section 143(1D) of the Income-tax Act to
provide that before making an assessment under Section 143(3) of the Act, the return shall be
processed. Also, the rate of interest on refund has been enhanced.
(vii) Ever Increasing Need for Rectifications

Sometimes there may be a mistake in any order passed by the tax officer. The income
tax authority can rectify (IT Act 1961 s 154)'° the mistake on its own motion or the
taxpayer can intimate the mistake to the income tax authority by making an applica-
tion to rectify the mistake. No order of rectification can be passed after the expiry of
four years from the end of the financial year in which order sought to be rectified was
passed. In case an application for rectification is made by the taxpayer, the authority
shall amend the order or refuse to allow the claim within six months from the end of
the month in which the application is received by the authority.
The time within which rectification orders are passed, has however been a matter
of concern. This is happening because the field officers are not dealing with these
applications promptly. As per the Citizen’s Charter, a rectification application of a tax-
payer should be dealt with within a period of two months. An SOP was also prescribed
(CBDT 2013)" in this regard wherein the requirement to maintain a rectification reg-
ister was stated. Very recently, the Board has again prompted (CBDT 2015)" expedi-
tious disposal of applications for rectification.
(viii) Extended Period of Limitation

The tax administration routinely allege fraud and suppression of facts on part of tax-
payer, even in cases where the factual position is on record and examined during
audits, thereby seeking to enlarge the limitation period for demand. It is only woeful
that defence against such allegations are generally not adverted to at the first level
subjecting the taxpayer to the agony of substantial interim pre-deposit and making
them susceptible to vagaries of appellate process.
(ix) Accountability of Tax Officer

The accountability of tax officer is undefined, leading to increase in cases of revision
and reassessment. In September 2002, two separate task forces, for direct and indirect
taxes, were set up under the chairmanship of Mr Vijay Kelkar, the then Advisor to the
Ministry of Finance and Company Affairs to recommend measure for simplification
and rationalization of direct and indirect taxes. The task force on direct taxes deliber-
ated on ways to reduce costs of tax administration, examined best tax practices in the
world and extensively debated means of empowering CBDT to fulfil its function effec-
tively. The task forces submitted their Final reports to the Government in December,
2002. The Task Forces made several important recommendations on improving tax
administration and enhancing the accountability of officers and staff. The task forces
noted that taxpayers across country expressed grave concerns about lack of account-
ability amongst tax administration. At various instances judiciary’ has passed severe
strictures on tax officer’s approach towards taxpayers.
10 JIT Act.
11 CBDT, 2013, Instruction No. 3/2013 5 July, 2013.
12 CBDT, 2015, ENo. 225/148/2015-ITA-II 11 June, 2015.
13 A.T. Kearney India Put. Ltd v. ITO, ITA No. 1403/Del/2010 order dated 16 October 2015.
Reasons for Protracted Tax Disputes ® 73
Prime Minister, Shri Narendra Modi at the 6" Delhi Economic Conclave held in
the national capital instructed that the performance appraisal system for Income-Tax
Officers be changed such that appraisal reflects, whether or not officer’s orders and
assessments have been upheld on appeal. This will deter corruption and also moti-
vate officers to pass fair and objective orders. Pursuant to PM’s directions, the CBDT
announced (CBDT 2015)" a new appraisal system for tax officials to induce greater
accountability within tax officers while carrying out the assessment function. To this
effect, the annual performance appraisal report of the tax officers has been modified.
As per the revised format, the performance of tax officers will also be specifically mea-
sured for quality of assessment, the pace of disposal, and efforts made towards widen-
ing the tax base rather than only meeting the annual tax collection targets.
(x) Inefficient Valuation Mechanism Under Customs

The current mechanism of valuation by special valuation branches under customs
laws to value transactions of import and export between related entities is inadequate
to determine the true price of goods imported or exported as the volume of transaction
have gone up substantially. Payments on account of royalty, fee for services etc.
are routine targets of the Revenue-authorities, sometimes even in cases where the
position has been accepted in the past transactions/years.
(xi) Frequent and Rotational Transfers of Tax Officials

Officers are posted on a rotation basis and further assigned the roles in varied disci-
plines such as adjudication, investigation or audit wing. Each role demands a differ-
ent kind of experience and expertise; frequent transfer of officials leads to disruption
of on-going proceedings. The conclusion of proceedings at first level gets fairly elon-
gated due to frequent inter/intra-departmental transfers of officers. Significant time is
lost in transition of matters whenever there is change in the tax officer.
(xii) Failure of LTU

The LTUs were set up in India based on the concept of Cooperative Compliance fol-
lowed by nearly 48 countries out 55 countries surveyed by the OECD (OECD 2015)”.
This involved two way cooperation between the taxpayer and the tax department to
enhance compliance. Taxpayers are expected to disclose tax related measures and
details and in return tax administration provides binding advice. Taxpayers can seek
guidance and decisions before filing of tax returns or before entering into transactions.
LTUs was initially set up in Bengaluru (in the 2006) and subsequently at Chennai,
Delhi and Mumbai. LTUs were mandated to handle all income tax, central excise and
service tax matters of defined large businesses who had volunteered to join. A tax-
payer was eligible to join LTU provided it had paid advance income tax of over INR
100 Mn and excise/service tax of over INR 50 Mn. Establishment of LTU was premised
on manifold objectives including increase facilitation through single window, collate,
14 CBDT 2015, Press Release 8 January 2016.

15 OECD 2015, Tax Administration 2015.
integrate and interpret information, build multi-disciplinary teams for better compli-
ance and to provide better taxpayer services and augmenting government revenues.
The intended advantages for a taxpayer getting registered as a LTU included filing
of documents at a single place, single point interaction at senior level, limited interac-
tion with erstwhile field officers, movement of capital goods without duty reversal, not
being subjected to mandatory audit, ensuring uniformity, time bound rebate/refund
claims, automation and an interactive approach for dispute settlement.
LTUs have failed to achieve uniform results across four cities. Whilst Bengaluru
and Chennai LTUs have performed comparatively better in terms of number of tax-
payers opting for LTUs; this possibly hints at relatively better taxpayer services at Ben-
galuru and Chennai in comparison to Mumbai and Delhi. Revenue collected through
these units have increased from INR 209,240 Mn in the FY 2008-09 to INR 561,970 Mn
in FY 2011-12 accounting for 7.65 percent of the total direct and indirect collections
excluding customs. The advantage of LTU regime has hardly accrued and its below
par performance is attributable to various reasons (discussed in detail in chapter on
tax measures).
(xiii) Reasonable and Fair Assessments - Target Driven Approach

The fiscal deficit exercise has largely been revenue driven, leading budget policy
makers to exercise pressure on administration and field officers to collect more taxes.
This has led to the Revenue authorities making arbitrary/irrational demands in the
wake of targets-linked performance evaluation and incentives for tax officers. Whilst
the approach has resulted in high pitched assessments and in some cases pre-deposit
of tax to shore up tax revenues for the exchequer, from taxpayers’ standpoint such
approach has raised doubts on sanctity of the tax administration, reducing taxpayer’s
willingness for compliance (indirectly thus creating incentive for non-compliance).
In most cases, the fundamental cause of disputes is incompatible interest of two
sides to the dispute (hereinafter referred to as ‘interest-driven disputes’); in other
instances, causes of disputes could also be power-driven and/or a combination of
interest-driven and power-driven. Overarching revenue collection targets for tax
officials and jurisdictional commissioners inherently conflicts with the taxpayers’
expectations of fair interpretation of legislations and due regard to adherence to
principles of natural justice. Such conflict of interest has led to multiple frivolous tax
demands which drag taxpayers in forced dispute with the Government.
The revenue targets setting are rudimentary with no mechanism to revise the
targets with the change in the performance of economy. This creates undue pressure
on the tax officials which is ultimately passed to the taxpayer. The Kelkar Committee
Task Forces observed that the standards of accountability were considerably diluted
since the performance targets; particularly those related to revenue collection, were
unrealistic and thrust upon them. The Task Force was informed that very often the
officers were (informally) directed to hold back refunds to boost revenue collection.
Accordingly, the Task Forces recommended that the revenue targets should be based
on underlying economic trends.
Reasons for Protracted
Tax Disputes ™ 75
Fear of case file being scrutinized by an audit team (including objection by Depart-
ment’s internal audit team, CVC'® or CAG"’) adds to the dispute tangles. Thought of
being subjected to critical evaluation pushes tax officials into a ‘fault finding’ mode,
resulting in assessments being conducted with a preconceived notion of taxpayer
intending to outsmart the tax administration.
(xiv) Differences in Central and State Level Authorities

State tax laws authorities which oversees laws like VAT, entry tax, entertainment tax
etc. are relatively more aggressive compared to central laws authorities. The differ-
ences are visible in form of high pitched demands, harsh penalties and non-respon-
sive behaviour of officials.
(xv) Recognition of ‘Taxpayer Services’ Approach

In line with best practices pursued by tax administrations globally, the CBDT issued
Citizens’ Charter in July 2007. The mission and vision of the tax administration is to
provide top quality services to taxpayers such as to enable them meet their tax respon-
sibilities through encouraging voluntary compliances, transparency and fairness in
tax matters. In December 2008, the CBEC released the Charter outlining its endeavour
to provide an efficient, judicious, and responsive indirect tax administration. Largely,
the Charter document revolves around setting out timelines for speedy redressal of
basic grievances and lacks in-depth analysis and strategy for improving quality of tax-
payers’ services (such as confidentiality, proprietary of information shares by taxpay-
ers, etc.).
Implementation of Citizen’s Charter has been patchy and inconsistent. It is widely
perceived that approach of tax administration, is taxpayer-averse, as Revenue officers
are guided by revenue collection targets and often disregard the principle of fairness
and natural justice in assessment proceedings. The Citizens’ Charter seems to appear
as advocating noble promises and ambitious timelines, which are rarely being met.
The Citizen’s charters of the two Boards lay down service standards and timelines
for the delivery of such services. However, there is no review mechanism for delivery,
nor any impact assessment. There is an urgent need to revisit the citizen’s charter
to make it more meaningful and customer focused. There is also no institutional
mechanism for receiving feedback with respect to the services provided. The TARC
in its report stated that there is an urgent need to revisit the Citizen’s Charter to focus
on taxpayers’ concerns, needs and priorities. Taking a step in the direction of fulfilling
16 CVCis an apex Indian governmental body created in 1964 to address governmental corruption.
It has the status of an autonomous body, free of control from any executive authority, charged
with monitoring all vigilance activity under the Central Government of India, and advising var-
ious authorities in central Government organizations in planning, executing, reviewing and re-
forming their vigilance work.
17 CAG is an official mandated by the Constitution to act as a watchdog on government finances
and its functioning. By auditing the accounts of bodies at various levels of the Government he
plays an essential role in making the government more transparent and accountable to the leg-
islature as well as civil society.
this significant recommendation of TARC, the CBDT on March 7, 2016 (CBDT 2016)!®
has ordered to set up a dedicated structure for delivery and monitoring of tax payer
services in the income tax department. Two separate directorates have been set up
in this regard and they will be responsible for delivery and monitoring of taxpayers
services in the field offices and e-services deliverable through various electronic
platforms of the Department. They will oversee and co-ordinate all matters relating to
grievances of taxpayers and ensure their timely redressal. The Income Tax Department
has also released on January 5, 2011 the Vision 2020 to articulate its vision, mission
and values. It strives to make compliance easy, to enforce tax laws with fairness and
to deliver quality services. It notes that when compliance is made easy, voluntary
compliance is automatically enhanced.
Illustrative International Practices - Summary

United Kingdom
(i) HMRC has published detailed set of tax manuals setting out its views on
almost every aspect of taxation (including GAAR).
(ii) In case of anew complex legislation, the HMRC releases technical guidance
along with the draft legislation. Whilst tax manuals are intended for use
by HMRC officers, they are published for the public, and are referred to by
Courts.
(iii) The HMRC has issued a guide in relation to Statements of Practice (HMRC
2014)'*. Illustrative examples of statements included therein that act as an
interpretational guide to taxpayers:
(a) Partnership mergers and demergers;
(b) Taxation of commission, cash backs and discounts;
(c) Capital allowances: Machinery and plant - Short-life assets;
(d) Tax treatment of transactions in financial futures and options; etc.
(iv) Non-statutory clearances - Non-statutory clearance, is a written non-bind-
ing confirmation of HMRC’s view regarding applicability of tax law to a
specific transaction or event. Non-statutory clearances are provided both,
pre-transaction as well as post-transaction. HMRC provides such clearances
across various taxes including direct and indirect tax where it appears that
there is material uncertainty or the issue is commercially significant. HMRC
targets to send their views to taxpayers within twenty eight days, though in
complex cases it may take longer.
(v) Statutory clearances- There are a few statutes [For example, Taxation of
Chargeable Gains Act 1992, Corporation Tax Act 2010] which provide that
HMEC shall give clearances relating to applicability of legislation to specific
point/s. These are referred to as ‘statutory clearances: The most common
18 CBDT 2016, Press release March 7, 2016 and order No. 1/Ad VII/2016 dated February 26, 2016.
19 HMRC 2010, Statement of Practice. Available from: https://www.gov.uk/government/
collections/statements-of-practice, accessed in May 2016.
Illustrative International Practices - Summary ™ 77
statutory clearance applications encountered among various others include

the ‘transactions in securities; income tax anti-avoidance provisions and
company demergers.
(vi) LBS (HMRC 2014)”, similar to LTU concept in India, is responsible for
working with the UK’s largest businesses (about 10,400) on a range of taxes
(corporation tax, VAT, etc.), duties and regimes and works collaboratively
with officers across HMRC in tackling risk and providing customer service.
Large businesses are compulsorily assessed to tax in LBS. LBS employs the
following:
(a) Dedicated CRM who is the first point of contact for any enquiries by
large businesses;
(b) Tax specialists (who are expert in corporate tax, VAT, etc.);
(c) Accountants;
(d) Auditors;
(e) Specialists from across HMRC helps in cross-checking information
across taxes, based on the latest sector developments
LBS is divided into 17 sectors, such as banking, oil and gas, insurance, telecom &
information technology, transport & utilities, agriculture & food, alcohol & tobacco,
automobiles, chemicals, healthcare & pharmaceuticals, construction, general retail,
leisure & media, manufacturing, charities, local authorities and real estate.
There are about 10,400 Large Businesses in the UK. For top 2000 Large Businesses,
there are 218 CRMs supported by tax specialists. For remaining 8400, there are Com-
pliance Checks. One CRM is supported by a few tax specialists who provide services
to other CRMs. There are Strategic Resource Units which scan wider horizon for risks
and feed information to case teams and there are audit/governance specialists who
are experts in a computer assisted audit techniques. CRMs hold weekly meetings,
especially CRMs of a particular sector to ensure uniformity in decisions and reduce lit-
igation. Strategic approach is to invest in a resource-intensive, relationship-managed
service for the largest customers and prioritize highest risks. For handling tax evader
Large Businesses, approach is to first change behaviour through policy design and
disclosure, then through rigorous investigation and assessment and at last through
litigation. HMRC has inserted in the year 2004, a legal provision requiring taxpayers to
disclose tax avoidance schemes and in the year 2009, making a senior person in busi-
ness personally responsible for ensuring that tax accounting arrangements are appro-
priate. After gathering evidence from various sources including international sources
under tax treaties and Joint International Tax Shelter Information Centre, CRMs and
Compliance Checks take help from specialists like Transfer Pricing Specialists and
Sector Specialist. CRMs and Compliance Checks work on real time basis to advise
Large Businesses about their transactions and how these should be treated in their
return. In other words, tax officials in charge of Large Businesses do not wait to see
first whether taxpayers disclose on their own so that they can be booked for conceal-
ment. Tax officials work jointly with taxpayers advising them about such transactions
20 HMRC, 2014, Large Business. Available from www.hmrc.gov.uk/lbo/ index.htm, accessed in May
2016.
and guide them accordingly. This saves a lot of work and uncertainty on both sides.
However, if the Large Businesses are not in agreement, the CRMs/Compliance Checks
takes appropriate action inter alia collection of taxes. This approach of HMRC in han-
dling of Large Businesses has created tax certainty, aided deployment of resources for
purposes other than litigation facilitated faster collection of revenue, and has resulted
in overall improvement in level of taxpayer satisfaction. Following this approach, ~ 90
percent of the cases are settled at the assessment stage and ~10 percent approach the
Tribunal level. The numbers decline as taxpayers approach higher courts. Whilst only
limited cases are subject to prosecution, the conviction rate is > 80 percent of cases
where prosecution is launched. It is pertinent to note that between the years 2006
and 2013, HMRC collected additional revenue of £13.7 billion through these measures
apart from reducing backlog of outstanding appeals.
Australia
(i) ATO adopts ‘precedential ATO view’ approach to resolve disputes in cases
which require interpretative decision making. Precedential views are set out
in the form of
(a) Publicly issued rulings and draft guidelines
These precedential ATO views serve as link between ambiguous legis-
lative provisions and ATO’s purposive interpretation and thus resolve
conflict at the audit/assessment stage. A public ruling provides inter-
pretation of law as administered by the Commissioner. Typically,
such rulings deal with priority issues that require clarification, and
are issued as either rulings or determinations. For instance, the ATO
finalized a tax determination”! in relation to denial of deductibility of
interest on a full recourse loan where the loan used to prepay interest
on another loan is a capital protected borrowing”.
(b) IDs
The practice of tax officers to search for and apply ATO IDs” ensures
that decision making on interpretative issues are accurate and consis-
tent. For instance, the ATO issued an ATO ID” dealing with applicabil-
ity of capital gains tax to bonus share.
(c) DIS
The ATO also issues DIS* which informs taxpayers and tax practi-
tioners about implications of recent Court/Tribunal decisions. The
objective is to promote transparency in tax administration and pro-
vide taxpayers with increased certainty. Such statements are required
to be published in eight weeks from the pronouncement of Court/Tri-
bunal decisions. DIS is not usually published until all appeals have
21 Available from: < http://law.ato.gov.au/> [5 February 2016], accessed in May 2016.

22 TD 2013/1.
24 ATOID 2013/19.
Illustrative International Practices - Summary ™ 79
been dealt with and there is a final decision. DIS provides gist of the
ruling along with ATO’s viewpoint.
(ii) Australia has a voluntary system of ACAs (ATO n.d)” to build enhanced pos-
itive relationships and compliance outcomes with large business. ACA is an
administrative arrangement developed to manage the compliance relation-
ship with taxpayer in an open and transparent environment by making full
and true disclosures of major tax risks in a real-time environment. Subject
to true and full disclosures, and a commitment to adhere to corporate gov-
ernance principles, ACAs provide practical certainty for tax return, shortly
after lodgment, subject to issues which may need further examination.
ACAs are available for income tax, GST, excise, petroleum resource rent tax,
minerals resource rent tax and FBT or any combination of these taxes.
(iii) Register of private binding rulings - ATO publishes edited versions of writ-
ten binding advice without the names of taxpayers in the Register of Pri-
vate Binding Rulings. The register contains responses to requests for written
binding advice received from April 1, 2001 (except for GST specific rulings,
which date from July 1, 2001). Records on this Register are published to
enhance the integrity and transparency of the ATO’s decision making, but
should not be relied on as precedent or to determine how the ATO will apply
the law in other cases.
(iv) Technical assistance- Technical assistance is a guide to help in research on
a technical issue using ATO advice and guidance products. It outlines the
options available, should one need tailored assistance to resolve a technical
issue.
(v) LAPS provide direction and assistance to ATO personnel on approaches to
be taken in performing duties involving the application of the laws admin-
istered by the Commissioner - usually referred to as ‘technical’ work. LAPS
can supplement public rulings and are not intended to provide interpreta-
tive advice, but technical issues may be discussed in LAPS in the course of
providing directions to ATO personnel.
(vi) ATO has signed agreements with the large businesses to provide informa-
tion on their business transactions, investment details, internal tax control
and tax calculation frameworks to the tax authorities. The authorities in turn
are required to provide clarity and certainty about the taxes to be paid under
their specific circumstances.
Canada
(i) The Income Tax Rulings Directorate is the centre of income tax expertise
within the CRA issuing advance income tax rulings and technical inter-
pretations. The Directorate maintains a well-educated, trained and expe-
rienced staff which is able to deal effectively with any income tax issue that
arises.
26 ATO n.d., Annual Compliance Arrangements. Available from: http://www.ato.gov.au/Business/

Large-business/In-detail/Compliance-and-governance/Annual-Compliance-Arrangements/,
(ii) Unlike income tax rulings, technical interpretations are not binding on the
CRA.
(iii) The Directorate releases Interpretation Bulletins (CRA 2011)’’ and a news-
letter, ITTN which provide CRA’s interpretation of income tax law. While
such releases do not have force of law, they can generally be relied upon
to reflect the CRA’s interpretation of income tax law in force at the time of
publication, to be applied on a consistent basis by its staff. The ITTN allows
for a more rapid dissemination of new or revised interpretations and the
interpretations therein. Reference can be made on technical interpretations
issued by the CRA, for instance, technical interpretation issued in relation
to Employees’ Fringe Benefits”*).
(iv) In case the CRA issue a notice of reassessment, the taxpayer can file an
objection against the notice of reassessment. At this stage, CRA assigns an
appeal officer to conduct an independent audit of facts and legal issues.
Most disputes are resolved at the audit stage; only if the CRA continues to
maintain its position in the objection filed by the taxpayer, does the appeal
reach the Tax Court of Canada. Whilst the Courts are not bound by CRA
interpretations, several Canadian court cases have given weight to CRA’s
published interpretations in making it interpretive decisions.
US
(i) Treasury regulations - Treasury regulations (commonly referred to as Fed-
eral tax regulations) pick up where the IRC leaves by providing an official
interpretation of the IRC by the U.S. Department of the Treasury. These reg-
ulations are very detailed and further explained with help of examples.
(ii) Tax guidance - In addition to participating in the promulgation of Treasury
(Tax) Regulations, the IRS publishes a regular series of other forms of offi-
cial tax guidance, including revenue rulings, revenue procedures, notices,
and announcements. The authoritative instrument for the distribution of all
forms of official IRS tax guidance is the IRB, a weekly collection of items of
general interest to the tax professional community.
(iii) The US IRS resolves frequently disputed or burdensome tax issues that
affect a significant number of business taxpayers by issuing guidance under
the IIR Programme. For this, the US IRS solicits suggestions from taxpayers,
representatives and industry associations. For each issue thus selected, a
resolution team is formed from the litigation wing as well as from the Trea-
sury (Ministry of Finance).
(iv) US IRS has also implemented the CAP for identifying and resolving tax
issues through open, cooperative, and transparent interaction between the
IRS and LB&I” taxpayers prior to the filing of a return. Through CAP pro-
27 CRA 2011, What the “Archived Content” notice means for interpretation bulletins. Available from:
http://www.cra-arc.gc.ca/E/pub/tp/it-index/it-index-e.html#_toc01, accessed in May 2016.
28 IT-470R (Consolidated).
DAs) FTA Task Force of OECD, which examines aspects of large taxpayer operations and survey oper-
ations.
Illustrative International Practices — Summary @ 81
gram, the taxpayers can achieve tax certainty sooner and with less admin-
istrative burden than conventional post-file examinations. LB&lI has nearly
242,000 taxpayers and is organised under five industry-based operation
groups, namely, financial services, heavy manufacturing & transportation,
communication, media & technology, natural resources & construction and
retailers, food, pharmaceuticals and healthcare.
(v) Taxpayers can also request a Private Letter Ruling, which will determine
prior to filing the legal status for tax purposes or tax effects of a particular
transaction.
South Africa
(i) SARS is involved in drafting of legislation in conjunction with National
Treasury. For preparation of primary and secondary legislation, discussion
papers are prepared on specific tax policy matters and circulated for public
comments before the drafting process starts. Additionally, draft documents
are circulated for a minimum of one week to invite comments from the
public.
(ii) A dedicated mailbox for interpretation queries is managed by a team of offi-
cials. Queries on matters relating specifically to the interpretation of provi-
sions of the income tax act are handled by this team.
(iii) SARS’ VDP is also administered under the Tax Administration Act, 2011 with
effect from October 1, 2012. The purpose of the VDP is to enhance voluntary
compliance in the interest of good management of the tax systems and the
best use of SARS’ resources. The VDP aims to encourage taxpayers to come
forward on a voluntary basis to regularize their tax affairs with SARS and
avoid the imposition of understatement penalties and other administrative
penalties.
Brazil
(i) Brazilian tax authorities have commenced consultations with taxpayers on
development of new tax regulations.
(ii) Dispute resolution in Brazil is possible through two routes: either by pre-liti-
gation administrative review and by judicial review. If the taxpayer is unable
to achieve resolution through the administrative review route, taxpayer can
approach the courts for recourse under judicial review route, but not vice
versa.
(iii) Brazil’s tax system features highly developed framework for settling dis-
putes at the administrative level. Brazil’s tax system provides three levels of
administrative review:
(a) Review by a panel of tax auditors - At this stage, taxpayer can present
any argument or new facts to support its position. In practice, how-
ever, new arguments and facts are rarely considered and achieving
resolution at this stage is unusual.
(b) Review by a panel of tax auditors and taxpayers’ representatives - New

arguments and facts can again be presented, and the greater indepen-
dence of this panel can increases taxpayers chance of a favorable out-
come.
(c) Review by a senior panel of auditors and representatives with special-
ized knowledge of specific issues - To have the case considered at this
level, taxpayer needs to prove that the subject has been decided differ-
ently in the course of a review of a different taxpayer.
The panels’ higher degree of tax specialization relative to the courts makes
administrative review the preferred route for resolving disputes based on
tax planning and matters of fact and evidence.
(iv) Brazil is introducing a new system of binding advance tax rulings and
changing the administrative court rules to bind them to follow interpreta-
tions rendered by the Judicial Superior Courts.
Key Recommendations for India

Studying the underlying causes of tax disputes alongside the best practices, following
recommendations emerge for consideration -
Law Making - Engaging Stakeholders and Ironing out Ambiguities

(i) Interpretational issues could be largely avoided by instilling adequate focus
at the drafting stage to ensure that language of the provision is unambigu-
ous and consistent with the intent. This could be achieved by inviting com-
ments from independent experts on the proposed language and modifying
the language accordingly. For instance - in recent years, the Ministry of
Finance has sought comments and stakeholders’ wider consultation and
participation in drafting administrative guidelines for introduction of GAAR
and ‘indirect transfer tax’ It is imperative that such consultative rule making
behaviour is adopted as a SoP, especially in cases of introduction of rela-
tively new sophisticated pieces of legislation which are principle based. The
CBDT, following a non-adverse tax regime, has been very proactive in issu-
ing circulars and instructions. More than thirty circulars and instructions
have been issued since the new Government took over the reigns. A number
of circulars have been issued by CBDT directing the Revenue authorities
to either withdraw or not press appeals on settled tax issues. In addition,
the CBDT has actively been issuing necessary clarifications on a variety of
litigious and/or ambiguous tax issues. In one such recent instance, CBDT
clarified (CBDT 2015)*° that where MAT is applicable, no penalty for con-
cealment of income under Section 271(1)(c) of the ITA shall be levied with
reference to additions/disallowances made under normal provisions.
30 CBDT 2015, Circular No.25/2015 31 December 2015.

Key Recommendations for India @ 83
A List of Key Circular/Instruction Issued by the CBDT Since July 2014

Circular No/Instruction No/
S.No. Content
Letter No
1 Office memorandum- ENO.279/ CBDT Stung by judicial strictures- Sets up committee
MISC./M-84/2014-(ITJ)] to study filing of appeals
[17.07.2014]
Office memorandum No more frivolous or high- pitched assessments
[R.NO.279/MISC/52/2014-(ITJ)] allowed
[07.1 1.2014]
Circular No. 08 of 2015 dated CBDT circular sets out procedure for speedy resolu-
14.05.2015 tion of taxpayer’s grievances regarding outstanding tax
demands
Letter [RNO.225/148/2015- CBDT directive for expeditious disposal of sec 154 rec-
ITA-II], dated 05.06.2015 tification applications during FY 2015-16
Instruction No. 06 dated CBDT instruction streamlines litigation in high courts
03.07.2015
Instruction No. 9/2015 dated CBDT Instructions on Non-Applicability of MAT on

02.09.2015 FIls/FPIs for the period prior to 02.09.2015
Instruction dated 07.10.2015 CBDT directed tax officers to give prompt and proper
effect to the appeal orders of the CIT(A)
Instruction dated 19.10.2015 CBDT in order to improve the taxpayer services,
enhance the efficiency, and to usher in a paperless
environment, initiated the concept of using email for
corresponding with taxpayers.
Letter [RNO.225/267/2015-ITA. CBDT directs use of email based communication for
II] dated 19-10-2015 paperless assessment proceedings
10 Instruction No- 17/2015 dated CBDT sets up a committee to punish Assessing officer
09.11.2015 for harassing taxpayers with high- pitched assessment
orders, non- observance of principles of natural jus-
tice, non- application of mind, gross negligence or lack
of involvement
Tt Instruction dated 02.12.2015 CBDT directed tax officers to expeditiously process
and determine refunds in non-CASS cases having
claim of refund of less than INR 50,000 and issue the
same as early as possible
12 Office memorandum dated CBDT takes note of strictures passed by Bombay high
10.12.2015 court and sets up collegium to withdraw frivolous
appeals
13 Circular No-21/2015 dated CBDT enhances monetary limits for filing appeals by
10.12.2015 the department & gives it retrospective effect
14 Circular No. 22/2015 (RANO.279/ The circular deals with allowability of employer’s con-
MISC./140/2015-ITJ] dated tribution to funds for the welfare of employees in terms
17.12.2015 of section 43B(b) of the IT Act. It was clarified that this
circular does not apply to claim of deduction relating
to employee’s contribution to welfare funds which are
governed by section 36(1)(va) of the IT Act.
84 = Dispute Identification and Prevention _
: Circular No/Instruction No _ Content

S.No
Letter No >
15 Instruction No. 19/2015 dated CBDT Frowns on hardship to taxpayers and wastage of
29.12.2015 time by issue of vague section 143(2) Scrutiny Notices
By AO
16 Instruction No. 2/2016 dated CBDT directs that all rectification applications must be
15.02.2016 disposed of after passing an order in writing to be duly
served upon the taxpayer concerned
17 Circular No. 1/2016 dated For strict compliance of the prescribed time limit for
15.02.2016 passing an order under section 154(8) of the IT Act for
rectifying a mistake apparent from record
18 Circular No. 1/2016 dated Clarification of the meaning of term ‘initial assessment
15.02.2016 year’ as referred to in section 80 IA(5) of the IT Act
19 Circular No. 3/2016 dated Clarification regarding nature of share buy-back trans-
26.02.2016 actions under IT Act
20 Circular No. 6/2016 dated Clarification regarding classification of gains arising
29.02.2016 on account of sale of shares/securities as ‘Capital
Gains’ or ‘Business Income’
21 Circular No. 7/2016 dated Clarification regarding taxability of consortium mem-
7.03.2016 bers in case of turnkey/EPC projects as an Association
of Person (AOP)
a2, E.No.279/Misc./M-142/2007-ITJ Applicability of revised monetary limits for filing cross
(Part) dated 8.03.2016 objections by the department before the ITAT and
High Courts
23 Instruction No. 3/2016 dated Revised guidelines issued by the CBDT for transfer
10.03.2016 pricing assessments
A healthy debate and exchange of draft law between the tax policy officials
and Ministry of Law shall facilitate in avoiding drafting errors. Boards (i.e.
CBDT and CBEC) must also encourage a practice like Annual Compliance
Arrangement, where changes in tax legislations/guidelines/supplementary
legislations are introduced annually and that too in advance and thus offer a
‘no-surprise’ approach. Such an arrangement encourages consultative par-
ticipation by affected taxpayer and reduce the risk profile that prospective
tax legislations may cause.
(ii) The CBDT and CBEC should encourage consultative participation from
taxpayers in drafting supplementary legislation/administrative guidelines;
such collaborative approach to rule making is in line with international best
practice and shall reduce disputes
(iii) Establishing uniformity in the understanding and interpretations of terms
and statutory provisions common to multiple tax and regulatory legisla-
tions, shall avoid parallel interpretations.
(iv) To avoid interpretation of legal provisions, it is necessary that experts from
various verticals of trade and industry should be involved in drafting and
review of legal provisions before they are made applicable. The SC in Bharti
Key Recommendations for India & 85
Airtel Limited*' case, whilst adjudicating on applicability of withholding

tax on interconnect charges, and access/port charges highlighted the rele-
vance of expert evidence for deciding technical matters. The tax officer was
directed to decide the matter after examining a technical expert.
Further, once the amendments or new legislation is drafted, it should be
placed for the public comments along with explanatory notes elaborating
all aspects of such amendment/legislation.
(v) A separate and dedicated nodal team comprising of senior officers with
prior drafting experience should be formed. Each piece of proposed legisla-
tion ought to be vetted by this nodal team of officers before being forwarded
to law ministry for approval. While drafting the piece of legislation focus
should be on ensuring the inclusion of well-defined terms from tax as well
as commercial perspective.
(vi) Tax authorities may issue a master circular on the similar basis as issued by
the service tax department at the beginning of financial year which incor-
porates or replaces all the individual circulars issued during the preceding
year. This single document will reduce the ambiguity about technical posi-
tions and procedural requirements
A procedure for obtaining suitable clarifications from the Commissioner is avail-
able in some of the state VAT laws and is used by taxpayers as an effective mechanism
to clarify doubts. A similar approach, can be implemented under other laws so as to
increase collaboration and cooperation.
Taxpayer Services
(i) ‘Enhanced Relationships’ should be encouraged in India to provide cer-
tainty to taxpayers, especially LTUs, to elevate their confidence in transpar-
ency of the tax administration, similar to the practice followed by US.
(ii) To improve relationship with its clients (i.e. taxpayers), it is imperative that
the Revenue department uses conflict de-escalation measures. Towards this
goal, the tax administration should encourage consultative participation,
and adopt improved interpersonal approach in dealings with taxpayers. A
symbiotic and near professional relationship between tax administration
and taxpayers would go a long way in reducing overall cost of compliance
and disputes.
(iii) A dedicated organizational setup for management of disputes with inde-
pendence in functioning needs to be provided such that the taxpayer has
confidence in the administration’s objectivity and fairness as practiced in
advanced tax administrations, such as UK’s HMRC and Australia’s ATO.
(iv) Going one step further to win trust of taxpayers, the CBDT and CBEC should
consider providing statutory powers to ombudsman. The issues settled by
the ombudsman should be binding and should be accorded precedential
value and there must be an expansion in the power of recommendation
31 CIT v Bharti Airtel Limited (2014) 6 SCC 401 (SC) on the need to examine the meaning of the
words “Fees for technical services” for applicability of TDS on interconnect/access/port charges.
by the ombudsman. The ombudsman should be manned by professionally

trained officers; importantly, officers at such units should conduct them-
selves as ‘advocates of the taxpayers, thus encouraging the taxpayers to
make adequate disclosure of facts at assessment stage. The ombudsman
should provide an annual report of performance, which should be tabled
as part of budget document and decisions of ombudsman should not be
questioned by investigation agencies such as vigilance, CA&G, etc.
(v) Taking a cue from. Australia and the US, it is imperative for the Indian
tax administration to consider evolving a Charter of taxpayers’ rights
that would explicitly outline the rights and responsibilities of taxpayers.
These rights must range from the most basic, such as the right to fair and
courteous treatment, to specific actions that may be taken to resolve a tax
issue. Simultaneously, in order to promote transparency in procedures,
taxpayers must have the right to access procedures, policies, guidance, and
other instructions to staff, to the extent considered as feasible. Further, such
rights should be implemented by way of a binding code of conduct for the
Revenue officers; non-adherence of which should lead to accountability or
lack thereof for non-compliant officers.
(vi) A procedure for obtaining suitable clarifications from the Commissioner is
available in some of the state VAT laws and is used by taxpayers as an effec-
tive mechanism to clarify doubts. A similar approach, can be implemented
under other laws so as to increase collaboration and cooperation.
Gearing Up the Tax Administration

(i) To avoid interest-based conflict and create transparency at the pre-assess-
ment consultation, it is imperative to delink the revenue collection targets
of the field officers and jurisdictional commissioner from assessment func-
tions.
(ii) With a view to ensure highest degree of transparency and accountability, it
is imperative to review organization structure and management of Indian
tax administration. Taking a leaf from international best practices (such as
Australia and Canada), India should consider revamping Revenue depart-
ment as functions-based organization having independent verticals for
each of tax functions, i.e. taxpayer services; compliances; assessment and
benefit services; tax collections; appeal and dispute resolution. Each of
these verticals should be accountable to the Commissioner at the helm; at
the same time to ensure integrated working of different parts of the organi-
zation, each vertical should interact with other horizontally in a meaningful
manner.
(iii) To reinforce independence and fairness in assessment proceedings, the
assessing authority issuing the SCN should not be the authority adjudicating
the dispute. In the present system of indirect tax administration, the
authority issuing the show cause, authority issuing the assessment order
and the Commissioner (Appeals) - all of them function under the same
administrative control of the Chief Commissioner. Such a system does
Key Recommendations for India & 87
not allow an independent view on the SCN. There is a case to look for the
following model of assessment and appeal:
(a) Assessing authority issues the SCN;
(b) An Independent Directorate of Adjudication with an all India span
and control, under the administrative control of a Chief Commissioner
should evaluate the merits of the SCN and pass order on merits. It
is most likely that such independence would result in number of
SCNs (primarily arising out of ego of assessment officers) getting
dropped, thus reducing the number of unwarranted cases clogging
the machinery. The Directorate should be sufficiently manned to take
up Cases as per specialization and financial authority;
(c) Tribunal should be operating as an independent body under
Ministry of Law & Justice and the posting of the tax officials should
be considered as deputation to the Ministry of Law and Justice thus
ensuring that these is no conflict of interest of protecting the revenue
interest and dispensation of justice. Presently, the Tribunal members
draw their salary from Ministry of Finance and thus remain to be
under administrative control of the revenue administration.
Currently the revenue bias pervades the adjudication process till the stage
of High court or SC. Justice should prevail at the lowest level of adjudication
process to instil lost faith and to restrain the unbridled biases.
(iv) Taking a cue from countries like Australia, administrative guidelines/rules
should be codified in the spirit of the principle of simplicity and predictably
of tax legislations. Presently, section 119 of the IT Act empowers the CBDT
and similar provisions under the indirect tax legislations (For example.
section 37 of the Central Excise Act, 1944) empowers the CBEC to issue
order, instructions, etc., to its officers; such orders/instructions to the extent
they are beneficial to taxpayers are binding on the Revenue authorities. Such
delegated legislated powers to issue administrative directions/guidance in
the form ofinstructions has not been used as effectively as in other developed
and developing countries, such as Australia, Canada. It is imperative for
efficacious implementation of the legislation that the CBDT and CBEC should
actively issue interpretation statements/rules on deductibility/taxability
aspects of peculiar items, or on new pieces of legislation (e.g., GAAR;
taxation of indirect transfer of capital assets; approach and administrative
practices to APAs; specific anti-abuse provisions; expanse of domestic TP,
etc. Similarly from indirect taxes standpoint, taxation of software/software
related transactions; taxation of transactions relating to intellectual property
rights; scope of the definition of ‘service’ under the new service tax regime
based on negative list; identification of establishments of service provider/
service recipient for service tax purposes, etc.), to provide useful guidance to
its officers. Appropriate working groups should be constituted to frame such
interpretation statements/rules (including stakeholder representation). For
administrative ease, top twenty key tax issues should be selected each year
for drafting relevant interpretation statements/rules.
88 = Dispute Identification and Prevention
Tax officials must, as a matter of best practice, be encouraged to refer to

administrative guidelines views taken by other officials and provide an
ecosystem to agree or disagree. A healthy practice of consistently applying
administrative guidelines would ensure accuracy of outcomes in assess-
ment and minimize potential of dispute. Further, tax legislation and admin-
istrative rules/guidance should in parallel and continually address poten-
tial conflicts with international agreement (such as tax treaty/s, TIEAs),
guidance by agencies such as OECD, UN etc.
(v) Lack of adequate budgets and trained resources have been a hurdle in
ensuring effectiveness of tax administration. Having a dedicated budget
for staffing and training resources in the Revenue department would help
improve the productivity of tax officials and taxpayers-Revenue relationship
through an improved professional approach to tax disputes.
Making Assessment Procedure More Objective

(i) Similar to practices adopted in Australia and Canada, India should establish
a process where tax officers and taxpayers prior to starting an assessment,
disclose full facts of the case and come to an agreement on the interpreta-
tion and tax positions.
(ii) An administrative pre-dispute consultation mechanism, similar to the
US may be instituted in both the Boards for resolving tax disputes at the
pre-notice stage through an open dialogue with the taxpayer, in which both
sides articulate and discuss their respective positions. This would leave few
contentious where mutual agreement is not reached. Such disputes could
follow legal channels.
(iii) Assessing officers be discouraged to use a standard questionnaire for seek-
ing information, and should customize the requirement based on the facts
of each case (i.e. carry out an issue based/risk-based assessment). The Rev-
enue can consider implementing a risk-based assessment strategy as per
which detailed assessments should be done only in high-risk cases, i.e.
cases with high probability of under reporting. This will result in better use
of resources in a focused manner with fewer cases and more time for under-
taking meaningful assessment.
(iv) Appropriate procedural guidelines should be issued directing tax officials to
start early and avoid last minute rush. For instance, all non-TP assessments
should be completed at least three months prior to the statutory due date,
and the same can be spaced out evenly in the last six months. The current
practice of assessing all TP cases applying monetary threshold is flawed.
This would give adequate time to complete the regular assessments involv-
ing TP matters after the orders from the TPOs are received.
Appropriate guidelines should be framed for reporting/monitoring of
assessments, particularly international tax and transfer pricing cases, by
higher officials. Directions to the tax officials to assess the income for the
subsequent year by applying the directions of the competent authorities
Key Recommendations for India ™ 89
who have settled disputes for the earlier year, if there is no change in facts
and the law.
(v) As good governance, tax officials should be mandated to articulate their
findings in framing the assessment or draft assessment. Ideally, the orders
should follow a standard template to ensure consistency, flow of content
comprising background of the taxpayer, operations dealt with during the
year, facts of the case, legal issues involved, interpretation of legislation pro-
vision and applicability to facts, jurisprudence relied upon and conclusion
arrived. Consistency of the approach while drafting the assessment will help
minimize potential disputes that could arise from reading of the assessment
orders.
(vi) Emphasis must be laid on - accountability of tax officials and restricted
power to Revenue authorities for re-opening or revising assessment.
Re-opening/revision of assessment must be initiated only by exception and
not as a matter of routine. Actions taken by Revenue authorities to recover
tax for the earlier period should be restricted and based on guidelines on
rational reasoning. Clear guidance to be instituted to initiate and conclude
investigations within the prescribed time limit.
(vii) The manner of investigation must be amicable and hassle-free; there should
not be a coercive approach from authorities whilst seeking information, or
levying a demand pursuant to the audit.
Role of ‘IT’ In Combating Tax Disputes

(i) Considering the staggering numbers for tax disputes, there is a need to crit-
ically evaluate the role of IT in simplifying the administrative procedures
and facilitating swift delivery of services. Computerization in Income Tax
Department started in the year 1995 with development of Income Tax
Department application software, allotment of taxpayer identification
number (i.e. PAN) and the tax accounting system dealing with payment and
accounting of taxes; electronic filing of TDS and TCS returns commenced
in 2003 followed by electronic filing of income tax return in the year 2006
though it took years thereafter to stabilize the system. The computerised
assessment system provides for end to end computerization of the assess-
ment process, inter alia receipt of return to processing of return, issue of
refund/demand, scrutiny assessment (audit), rectifications, appeals, revi-
sion, penalties and prosecution, posting of tax payments/demands to
respective ledger account of the taxpayers. The Commissioner (Appeals)
and their staff have access to the appeal module of the assessment system
which provides for an equivalent of ‘appeal register’ and ‘appeal disposal
register. The system links the appeal with the assessment or penalty order
thereby, assisting in monitoring the chain of events and helps in maintain-
ing transparency. Tax officer/CIT can monitor whether appeal have been
filed/disposed off against any order passed by the tax officer/s. The system
also prompts the user for various timelines, inter alia, for filing of appeal to
Commissioner (Appeals)/ITAT/HC/SC. Projects for data warehousing and

business intelligence (DW&BI) are already initiated which would further
digitise the key processes within the Income Tax Department. Thus, digiti-
sation of processes is an on- going exercise which is being actively pursued
by the Income Tax Department. However, ineffective implementation of IT
system at field level has constrained the benefits.
(ii) In March, 2015, CBDT started trial implementation of NJRS, consisting of
two components, i.e. -
(a) Appeal Repository & Management System, an electronic database of
pending appeals at ITAT/HCs/SC. It is proposed to obtain data from
the computerised systems of ITAT/HCs/SC and linking the appeals
with the taxpayers’ PAN.
(b) Judicial Reference and Research System, an electronic database of all
orders and judgments of ITAT/HCs/SC.
The above two databases are cross referenced on the basis of issues involved.
The system will not only monitor and manage litigation work, but also assist
Department's officers in arriving at informed and consistent decisions. This
computer assisted legal research will aid in forming a ‘Departmental view’
akin to ATO.
(iii) The Income Tax Department is rewriting the old ITD application software
developed during 1995-97 and proposes to replace the same with ITBA.
The new system should encourage paperless working through uploading of
appellate orders in the system, e-mailing orders to tax department and tax-
payers and ensuring case-tracking facility. It should link appeals at all levels
i.e. from filing of appeal till its disposal in order to reflect changes on a real-
time basis in the taxpayers’ ledger. The ITBA should also enumerate atleast
three issues of the grounds of appeal for ease of indexing and retrieval. This
would enable issue based clubbing of appeals for expediting hearing of
appeals by HCs/SC.
(iv) For reducing the administrative hardships associated with appeal proce-
dure, it is important for the NJRS and ITBA systems to be linked. This would
lead to improvement in taxpayer service by facilitating seamless integration
of taxpayers’ assessment over multiple periods.
(v) In its endeavour to digitise various functions for providing efficient taxpayer
services, the CBDT has taken another significant step in this direction
and has made electronic filing of appeal before Commissioner (Appeals)
mandatory for persons who are required to file the return of income
electronically (CBDT 2015)**. Such measure should be consistent and error
free administrative practices, as validations of records will be inbuilt, thus
resulting in fewer deficient appeals. Online filing will also facilitate fixation
of hearing of appeals electronically®.
32 CBDT 2015, Press Release, 30 December 2015.

33 The Finance Act, 2016, has made amendments to provisions of the IT Act for enabling e-hearings
and communication of income-tax notices electronically.
Recent Developments — Thrust on Reduction of Disputes, etc. # 91
Other Reforms
(i) Induction training should be provided to all new joiners and transferees
to apprise them of the technical aspects in the laws they are expected to
handle in their new role.
(ii) Call book policy should be abolished from the CBEC so as to avoid unneces-
sary pile up of disputed cases.
(iii) In order to make the assessment proceedings more meaningful and effec-
tive the timeframe for adjudication of disputed cases should be mandatorily
adhered.
(iv) SCNs should meet the quality parameters and should be clear and transpar-
ent to meet the test of legality and fairness.
(v) The protective demand practice should be replaced by demand raised on
the basis of merits of case whether or not they arise out of the audit queries.
(vi) To curb the practice of reopening and reassessment of cases, power of reve-
nue authorities should be restricted.
(vii) It should be mandated that the adjudicating authority should invoke
extended period of limitation only when the said authority has grounds to
prove that the taxpayer did not pay tax by reason of fraud, collusion or mis-
statement.
(viii) Collegium of three commissioner appeals should decide complex cases
involving extended period of limitations, related party transactions and tax-
ability of services.
(ix) SCN questioning eligibility for refund application should be sent within
fixed timeframe and if no SCN is issued within the timeframe, the part of
refund demanded should be released to the applicant without waiting for
the completion of whole process.
(x) As in the case of TP regulations imposed by CBDT, CBEC can implement a
mechanism of APAs on the import and export transactions between related
entities to ensure that diverse approach is not adopted on those transac-
tions under direct and indirect tax laws.
Recent Developments - Thrust on Reduction of Disputes

and Enhancing Taxpayers’ Faith
(i) Penalty regime overhauled
Amongst key legislative amendments rolled out vide Finance Act 2016,from dispute
resolution reforms standpoint, one of the significant proposals targeted rationalisa-
tion of penalty regime. In his Budget speech, the FM identified that levy/risk of heavy
penalty triggers large number of disputes; to dissuade avoidable cases of tax litiga-
tions, the Finance Act 2016 modified the scheme of penalty, in respect of any assess-
ment for assessment year 2017-08 onwards, codifying categories of misdemeanour
with graded penalty percentages; this amendment thus, significantly reduced the dis-
cretion vested with tax officers in so far as penalty proceedings are concerned. The
penalty is proposed to be pegged at 50 percent of tax in case of ‘underreporting’ of
income, and 200 percent of the tax where there is ‘misreporting’ of facts. An oppor-
tunity for seeking immunity from penalty has now been provided for, where taxes are
paid and appeal is not filed.
(ii) Stay of demand
In recent past, a significant hardship often confronted by taxpayers has been tax
authorities’ aggressive approach for collecting outstanding tax demand. Instances
of tax authorities insisting on discharge of significant chunks of tax demand, even
though such demand is disputed by the taxpayers, are common. This causes ongoing
hardship to taxpayers, especially, in cases of high-pitched assessments.
In December 2015, the Ministry of Finance had set-up an IT simplification com-
mittee, led by Retd Justice R V Easwar; one of the terms of reference for the committee
was to come up with a set of recommendations with a view to reform administrative
practices prevalent for enforcing collection and recovery of tax demands. Taking cue
from the suggestion drawn from the committee’s report, the FM in his Budget speech
acknowledged the hardship faced by taxpayers and indicated issuance of appropriate
instructions by CBDT in this regard.
Soon after the budget speech, the CBDT issued an office memorandum (CBDT
2016), modifying the guidelines for stay of demand and standardizing the process
for collection of demand. Pursuant to the office memorandum, the tax authorities
have been instructed to collect up to 15 percent of the outstanding tax demand (sub-
ject to certain conditions) in cases whereby appeal is pending before Commissioner
(Appeals); however, cases pending before the Tribunal is kept out of the applicability.
Nevertheless, this certainly is a welcome move for streamlining the process of collec-
tion of demand and is expected to address hardship faced by taxpayers with appeals
pending before the Commissioner (Appeals).
(iii) Remedial action on revenue audit objections
Vide paragraph 4 and 5 of Instruction No 9 of 2006, dated November 7, 2006, the tax
officers were mandated to initiate remedial actions in case of revenue audit objec-
tions, irrespective of whether or not such objections were accepted by concerned tax
authorities. Recently, the Delhi High Court in the case of Sun Pharmaceutical Indus-
tries Ltd vs DCIT [W.P.(C) 6729/2011] observed that the instruction sought to override
the statutory powers entrusted to tax officers under section 147 of the IT Act. Further,
the said instructions, if read otherwise, would run contrary of proviso (a) to section
119 (1) of the IT Act, which prohibits issuance of instructions requiring income-tax
authority to make an assessment/reassessment in a particular manner.
Giving due regard to the ratio pronounced by the Delhi High Court, the CBDT in
another move towards building a non-adversarial tax regime, has recently modified
the existing instruction dealing with remedial action on revenue audit objections. As
per revised instruction®, the tax officers are mandated to initiate remedial actions,
only if tax authority audit objections are found to be correct.
34 CBDT 2016, Office memorandum, February 29, 2016.

35 CBDT 2016, Circular No 8, March 17, 2016.
Recent Developments — Thrust on Reduction of Disputes, etc. @ 93
This is certainly a welcome move that shall avoid creation of un-collectible

demand and reduce litigation with the taxpayer in such cases where the tax authori-
ties find the revenue audit objection not acceptable.
ener ect id ah
lod jpsice TV taerar a ut
— jevtn. ols ohVaro SP :
Ee feescedar ing,Redantad Acmwery tes :
y Tesae mhrecs Kise eeeCrum stn diem neces :
sdetedebed tachedhong — mae
(eileCIM tg Die yrguet.« - zo }
Ramiles adam =i Chioa en teoi
wi eect narthes‘pallens for way of denn end bee
de Gtocts A deen. Pure 10 the offer svermrendinty, tee een once7
‘beep beep eiPe we) m eer of a oS parieent ofa ecient i
wefiyceils Come thew) u, spel i oe *
aie.ol) tare weno pwtling belie sve Trib unad be GepeoMr enh :
diidhom Che oereaidy to a ow amtn stein hee mcoanltsieg
the papenes Hi colle _
alae a these er ered 4 wero Pvp Vosinds Veyaa dahil
pring beet vps ee (Aegupicta rn S
DU Pectin artless, eaocare oes ii aan Se “i irraul:ba

5 ithe portent, dove 4 sdTaairrnaseh os 5 eaWiel,dead iegerites 3( 008,Wivtax4
BROT Tes iemd>ek to Lcvinge weet aathiwide tlycond.at eran te
Sie, Veer of @ a’ (hr Roe oya es
Se Remit Ow Nein lig Cour ina tru Fae
See Cap iy ali few 10 OC Ses WI le tours Minas tap rigeeaien) iow
De eo pwelin os oth i? ee a
Come Ge: ' eran, eae a ta) toGreet
iuoid lam t perrmmstali rence warren Hparay oie
Sihek)) Arey © ect! ae tarienst itt @ pale i em
ipfSOe '» oe ts coehs prin pl lpere- yr
i a 1 oun a et abel
ane Ay
oe OO a ie isn ;
rev yee
—_— ar O59 1187s ‘ i atueatia! actige
.
= 5 ime ah with
Dispute Resolution
Introduction
The sub-optimal outcomes in Indian tax administration as outlined in preceding
Chapter can be largely attributed to inconsistent approach to law and rule making,
as well as lack of taxpayer focus in the administrative practices; to a significant
extent, such counter-productive attributes of Indian tax systems can be arrested
by ensuring fair and effective practices at appellate authority and judicial forums.
Insofar as the tax disputes are concerned, India does offer multifarious forums for
dispute resolution.
Direct tax and indirect tax statutes allow taxpayers access to following appellate
forums
Figure 3.1: Traditional and Modern Dispute Resolution Forums
Traditional Forums
y Ey Y y
Commissioner -_ ITAT/ICESTAT
____ [Appeals] _ 2.
Modern ADR Forums
y }
_ Authority for Dispute Resolution Settlement Advance Pricing | Mutual Agreement
Advance Rulings — Panel = | Commission — Agreements _ Procedures
Additionally, taxpayers can also approach the HC/s and SC by way of writ and
special leave petition, respectively. Largely, this addresses resolution of disputes for
which (relevant) statutes do not provide explicit access to any appellate forum.
95
96 ® Dispute Resolution
Looking at the above list of forums, quick thought emerges - India does have a
reasonable framework for addressing tax disputes. It is, however, altogether a differ-
ent aspect whether such framework is performing at the optimal level and whether it
is requires further support in form of sophisticated ADR forums, such as, arbitration,
mediation, etc.
In this chapter, we review the performance of traditional forums (enumerated
above) and study international best practices to cull out key recommendations for
improving performance of the traditional forums.
Traditional Forums — Review of Performance
Whilst the Commissioner (Appeals) functions under the control of Ministry of
Finance, it is expected to serve as an independent and fair adjudicator. In an ideal
scenario, the first appellate forum should be able to resolve majority of disputes with
exceptional matters moving upwards for consideration by higher appellate authori-
ties. However, the situation in India is far from ideal as it is seen that large number of
disputes pending resolution at Commissioner (Appeals) level. It is worrisome to note
that the amount locked up in cases with Commissioner (Appeals) was INR 2,900 Bn in
2010-11 which equated to 108.8 percent of the revised revenue deficit of Government
of India’.
Recent statistics with regard to the pendency of cases before the Commissioner
(Appeals) are presented below:
Table 3.1: Statistics of Appeals Pending with Commissioner (Appeals)
Amount involved
Commissioner (Appeals) | es pendin \
Direct Taxes (Figures as at March 31, 2015) 232,000 3,837,970
Indirect Taxes (Figures as on October 31, 2014) for 37,256 105,776

customs, excise and service tax)
Source: Report No. 3 of 2016 (Direct Taxes) of the CAG and Ministry of Finance, Department of Reve-
nue, Annual Report 2014-15.
Evidently, the institution has not been functioning with the level of efficacy
expected.
The statistics below reveal that taxpayers have not received much success at Com-
missioner (Appeals) level, thus, leaving them to dive deeper into the appellate hier-
archy.
1 ‘The 87th Report of the Public Accounts Committee presented in the Lok Sabha on August 29,
2013, Tax Administration, India.
Traditional Forums — Review of Performance ™ 97
Table 3.2: Statistics on Disposal of Appeals Filed Before the Commissioner (Appeals)
oe
FY Disposal infavour of Totaldisposal © Success __ eigeirs
foo _— 5 percentage
2011-12 Taxpayer 76,907 22,293 28.9
2012-13 Taxpayer 85,473 19,859 23.2
The key challenges restraining efficient and independent first level appellate are
as following -
(i) The Income-tax Act® (“the Act”) prescribes an advisory time limit to decide
an appeal within one year from the end of financial year in which it is filed.
However, such time limit is rarely adhered to. Statistics indicate an average
time frame of three to four years (six to eight years in certain jurisdictions)
(TARC 2014)‘. In the financial year 2012-13, the ageing of pending cases
before Commissioner (Appeals) (TARC 2014)° revealed that 2,302 cases are
pending for over three years, and around 9,622 case were pending for the
period more than one year. The number of cases pending for less than a year
were 21,301.
(ii) Frequent transfers of Commissioner (Appeals) contribute to slack in dis-
posal of appeals since matters are often re-heard by incoming Commis-
sioner (Appeals) leaving the taxpayers have to represent the entire matter
before more than two Commissioner (Appeals).
(iii) Whilst the Commissioner (Appeals) are expected to resolve majority of dis-
putes arising out of assessment review/original adjudication proceedings,
inadequate infrastructure in terms of support staff, knowledge support,
field officers, etc., is not provided to Commissioner (Appeals).
(iv) Another reason for delay in disposal is increasing number of cases being
allocated to each Commissioner (Appeals). This may be attributed to the
lack of sufficient number of Commissioner (Appeals) in the country.
With the year on year increase in taxpayers and corresponding increase
in disputes, the workload per Commissioner (Appeals) has increased and
requires administrative attention, i.e. by way of induction of more Commis-
sioner (Appeals) into the system.
(v) The order of Commissioner (Appeal) can be further appealed before the
ITAT/CESTAT either by the tax officer or the taxpayer or both in some
instances. Multiplicity of appeals emanating from the order of Commis-
sioner (Appeal) is chief concern that results in loss of credibility of this
forum as an effective dispute mechanism.
2 The percentage is on the basis of success in favour of the department or the taxpayer out of the
cases disposed of by each appellate authority. The remanded cases are considered to have been
disposed of, but they have not been included as a success case for the appellant.
3 IT Act, Section 250.
4 TARC 2014, First TARC Report, TARC, India.
5 TARC 2014, Chapter V of the First Report of TARC, TARC, India.
Direct Tax Dispute Resolution Scheme, 2016

Recognising the staggering backlog of disputes, vide Finance Act, 2016, the FM intro-
duced a Direct Tax Dispute Resolution Scheme, 2016 in respect of following cases
pending on February 29, 2016 -
(i) Cases in appeal before the Commissioner (Appeals); or
(ii) Cases involving tax demand on account of retrospective amendment relat-
ing to a period prior to the date on which such amendment was made.
Key takeaways
(i) The taxpayer can avail the benefits under the said scheme by filing a decla-
ration during the specified period (starting from June 1, 2016) with the des-
ignated authority. If the declaration is filed in accordance with the scheme,
the amount payable would be as under:
(a) For tax disputed in appeal pending before Commissioner (Appeals):
e In case of assessment order - the tax and interest up to date of
assessment. If the disputed tax exceeds INR 1 mn, 25 percent of the
minimum penalty would also be required to be paid.
e Incase of penalty order - 25 percent of the penalty along with the
tax and interest up to date of assessment.
(b) For disputes on account of retrospective amendments - amount of tax.
(ii) In cases where an appeal is pending with the Commissioner (Appeals), on
filing the declaration, the appeal would deemed to have been withdrawn.
In other cases, the taxpayer would have to withdraw the appeal and/or the
claims for arbitration/conciliation etc. and furnish the proof of such with-
drawal along with the declaration in addition to an undertaking not to
pursue any remedy in respect of the dispute.
(iii) Within 60 days of the receipt of such declaration, the designated authority
shall determine the amount payable and issue a certificate to that extent
(the same is not appealable). The taxpayer would have to remit such amount
within a period of 30 days of receipt of the certificate and communicate the
same to the designated authority.
The designated authority is required to grant certain immunities from prosecu-
tion, penalties and interest subject to the fulfilment of prescribed conditions Whilst
one may view Government's initiative as a stride towards pressing down the litiga-
tion meter, however, analysed holistically, possibly, such scheme of paying taxes
on account of retrospective amendment could be a ‘dampener’ on account of the
requirement for tax payment.
Indirect Tax Dispute Settlement Scheme Introduced by

Finance Act, 2016
Chapter XI of the Finance Act, 2016 provides for “The Indirect Tax Dispute Resolu-
tion Scheme, 2016” While the scheme applies to all principal indirect tax legislations
Traditional Forums — Review of Performance @ 99
(ie. Customs, Excise, and Service Tax), it has a limited application as it applies only
to cases which are pending as on March 1, 2016 and that too before Commissioner
(Appeals). An eligible tax-payer is required to make a declaration within the specified
window (lst June to December 31, 2016) and pay the total of (a) principal tax amount
in dispute, (b) applicable interest and (c) 25 percent of the penalty imposed under the
order challenged before Commissioner (Appeal). The scheme thereafter provides for
a time-bound closure of the dispute and extends immunity from all proceedings in
respect of the dispute and foreclosure of any reopening at a future date. It is also pro-
vided that the resolution under the scheme would not affect the substantive merits of
the dispute.
Though it is premature to assess the success of the scheme at this stage, from its
broad contours it appears that the Scheme may not accommodate disputes involving
interpretation issues and those where tax positions are contested for the requirement
to pay even the interest and 25 percent penalty implies that only those taxpayers who
does not estimate substantive merits in their case may opt for the scheme. Further, the
limited closure of the applied dispute without affecting the merits of the dispute may
act as a disincentive to cases where the issues are recurring in nature. Additionally,
in view of applicable monetary limits, only disputes with low thresholds are covered
within the scope of the scheme.
ITAT/CESTAT
In Indian landscape, tax Tribunals (i.e. ITAT and CESTAT) have certainly emerged as
relatively effective dispute resolution forums, largely on account of the fact that Tri-
bunals are independent of the Ministry of Finance and hence, are not prey to revenue
bias. This experience also finds support in statistics of appeals disposed by the Tribu-
nals. The table below indicates that taxpayers have found more success at the ITAT
level than experienced at Commissioner (Appeals) level.
Table 3.3: Statistics of Disposal and Success Rates for the Appeals Filed Before the ITAT
: : : Success
FY Disposalinfavourof Total disposal Success percentage’
Department 5,102 24.4

2011-12 20,884
Taxpayer 9,642 46.2
Department 4,349 20:5

2012-13 21,424
Taxpayer 9,984 46.6
6 The percentage is on the basis of success in favor of the department or the taxpayer out of the
cases disposed of by each appellate authority. The remanded cases are considered to have been
disposed of, but they have not been included as a success case for the appellant.
Table 3.4: Statistics for Total Number of Indirect Tax Cases poi on March 31, 2014
oe - Amountinvolved _
Authority “Number ofe
cases pee Gash).
HCs 15,134 200,459

Sc 3,490 119,231
Source: Ministry of Finance, Department of Revenue, Annual Report 2014-15.
Presence of subject matter experts i.e. Accountant and Judicial members in the
case of ITAT and Judicial and Technical members in CESTAT at the helm has also led
the Tribunals to emerge as the forum issuing speaking and well-reasoned orders.
A careful study of the functioning of Tribunals throws up following challenges for
consideration -
(i) The Tribunals are over burdened with sheer number of appeals and grow-
ing pendency. The table below reflects the statistics for number of matters
pending at the Tribunals:
Table 3.5: Statistics for Total Number of Cases Pending on March 31, 2015
. . Amount involved |
: Authority Cases pecans (in INR Mn)
ITAT (Figures as at the end of FY) 37,506 1,455,347

CESTAT (Figures as on 31.10.2014) 71,752 1,313,803.3
Source: Report No. 3 of 2016(Direct Taxes) and Ministry of Finance, Department of Revenue, Annual
Report 2014-15.
The above clearly reflects the urgent need to accelerate the initiatives for
adding strength to Tribunal benches. Recently, the SC observed that lit-
igants suffer due to vacancies in tribunals resulting in huge pendency of
cases at the ITAT, but there is no sense of urgency at all on the part of the
Government. The SC pointed out that recommendation for appointment in
ITAT was forwarded 8 months back by the Chief Justice of India and Govern-
ment had not taken any decision till date.
(ii) Absence of mandatory time limit under direct tax and indirect tax statutes
impacts mind-set of bench members, leading to delays. The numbers in the
table below are a reflector of the slow speed of disposal of appeals by the ITAT.
Table 3.6: Age Wise Disposal of Appeals by the ITAT

Less than Onetotwo Twoto five Fivetoten Morethan
FY ( y
one year years years years : ten years
2011-12 6,799 8,016 4,535 1251 283

2012-13 6,223 8,435 4,732 1,336 698
Source: First Report of TARC’.
7 First Report of TARC, 2014, Available from: http://www.finmin.nic.in/the Snisty) dept reve-
nue/First_report_TARC.pdf, accessed in May 2016.
Traditional Forums — Review of Performance @ 101
(iii) India has witnessed emergence of complex legislations especially in the

recent decade, including Transfer Pricing regulations, state VAT legisla-
tions, which were non-existent in 90s. Considering the changing business
forms and evolving legislation, there is a shortage of specialized benches
(for international tax, TP, etc.) which seemingly impacts quality of deci-
sions. At present, only Delhi and Mumbai have special benches to deal with
international tax and TP matters.
(iv) Conflicting ratios emerging from rulings of different benches adds to
uncertainty, especially if the rulings do not distinguish the preceding
(and conflicting) ratio emerging from prior rulings. This challenge stands
compounded due to absence of online log of all decisions pronounced by
jurisdictional benches of the Tribunal.
(v) Non-functional benches is a frequent experience. Typically, adjudication of
appeals is deferred by three to four months for an adjournment.
(vi) Frequent rotation of bench members creates a vicious circle of learning and
relearning of cases, taking a toll on productivity.
(vii) There is imminent need to improve the infrastructure deployed at the Tri-
bunal. Voluminous paperbooks, rigid procedures, uncertainty on function-
ing regarding benches, tend to wear down taxpayers creating a sense of pro-
crastination. Absence of e-filing infrastructure is a significant handicap for
both taxpayer and the department in ensuring efficient handling of records
and evidences.
(viii) Another concern associated with the ITAT is the increasing tendency of
tribunal to ‘set aside’ matters for de novo adjudication, especially in context
of TP, methodology, etc. This not only leads to clogging of the assessment
machinery, but also results in loss of taxpayer confidence.
SC and HC
It’s trite saying, denial of ‘timely justice’ tantamount to denial of ‘justice’ itself; the two
are integral to each other. Timely disposal of cases (including tax matters) is critical
for instilling the faith of public in the judiciary at large. The Indian judicial system
has been confronted with significant constraints in its adjudication process, resulting
in increased pendency and locking of huge tax demands; this is evident from the
following statistics published by CAG:
Table 3.7: Statistics for Total Number of Direct Tax Cases Pending on March 31, 2015
4 Amount involved
Authority Number of cases pending (in INR Mn)
HCs 34,281 376,840

SG 5,661 46,545
Source: Report No. 3 of 2016 (Direct Taxes) of the CAG.
Following constraints emerge in context of SC and HC’s performance so far on

tax matters -
(i) As discussed earlier in Chapter I, the Government itself has emerged as a

prolific litigant. In spite of the SOPs framed by the Revenue department
from time to time in the regard, it appears that matters are taken before the
SC and HC in appeal as a routine, than on merits of each individual case.
Further, poor performance of the lower adjudication authorities adds to the
backlog of cases pending before Courts for disposal. The statistics below
clearly show that Department’s success rate at the SC/HC is much lower
than that of the taxpayer.
Table 3.8: Success Rates Relating to Appeals Disposed of by the SC and HCs
FY Disposal in favour of Success percentage®
SC -
Department 10.1
2011-12
Taxpayer 39.0
Department 11.6
2012-13
Taxpayer 5a
HCs.
Department 21.6
2011-12
Taxpayer 59.3
Department 20.6
2012-13
Taxpayer 61.2
Source: Source: First Report of TARC.®
(ii) Lack of sufficient judges is the most significant deterrents inherent in the
Indian judicial system contributing to overall delay in adjudication process.
The number of disposals by the SC during FY 2012-13 was almost half that
during FY 2011-12 (i.e. 1,030 during FY 2011-12 and 536 during FY 2012-13).
The trend has been similar for cases pending before the HCs.
Table 3.9: Age Wise Disposal of Appeals by the SC and the HCs
FY Less than One to two Two to five Five to ten More than
one year years years years ten years
SC
2011-12 268 250 268 207 37
2012-13 136 136 125 101 38
HC
2011-12 1,668 2,439 Zao 925 186
2012-13 1,415 Alla 1,602 687 308
Source: First Report of TARC
8 Success as a percentage of total disposal.

9 First Report of TARC, 2014, Available from http://www.finmin.nic.in/the_ministry/dept_reve-
nue/First_report_TARC.pdf [5 February, 2016], accessed in May 2016.
Traditional Forums — Review of Performance ® 103
Table 3.10: Statement Showing the Approved Strength, Working Strength and
Vacancies of Judges in the SC of India and the HCs as on February 29, 2016
| :ie ameof ne court. Approved strength Working strength ued webak
A. : ‘SCof adia a : | 25 06
Bo -—-«HC-——simt: Addi Total Pmt Addi Total Pmt Addl Total
1 Bombay Waa oe 9040 ga) ee20) 60) 5938: ONO aa
2 Calcutta eS) a yee cy ier) eae pe E
3 Delhi Bee 60 a 05 39) ST! aS OST
4 Gujarat SU fo oy 282/87). 08° 8! 530 12) 2 a0. 9p
5 Karnataka RIPE SIG Gas Ogg. = QgkeOgT” cage: ogy ergy
6 Madras BE ele 85 01995, i Oig 135. gL 19 40
7 Punjab & Haryana ee er ba se tee oer age © ope rg Faz
8 Others 987, |\eseB70n, 290%)». 67 8087 148) Pie a64
Total 754 302 1056 453 139 592 301 163 464
Source: Statistics from the online portal of the Department of Justice as on February 29, 2016(Press
Information Bureau - appointment of Judges).
(iii) Historically, HCs and the SC in India has lacked infrastructure of a perma-
nent/dedicated tax bench/es. This limitation has caused significant stress
on the limited bandwidth of the bench of judges at HCs and the SC, and in
turn have led to delayed adjudication which in some case can extend upto
three to five years in case of HCs (eight to ten years in some jurisdictions),
and four to seven years in case of matters before the SC.
In March 2015, the Chief Justice of India constituted a special bench for
adjudicating the pending cases on both direct and indirect tax. The bench
comprised of two seasoned tax hands, Justice A.K. Sikri and Justice R.E. Nari-
man. This move aimed towards quick settlement of backlog of such matters
and yielded good results - more than 1200 tax cases were decided in nine
months. However, to taxpayers’ chagrin the special bench has since been
disbanded. Also, the practice has not been implemented at jurisdictional
HCs either.
(iv) The practice of appointing judges to the HCs and the SC by way of direct
recruitment from the Bar has been followed only selectively. The challenge
around appointment of adequate bench strength thus adds to overall delay
in adjudication process. In 2014, a few of SC judges were appointed through
the direct recruitment process, i.e. from the Bar, following recommenda-
tions.
Select International Practices for Dispute Resolution
Australia
(i) Settlements
ATO may settle a dispute where it considers it consistent with good management of the
tax system. In doing this, the ATO balances its responsibility to collect taxes with the
need to administer the tax system sensibly, having regard to relevant factors set out in
the Code of settlement, such as the relative strength of the positions, the cost versus
the benefits of continuing the dispute and the impact on future compliance for tax-
payer and the broader community. The tax payer should make any offer to settle a dis-
pute directly to the officer. In some cases, ATO might initiate settlement discussions
or make a settlement offer. Settlements may also arise as an outcome from alternative
dispute resolution process. In significant matters, generally internal technical experts
are assigned and, if necessary, external legal advice is taken. A technical and settlement
panel provides guidance on proposed settlement arrangements. These negotiations are
conducted on a ‘without prejudice’ basis. If an agreement is reached, the terms are cap-
tured in a deed of settlement. Such settlements have no precedence value.
(ii) Independent review
After receiving a position paper particularly at the latter stage of an audit, large public
or privately owned groups with a turnover of more than $250 Mn can seek an indepen-
dent review of the statement of audit position prior to ATO making its final decision.
The independent review is conducted by a senior officer from ‘Review and Dispute’
Resolution area (which is outside the audit area). They consider the technical merits
presented by both the audit team and taxpayer concerning the audit position. Such
officer will not have been previously involved in the audit and will bring an indepen-
dent, fresh set of eyes to the review.
(iii) Objections
The tax payer has the right to object to ATO decisions, including those relating to
assessments, penalties and private rulings. When ATO receives a written objection
application, it appoints a review officer, independent of the original decision maker.
ATO engages with the tax payer in a process that typically involves:
(a) gathering all relevant information relating to the original decision (for example,
audit files) and talking about availability of any further information
(b) examining the grounds for objection and considering the scope of the dispute
(c) discussions to better understand business context, the relevant facts and tax-
payers’ view on the issues
(d) researching the issue, consulting with technical experts and any other party as
necessary, and assessing any new information provided with objection appli-
cation or any other clarifying information
(e) forming a view on the dispute and, where appropriate, discussing alternative
ways of resolving the dispute before issuing our decision
(f) advising in writing of decision and outlining your further rights of review or
appeal
Select International Practices for Dispute Resolution ® 105
Brazil
In case the taxpayer decides to challenge an assessment, a defense shall be filed within
thirty days from the date the notification is received. There is no requirement to post
any collateral in order to exercise the right to file a defense as long as the defense
is filed within the deadline and consequently, enforceability of the tax debt is sus-
pended. Once the defense is filed the case is remitted for review by a panel formed by
three judges, formed exclusively by members of the Brazilian Tax Authority (“RFB”).
This panel is a body of the RFB and is called “Delegacia Regional de Julgamento - DRJ”
which serves as a Federal Lower Administrative Tax Court. After the receipt of the
defense, the panel can request additional clarifications from the tax auditor respon-
sible for the draft of the tax assessment.
In this case, after given clarifications, the tax-
payer is notified to present additional defense regarding the issues added or clarified
by the tax auditor. The sessions conducted by the three-judge panel are private and
made without the presence of the taxpayer.
There are some attempts by the Brazilian Bar Association to make sessions public.
On an average, a regular case takes up one to two years to be reviewed by the DRJ.
Once notification about the decision is formalized, the taxpayer has thirty days to file
a voluntary appeal to be reviewed by the CARF or to pay the debt with 30 percent over
the penalty maintained by the DRJ’s decision. There is no need to post a collateral to
file an appeal to the CARF or to pay court fees. In addition, there is no need for the
taxpayer to be represented by an attorney, even in virtually in all cases, the taxpayers
chooses to be represented by one. As of 2011 the RFB started the implementation of
the electronic process (“e-processo”).
Canada
(i) In Canada, tax controversy typically starts with an audit in case the CRA
issues a notice of reassessment, the taxpayer can file an objection against
the notice of reassessment. At this stage, CRA assigns an appeal officer to
conduct an independent audit of facts and legal issues. Most disputes are
resolved at the audit stage; only if the CRA continues to maintain its position
in the objection filed by the taxpayer, does an appeal reach the Tax Court
of Canada. The interim independent review of the disputed facts and legal
issues helps save time and costs for both sides to the dispute.
(ii) In Canada, the Appeals Branch is a separate section of the Canadian Rev-
enue Authority. Importantly, it is cognoscente and retains impartiality by
remaining an independent function (ATO date).
United Kingdom
(i) High Risk Corporates Programme (HRCP)
HRCP is a cross-directorate initiative which aims to resolve tax issues of large busi-
nesses by agreement or litigation and reduces the scale of risk for the future. The Pro-
gramme helps to improve the relationship between HMRC and its large businesses
10 ATO, Multilateral Workshop Talkbook, ATO.

along with enhancing HMRC’s capability to deal with most complex tax risks. HRCP
selects suitable cases at the scale of open risks across all taxes and considering the
customer’s tax and relationship strategies. Both sides commit to a mutually agreed
target date for resolution of the enquiry and negotiation process. All open issues are
identified, their status logged and a time tabled action plan is agreed. The HRCP pro-
cess typically involves a period of investigation, technical analysis and debate before
resolution of issues by the HRCP.
(ii) Collaborative Dispute Resolution (CDR)
HMRC is committed to using a CDR approach wherever possible in order to resolve
disputes as efficiently as practicable. In the vast majority of cases, this involves dis-
putes being settled through bilateral discussion/agreement between the parties or lit-
igation, without recourse to ADR. Through openness and early dialogue, HMRC seeks
to be transparent with its taxpayers and is open about emerging risks and keeps tax-
payers updated on its progress, as well as informed of what its expectations of them
are.
Key Recommendations for Dispute Resolution Forums in

India
(i) To strengthen the functional independence of Commissioner (Appeals), it
should be placed in a separate vertical and should be replaced by a colle-
gium of 3 Commissioners including a Chief Commissioner. Further, such
panel should be supported by a dedicated secretariat, team of field officers,
technical personnel and necessary bandwidth to carry out an independent
investigation into facts of the appeal and decide the appeal in an inde-
pendent manner. Taking a leaf from best practice followed by the CRA of
Canada, it should be mandated that the Commissioner (Appeals) forming
part of the aforesaid collegium shall be an officer who has no history of the
case in appeal before him.
(ii) To strengthen credibility in the forum of Commissioner (Appeals), the
approach followed by Canada should be adopted; the right to further appeal,
especially by tax officer should be limited to exceptional situations (like,
where the interpretation of the relevant statute is unacceptable or where it
is ex facie perverse on facts). Further, Commissioner (Appeals) should be
required to follow standard operating procedures (in terms of drafting of
order, hearing an appeal, timely disposal, dealing with all facts including
new facts, examining evidence, etc.) to restore taxpayers’ confidence in the
first appellate forum.
(iii) The statutory powers of the Commissioner (Appeals) should be enhanced
to include the following -
(a) A provision enabling the Commissioner (Appeals)/collegium of Com-
missioner should have the power to grant stay of demand in matters
Key Recommendations for Dispute Resolution Forums in India ® 107
pending for adjudication. In case the matter pending for adjudication

is covered by a ruling of higher appellate authority/s and/or juris-
dictional Court on identical issue in assessee’s own case, the entire
demand should be mandatorily stayed.
(b) It should be provided that Commissioner (Appeals) is mandatorily
expected to dispose of the appeal within the period for which stay is
granted up to one year.
(c) Power to levy penalty should be taken away from the first stage tax
officer and such power should vest with Commissioner (Appeals).
As the first appellate forum, Commissioner (Appeals) is equipped to
test the merits of the case and accordingly decide whether a particu-
lar addition calls for a penalty or not in a common order; this would
also help in reducing the duplication of simultaneous assessment
proceedings and penalty proceedings. Further, the Commissioner
(Appeals) should issue specific SCN to taxpayers seeking reasons as
to why penalty should not be levied in a given case. Should the facts
justify, initiation of penalty should be at the sole discretion of Com-
missioner (Appeals).
(iv) In the context of delay in disposal of appeals, the following measures may be
evaluated for implementation:
(a) The number of Commissioner (Appeals) in each jurisdiction should
be increased to ensure work allocation is manageable.
(b) Administrative support should also be sufficiently beefed up.
(c) The current advisory time limit of one year should be monitored and a
statutory limit should be laid down under the law.
Tribunals (ITAT/CESTAT)
(i) Allocation of funds: Sufficient budgetary allocations for capacity building is
an immediate need. At several locations, the Tax Bars have made petitions
for regular benches, however, lack of funds has been pointed out as a major
constraint, which in turn, has affected the speed of disposals.
(ii) Concept of e-Tribunal: The 87" Report of the Public Accounts Committee
presented in the Lok Sabha on August 29, 2013, noted that the Department
had issued instructions to the administrative authorities concerned to
ensure timely and proper presentation of the cases before Tribunals and
Courts. It also observed that Ministry of Law and Justice was considering
establishing e-benches of ITAT at eight stations which will help in reduc-
ing the pendency at small towns. Despite the increase in pendency at ITAT
level, the direction of Ministry of Law and Justice is yet to become a real-
ity. Time is ripe for developing an e-Tribunal and remove the bottlenecks
associated with primitive manner of functioning of the benches. Procedures
such as e-filing of appeals, paperbooks, etc., need to be encouraged.
(iii) Elevation of Tribunal members to the HC: The process for elevation of
members of the ITAT as judges of the HCs should be institutionalized subject,
of course, to professional qualifications. Direct nomination of meritorious
members as judges to HC with specialised knowledge and experience in tax

should be encouraged.
(iv) As per the current ITAT/CESTAT rules, all matters are ordinarily decided
by the divisional bench or single member bench. The ITAT and CESTAT
rules should be amended to provide for an automatic constitution of spe-
cial bench to deal with matters of importance, which entail high value lit-
igation, particularly ones that impact a wider group of taxpayers including
important matters on Transfer Pricing and International Taxation including
interpretation of tax treaties. Special benches constituted for such matters
should typically answer the reference/questions of law, which have wider
ramifications for a group of taxpayers.
(v) Currently, there is no formal process laid out for examining expert witness
in ITAT and CESTAT proceedings. Several disputes that come before Tribu-
nal entail examination of technical matters. Calling for expert witness by
the Tribunal either at the behest of taxpayer or department and their depo-
sitions will enable Tribunals to come to informed decisions that entail tech-
nical and complex business issues.
(vi) From capacity building standpoint, each bench of the Tribunal should be
allowed the facility of recurring at least two research assistants to provide
adequate bandwidth for research. This measure can also contribute towards
enhancing the quality of decisions pronounced by the Tribunal by ensuring
adequate reference to ratio pronounced by the other benches of the Tribu-
nal.
(vii) Furthermore, to ensure consistency in Tribunal decisions, adequate infra-
structure should be provided for to allow electronic log of all decision of the
Tribunal and jurisdictional HCs.
(viii) Whilst the Delhi and Mumbai benches of the ITAT do have specialised
benches for subject matter (for example, for TP; International Taxation; etc.),
the practice of constituting specialised benches should be implemented at
other benches which are dealing with overload of appeals and resultant
pendency of cases.
SC and HC
(i) Use of technology: Use of technology in managing tax disputes can help
reduce time and build efficiencies. The CBDT/CBEC can source information
from across the country on type of litigation pending before. Whenever
common issues are involved, grouping of matters can be done or special
benches can be created. If the issue involved affects a large number of
appeals, the CBDT may request the SC to decide the matter out of turn which
in turn will help reduce the pendency in all the Courts. The Law Commission
in its 230" Report on ‘Reforms in Judiciary’ had recommended that cases
involving similar issues should be clubbed with the help of technology and
disposed of on priority basis with single judgement; this will substantially
reduce the arrears and pendency. Similarly, old cases, many of which have
become infructuous, can be separated and listed for hearing and their
Key Recommendations for Dispute Resolution Forums in India ™ 109
disposal normally will not take much time. The Law Commission further
recommended that there must be full utilization of the court working hours
and grant of adjournment must be guided strictly by the provisions of order
17 of the Civil Procedure Code.
(ii) Direct appeal to the SC on issues involving complex questions of law: ITAT
refers the matters to special bench when there are conflicting decisions
of Benches. Different HCs can take a contrary view on a point of law. This
brings uncertainty for taxpayers. To avoid such situations, important and
complex questions of law can directly be referred to the SC, particularly
if there are conflicting HC decisions or similar questions before multiple
HCs.
(iii) Apart from the above, the 245" Report of the Law Commission of India pro-
vides certain key recommendations for addressing the arrears and backlogs
in the judiciary. The Commission recognizes, that apart from increasing the
judge strength, there is also need for efficient deployment of the additional
judicial resources and adequate provisions must be made for improving the
judicial infrastructure.
(iv) Permanent tax bench in SC for tax matters - As mentioned earlier in this
Chapter, the move to appoint permanent tax bench in the SC (in 2015)
yielded unprecedented result in terms of efficiency and speed of disposal
of cases. Going by this precedence, there is a strong case in favour of con-
tinuing with the permanent tax bench in SC given the cascading effect of
SC decisions on similarly issues pending before HCs and lower appellate
authorities.
(v) Permanent tax bench in select HCs: In all HCs, there should be a dedicated
tax bench to decide the issues relating to direct and indirect tax matters. The
tax bench should function throughout the year till the matters registered
before six months are disposed of.
(vi) Judicial impact assessment: There must be ‘judicial impact assessment,
whenever any legislation is introduced either in Parliament or in the State
Legislatures. The financial memorandum attached to each Bill must esti-
mate not only the budgetary requirement of staff but also the budgetary
requirement for meeting expenses of the additional cases that may arise out
of a new Bill. The said budget must mention the number of cases likely to
be generated by the Law, how many courts are necessary, how many Judges
and staff are necessary and what is the infrastructure requirement. It is nec-
essary to impress upon the Governments to create capacity to deal with
interpretation of new law.
(vii) To maintain consistency in orders, if any decision of SC/HC is accepted by
CBDT/CBEC than an instruction should be issued to all authorities to with-
draw pending appeal cases where the issue involves similar facts as decided
by the courts. More than thirty circulars and instructions have been issued
since the new Government took over reigns. Number of circulars have been
issued by CBDT for withdrawal or not pressing of appeals on settled issues
relating to the subjects.
(viii) Abolition of Joint Secretary (Revision Application) - The authority of Joint

Secretary (Revision Application) should be abolished and all the matters
should be referred to CESTAT as the single appellate authority to challenge
the order of Commissioner/Commissioner (Appeals)
Case for NTT — An Alternate for Expeditious Resolution of

Tax Disputes
Historically, the appellate remedy against the adjudication by the Appellate Tribunal
in the matter pertaining to income tax, customs, central excise and service tax, lies
before the jurisdictional HC. Respective statutes provide for such appellate remedy in
cases where substantial question/s of law are involved.
NTT Act was enacted to replace the appellate jurisdiction of the state HC under
the relevant tax statutes by providing that an appeal against every order of the Appel-
late tribunal (i.e. ITAT/CESTAT) shall lie before NTT, provided NTT is satisfied that
the matter involved a substantial question of law. On admission of an appeal, the NTT
would formulate the substantial question of law, for hearing the appeal. Section 23
of the NTT Act also provided that all matters and proceedings including appeals and
references, pertaining to direct/indirect taxes, pending before the jurisdictional HCs,
would stand transferred to the NTT, on and from the date to be notified by the Central
Government. Section 24 of the NTT Act provided for an appeal from an order passed
by the NTT, to the SC.
Constitutional validity of the NTT Act (of 2005) was challenged before the SC in a
batch of civil appeals and writ petitions. The SC in vide its ruling order dated Septem-
ber 2014, struck down the NTT Act as unconstitutional, being the ultimate encroach-
ment on the exclusive domain of the superior Courts of Record in India.
Without delving any further into the merit of NTT Act, and the reasoning of the
SC ruling striking down the Act as unconstitutional, it is important to review circum-
stances that led to its enactment and the objectives set out.
Build-Up to Enactment of NTT Act

The idea of constituting a National Tax Court was mooted by the first Law Commission
in its 12th Report, suggesting the abolition of the existing appellate tribunal, under
the framework of the IT Act. It recommended a direct appeal to the HCs, from orders
passed by appellate Commissioners. This recommendation was not accepted.
A Direct Taxes Enquiry Committee set up by the Government in 1970 with Mr.
K.N. Wanchoo a retired Chief Justice of the SC, as its Chairman, for creation of perma-
nent Tax Benches in HCs, and appointment of retired judges to such benches, under
Article 224A of the Constitution. The suggestion was aimed at clearing the backlog of
tax cases. The Wanchoo Committee did not suggest the establishment of any separate
tax courts as it would involve an amendment to the Constitutional provisions, besides
other statutory and procedural changes.
In 1986, Mr. V.P. Singh, the then Finance Minister had proposed the setting up of
a National Court of Direct Taxes, which would function on par with the HC as a ded-
Key Recommendations for Dispute Resolution Forums in India # 111
icated tax court. The Chelliah Committee applauded the idea and suggested ousting
the jurisdictions of the ITATs and HCs. However, the idea of setting up a National Tax
Court was not pursued all these years in spite of the recommendations of the Chelliah
Committee. Whilst none of the expert committee recommendation was implemented,
National Tax Tribunal Ordinance, 2003 was promulgated. After the Ordinance lapsed,
the National Tax Tribunal Bill, 2004 was introduced. The said Bill was referred to a
Select Committee of the Parliament. The Select Committee, after holding consulta-
tion with stakeholders including petitioner (i.e. Madras Bar Association) expressed
serious reservations in its report (of February 2005) on constitution of NTT. The Bill
was nevertheless presented in the parliament and enacted in 2005. Main reasons for
setting up the NTT were:
(i) To reduce pendency of huge arrears in HCs across India;
(ii) Huge tax demands (including interest and penalty) held up in litigation
before the HCs which directly impacted implementation of national proj-
ects/welfare schemes of the Government of India;
(iii) To achieve uniformity in the interpretation of tax laws; and
(iv) The judges dealing with tax cases were from civil courts and, therefore, not
well versed to decide complicated tax issues.
Challenge to Constitutionality of NTT

NTT was challenged on constitutional validity on grounds of enactment undermining
the basic structure of the constitution by impinging the power of ‘judicial review’
vested in the HCs.
Four main contentions were advanced by the petitioners in SLP before the SC:
(i) Reasons for setting up the NTT were fallacious and non-existent.
(ii) It is impermissible for the legislature to abrogate/divest the core judicial
appellate functions, especially functions constitutionally vested with HCs.
(iii) Article 323B of the Constitution inserted vide Constitution (Forty-second
Amendment) Act, 1976, to the extent it is violative of the basic tenets per-
taining to separation of powers, rule of law and judicial review under the
Constitution, was liable to be declared ultra vires the Constitution.
(iv) A number of provisions enacted in the NTT Act undermine the indepen-
dence of the adjudicatory process vested in the NTT.
The Apex Court in two separate concurring judgments held NTT Act as unconsti-
tutional. Key takeaways form the rulings:
(i) The legislative power conferred by the Constitution is subject to the ‘basic
structure’ of the Constitution which is inviolable.
(ii) Undoubtedly, the Parliament has the power to enact legislation, and to
vest adjudicatory functions with an alternative court/tribunal, though such
power should not per se violate the basic structure of the Constitution.
(iii) The basic structure will stand violated, if while enacting legislation pertain-
ing to transfer of judicial power, Parliament does not ensure, that the newly
created court/tribunal, conforms with the salient characteristics and stan-
dards of the court.
112 @ Dispute Resolution
(iv) The power of judicial review under Articles 226 and 227, more than any other
feature of the Constitution, was the part of basic structure of the Constitu-
tion. Abrogation of such power shall militate with ‘rule of law’ and hence
cannot be permitted.
(v) Since the NTT would hear appeals from the ITAT and CESTAT only on ‘sub-
stantial questions of law, it was difficult to appreciate the propriety of repre-
sentation, on behalf of the litigants, through either a Chartered Accountant
or Company Secretary. Accordingly, provision allowing Chartered Accoun-
tant/Company Secretary to represent before NTT would be unacceptable in
law.
(vi) Allowing the Central Government to participate in the administrative func-
tioning of the NTT would impinge upon the independence and fairness of
the Members. Substituting a quasi-judicial authority, the Chairperson and
Members should be possessed of the same independence, as the judges of
jurisdictional HCs.
Way Forward
Evidently, the Apex Court ruling deliberated upon each of the contentions, before con-
cluding to strike down NTT as unconstitutional, and holding provisions for appoint-
ment of members as unsustainable in law.
Moot question, now therefore, emerges as to whether there is a merit still in con-
sidering setting up of specialised National Tax Tribunal/Court for expeditious resolu-
tion of tax disputes, recognizing the growing pendency before the Tax benches of HC
(both in absolute number and in terms of quantum of tax demands locked in).
It is desirable to redesign the constitution of NTT (i.e. NTT Act) and present it
for reconsideration before the Parliament in light of observation of the Apex Court.
It should be ensured that NTT, as the quasi-judicial authority replacing HC’s power
in adjudicating tax matters, doesn’t encroach upon writ jurisdiction of the HC under
Article 226 of the Constitution, and that appointment of members and Chairman is
independent of Executive and Parliament. It shall require a thorough reconsideration
of form and constitution of NTT as proposed in the NTT Act (2005), view a view to
ensuring NTT is possessed of equal competence and independence as borne by the
HC. For administrative and logistic reasons, if it serves purpose, the functioning of the
NTT, may be housed within the premise of HCs, to commence the process of dispos-
als.
The distinct advantage of pursuing with institutionalizing a specialised forum for
tax dispute resolution such as NTT shall go a long way in positioning India as a favour-
able destination for global investors.
ADR Framework
Introduction
It was stated that
Discourage litigation. Persuade your neighbours to compromise wherever you can.
Point out to them how the nominal winner is often a real loser - in fees, expenses, and
waste of time. As a peacemaker, the lawyer has a superior opportunity of being a good
man. There will still be business enough
-Abraham Lincoln
ADR, in general parlance, means assisting the parties in dispute by involving a
neutral person to resolve the disputes through means other than adjudication. ADR
techniques do not intend to displace established means of resolving disputes by
adjudication; they only offer alternative to adjudication.
Typically, ADR processes are prompt, also relatively inexpensive compared to
court procedures, and are preferred in cases where the resolution can be achieved by
an agreement between the parties. In some ADR processes, like arbitration, mediation
and conciliation, the outcome (arbitral award and settlement agreement) is binding
and enforceable. ADR may not be the appropriate forum where the matter requires a
judicial clarification and there is a departure from a conventional view on a technical
issue, or where owning to parties’ mutual relationship, ADR is likely to be unfruitful.
Forms of ADR
The commonly used forms of ADR are -
(i) Arbitration: Typically a legal alternative to litigation whereby the parties to
a dispute agree to submit their respective positions (through agreement or
hearing) to a neutral third party (known as the arbitrator(s) or arbiter(s)) for
resolution.
(ii) Conciliation: Under conciliation, parties to a dispute agree to utilize ser-
vices of a conciliator, who meets with the parties separately in an attempt
to resolve differences. Conciliation differs from arbitration in a way that the
113
114 @ ADR Framework
conciliation process, in and of itself, has no legal standing, and the concilia-
tor usually has no authority to seek evidence or call witnesses, usually writes
no decision, and makes no award.
(iii) Mediation: It is an informal process under which a neutral third party
without the power to decide or usually to impose a solution helps the par-
ties resolve a dispute or plan a transaction. Mediation is voluntary and
non-binding, although the parties may enter into a binding agreement as
an outcome of mediation process. Mediation aims to facilitate negotiations.
The mediator has no independent decision-making power, jurisdiction or
legitimacy beyond what is voluntarily offered by the parties.
(iv) Negotiation: Under negotiation, interested parties resolve disputes, agree
upon courses of action, bargain for individual or collective advantage, and/
or attempt to craft outcomes which serve their mutual interests. It is usually
regarded as a form of alternative dispute resolution.
Most common law countries follow ‘Arbitration’ and ‘Conciliation’ forms of ADR.
Mediation is not a preferred process of ADR in tax matters as it is voluntary and usu-
ally results in non-binding outcomes. Similarly, negotiation is also a process whereby
parties resolve disputes based on a priori course of action to serve mutual interests.
Key Advantages of ADR

ADRs follow an approach and focus on enhanced direct participation of disputants,
rather than submitting to judicial judgement. This level of involvement typically yields
increased satisfaction with an ADR outcome. Parties are likely to be more co-opera-
tive and less rigid vis-a-vis adversarial court based methods like litigation. Other key
advantages of ADRs are as follow:
(i) Ability to be resorted to any time, irrespective of matter pending before any
Court of Law
(ii) Disputes are resolved expeditiously and at less cost than regular litigation
(iii) Confidentiality of the procedure
(iv) Flexibility since governing rules/procedures are not rigorous
(v) Easing of burden on Courts/Tribunals
ADR - Indian Landscape

Under the Constitution, all Indian Citizens are guaranteed equal rights of life and per-
sonal liberty, besides the fundamental rights. Various other rights flow out of welfare
legislations. But such rights are of no avail if an individual has no means to get them
enforced. Article 14 of the Constitution provides for equality before law; Article 39A
mandates the State to secure that the operation of the legal system promotes justice
on a basis of equal opportunity, and ensure that justice is not denied to any citizen on
account of economic or other disabilities. To secure justice through court, one has to
be aware of the complex procedures and ready to bear cost of such procedures, which
puts economically disadvantaged to misery.
ADR
- Indian Landscape ® 115
The Supreme Court in Hussain ara Khatoon' recognised the ‘right to speedy trial’
in its judgment as being implicit in Article 21 of the Constitution. The Law Commis-
sion in its Report No 238 dated December 30, 2011 emphasised the need to put in
place ADR mechanisms to facilitate easing burden off the Courts.
In the Indian context, ADR framework has been in vogue for long. Whist multiple
legislations envisage ADR, including Section 89 of the Code of Civil Procedure, 1908,
a full-fledged legislation governing implementation of arbitration mechanisms is
Arbitration and Conciliation Act, 1996, which was legislated after the Arbitration Act
of 1940.
Pre-1996 Position
The first direct law on arbitration was the Indian Arbitration Act, 1899; however, the
same was limited to the Presidency towns of Calcutta, Bombay and Madras. This was
followed by the Code of Civil Procedure, 1908 where the Second Schedule was com-
pletely devoted to arbitration.
The first major consolidated legislation governing the arbitration law of the coun-
try was Arbitration Act, 1940, which was based on the (English) Arbitration Act, 1934.
The 1940 Act repealed the Arbitration Act, 1899 and the relevant provisions in the
Code of Civil Procedure, 1908, including the Second Schedule thereof. The 1940 Act
however, did not deal with enforcement of foreign awards, and for which purpose, the
legislature passed the Arbitration (Protocol and Convention) Act, 1937 to deal with
Geneva Convention Awards and the Foreign Awards (Recognition and Enforcement)
Act, 1961 to deal with New York Convention Awards. The working of the 1940 Act,
which dealt with domestic arbitrations, was far from satisfactory. This Act was largely
premised on mistrust of the arbitral process as it was the subject of adverse comments
by the courts*. Coupled with a sluggish judicial system, this led to delays rendering
arbitrations inefficient and unattractive.
Post 1996 Position

The problems became acute after liberalisation of economy after 1991. Foreign inves-
tors eyed a stable business environment and a strong regime for a predictable system
of dispute resolution. Existence of a strong system of arbitration were thus sine qua
non for country’s development.
In this backdrop, Arbitration and Conciliation Bill, 1995 which could not get pass
the legislative process. Accordingly, Arbitration and Conciliation Bill, 1996 was pro-
mulgated and enacted subsequently as Arbitration and Conciliation Act, 1996 in the
lines of UNCITRAL Model Law. Its primary purpose was to encourage arbitration as
a cost-effective and quick mechanism for the settlement of commercial disputes. The
1996 Act covers domestic arbitration and international commercial arbitration.
1 Hussainara Khatoon v. State of Bihar AIR 1979 SC 1360.

2 EC. v. Joginderpal Mohinderpal (1989) 2 SCC 347; Guru Nanak Foundation v. Rattan Singh
(1981) 4 SCC 634.
116 ® ADR Framework
Arbitration and Conciliation Act, 1996 — Framework

The 1996 Act applies to all types of arbitrations, viz., statutory or non-statutory, insti-
tutionally administered or ad hoc, the only prerequisite being that the dispute must be
arbitrable. The 1996 Act provides for - a) domestic arbitration; b) international com-
mercial arbitration; and c) enforcement of foreign award and conciliation (the latter
based on the UNCITRAL Conciliation Rules of 1980). The more significant provisions
of the Income-tax Act are to be found in Parts I and II.
Part I is comprehensive and contains extensive provisions based on the Model Law.
It provides, inter alia, for arbitration of disputes, non-intervention by courts, compo-
sition of the arbitral tribunal, jurisdiction of the arbitral tribunal, conduct of the arbi-
tration proceedings, recourse against arbitral awards and enforcement. Arbitration in
India would be governed by Part I, irrespective of the nationalities of the parties.
Part II, on the other hand, is largely restricted to enforcement of foreign awards
governed by the Convention on the Recognition and Enforcement of Foreign Arbitral
Awards or the Convention on the Execution of Foreign Arbitral Awards.
Salient features of the 1996 Act
(i) An arbitration agreement has to be in writing, and may be even contained
in an exchange of letters or any other means of telecommunication which
provide a record of the agreement. The agreement need not be signed as an
unsigned agreement affirmed by the parties’ conduct would be valid as an
arbitration agreement.
(ii) The principle that the courts shall not interfere in an arbitral proceedings is
fundamental theme underlying the Act (except in certain instances such as
appointment of arbitrator, where the method envisaged by the parties fail,
termination of arbitrator under specified circumstances and provide assis-
tance in taking evidence).
(iii) Providing interim measures of protection, the applicant may reach out to
competent court during the course of or after an award is pronounced.
(iv) The arbitrators are masters of their own procedure and subject to parties’
agreement, may conduct the proceedings ‘in the manner they consider appro-
priate; including ex parte proceedings. This power includes the power to deter-
mine the admissibility, relevance, materiality and weight of any evidence.
Recent Developments
While the 1996 Act was enacted for ensuring decreased court intervention in arbitration
and greater coherence and consistency between domestic arbitration law and interna-
tional practices, arbitration continues to be ad hoc, expensive, long drawn and often
suffers from excessive court intervention. 246 Law Commission headed by Justice AP
Shah reviewed the situation to come up with reformative measures. The commission in
its report recommended holistic changes to the 1996 Act. Pursuant to the law commis-
sion report, the Union Cabinet on August 26, 2015, approved a new bill to amend the
1996 Act which would be placed in the winter session of Parliament for approval.
The Union Cabinet on October 21, 2015 has approved the Arbitration and
Conciliation (Amendment) Ordinance 2015 (“Ordinance”) which was promulgated
ADR
- Indian Landscape ® 117
on October 23, 2015 after having received Presidential assent. Subsequently, in the
concluding days of 2015 winter session the Arbitration and Conciliation (Amendment)
Bill, 2015 (“Amendment Bill”) was introduced in both houses of Parliament to replace
the Ordinance. It was passed by the Lok Sabha and Rajya Sabha on December 17 and
December 23, 2015 respectively. This Amendment Bill has now become an Act after
having received the President’s assent on December 31, 2015 and shall be deemed to
have come into force on the October 23, 2015. The Amendment Act has introduced
some major changes in the principal Act, such as:
(i) Communication of arbitration agreement through electronic means shall
be deemed as an arbitration agreement in writing;
(ii) In case the Court passes an order for any interim measure before the com-
mencement of arbitral proceedings, the arbitral proceedings shall be com-
menced within a period of ninety days from the date of such order;
(iii) Appointment of arbitrator shall now be made by the Supreme Court or the
High Court, as the case may be, instead of the Chief Justice of India or the
Chief Justice of the High Court. Further, application for appointment of arbi-
trator(s) shall be disposed of as expeditiously as possible and an endeavour
shall be made to dispose of the matter within a period of sixty days from the
date of service of notice on the opposite party;
(iv) Any order issued by the arbitral tribunal for grant of interim measures shall
be deemed to be an order of the Court for all purposes and shall be enforce-
able under the Code of Civil Procedure, 1908 in the same manner as if it
were an order of the Court;
(v) Regarding procedure of hearing, holding of oral hearing for the presentation
of evidence/oral arguments on day-to-day basis by the arbitral tribunal and
that any adjournments should not be granted without any sufficient cause;
(vi) The arbitral Tribunal shall ensure speedy completion of Arbitration pro-
ceedings and ensure to:
(a) Pass the award within a period of twelve months from the date when
the arbitral tribunal enters upon the reference;
(b) However, the parties may extend such period for a further period not
exceeding six months;
(c) Ifthe award is made within a period of six months, the arbitral tribunal
shall be entitled to receive additional fees as the parties agree;
(d) If the award is not made within specified period or extended period,
the mandate of the arbitrator shall terminate unless the time is
extended by the court.
(vii) Provision for a fast track procedure for conducting arbitral proceedings, in
cases where the parties mutually agree for such procedure;
(viii) Indian High Court to exercise jurisdiction for cases of international commer-
cial arbitration even if the place of arbitration is outside India provided such
award is enforceable and recognized under the Indian Arbitration Law;
(ix) For purposes of enforcement of foreign awards, every arbitral award made
in a country to which one of the two international Conventions relating to
foreign arbitral awards to which India is a party applies, will be treated as a
foreign award
It is anticipated that above changes will revamp the arbitration landscape in India,
inducing investor confidence in international commercial arbitration (whether seated
within or outside India) and make domestic arbitrations efficient and transparent.
ADR Framework for Tax Matters

The ADR mechanism comprises of several foras in context of disputes under direct tax
and indirect tax statutes -
AAR
AAR was legislated as amongst the most reformist ADR forum for taxpayers. One
distinct feature of AAR forum is that rulings pronounced by the AAR are binding on
taxpayers and the Revenue authorities alike, although in the last few years, the impor-
tance of AAR as an effective dispute resolution forum has come under question as
parties to the dispute have sought to constitutional remedy against otherwise bind-
ing ruling of the AAR. In certain cases’, the taxpayers/Revenue authorities resorted to
forum shopping by filing a SLP before the Apex Court under Article 136 of the Consti-
tution of India, instead of a writ under Article 226 of the Constitution of India. The Apex
Court in the case of Columbia Sportswear Co vs DIT‘, laid down the principle of writ vs
SLP against the AAR ruling, laying the controversy (viz., whether the challenge against
an AAR ruling lies before the jurisdictional High Court or the Apex Court) to rest by
holding that the aggrieved party to dispute can file a writ before the jurisdictional High
Court against the ruling of the AAR*; however only in exceptional situation, the Apex
Court shall exercise discretion in allowing an SLP against the AAR ruling.
In the context of indirect tax disputes resolution under the customs, excise and
service tax laws, the scheme of advance rulings has assumed special significance in
the context of greater investments resulting from emphasis on FDI. Similar to direct
tax disputes, advance rulings afford greater certainty to foreign investors in respect of
their prospective indirect tax liabilities. The first application for seeking an advance
ruling was received on November 20, 2002. During the period November 20, 2002
to December 31, 2014, two hundred twenty-nine applications were received, out of
which rulings were pronounced in ninety-nine cases (seventy-two relating to Cus-
toms, sixteen relating to Central Excise and eleven relating to Service Tax). During
this period, orders were also issued in five cases relating to Service Tax issued under
Section 96 D(2) of the Finance Act, 1994.°®
3 Ishikawajima-Harima Heavy Industries Ltd v. DIT (2007) 288 ITR 408 (SC), Director of In-
come-tax (International Taxation) v. Morgan Stanley & Co [2007] 292 ITR 416 (SC).
4 Columbia Sportswear Co v. DIT AIR 2012 SC 3038; (2012) 283 ELT 321. Useful to note that in
the case of Foster’s Ltd v. CIT (2008) 17 SCC 484 (SC), a two-member bench of the Apex Court
ordered the applicant to withdraw the SLP and instead, file a writ in the High Court. However,
the SC order in Foster’s case was not reasoned adequately to lay down principles as to the deter-
mination of an appropriate forum for appealing.
5 For detailed opinion of the author in this regard, refer article titled ‘SC upholds HC’s writ jurisdic-
tion against AAR rulings’ dated August 6, 2012, published in Business Standard.
6 Ministry of Finance, Department of Revenue, Annual Report 2014-15.
ADR Framework for Tax Matters ® 119
Table 4.1: Statistical Information About the Performance of AAR from FY 2009-10 to
December 31, 2014 in Income-tax Cases
YY a
balance
ae foe “Total “Dienosal C/f So pmage
8 received a : total applications
2009-10 25 75 100 56 44 56.00
2010-11 "aa 182 226 13 213 5.75
2011-12 213 246 459 105 354 22.88
2012-13 354 158 512 88 424 17.19
2013-14 424 133 557 64 493 11.49
2014-15 493 71 564 22 542 3.90
Source: Annual Report 2014-15 (modified).
Key limitations in the way of AAR emerging as an effective ADR forum for direct
tax disputes are -
(i) Whilst the statute/s provide for a swift time limit (6 months for income-tax
and 90 days for indirect tax) for disposal of applications, in reality the AAR
suffers from disposal of cases at snail pace. To illustrate, below is tabulation
indicating list of certain applications which witnessed long drawn and
tedious approach of this forum in rendering rulings.
Table 4.2: Year of Filing the Application and the Date of Giving Ruling by the Authority
in the Following Cases in the Recent Past
S.No. Name of Ruling Application No.& Year Decided on

1 Satyam Computers Services Ltd. 1066/2011 01.12.2015
2 Measurement Technology Ltd. 66/2010 29.07.2015
3 Skillsaft Ireland Ltd. 985/2010 20.07.2015

4 Pan-Asia iGate Solution 1041/2011 09.05.2014
5 The Royal Bank of Scotland 964/2010 09.05.2014

6 Steria (India) Ltd. 1055/2011 02.05.2014
7 Endemol India Pvt. Ltd 1081/2011 19.02.2014
8 Smita Anand 1091/2011 19.02.2014
9 Booz & Company (Australia) Pvt. Ltd. 1018/2010 14.02.2014
10 Dynamic India Fund 1016/2010 18.07.2014
11 Serco BPO Private Limited 2011 02.05.2014
Source: Inputs from article titled ‘Adjudication process under the Income-tax Act - How much effec-
tive?’ authored by VP Gupta, forming part of publication ‘Ease of Doing Business Towards an Easy,
Effective and Efficient Tax Administration and Policy’ by ITAT Bar Association, New Delhi (modified).
120 @ ADR Framework
The judiciary have also taken cognizance of functioning of AAR. Recently,

the High Court in Serco BPO’ took note that there was considerable delay
by the AAR in deciding the matter, being more than three years despite a
legislative mandate of six months. Despite multiple rounds of hearings the
AAR declined a ruling on the matter noting a prima facie finding of ‘tax
avoidance’ Whilst adjudicating taxpayer’s writ against AAR’s order, the High
Court took note of AAR’s discouraging approach with the matter and tried to
set an example by hearing the case on merits instead of remanding it back to
the AAR for fresh hearing.
(ii) Lack of bandwidth - Whilst additional benches of AAR are being set up pur-
suant to announcement vide Budget 2015, the inventory of pending appli-
cations and the steady stream of new applications suggests that the efforts
need to be accelerated. There are often vacancies in the AAR leading to in
delay in constitution of the authority and consequent delay in disposal of
applications.
(iii) Similar vagaries restrict an effective working of AAR in so far as indirect tax
disputes are concerned. However, in addition to the above, the following
are other systematic challenges to AAR becoming an effective dispute
settlement mechanism in the context of indirect taxes. The officers posted
as ‘Departmental Representatives’ before the Appellate Tribunal are given
the additional charge of representing the Department before the AAR.
This implies additional work-load for them and often lack of incentive
to expedite the hearings before the AAR. Additionally, this systematic
positioning denudes these officers from effectively representing before
the AAR are they have to refer and rely upon the jurisdictional officers for
even minor factual clarifications. As a matter of convention, the Chairman
of the AAR under direct taxes is also the Chairman of the AAR in indirect
taxes. Under the applicable rules all hearing before the AAR require the
presence of the Chairman. Accordingly the hearings before the AAR under
indirect taxes can take place only on occasions when the Chairman is not
preoccupied with the work from AAR under direct taxes. This implies that
the hearings are scheduled with considerable time difference between
them. For illustration, as a matter of existing practice the hearing in the AAR
in indirect taxes takes place only once in a week. This considerably reduces
the ability of AAR to address the cases before it at a faster pace.
(iv) Public ruling - AAR’s ruling are private ruling insofar as the ruling is appli-
cable to the applicant taxpayer and is binding only on the facts of each
ruling. A ruling of the AAR is not binding on other taxpayers even though
facts could be identical. In other words, AAR is not mandated to give out
‘product rulings, thus significantly limiting the utility and precedence value
of rulings pronounced by the AAR.
7 Serco BPO P (Ltd) v. AAR [2015] 379 ITR 256 (Punjab & Haryana HC).
ADR Framework for Tax Matters @ 121
(v) The scope of taxpayers covered under AAR is restricted and does not covers
majority of domestic taxpayers under its ambit. In context of indirect taxes,
taxpayers are not permitted to approach the AAR for ongoing transactions
to confirm the implications arising thereon pursuant to a change in the pro-
vision of law/emerging out of significant ruling impacting their positions.
Thus, bonafide doubts are left unaddressed rendering them susceptible to
challenge by the Departmental authorities.
(vi) During the process of adjudication, AAR under the legislative framework
can call upon Commissioner, if required necessary for adequate disposal of
application. However, practically, AAR exercises such discretion in almost
every case, leading to inordinate delays.
(vii) As per provisions of the Income-tax Act, the AAR shall have the power to
reject the application in certain cases, inter alia including a case wherein
it is determined that the arrangement entered into by the applicant in rela-
tion to which ruling is sought is for tax avoidance. Experience indicates that
the Revenue without fail builds a case for ‘tax avoidance’ in every matter,
without appreciating the intent for formation of AAR - i.e. to establish ‘tax
certainty: Recently, the High Court in Serco BPO* remarked that whilst the
AAR denied ruling on a prima facie finding that the subject arrangement
was a tax avoidance arrangement, however, no clear factual observation
was made by the AAR to support such finding. There was no correlation
between the factual observations of the AAR (regarding documents, requir-
ing an in-depth analysis, examination of fund flow, commercial expediency
etc.) vis-a-vis conclusion reached.
Settlement Commission though conceptualized as an impactful ADR tool in tax laws,
has not been able to realize the expectations, chiefly on account of its limited reach,
and the interpretative issues embedded in provisions. Key constraints in efficient
functioning of settlement commission are:
(i) One of the key limitations of ITSC that a taxpayer can file an application
before the ITSC for dispute resolution only if its case is pending before the
assessing officer and the assessment has not become time-barred. There
are no provisions under the IT Act for the taxpayer to access the forum of
ITSC in case dispute has reached the appellate forum. Similar restrictions
are present in the indirect tax legislations too.
Statement showing number of application filed and disposal of from the
year 2009 - 10 till 2014 - 15 (up to December 2014) is given as under”:
8 Serco BPO P (Ltd) v. AAR [2015] 379 ITR 256 (Punjab & Haryana HC).
122 @ ADR Framework
Table 4.3: Statement of Consolidated Receipt and Disposal of Applications by the

Settlement Commission (Income Tax and id? ney
: ‘Total—
ee
alt me ofap “Addi
ate” plications” ‘tions du
disposal
: ee a -Penden-
FY os
: Pa : neo received
sesah
to High ding she year _cyfor
during the —Court — for dis- ae ding) disposal
oo Avril = ae. oe : crest “Section
2009-10 1340 48 53 1388 203 1238

2010-11 1356 108 138 1611 423 1184
2011-12 1209 350 (-)6 1553 376 1177
2012-13 1186 410 (-)4 1592 443 1149
2013-14 1152 363 1 1516 673 843
April 2014 to 850 206 8 1064 446 618
December 2014
Source: Annual Report 2014-15 published by Ministry of Finance (Budget Division).
(ii) Despite clear legislative provisions that conclude ITSC to be an indepen-

dent body from IT department, existence of an internal directive for review
of order (Padmakishan, M 2013)'° of ITSC by Revenue officers implies lack
of trust on its decisions which is rendered by members ‘appointed by Cen-
tral Government from amongst persons of integrity and outstanding ability,
having special knowledge of, and experience, problems relating to direct
taxes and business accounts’!'. To this extent, it does entail fading away of
taxpayer considering to approach ITSC.
(iii) Under the Income-tax Act”, the tax authorities may use confidential infor-
mation furnished by the applicant before the ITSC. In situations where the
ITSC is unable to dispose off the applications within the specified time, with-
out any fault being on account of applicant, such confidential information
can severely prejudice taxpayer if matter is back in tax authorities’ court.
This provision is arbitrary, unreasonable and violative/ultra vires of Article
14 of the Constitution.'* Courts have held that confidential information
disclosed to the settlement commission used by the tax authorities against
the applicant to make additions is bad in law. Consequently, the imposition
of penalty on the basis of such invalid addition could not be sustained. The
scheme of settlement provides a framework by which an applicant can give
all confidential information to the department and the department, in turn,
promises immunity against penalty and prosecution.
10 Padmakishan, M 2013, I-T department to review orders of Setthement Commission, The Eco-
nomic Times. Available from: http://articles.economictimes.indiatimes.com/2013-10-24/
news/43366208_1_orders-direct-taxes-cbdt, October 24, 2013, accessed in May 2016.
11 IT Act, Section 245B(3).
12 IT Act, Section 245HA(3).
13 Star Television v. UOI (2008) Writ Petition No 952 of 2008.
14 Dolat Investments Ltd v. DCIT (2010) 38 SOT 123 (Mum).
(iv) The provision ° of the IT Act was amended by the Finance Act, 2007, to
provide that if in respect of application filed before June 1, 2007, the pro-
ceedings would abate in case ITSC doesn’t pass final order before March
31, 2008. The HC upheld jurisdiction of ITSC in case of applications which
were not disposed for no fault of applicants, however, tax authorities filed
SLP with SC challenging the HC decision. The fate of subject applications
has been hanging in limbo since then.
(v) For approaching the ITSC, the applicant is required to make ‘full and true dis-
closure’ of additional income (not disclosed before the AO) before the ITSC.
The interpretation of expression ‘true and full disclosure of income’ is thus crit-
ical for determining maintainability of application before the ITSC. In search
cases, the applicant’s disclosure is compared with provisional/one sided figure
of income estimated in Appraisal Reports of the Investigation Wing presuming
the disclosure to be malafide and merits of application are lost sight of. Appli-
cant is not provided with sufficient opportunity to rebut the estimations and
prove that true disclosures are made. Consequently, this promotes litigation
dissuading potential applicants from coming forward to ITSC.
(vi) Having regard to legislative intent to constitute ITSC and the nature of
functions entrusted to it, the conclusion both on question of facts and law
reached by the ITSC should not be challenged except under very rare cir-
cumstances, such as on grounds of validity of the manner in which ITSC
conducted proceedings.
DRP
Whilst DRP was instituted with an intent to provide an alternate fast track yet fair dis-
pute resolution forum, its implementation has not defeated the noble intent. Follow-
ing statistics reveal the huge quantum of additions in case of proceedings before the
DRP, indicating the importance of DRP as a dispute resolution forum -
Table 4.4: Year Wise Data Regarding Objections Filed Before Dispute Resolutions Panels
FY Total cases filed during the Amount involved

cycle (in INR Mn)
2009-10 1,154 375,950
2010-11 938 428,350
2011-12 1,041 689,770
2012-13 1,070 803,320
2013-14 1,015 985,650
2014-15 1,103 1,238,080*
*Information regarding amount involved is not available in respect of CCIT (IT), SZ, Bangalore.
Source: Annual Reports 2014-15 published by Ministry of Finance (Budget Division).
15 IT Act, Section 254D(4A).

124 @ ADR Framework
CCIT (IT), WZ, Mumbai 19,023.29

CCIT (IT), SZ, Bengaluru #
DRP-1, Delhi 408.67

DRP-2, Delhi 20,674.00
DRP-3, Delhi 14,666.34
DRP-4, Delhi 100 100 12,536.00
TOTAL 1103 1052 123,808.30
* Proceedings in 1 case is stayed by the High Court of Karnataka
# Information regarding amount involved is not available at present
Source: Annual Reports 2014-15 published by Ministry of Finance (Budget Division)
The key concerns emerging from functioning of the DRP are -

(i) Access to DRP is limited to foreign companies and taxpayers with TP adjust-
ments during the audit. To maximize the benefits of DRP forum, it is critical
to permit wider set of taxpayers to access the DRP.
(ii) Statistics reveal that DRP rarely affirms a position different from the one
proposed by the tax officer, which takes away the efficacy of the first appel-
late forum and taxpayer’s faith in the forum.
(iii) Credibility of DRP as an effective ADR forum received a major setback
when the Finance Act 2012 introduced right of the Revenue to challenge the
assessment concluded post DRP directions. On one hand whilst the DRP
didn’t apply jurisdictional ITAT/HC jurisprudence in favour of the taxpayer
citing Union’s challenge to order of jurisdictional authority in higher forum,
on the other hand, the Revenue preferred an appeal against each and every
favourable direction of the DRP. Besides curtailing the superfluous litiga-
tion, this would ensure that the principle of judicial discipline is adhered to.
(iv) Lack of well-reasoned orders are another area of concerns. A typical order of
the DRP contains large extracts from the draft assessment order and submis-
sions made by the taxpayer, whilst DRP’s objections are stated in a couple of
lines. The order typically does not reflect DRP’s thought process on factual
observations/legal arguments of the taxpayer. On multiple instances, the
judiciary has criticized DRP directions for lack of merit based approach and
directions being ‘laconic’ and ‘non-speaking’ (GAP International Sourcing
India Put Ltd vs DCIT (2011) 44 SOT 56 (Delhi))'°/absence of cogent and
germane reasons (Vodafone Essar Ltd v. Dispute Resolution Panel)!”. Albeit
detailed submissions made by the taxpayer, the DRP usually brushes aside
all arguments without stating the reason for the same. This, in essence, is
16 GAP International Sourcing India Put Ltd v. DCIT (2011) 44 SOT 56 (Delhi).
17 Vodafone Essar Ltd v. Dispute Resolution Panel (2012) 340 ITR 352 (Delhi).
ADR Framework for Tax Matters ® 125
inconsistent with the rules of natural justice (Sahara India (Farms) vs CIT
300 ITR 403 (SC))!®.
(v) Lack of sufficient benches to absorb the cases being submitted with the
DRP, along with inadequate support and research staff also appears to be
a reason for inefficient functioning; however, the same can be revived pro-
vided progressive steps are taken.
(vi) Statutorily too, rights of the DRP are constrained vis-a-vis rights granted
to the first appellate forum, i.e. Commissioner (Appeals); e.g., DRP does
not have power to annul the draft assessment, neither can it compromise
or arbitrate a dispute since what is available before the panel is the draft
assessment order.
(vii) Absence of independent experts in the collegium of DRP Commissioners
and tight timelines for filing of objections by taxpayer and adjudication by
the department renders the process ineffective.
APA
The Indian APA regime is designed to embrace global best practices and seeks to provide
much needed certainty to MNEs in connection with their transaction with related par-
ties. Over six hundred APA applications have been filed in the last three years since the
advent of the APA regime. Of course, in large measure, the rush for APAs is on account
of the aggressive annual TP audits conducted by the Revenue authorities leading to sig-
nificant litigation and contingent tax demands. As at March 29, 2016 (CBDT 2016)", the
statistics released by the CBDT indicate that fifty-nine APAs have been concluded. It
is learnt that most of the latest batch of APAs are for service provider entities - with a
margin range of 17 to 22 percent [as reported by media (Seth 2015)”].
India contributes around 70 percent of global TP litigation. The latest concluded
audit cycle witnessed TP adjustments in FY 2014-15 to the tune of INR 464.6 billion”'.
Table 4.6: Transfer Pricing References and Adjustment made in FY 2014-15 (in Cycle
Completed on January 31, 2015)
No of cases Total amount of
on). / Charge NoofTP audits inwhichTP TP adjustment
completed adjustments made
made (in INR Mn)
1 CCIT (IT), WZ, Mumbai L713 1,098 188,903.4
2 CCIT (IT), SZ, Bengaluru 1,258 637 109,114.8

3 CIT (TP)-1, Delhi 474 218 39,258.5
4 CIT (TP)-2, Delhi 303 150 44,945.9
18 Sahara India (Farms) v. CIT 300 ITR 403 (SC).

19 CBDT 2016, Press Release, March 29, 2016.
20 Seth, D 2015, ‘-T Dept inks 11 agreements to solve transfer-pricing issues, ‘1-T Dept inks 11 agree-
ments to solve transfer-pricing issues: [November 24 2015].
126 #® ADR Framework
No of cases Total amount of

NoofTP audits inwhichTP TP adjustment
ae | es : completed = adjustments _ made
eo |) made (in INR Mn)
5 CIT (TP)-3, Delhi 409 175 65,626.2
6 CIT (IT & TP), Kolkata 133 Ths 16,807
TOTAL 4,290 2,303 464,655.8
Source: Annual Reports 2014-15 published by Ministry of Finance (Budget Division).
Indian APA regime is still in nascent stage and thus would take time to mature as
a legislation. Even though the CBDT has come out with preliminary administrative
guideline” for pre-filings and the likely approach of the Government/CBDT, there are
several areas which require further clarity for MNCs to be confident about embracing
Indian APA regime; some of notable areas requiring further focus are -
(i) The APA regime does not explicitly provide for confidentiality of taxpay-
ers’ information and details shared with APA authorities [i.e. Competent
Authority/CBDT/Commissioner (APA)]. This has been a significant source
of concern for MNCs who have to share confidential data on their business
processes and strategy as part of submissions before APA. Also, taxpayers’
may be required to share classified information pertaining to business of for-
eign associated enterprises. Whilst most countries have provided detailed
rules regarding sharing of sensitive taxpayers’ information (e.g., business
projections, target profitability, etc.) with Revenue authorities, the Indian
APA regime is unclear on this important aspect.
(ii) Applicability of APA is subject to ‘critical assumptions’; any change in
‘critical assumptions’ shall require a revision to already concluded APA.
Although the Indian APA regime provide for revision of APA in such eventu-
ality, it does not elaborate upon the circumstances that would lead to such
change.
(iii) From past rounds of APA filings it has emerged that number of Indian tax
treaties* do not contain enabling provision for corresponding adjustment
under Article 9 [as provided in Article 9(2) of OECD MC/UN MC]. In
22 CBDT 2012, Press Release August 31, 2012 and Income Tax India, Advance Pricing Agreement
Guidance with FAQs’ (Tax Payers Information Series - 43), Available at: http://www.incometax-
india.gov.in/booklets%20%20pamphlets/advance-pricing-agreement-guidance-with-faqs-(t-
pi-43).pdf, accessed in May 2016.
73} ‘Critical assumptions’ refer to a set of taxpayer related facts and macro-economic criteria (such
as industry, business, economic conditions, etc), the continued existence of which are material
to support the concluded position under an APA. A material change in any of the critical as-
sumptions may result in revision of the APA, or may even termination in extreme circumstances.
Critical assumptions form an integral part of the Indian APA programme as well.
24 India’s tax treaties with Germany, France, Singapore, Italy, South Korea, Belgium, Finland
and Norway Available at: http://www.tpweek.com/Article/1937935/Double-tax-treaties-
and-transfer-pricing-in-India.html, accessed in May 2016 and _http://www.business-
standard.com/article/economy-policy/revision-in-tax-pacts-to-push-advance-pricing-
agreements-114082501268_1.html, accessed in May 2016.
absence of such provision in Indian tax treaties, there is a fundamental

hurdle in approaching the Indian Competent Authority and the Competent
Authority of the treaty partner country for negotiating bilateral APAs. In
this connection, relevant to note that the CBDT has clarified?5 in absence
of provisions for corresponding adjustment in the relevant tax treaty, India
shall not entertain bilateral APA with respect to transactions involving such
treaty partner. This is contrary to the OECD commentary which provides
that even if bilateral tax treaty does not contain provisions of corresponding
adjustment, the two sovereign States can still mitigate double taxation arising
out of TP adjustments by allowing corresponding adjustments, through
invoking Article 25(3). However, India (as an observer nation to OECD)
disagreed with the mechanism of granting corresponding adjustment in TP
matters through invoking Article 25(3).
MAP
MAP framework enshrined in bilateral tax treaties has the capability of emerging as
the most incisive ADR tool in cross border tax issues. The framework permits Com-
petent Authorities to engage, suo motu or at taxpayer’s request, to address potential
cases of double taxation. Given the Indian experience of resolving tax matters with
traditional forums, MAP does offer a more attractive dispute redressal opportunity.
However, in spite of apparent efficiencies of the MAP framework, anticipated results
have not accrued.
Recently, in its move to boost in to boost investment sentiments among MNCs,
CBDT signed a framework agreement with the Revenue Authorities of USA in January,
2015 (CBDT 2016)*° under MAP provisions of India-US DTAA. The said framework
agreement seeks to resolve about two hundred past transfer pricing disputes between
the two countries in the Information Technology (Software Development) Services
and Information Technology enabled Services segments. The progress made under
the aforementioned framework agreement with the US, will also inspire results under
the bilateral APA programme between India and the US.
Besides above, as per written reply to Rajya Sabha by Minister of State for Finance,
Shri Jayant Sinha, submitted that 175 MAP cases have been settled.
As discussed, MAP process offers a credible treaty driven ADR in cases where tax-
ation that is not in conformity with provisions of the treaty. However, the MAP process
has certain inherent limitations such as -
(i) One key limitation that constraints success of MAP process is time limit pre-
scribed in Article 25 of the Model Convention (i.e. three years) for invok-
ing MAP remedy. Due to the lack of jurisprudence/guidance available in
the Indian context, taxpayers often struggle in determining the date of first
action which entitles the taxpayer to invoke MAP remedy.
25 Answer to question no 19 in the guidance book ‘Advance Pricing Agreement Guidance and
FAQs’ published by CBDT.
26 CBDT 2016, Press Release, January 28, 2016.
128 @ ADR Framework
(ii) Given the lackluster results of MAP interactions, taxpayers have started to
feel less confident as to the efficacy of this forum and may not opt for the
MAP as the forum of first resort, over other remedies available under the IT
Act or the Constitution. More often than not, bureaucratic overhang comes
in the way of successful negotiation of MAP between Competent Authorities
of two negotiating countries; such behavior can cause serious damage to
taxpayer confidence in the tax administration and the Government. India -
US example of a two year deadlock between their CAs is a case in point that
stood in the way of resolving tax cases of US MNEs. The deadlock was broken
with the aid of political intervention between the two country authorities in
early 2015.
(iii) Taxpayers’ trust in functioning of MAP authorities is another key challenge.
Often taxpayers are circumspect as to the degree of confidentiality accorded
to information that they share with MAP authorities. Moreover, the entire
exercise is carried out by the CAs with participation of taxpayers as per its
discretion.
(iv) Insofar as Indian MAP framework is concerned, suspension of tax demand
is not provided for, except in case of four countries (i.e. UK (CBDT 2004)’,
USA (CBDT 2003)”, Denmark (CBDT 2008)” and Korea (CBDT 2015)*).
In cases of high demands, taxpayers are relatively keen on opting for tradi-
tional appellate remedies, as IT Act contains enabling provisions for seeking
stay of disputed demand in such cases.
(v) Absence of defined time lines for conclusion of MAP proceedings has also
led to lackluster results; at present more than two hundred MAP applica-
tions are pending with the Indian CA. Such statistics provoke taxpayers to
try their chances at the more matured dispute resolution forums.
Select International Practices - Summary

United Kingdom
(i) Since 2011, UK Government has been using two ADR pilots to explore which
ADR may be appropriate for resolving tax disputes -
(a) One that involves large taxpayers with complex tax affairs under which
disputes are subject to ADR process which uses accredited taxation
staff to facilitate discussion and/or involvement of third-party accred-
ited mediator.
(b) The other (pilot) covers disputes involving mainly SMEI in which an
in-house Government-trained facilitator is deployed to help the par-
ties arrive at a resolution; this pilot has no access to third-party medi-
ators.
yall CBDT 2004, Instruction No 3 of 2004, March 19, 2004.

28 CBDT 2003, Instruction No 2 of 2003, April 28, 2003.
29 CBDT 2008, Instruction No 7 of 2008, June 24, 2008.
30 CBDT 2015, Press Release, December 9, 2015.
Select International Practices — Summary ™ 129
(ii) HMRC may engage in following types of ADR -

(a) Facilitated discussion: Under this, an HMRC externally trained and
accredited mediator facilitates brings parties together but offers no
opinion on merits of arguments. The facilitator(s) may challenge each
side as to how their dispute may play out in front of the Tribunal. The
HMRC facilitator may or may not be a specialist on the subject but
will not have had any prior involvement on the case as part of the case
team, to address the conflict issue.
(b) Facilitative mediation: Under this, an independent external mediator
is jointly engaged by HMRC and the taxpayer to try to bring the parties
together but offers no opinion on the merits of the arguments.
(c) Evaluative mediation: Under this, the mediator will bring parties
together in the same way as in facilitative mediation. Further, the
mediator will also provide his/her view as a specialist on the subject.
(d) Non-binding neutral evaluation: Under this, a neutral third party who
is an expert in a particular field provides a non-binding opinion. This
is suitable for tax cases where issue ain’t tax related but determination
thereof has tax consequences.
New Zealand
(i) Issuing a binding ruling is Inland Revenue’s® own peculiar way of providing
a regime of tax certainty to taxpayers and hence, create a taxpayer friendly
environment. Such a ruling aims to outline Inland Revenue’s interpretation
of how the relevant taxing provisions shall apply to a particular arrange-
ment.
(ii) Broadly, there are following four types of binding rulings -
(a) Public rulings: Public ruling interprets how a tax law applies to a
defined arrangement that has widespread general application. In case
a taxpayer’s situation is identical to the defined arrangement which is
taken up for the purpose of such ruling, such a taxpayer, may bind the
Inland Revenue. A plethora of issues have been clarified pursuant to
such rulings; for instance, recently, Inland Revenue has come out with
a public ruling on the interest deductibility for income-tax purposes
on borrowings to replace and repay amounts invested in business/
other income-earning activity”, income tax treatment of amounts of
unclaimed money of $100 or less**, whether a director’s fees are sub-
ject to GST“, the issue of deductibility of break fee paid by a landlord
to exit early from a fixed interest rate loan”, etc.
(b) Private rulings: Private ruling, much similar to the AAR prevalent in
the Indian scenario, caters to a single tax payer or a group of taxpayers
31 Inland Revenue Available at: http://www. ird.govt.nz/, accessed in May 2016.

32 BR Pub 15/04 to BR Pub 15/09.
33 BR Pub 13/03.
34 BR Pub 15/10.
35 BR Pub 12/01.
of how tax laws apply to a particular arrangement entered into by such

taxpayer/s. Such rulings apply only to person/s named in the ruling
and are binding solely on the applicant.
(c) Product rulings: Product ruling provides interpretation of how the
tax law applies to ‘consumers’ of a particular ‘product, which is an
arrangement entered into by numerous taxpayers on identical terms.
For example, Inland Revenue came up with a product applicable
to charging of an annual telecommunication operators levy on
liable telecommunication operators under the Telecommunication
Operators (Commerce Commission Costs) Levy Regulations 2011
which is collected by MBIE, the Ministry responsible for administering
the Telecommunications Act 2001.*°
(d) Status rulings: As a recourse in a post amendment scenario, such
rulings can be applied for by taxpayers to vouch the continuity of the
stands taken by them pre amendment owing to private or public rul-
ings.
Australia
(i) In Australia, ADR, both formal and informal, are gaining popularity as it
provides both ATO and taxpayer opportunity to resolve disputes in a timely
and cost efficient manner.
(ii) Australia provides various options for ADR like - conferencing, mediation,
conciliation, case appraisal, neutral evaluation before the Administrative
Appeals Tribunal; mediation, arbitration before Federal Court. Consequent
to the increase in emphasis on ADR, only a small percentage of disputes are
resolved through litigation. Mediation is the most widely used form of ADR
by the ATO.
Salient features of the ADR in the Australian tax administration are:
(a) Prevent conflict through notification, consultation and feedback: The
objective is to avoid dispute before it starts. Consultation is an inherent
part of the process. Most ATO interactions typically involve exchange
of views and informal meetings. Taxpayers are usually represented by
their advisors at such meetings providing a counter to points put forth
by ATO officer. Despite consultations in case the dispute arises, the
process enables consultation between the taxpayer and ATO officer’s
supervisor. The next level involves appeals to the TCRU, which does
not involve detailed consultation albeit at initial stages.
(b) Create ways of reconciling the interest of those in dispute: ATO model
provides clear ways to reconcile the interest of the ATO and the tax-
payers.
(c) Build in ‘loop-backs’ to negotiation: ATO allows the flexibility to tax-
payers to switch from formal to informal procedures at each stage of
the process to facilitate efficacy in disposal (popularly known as ‘loop-
36 BR Prd 13/07.
Select International Practices - Summary ™ 131
back’). Even at the highest level, the Ombudsman negotiates with the
ATO on behalf of the taxpayer.
(d) Provides low-cost alternatives where negotiation fails: Last resort for
taxpayer in most procedural matters is appeal to the Ombudsman.
This involves negotiation of the ombudsman, on behalf of taxpayer,
with the ATO.
Canada
(i) CRA has been issuing advance income tax rulings since 1970 in cases where
taxpayers seek an upfront determination of tax outcome of a proposed
transaction.
(ii) To ensure that there is a reduction in likelihood of taxpayer incurring sig-
nificant costs for a ruling that Income Tax Rulings Directorate (“ITRD”) will
be unable to provide, CRA have introduced the concept of ‘pre-ruling con-
sultations: Taxpayers may approach the ITRD on a formal, written basis to
obtain a preliminary ‘pre-ruling’ on a particular issue in order to determine
whether the ITRD will issue a full ruling on the same issue in the future. This
is similar to AAR in Indian scenario.
United States of America

(i) Typically in the US, in case a person disagree on tax matter with the IRS,
following recourse is available*’ -
(a) Appeal before the Appeal Office - File a protest letter directly with the
Appeals Office stating in detail the reasons for your disagreement with
the IRS’s findings.
(b) Appeal directly to the US Tax Court - Most cases arrive in Tax Court as
a result of a taxpayer’s challenge of what is known as a NOD. Gener-
ally, an NOD is issued by the IRS’s audit division after an audit takes
place and the IRS and the taxpayer cannot agree on all of the proposed
adjustments. The NOD is also called a ninety day letter because the
taxpayer receiving it has ninety days from the date of its issuance to
file a Tax Court petition disputing the deficiency assessment. Prior to
receiving the ninety day letter a taxpayer will have be given the oppor-
tunity to file a formal written protest of the proposed assessment
directly with the IRS appeals office. The written protest, if any, is to be
filed within thirty days of receipt of the notice of proposed assessment.
A notable feature of the process is that the filing of an appeal entails an
automatic stay of demand.
(ii) Mediation is an extension of the Appeals process. The mediator’s role is to
help resolve the dispute after good faith negotiations in Appeals have been
unsuccessful. Mediators may come from Appeals, or the taxpayer can use
non-IRS co-mediators, at the taxpayer’s own expense. Mediation is optional
37 IRS, Appeal Process, Available at:https://www.irs.gov/Government-Entities/Feder-

al,-State-&-Local-Governments/Appeals-Process, accessed in May 2016.
132 = ADR Framework
and available for both factual issues, such as valuation and TP issues, and
legal issues. The mediator will not require either party to accept a certain
outcome.
(iii) Process of ‘Fast Track Mediation’ is designed to help Small Business/Self
Employed (SB/SE) taxpayers resolve disputes during the examinations
(audits) procedures.
(a) Most cases which are not ‘docketed in court’ (i.e. case is placed in
court’s calendar) qualify for fast track mediation. Excluded cases are,
among others, issues with no legal precedent and issues where the
courts’ decisions differ.
(b) The taxpayer and the IRS representative must sign an agreement to
mediate before the first mediation session. The taxpayer does not need
to file a written protest to request fast track mediation and retains all
the usual appeal rights for any issues that do not get resolved through
fast track mediation.
(c) Appeals personnel trained in mediation help the taxpayer and IRS rep-
resentative discuss the issues involved, and possible ways to resolve
and reach a joint agreement solution, within forty days.
(iv) Fast Track Mediation offers taxpayers a way to resolve audit issues during
the examination process, within one twenty days, as a general rule. It is
available for Large, Medium and Small Business and SB/SE taxpayers, as
well as to other IRS Operating Division taxpayers* on case by case basis for
factual and legal issues, including issues that require consideration of the
hazards of litigation.
(v) For successful arbitration experience in context of tax treaty disputes, ref-
erence could be made to the US - Canada framework. The original tax
treaty between Canada and the United States did not contain arbitration
clause. Subsequently, the ‘Memorandum of Understanding between The
Competent Authorities of Canada and The United States of America’ and
the ‘Arbitration Board Operating Guidelines’ released by the Canada Rev-
enue Agency (CRA) and the US Internal Revenue Service (IRS) introduced
detailed rules regarding arbitration. The proceedings are conducted as per
‘baseball arbitration’ rules**. Based on a majority vote, the arbitration Board
makes a determination which is binding on both CAs. The Board members
have to destroy all related documents upon termination of the proceed-
ings to maintain confidentiality of the matter. MoU also provides guid-
ance regarding certain logistical aspects - for example, the MoU provides
38 ‘The IRS is composed of many different operating divisions that oversee different management
functions. Main divisions in this regard are - a) Wage & Investment Income Division (deals with
individual taxpayers who only receive wage and/or investment income); b) Small Business & Self
Employed Division (deals with self-employed taxpayers and small businesses); c) Large Business
& International Division (deals with a business needs to have assets valued at over $10 Mn); d) Tax
Exempt Organizations & Government Entities Division (deals with pension plans, exempt organi-
zations and governmental entities) etc.
39 Under baseball arbitration, both CAs put forth their ‘best’ proposals for resolving the dispute
and the common selected arbitrator reaches a decision by accepting either of the two proposals.
Select International Practices - Summary ® 133
that Board members shall communicate through written medium, costs of

Board members are to be borne equally by the CAs.
Brazil
(i) Pre-filing: Binding rulings are for pre-filing phase and are strictly limited
to unrealised facts, providing resolution for future circumstances. It works
whenever a doubt in the application of the tax law is raised. The taxpayer
is required to describe detailed facts that he is considering to realize in the
future and the rules he believes are applicable to such facts. This is similar
to AAR in Indian context.
(ii) Post filing: Administrative Tax Litigation (akin to DRP framework in India)
are post filing in nature and are distinguished from judicial litigation which
involves an attorney. This involves taxpayer filing a protest letter to the
competent branch of the Federal Revenue Authority. If the infraction or
inconsistency is confirmed by the Authority, the Taxpayer may file a Vol-
untary Appeal to the Administrative Council of Tax Appeals. This is similar
to appeals filed before the Tribunal (against the assessment order passed
pursuant to DRP directions) in an Indian context.
(iii) Tax Amnesty Program: The process varies in accordance with the Program,
but in general it requires voluntary disclosure and a formal declaration by
the taxpayer to ‘cease and desist’ of any administrative or judicial litiga-
tion of an asserted tax claim. It typically includes the reduction or waiver of
interest and penalty charges, and it may also include other incentives for the
settlement.
At times, tax amnesty program may provide full tax relief as well, but such
program typically has a very short window of opportunity (such as two-
three months). The objective of an amnesty program is for the government
to collect as much tax revenue as possible within a short window of time.
Such programs may also provide an opportunity for taxpayers to file late
returns, make revisions or pay off a balance in full.In the most recent tax
amnesty program, over fifteen thousand Americans took advantage of this
tax relief, enjoying a limit on penalties and fees for failing to report offshore
account and assets, or for failing to submit returns or submit returns in a
timely manner.
South Africa
South Africa has two forms of ADR for tax matters -
(i) ATR: The ATR (binding general, class and private rulings) provides resolu-
tions for future transactions and is similar to AAR in Indian context
(ii) ADR: ADR process is aimed at resolving disputed tax positions with the
SARS; technically any disputed matter can be taken to ADR. Under ADR
process, a taxpayer aggrieved by an assessment and wishes to appeal the
SARS’ decision, may request the ADR process to either agree or settle the
dispute. SARS has the discretion to decline the request but is required to
give reasons for such which the taxpayer can also contest.
134 @ ADR Framework
Both ATR and ADR processes are relatively new in South Africa (ADR
approx. six years and ATR four years).
European Union’s Arbitration Convention

(i) It may also be useful to refer to the EU Convention, which was concluded in
1990 and is a well-developed illustration for understanding the relevance of
multilateral treaties for resolving tax disputes.
(ii) The EU Convention deals with disputes arising on account of double taxa-
tion between EU member states, primarily arising out of TP adjustments by
either of the states.
(iii) The convention prescribes a definite timeline within which CAs of relevant
member states should try to reach an agreement following the MAP.
(iv) In case the CAs fail to arrive at a mutual agreement, the CAs are mandated
to constitute an ‘advisory commission, which acts as an arbitrator between
the disputing member states.
On scrutinising the global best practices it emerges that tax disputes could be
prevented, or at least resolved speedily, with the help of ADR framework. For example,
the US IRS launched the fast track settlement process in 2001 for large corporate
taxpayers as a part of their ADR initiative. This programme has been largely successful
with several cases being resolved and significant reduction in appeal timeframes. As
per the statistics released by the US Department of Justice (Department of Justice
2015)*°, the success rate of ADR proceedings stood at 71 percent in 2015 (against 58
percent in case of court proceedings) entailing a win-win equation for all stakeholders
- saving of litigation expense of USD 14,208,626, equivalent time of attorney saved of
twenty thousand six hundred eighty six days and two thousand one hundred eight
months of litigation avoided. Pertinent to note that such statistics have been constantly
improving over years.
In the Canadian context*', percentage of MAP cases accepted and completed
during a fiscal year seems promising. To illustrate, during fiscal year 2013-14, out of
three thousand two hundred sixty seven cases, two thousand nine hundred twen-
ty-three cases were completed.
Key Recommendations for India

Considering the issues on ADR mechanism in India and useful takeaways gathered
from successful experience across globe, following key recommendations emerge for
Indian context -
40 Department of Justice 2015, Statistical Summary: Use and Benefits of Alternative Dispute Res-
olution by the Department of Justice, Available at: http://www.justice.gov/olp/alternative-dis-
pute-resolution-department-justice, accessed in May 2016; (as specified, the data is based on
detailed case reports submitted by lead trial counsels in all cases where a private neutral con-
ducted an ADR process in department litigation across the country).
41 CRA 2014, 2013-2014 MAP Program Report, Available at: http://www.cra-arc.gc.ca/tx/nnrsd-
nts/emp/mp_rprt_2013-2014-eng.html, accessed in May 2016.
AAR
The following key recommendation should be considered -
(i) To ensure independence in the functioning of AAR, it should be housed as
an independent directorate or under Ministry of Law & Justice rather than
being under the administrative control of the Ministry of Finance.
(ii) AAR should be accessible to all taxpayers falling within the LTUs category.
From indirect taxes standpoint, taxpayers should be eligible to seek a ruling
of the AAR in connection with existing/on-going transactions.
(iii) From a direct tax standpoint, institution of a non-judicial forum to adjudi-
cate on facts of non-LTU taxpayers should be evaluated; such forum should
comprise of collegium of commissioners and eminent experts from respec-
tive fields. From indirect tax, the eligibility criteria for taxpayers should
be broadened so as to make it more inclusive; e.g., all domestic importers
should be allowed to approach the AAR.
(iv) AAR’s jurisdiction should be widened to facilitate ‘product ruling’; only
cases which are not fit for a private ruling in its current form should be
eligible to approach for ‘product ruling’ in the new format. AAR may at
the behest of taxpayers or a Group, announce its intention to pronounce
a ‘product ruling’ which will give an opportunity to intended taxpayers to
intervene. Useful reference can be made to the practice in New Zealand
wherein Inland Revenue issues a product ruling addressing tax certainty
concerns of a larger taxpayer base. To quote a relevant instance from Indian
context, payments of spectrum fees have been a subject matter of debate
from both direct tax and indirect tax (in particular, potential implications
under GST). A product ruling clearly laying down tax treatment of spectrum
fees could be a potential solution to such debates.
(v) Article 3 of the Agreement on Trade facilitation agreed at Bali Ministerial
meeting also lays emphasis on effectiveness of the AAR which would require
the AAR bench to be set up in other cities besides New Delhi to make dispute
prevention more accessible. AAR should be constituted in other metros and
select tier two metro cities such as Pune, Ahmadabad, Hyderabad, Kolk-
ata, Lucknow. AAR benches outside Delhi which can be chaired by retired
judges of state High Courts, just as additional bench. In this regard, whilst
CBDT has announced formation of two additional benches - in Mumbai
and NCR, the said benches are yet to be operationalized.
(vi) Reach of the AAR for Central Excise, Customs & Service Tax matters should
be expanded to allow Advance Rulings applications in connection with pro-
posed transactions, as prevalent under the Income-tax Act. All decisions of
AAR should follow consistent positions.”
(vii) AAR rulings should preferably be made appealable directly to the SC or
if the present convention is to be followed, the HC order should be final
unless there are constitutional question arising out of AAR order and HC
verdict.
42 Columbia Sportswear Co v. DIT AIR 2012 SC 3038 (SC).

(i) To reinforce efficacy of ITSC as an effective forum of dispute resolution,
taxpayers should be permitted to reach the forum even if proceedings are
pending before the appellate authority [i.e. Commissioner (Appeals)/ITAT].
Further, the CBDT should announce fresh guidelines for functioning of
ITSC as an effective out-of-court settlement authority.
(ii) Restrictions for approaching Settlement Commission, viz., stage at which
the Settlement Commission can be approached, the number of times a tax-
payer can approach, should be relaxed. The Settlement Commission should
be given discretionary powers to waive interest in cases of bona fide dis-
putes involving interpretational matters.
(iii) To strengthen the forum of ITSC the members should comprise of offi-
cers who are trained with skills to settle dispute. The ITSC member
appointment should not be an opportunity for retiring (or to be retiring)
members. Members should include technical members with requisite expe-
rience in the area of economics, finance, banking and law.
(iv) An application to be made before Settlement Commission should contain
‘full and true’ disclosure - interpretation of such terminology has been a
subject matter of debate. What is ‘full and true disclosure’ should be left
to discretion of the ITSC. Ordinarily, where material facts have been fully
and truthfully disclosed and a fair attempt made to compute the omitted
income, the application should be admitted and the criteria of true and full
disclosure should be deemed to have been met. The cases of incorrect dis-
closure should be punished by the Commission by levying penalties.
(v) To check frivolous challenging of order of Settlement Commission by the
Revenue/applicant and clogging of inventory of disputes, necessary checks
should be enabled under the IT Act. The HC should not exercise of the juris-
diction under Article 226 to generally decide whether conclusion reached
by ITSC on question of fact/law is correct or not. Accordingly, the decision
of the ITSC should be interfered only when* -
(a) If grave procedural non-compliances or breach of principle of natural
justice is made;
(b) Ifno nexus between reason given and conclusion rendered is present;
(c) High Court cannot interfere either with an error of fact or error of law
alleged to have been committed by ITSC
(vi) It is prerogative of the Department to encourage taxpayers to settle tax lia-
bilities. For instance, CBEC has issued instruction (CBEC 2015)” requiring
all Chief Commissioners of Central Excise and Customs to issue, in every
case immediately after issuance of show cause notice, a separate letter inti-
mating the taxpayer the option to avail the recourse of Settlement Commis-
sion. Taking cue from CBEC’s initiative, CBDT should also issue directions
43 N Krishnan v. Settlement Commission (1989) 180 ITR 585,596,597 (Karnataka), Patel Desai & Co:
Meera Industries v. ACIT (2000) 243 ITR 689, 692, 692-93 (AP).
44 CBEC 2015, Letter F No 275/72/2014-CX.8A, June 19, 2015.
to its field officers to encourage taxpayers to avail similar recourse to ITSC

in eligible cases.
(vii) The Revenue authorities should desist from challenging ITSC orders, as the
orders are an outcome of decision/findings made by a relatively senior tax
authority; instances have been witnessed where Department adopts ground
such as jurisdiction of ITSC, to challenge the order. CBDT should withdraw
departmental instruction requiring CITs to evaluate each order of settle-
ment for determining whether a writ needs to be pursued before the High
Court, as the instruction has interpreted by tax authorities as an enabling
provision for challenging the ITSC order by way of writ.
DRP
(i) Legislative amendments should be introduced to expand reach and powers
of DRP. From independence and implementation standpoint, DRP should
be reconstituted and function under the department under the vertical of
dispute management service. Its powers should comprise of power to com-
promise, arbitrate and power to settle a dispute. DRP orders should not
come under the lens of CVC or any other investigative agencies, unless there
are situations of fraud.
(ii) As against part time DRP responsibility, collegium of Commissioners and
technical expert/s should work on a full time basis. Each DRP bench con-
stitution should comprise of at least one technical member, who should
come from the field of economics, banking, financial services or any kind of
legal background. Having necessary expertise to come to bear on the DRP’s
experience would not only help ensure quality of DRP’s decision making
but shall also elicit taxpayers’ confidence in the institution of DRP.
(iii) DRP forum should be made accessible to all resident taxpayers (as opposed
to the current system covering only TP cases) depending upon the volume
and complexity of the dispute. This would require amendments to IT Act as
well as administrative changes.
(iv) Lastly, DRP proceedings should be amenable to conciliation process for
compromising disputes or refer special cases to the CBDT/CBEC for set-
tlement. Taking a leaf out of CRA’s practice in Canada, the objective of DRP
proceedings should be to resolve significant proportion of disputes either
through directions or conciliation. Order pursuant to conciliation should be
not be appealable.
APA
(i) Insofar as Indian APA regime is concerned, one of the key concerns amongst
taxpayers is the uncertainty regarding confidentiality of information/docu-
ments shared with tax authorities during the process. To make APA regime
a success, it is imperative to foster taxpayers trust in the process, and funda-
mental concerns such as confidentiality should be addressed by releasing
detailed administrative guidelines laying down the rules for maintaining
138 @ ADR Framework
confidentiality of the information. If required, limited and specific excep-

tions to confidentiality could be prescribed in the rules.
(ii) In the spirit of promoting APA as preferred forum for resolving TP disputes
more effectively, it is incumbent that India reviews its positions and tax
treaty framework to facilitate seamless bilateral APA framework under the
tax treaty. It is encouraging to note that Article 9(2) forms part of recently
concluded treaties* by India, but to reap true benefits of APA as a cross
border dispute resolution framework, India should reconsider its view on
existing tax treaties, absent Article 9(2) in such treaties.
(iii) CBDT should rollout more definitive guidance to determine scenarios
which could lead to an agreed APA becoming inapplicable for change in
facts or critical assumptions.
MAP
(i) MAP framework in India is supported by limited jurisprudence and admin-
istrative guidance for the taxpayers, which fosters sense of uncertainty
amongst stakeholders. To address the concern, supplementary rules should
be expanded to include illustrative list of scenarios in which MAP can be
invoked by the taxpayer, with specific guidance on the ‘point of trigger’ for
three year time typically found in Indian tax treaties. OECD’s MEMAP*
provides extensive guidance regarding best practices to be followed in con-
text of MAP, which should be examined to draw useful takeaways for the
Indian landscape. MEMAP provides tax administrations and taxpayers with
guidance on the operation of MAP, such as, illustrative time lines, preferred
approach to be adopted by applicant, Competent Authorities etc.
Further, the OECD Forum on Tax Administration (FTA) has set up a MAP
Forum in October 2014 and published a ‘Multilateral strategic plan on
Mutual Agreement Procedures: a vision for continuous MAP improve-
ment’”’ enlisting following aspects to be of strategic focus -
(a) Having a staff of well-trained personnel with expertise in applying the
principles embodied in global network of tax conventions to resolve
matters of double taxation/non-taxation.
(b) Ensure that principles embodied in global network of tax conventions
are properly applied to minimize to the fullest possible extent inci-
dents of double taxation/non-taxation.
45 Treaties with Fiji, Macedonia, Latvia, Albania, Malta, Nepal.

46 OECD 2007, ‘MEMAP,; Available at: http://www.oecd.org/ctp/38061910.pdf, accessed in May
2016.
UN 2010, ‘Guide to the Mutual Agreement Procedure under Tax Treaties’ Available at: http://
www.un.org/esa/ffd/wp-content/uploads/2014/10/6STM_GuideMutualAggrementProcedure.
pdf, accessed in May 2016.
FTA, ‘Multilateral Strategic Plan on Mutual Agreement Procedures: A Vision for Continuous
Map Improvement: Available at: http://www.oecd.org/site/ctpfta/map-strategic-plan.pdf, ac-
cessed in May 2016.
(c) Development of strong, collegial relationships, grounded in mutual

trust, between and among CAs around the world.
(d) Continually striving to process improvements ensuring that MAP
cases are resolved as efficiently and effectively as possible.
(e) Improvement of internal processes for both initiating and resolving
MAP cases are as efficient as possible; etc.
Given the nascent stage of MAP framework in India, and significant devel-
opments/initiatives across globe, CBDT should leverage on global experi-
ence for building a more effective MAP regime.
(ii) Presently, outcome of MAP does not carry a precedence value for financial
years not explicitly included in the MAP. To promote MAP as an effective
tool for resolution of disputes emerging in context of tax treaties, MAP out-
come for a particular FY should carry precedential value for subsequent
FYs unless there is a material change in facts and underlying assumptions.
These proposals would require appropriate amendments to be carried out
in respective tax treaties and the IT Act.
(iii) To incentivize MAP route vis-a-vis domestic law remedies, India should
enter into agreements for automatic suspension of tax demands with treaty
partners especially with countries contributing significant FDI and technol-
ogy to India.
(iv) Imposition of prescribed time limit would ensure timely resolution of dis-
pute. This may involve renegotiation of tax treaties as well.
(v) To bolster taxpayers’ faith in MAP, CBDT should increase general aware-
ness about the process. CBDT should release detailed SOPs and circulars
apprising the taxpayers regarding procedure adopted in MAP negotiation
along with indicative time lines. Publishing statistics regarding MAP - cases
received, cases admitted, cases resolved, cases pending will address trans-
parency issues, at the same time instilling a sense of accountability in the
CAs.
Legislative Framework for Sophisticated ADR Mechanism

(i.e. Arbitration, Mediation, Conciliation, Negotiation)
(i) Extant tax legislations, direct and indirect tax laws, do not carry legislative
framework to facilitate dispute resolution through internationally accepted
means of ADRs, viz., arbitration, mediation, conciliation, negotiation. Intro-
duction of ADR particularly with tax treaty partner countries shall require
legislative amendments to statutes. A separate chapter should be inserted
to incorporate aforementioned ADR mechanisms such as arbitration, medi-
ation, conciliation, negotiation, which must provide that outcome of ADRs
shall be binding on parties to the dispute. Necessary amendments should
be made to permit stay of disputed tax demand during the pendency of ADR
process.
(ii) Arbitration and conciliation framework under the tax statutes should be
aligned to principles laid down in the Arbitration and Conciliation Act,
140 = ADR Framework
1996, particularly on manner of conducting arbitration proceedings; loop-

back to mediation/negotiation as effective means of dispute resolution.
(iii) Taking a cue from best practices of ATO, to address the perceived imbalance
between powers of the Revenue and taxpayers, the tax administration (i.e.
CBDT and CBEC) should consider developing an effective dispute resolu-
tion mechanism which facilitates out of court negotiation and arbitration
process for speedy dispute resolution. Office of ombudsman for direct and
indirect taxes should be empowered to facilitate mediation and arbitration.
A ‘Committee of Compromise’ (at the Board level) should be considered
comprising of three full time members to guide functions of dispute resolu-
tion agents such as ITSC, DRP and AAR.
(iv) To enhance efficacy of ADR mechanism, the Government should consider
permitting ‘loop backs’ (flexibility to switch from formal to informal proce-
dures to facilitate efficacy in disposal) to negotiation at each stage of dispute
resolution. This practice has successfully evolved under ATO model and
provides a cost-effective less time consuming dispute resolution.
Separately, in this connection, relevant to note that settlement of GSK’s out
of court settlement of its multi-billion TP dispute with the US IRS (in 2006)
is a classic example of ‘loop-back’ to negotiation as an effective tool of expe-
ditious settlement of disputes”.
Other Measures
(i) Itis imperative for the Indian tax administration to consider evolving a Char-
ter of taxpayers’ rights that would explicitly outline the rights and responsi-
bilities of taxpayers. These rights must include right to fair treatment, right
to be heard and in particular to include right for timely resolution of dispute.
In order to promote transparency in procedures, taxpayers must also have
the right to access procedures, policies, guidance, and other instructions, to
the extent feasible. Further, such rights should be implemented by way of a
binding code of conduct for the Revenue officers; non-adherence of which
should be viewed seriously for non-compliant officers.
Broadly, the Charter of taxpayers’ rights should provide for the following
with a view to encourage compliance by holding out a commitment for fair
trial:
(a) Rights of taxpayers to a fair treatment in the course of assessment pro-
ceedings. Taxpayers should be assumed as honest in their submission,
unless they act otherwise.
48 In the reported GSK’s TP dispute, the controversy centered around Transfer Price paid by GSK
US to its UK parent and dispute involved multi-billion dollar stakes spread over more than fifteen
years from 1989 to 2005. In 1999, GSK initiated the MAP under the US-UK TREATY, but in 2004, the
Competent Authorities were unable to reach agreement to settle the longest-running dispute. It is
reported that even though GSK was confident of the strength of its arguments, given the sheer size
of the financial exposure (FIN 48) and the resources being used in the case, GSK agreed to settle
the dispute in out-of-court negotiation with a view to eliminate cost and uncertainty of future TP
litigation.
Bilateral Investment Promotion and Protection Agreement/Bilateral, etc. @ 141
(b) Right to obtain expert professional advice from government on confi-

dential terms.
(c) Right to seek review of decision/assessment by Revenue officer in
spirit; presently, whilst the IT Act provides for such right (e.g., Section
264), efficacy of such review right is questionable as the review pro-
cedure has turned out to be a mechanical unfruitful exercises in most
instances, seldom exercised by taxpayers.
(d) Right to report grievance should be acknowledged in principle and
the machinery for redressal of taxpayers’ grievances through special
cell (Tax Ombudsman) should be made expansive. This will necessi-
tate giving statutory recognition and powers to ombudsman, which
has been reduced to an office for retired IRS officers. The ombudsman
office should preferably be presided by professionals.
(e) Right of confidentiality of taxpayers’ information including informa-
tion sought under Right to Information, subject to court approval.
(f) Taxpayers should be allowed access to information held by tax admin-
istration and applied in the course of proceedings.
(g) Taxpayers should be assured of their right as to a fair and reasonable
trial at each stage of tax proceedings. In turn, revenue officers should
be mandated to pass a well-reasoned and speaking orders laying
down all facts presented by the taxpayer, facts collated from external
sources, analyses thereof, conclusion and applicability of legal princi-
ples for such conclusion. This shall help identify the reason of dispute
and could enable speedier dispute resolution.
(ii) ‘Enhanced Relationships’ should be encouraged to provide certainty to tax-
payers, especially LTUs, to elevate their confidence in transparency of the
tax administration in India. LTUs should be relaunched and made manda-
tory over a period of 2-3 years.
Bilateral Investment Promotion and Protection Agreement/

Bilateral Investment Treaty (BIT)*?
Typically, each agreement makes provision for settlement of disputes between an
investor of one contracting party and an investor of the other contracting party through
negotiation, conciliation and arbitration. India is a party to the Convention establishing
the Multilateral Investment Guarantee Agency (MIGA), which provides for settlement
of disputes between parties of members states under the Convention and the MIGA
through negotiation, conciliation and arbitration. Under Indian law, the following types
of differences cannot be settled by arbitration, but must be settled only through civil
suits: matters of public rights; proceedings under the Foreign Exchange Management
Act, 1999 which are quasi-criminal in nature; validity of IPR granted by statutory author-
ities; Taxation matters beyond the will of the parties; winding up under the Companies
Act, 1956; and disputes involving insolvency proceedings.
49 Also known as Bilateral Investment Treaty.

The government has so far signed BITs with 83 countries”, which have been
largely negotiated on the basis of the Indian Model BIT of 1993.
Relevance of BIT
Besides MAP, another method of alternate dispute resolution available to foreign
investors is the protection granted under the BIT. With liberalization of the foreign
investment policy of India, the Government undertook negotiations with a number
of countries and entered into BITs with them. This was done with a view to provide
predictable investment climate to foreign investments in India as well as to protect
Indian investments abroad.
Previously, Vodafone International Holdings BV, a Dutch company, invoked the
provisions of the India-Netherlands BIT for protection of its bona fide investments
made in the telecom sector in India. In circumstances where the Supreme Court of
India ruled in favour of Vodafone in the controversial INR 112 billion tax dispute
and where a review petition filed by the Indian Revenue against the said judgment
of the Supreme Court also being dismissed, retrospective amendments made by the
Government of India vide Finance Act, 2012 nullifying the effect of the judgment, in
Vodafone’s view, meant expropriation of bona fide investments made by Vodafone.
In 2012, Vodafone invoked the dispute settlement process under BIT which provided
for a three month period of negotiations for amicable settlement of the dispute after
which conciliation may be resorted to, if both parties so agree. Since, the three month
window expired, Vodafone initiated conciliation with the Government of India under
BIT, which follows the UNCITRAL rules. It is only due to Vodafone’s case that such
retrospective amendments to the law were made, only with the intention to nullify
the Supreme Court judgment which, according to Vodafone, amounted to denial of
justice and breach of the Government of India’s obligations under the BIT to accord
fair and equitable treatment to investors.
Since the objective of BIT is to promote and protect the interests of investors of
either country in the territory of other country, provisions of such agreements have
the effect of impacting the comfort level of investors by assuring a minimum stan-
dard of treatment in all matters and providing for justifiability of disputes with the host
country. However, in practice, invocation of the BIT for resolution of tax disputes may
be difficult, since the host country may argue that the comprehensive tax treaty exists
to address the tax related aspects and so the BIT cannot be relied upon. We will have
to wait and watch if Vodafone is successful at all in getting relief under the BIT.
Recently Notified Model Indian BIT

Last year, pursuant to the Government published the Model Indian BIT*! seeking to
replace the 1993 version that forms basis of the BITs entered into by India so far. The
new model shall form the basis for negotiation/re negotiation of investment treaties,
50 Law Commission of India 2015, Analysis of the 2015 Draft Model Indian Bilateral Treaty, Avail-
able at: http://lawcommissionofindia.nic.in/reports/Report260.pdf, accessed in May 2016.
51 For detailed opinion of the author on the new model BIT, refer article titled ‘Making the model
BIT work’ published in Financial Express on April 22, 2015.
Bilateral Investment Promotion and Protection Agreement/Bilateral, etc. # 143
existing and new, between India and other countries. The new BIT sets out to assure
“appropriate protection to foreign investors in India and Indian investors in a foreign
country, in light of the relevant international precedents and practices”.
Stepping back, it has had been widely believed that the extant 1993 Indian frame-
work was more skewed in favor of foreign investors at the cost of India’s sovereign
rights to regulate the investments in India vide appropriate regulatory measures. To
illustrate, as many as 17 foreign companies (including MNEs) have had issued notices
for arbitration demanding huge compensation alleging breach on part of India post
cancellation of telecom licenses. In this context, release of the model BIT indeed a
comprehensive endeavor to strike the right balance between protection of rights of
foreign company and India’s sovereign rights.
More recently in December 2015, the model BIT has been revised further in
the backdrop of several overseas companies invoking bilateral pacts to contest tax
demands raised by India. Useful to note that the model text of BIT, which has been
recently uploaded on the Finance Ministry website, said it will not apply on “any law or
measure regarding taxation, including measures taken to enforce taxation obligations”.
This has to be particularly read in the backdrop of recent notice of arbitration initiated
by Britain based Cairn Energy (Moneylife.in 2016) pursuant to demand of INR
102,470 Mn (approx. $1.6 billion) raised by India’s income tax department basis
retrospective amendments to the Act. It is learnt that Cairn Energy seeks to claim
damages for losses resulting from the department’s attachment of its stake in Cairn
India. It would be interesting to watch out for Government’s response to such notices.
Seemingly, Government had seen this coming and as a knee jerk reaction sought to
exclude settlement of taxation issues from the purview of BIT.
Further, the narrowing down in scope of BITs is perceived to be emerging from
the outcome of the White Industries Australia Limited vs The Republic of India case
which entailed an award against Indian government (in 2011). The landmark White
Industries case opened up the Pandora’s box raising questions on sanctity of archaic
BITs entered into by India. In this case, White Industries, an Australian mining com-
pany, entered into a long-term contract with Coal India Limited (Coal India), a State-
owned Indian company, for the supply of equipment to and the development of a
coal mine. Disputes relating to bonus and penalty payments as well as to the qual-
ity of the extracted coal arose between Coal India and White Industries prompting
the latter to commence commercial arbitral proceedings. In September 2002, Coal
India applied to the Calcutta High Court to set aside the ICC Award under the Indian
Arbitration and Conciliation Act. Nearly simultaneously, White Industries applied
to the High Court of New Delhi to enforce the ICC Award in India (the enforcement
proceedings). Both proceedings experienced significant delays. The enforcement
proceedings were eventually stayed pending a decision in the set-aside proceedings.
White Industries appealed to the Supreme Court; in the meantime (in 2006) the High
Court of New Delhi stayed the enforcement proceedings. For about ten years White
52 Vide Office Memorandum dated December 28, 2015.

53 Moneylife.in 2016, ‘Cairn Energy to seek damages for retrospective tax demand’, Available
at: http://www.moneylife.in/article/cairn-energy-to-seek-damages-for-retrospective-tax-
demand/45070.html, [January 20, 2016] accessed in May 2016.
144 @ ADR Framework
Industries could not get any relief. Consequently, White Industries alleged breach of
the India-Australia BIT for non-enforcement of its rights in relation to its investment.
The arbitral tribunal (under BIT) accepted the plea and India was forced to pay a huge
price for the delays caused by its judicial system.
Nevertheless, the essential features of the model BIT include an enterprise-based
definition of investment, non-discriminatory treatment, protections against expropri-
ation, a refined Investor State Dispute Settlement (ISDS) provision requiring investors
to exhaust local remedies before commencing international arbitration, and limiting
the power of the tribunal to awarding monetary compensation alone. The revised
model BIT, to be used now for renegotiation of existing treaties and for new ones,
excludes matters such as government procurement, taxation, subsidies, compulsory
licences and national security.
Key Tax Policy Reforms
International Landscape
Cross border taxation has become a double edged sword for governments across
economies - on one hand whilst they have to ensure that their tax systems remain
robust by way of embracing best practices, at the same time tax policies must foster
investment momentum. Maintaining the equilibrium in tax policies has posed bigger
challenges in recent years, especially in light of the rapid emergence of more sophisti-
cated means of doing cross-border business (e.g. electronic commerce, use of hybrid
entities and funding structures, etc.), which in turn have given rise to more opportuni-
ties for MNEs to minimize their overall tax burden using structures lacking substance.
Whilst the menace of tax avoidance has been in making for decades, recent years
have witnessed the global movement to combat tax avoidance gaining political accep-
tance and endorsement at multilateral forums, such as OECD, G8, G20 and BRICS
summits. Political leaders, media, and civil society have expressed growing concern
about tax planning by MNEs that makes use of loopholes in the international juris-
dictional tax systems to artificially reduce taxable income or shift profits to low-tax
jurisdictions in which little or no economic activity is performed.
The growing trend in resorting to harmful tax practices, such as of treaty shopping,
etc., more particularly in late 90s, had the effect of stifling competition amongst econ-
omies and creating undue bias in favour of certain jurisdictions and tax structures.
Since early 90s, the OECD has been at the helm of international tax policy develop-
ment. In keeping with this role, the international OECD Council initiated a movement
of sorts in 1998, by embarking upon to developing transparent and internationally
acceptable standards of international cooperation in tax matters. The OECD Council
in 1998 approved the report, “Harmful Tax Competition, An Emerging Global Issue”
(OECD 1998) which responded to a request by developed and developing econo-
mies to develop measures to counter harmful tax practices and laid the foundation for
the OECD work in this area. The OECD Council mandated the Committee on Fiscal
Affairs (“CFA”) to report periodically to the OECD Council on the results of its work.
54 OECD 1998, Harmful Tax Competition, An Emerging Global Issue.
145
146 @ Key Tax Policy Reforms
As a result of which, the 1998 Report was followed by four progress reports, one
each in the year 2000, 2001, 2004 and 2006. In its first report of 2000, OECD identified 47
preferential tax regimes. The 2000 Report of OECD proposed a three-pronged approach-
1. Identifying and eliminating harmful features of preferential tax regimes in
OECD member countries;
2. Identifying “tax havens” and seeking their commitments to the principles of
transparency and effective exchange of information; and
3. Encouraging other non-OECD economies to associate themselves with this
work.
Outcome of the abovementioned OECD reports did drive changes in tax policies
of countries (both OECD and non-OECD) as demonstrated from the developments
between 2000 and April 2002, 31 jurisdictions (OECD 2011)*° made formal commit-
ments to implement OECD’s standards of transparency and exchange of informa-
tion and were subsequently removed from the list of uncooperative tax havens. Sub-
sequently by the year 2009, all jurisdictions identified in the list of non-cooperative
nations were upgraded to compliant status as these jurisdictions made formal com-
mitments to implement the OECD standards of transparency and effective exchange
of information. The OECD came up with more reports on transparency standards and
exchange of information, inter alia, ‘Implementing the Tax Transparency Standards -
A Handbook for Assessors and Jurisdictions, ‘Tax Co-operation: Towards a Level Play-
ing Field (2006), ‘Improving Access to Bank Information for Tax Purposes (2000); etc.
Outcome of the OECD Work on Harmful tax practices project bore fruits as
countries rushed to sign TIEAs in the first decade of the 21“ century. The first TIEA being
signed in December 2000 between Antigua and Barbuda - United States. Between
2000 and 2010, nearly 444 TIEAs*® were signed across the globe. As the movement
to implement international standards for ensuring transparency in tax matters and
information exchange gathered momentum, India also joined the league by signing
first TIEA with Bermuda in October 2010. The reach of the TIEA was however limited,
as it didn’t address the emerging international tax landscape which allowed instances
of BEPS from high tax country to low tax country to mushroom across the value chain
of multinational enterprises, without necessarily creating friction between country-
specific tax rules and principles enshrined in international tax treaties.
BEPS relates chiefly to instances where the interaction of different tax rules leads
to double non-taxation or no taxation. It also relates to arrangements that achieve
no or low taxation by shifting profits away from the jurisdictions where the activities
creating those profits take place. Amongst the newer forms of cross-border trade,
spread of the digital economy particularly has posed significant challenges for gov-
ernment trying to protect their tax base using existing rules of taxation, which are
inherently designed to cater to ‘brick and mortar’ way of doing business. Besides, the
digital economy is characterized by an unparalleled reliance on intangible assets, the
massive use of data, and the difficulty of determining the jurisdiction in which value
55 OECD 2011, OECD Tax Transparency Report, 2011.

56 OECD, ‘Tax Information Exchange Agreements’ Available at: http://www.oecd.org/tax/ex-
change-of-tax-information/taxinformationexchangeagreementstieas.htm, accessed in May
2016.
BEPS Package — A Comprehensive Recipe ™ 147
creation occurs. This raises fundamental questions as to how enterprises in the dig-
ital economy add value and earn profits, and how the digital economy relates to the
concepts of source and residence or the characterization of income for tax purposes.
At the same time, the fact that new ways of doing business may result in a relocation
of core business functions and, consequently, a different distribution of taxing rights
which may lead to low taxation is not per se an indicator of defects in the existing system.
It is important to examine closely how enterprises of the digital economy add value and
earn profits. Such determination can help ascertain whether and to what extent it may
be necessary to adapt current tax rules to design sophisticated principles for allocating
taxing rights amongst involved countries, and thus, prevent instances of BEPS.
In the changing international tax environment, a number of countries have
expressed overarching concern over lop-sided distribution of taxing rights under
double tax treaties, largely in favour of residence country and thus, causing significant
loss of tax revenues to source state. Evidently, such concerns highlight the risks that
have crept into the existing (mutually agreed) international taxation framework, and
necessitate bold moves by policy makers to address the worsening problem of BEPS.
A large part of international taxation policies and rules are hitherto premised on
nearly a century old soft law developed by League of Nations, adapted as Model Con-
vention by OECD and UN in later years. Keeping in step with rapid globalization and
diversification of economies in becoming digital economies, a need was felt to review
taxation framework that created opportunities for shifting profits to low/nil tax juris-
dictions by causing tax base erosion in relatively high-tax jurisdictions (commonly
described as BEPS phenomenon). Exhaustive data on revenue loss owing to BEPS
occurrence is illusive; though using anecdotal instances, global revenue losses from
BEPS are estimated between USD 100 to 240 billion (upto 10 percent of global cor-
porate tax revenue) - clearly, stakes are extremely high. Viewed through this prism,
adoption of the BEPS recommendations will lay the foundation for a contemporary
and more relevant international tax framework ensuring profits are taxed where eco-
nomic activity and value creation substantially occurs. The other fundamental aspect
of BEPS recommendations is to enhance transparency standards in tax administra-
tion by placing more rigors on tax compliance and disclosures by multinational enter-
prises having cross-border operations.
In wake of this emerging landscape, the G20 finance ministers called on the
OECD to develop an action plan to address BEPS issues in a coordinated and com-
prehensive manner. In response, the OECD conceptualized its BEPS Works by iden-
tifying 15 Action Plans (“AP”) in July 2013. These APs were conceptualized to provide
countries with domestic and international instruments that will better align rights to
tax with economic activity. The first draft reports were published by OECD in the year
2013. The draft report on APs were put out for stakeholders’ feedback and consulta-
tion. Final Reports on all fifteen APs were released in October 2015.
BEPS Package - A Comprehensive Recipe

BEPS project has culminated into an agreement on comprehensive package of mea-
sures, designed to be implemented in two parallel action steps - one, through uni-
148 ® Key Tax Policy Reforms
lateral amendments to domestic legislations of respective countries, and the other,

through amendments to bilateral tax treaty in a coordinated manner.
Most APs have assumed significance as governments across the world have begun
embracing these changes. BEPS package proposes a fundamental policy move away
by replacing extant practice of measuring TP to contractual obligations by the princi-
ple of ‘conduct supplementing, or replacing contractual arrangements’ if there is an
artificial divide to create opportunities for BEPS.
On October 5, 2015, the OECD released the final reports on BEPS along with
compilation of executive summaries of all 15 APs. Couple of days later, these reports
were ratified by G20 Finance Ministers at their Lima, Peru meeting.
Interestingly, India’s tax policy and jurisprudence has evolved over the years to
deal with several issues, which are part of the BEPS APs. A case in point is the issue
of digital economy being dealt with by AP 1; the issues revolving around the same
have been a subject matter of debate in Indian courts, inter alia, taxability and online
advertising’, bandwidth payments®, website permanent establishment”, etc. Though
the debate is on-going, the Indian tax administration is keen on strict application of
source based rules of taxation. Whilst AP 1 has not articulated explicit rules for digital
economy taxation, AP 1 cautions nations to respect existing treaty obligations, should
they decide to impose additional safeguards in their domestic law for levying any form
of tax particularly, under the nexus approach. In view of the BEPS Report on AP 1, the
FM in the Finance Act, 2016 has introduced ‘Equalisation Levy’ at the rate of 6 percent
of the amount of consideration received for specified services (such as digital trans-
actions) by non-resident not having a permanent establishment in India. Further,
a committee® formed by CBDT’s has released its report dated February 2016, titled
‘Proposal for Equalization Levy on Specified Transactions:
Host of measures have been proposed under AP 2 to clamp down opportunities
created for double non-taxation, or double deduction of financial expenses (e.g. inter-
est payment), and treaty shopping which are created owing to uniqueness of domestic
tax rules, in conjunction with interplay of tax treaties. Measures proposed to neutral-
ize unintended effects of such mismatches could potentially cause concerns for inves-
tors preferring quasi-equity instruments for tax reasons over ordinarily debt or equity
instruments.
AP 3 relates to strengthening of CFC rules® and provides measures for preventing
shifting of profits to CFCs in low or no tax jurisdictions have been proposed as build-
ing blocks, and not as minimum standard for countries that choose to implement an
effective CFC regime in their domestic laws. In the Indian context, provisions relat-
ing to CFC were first introduced as part of Direct Taxes Code 2010, later amended
by Direct Taxes Code 2013. The DTC 2013 was scrapped off later and it remains to be
seen whether government introduces CFC rules in the IT Act, especially given the set
of measures recommended in the AP 3.
57 ITO v. Pubmatic India (P) Ltd [2013] 158 TTJ 398 (Mumbai - Trib).
58 Verizon Communications Singapore Pte Ltd v. ITO [2014] 361 ITR 575 (Madras).
59 ITO v. Right Florists [2013] 25 ITR (T) 639 (Kolkata - Trib).
60 Committee on Taxation of E-Commerce.
61 CFC rules enables to limit artificial deferral of tax by using offshore low taxed jurisdiction.
BEPS Package — A Comprehensive Recipe ™ 149
On AP 5, dealing with transparency and highlighting substance test, the sug-

gestion on ‘Nexus approach’ is interesting, particularly in light of R&D expenditure
in jurisdiction which undertakes such activities. India will particularly keep a close
watch on AP 5 given its focus on R&D. The Indian tax department had earlier issued
circulars (CBDT 2013)” regarding transfer pricing issues of R&D centres. Keeping in
view that India is a preferred destination for R&D centres, India has been keen on
the implementation of AP 5 and accordingly, in the Budget of 2016-2017, the FM has -
proposed to introduce a new taxing provision for taxpayers earning income by way of
royalty in respect of a patent developed and registered in India. The rate of tax is kept
at 10 percent at gross basis.
Addressing the issue of treaty abuse and treaty shopping has been a prime focus
area for OECD and accordingly, AP 6 assumes importance as it relates to preventing tax
treaty benefits in inappropriate circumstances. AP 6 essentially highlights’ Principle Pur-
pose Test’ (“PPT”) as the threshold for testing taxpayer’s treaty eligibility. Insofar as the
Indian tax treaties are concerned treaties with UAE, Singapore, USA, UK, Luxembourg,
Malta, prescribe LOB provisions as part of treaty eligibility conditions; India has recently
amended tax treaties with Israel (CBDT 2015)* and Turkmenistan (CBDT 2015)* to insert
LOB provision. Additionally, to curb the practice of arranging affairs to yield tax benefit,
General Anti-Avoidance Rule (“GAAR’”) provisions were introduced in 2012 in the IT Act;
however on account of the concerns raised by stakeholders and absence of adequate
maturity within the tax administration to implement a sophisticated law, implementa-
tion of GAAR has been deferred to April 1, 2017.° The Indian GAAR provides sweeping
power to the Revenue authorities in case GAAR provisions are triggered, including Reve-
nue authorities denying the treaty outcomes to the non-resident.
AP 7 on artificial avoidance of PE suggests host of changes to Article 5, inter alia,
providing broader tests for Agency PE, restrictive scope of ‘preparatory and auxiliary’
activities, artificial splitting-up of contracts related to Construction/Installation PE,
etc. These aspects have been debated in the Indian courts in multiple instances. For
instance, ‘preparatory and auxiliary’ activities has been debated in the context of liai-
son offices of MNC’s. Given the PE related litigation is rampant in India, the propos-
als put forth in AP 7 would be keenly scrutinized by Indian tax administration and
it would be interesting to see how the policy makers borrow the BEPS learning into
Indian landscape.
AP 8-10 highlights importance of beneficial ownership of IP/intangibles. On both
aspects of locational savings and intangibles, several multinational enterprises have
ongoing disputes®, which are lying in various dispute forums. Although the Indian TP
regulations do not contain guidance on the issue of marketing intangibles, the Indian
transfer pricing administration, in its comments in the UN TP Manual, has observed
that Indian subsidiaries engaged in distribution of products are generally claimed as
62 CBDT 2013, Circular 5 and Circular 6.

63 CBDT 2015, Press Release, October 7, 2015.
64 CBDT 2015, Press Release, November 5, 2015.
65 Assessment Year beginning April 1, 2018.
66 SLP is pending in the SC against the first set of judgements rendered in the case of Sony Ericsson
Mobile Communications India Put Ltd and others v. CIT, ITA 16 of 2014 with CA 155 of2014 [Del-
hi High Court].
150 # Key Tax Policy Reforms
carrying no risk or limited risk by the parent MNE. Accordingly, the Indian Revenue
authorities have taken a view that such Indian entities engaged in marketing activity,
which incur excessive advertisement and marketing expenses, and bear risks and per-
form functions beyond what an independent distributor with similar profile would
incur or perform for the benefit of its own distribution activities, should be compen-
sated separately for the said function.
AP 12 recommends framework for countries to seek information from taxpayers
on potentially aggressive or abusive tax planning schemes. AP 12 dealing with
mandatory disclosure norms is interesting from an Indian standpoint, given India’s
timing to introduce GAAR from April 1, 2017.
AP 13 deals with TP documentation. Documentation has been India’s forte since
the inception of TP rules in 2001. Elaborate guidance around documentation has
been provided and augmented with the introduction of Circular No 6 of 2013 (R&D
Circular). In fact, the advancement to the Safe Harbor and Advance Pricing Agree-
ment regimes has only augmented the need for maintenance of documentation,
albeit in more specific ways. To maintain consensus with the international standard
as outlined in AP 13, the Finance Act, 2016 has introduced the concept of ‘Coun-
try-by-Country reporting and Master file’ in the IT Act. Whilst detailed regulations
are yet to be prescribed by the CBDT, the disclosure requirements and compliance
timings seem to be broadly consistent with the international standard.
AP 14 deals with effective dispute resolution mechanism, though, India has put
out a stiff opposition to provide mandatory binding MAP arbitration. Historically,
India has refrained from inclusion of arbitration as a measure to resolve tax disputes
which otherwise could not be resolved under MAP prescribed under respective tax
treaties. Despite India’s reluctance for arbitration, there have been cases (Vodafone/
Cairn)*’ where taxpayers have sought to invoke arbitration provisions under the Inter-
67 Vodafone has been in dispute with the Indian Government regarding taxability of offshore
transfer of shares with underlying value in India. In the case of Vodafone, shares of CGP
Investment (Holdings) Ltd (CGP), aCayman based subsidiary of Hutchison Telecommunications
International Limited (HTIL), a Cayman Islands entity owned by the Hutchison group, were
transferred to Vodafone International Holdings BV (Vodafone International), a company
incorporated in the Netherlands. HTIL owned Hutchison’s operations in India though a series
of companies incorporated in Mauritius. The Revenue authorities issued a notice to Vodafone
International, holding it in default for failure to withhold taxes on gains arising to HTIL on the
transfer of shares of CGP, contending that the transaction resulted in the sale of business assets
located in India from Hutchison to Vodafone. Whilst adjudicating taxpayer’s appeal, the Supreme
Court of India, inter alia, held that gains arising from the said transaction were not liable to tax
in India, and thus there was no obligation on Vodafone International to deduct tax at source.
The Government subsequently enacted a series of retrospective amendments in the Finance
Act, 2012, and the Income-tax department raised a demand notice to Vodafone International.
Pursuant to which, Vodafone International approached for international arbitration by invoking
protection under the India-Netherlands BITs.
Similarly in the financial year 2006-07, Cairn UK had transferred shares of Jersey-based Cairn
India Holding to Cairn India. The Revenue authorities attached Cairn Energy Plc’s stake in Cairn
India, with a view to recover the alleged tax dues arising from Cairn’s restructuring of Indian
assets. In response to the draft assessment order issued by the Indian tax authorities, Cairn ini-
tially filed a petition with the Delhi High Court but subsequently withdrew its petition and filed
a ‘notice of dispute’ by invoking the protection under the India-UK BIT.
Methodology ® 151
national Bilateral Investment Treaties for tax disputes. Treading on a cautious path,
the new bilateral investment treaty model released® by India specifically excludes tax
matters from the purview of BIT and arbitration tribunal envisaged therein (Butani,
M 2015)®.
Monitoring Implementation and Impact

Some of measures may be immediately applicable such as the revisions to the TP
Guidelines, while others require changes that can be implemented via tax treaties,
including through the multilateral instrument. Certain measures proposed as part of
work on hybrid mismatches, CFC rules, interest deductibility, Country-by-Country
Reporting, etc. may require substantial legislative and administrative reforms to be
carried out to the domestic tax laws.
Challenge therefore, lies for governments in ensuring coordinated actions
through unilateral and bilateral means towards embracing these changes. Monitoring
of implementation of BEPS measures thus, emerges as a key follow through action for
respective governments.
From the standpoint of multilateral engagement, it is important that OECD and
G20 countries continue working on an equal footing to monitor the implementation
of the BEPS measures. This will consist of an assessment of compliance in particu-
lar with the minimum standards in the form of reports on what countries have done
to implement the BEPS recommendations. It will involve some form of peer review
which will have to be defined with a view to establishing a level playing field by ensur-
ing all countries and jurisdictions implement their commitments so that no country
or jurisdiction would gain unfair competitive advantages.
Timing
Addressing BEPS is critical for most countries and must be done in a timely manner,
not least to prevent the existing consensus-based framework from unravelling. The
pace of the project must be rapid so that concrete actions can be delivered quickly. At
the same time, governments also need time to complete the necessary technical work
and achieve widespread consensus. Against this background, it is expected that the
APs will largely be completed in a two-year period, recognizing that some actions will
be addressed faster as work has already been advanced, while others might require
longer-term work
Methodology
The BEPS project marks a turning point in the history of international co-operation
on taxation. As the current consensus-based framework is at risk, it is critical that a
68 Released by the Ministry of Finance, Government of India on April 1, 2015.

69 Butani, M 2015, ‘Making the model BIT work, The Financial Express [April 22, 2015].
proper methodology be adopted to make sure that the work is inclusive and effective,
takes into account the perspective of developing countries and benefits from the input
of business and the civil society at large.
To this end, and in order to facilitate greater involvement of major non-OECD
economies, OECD shall invite certain interest G20 (non-OECD member) countries
to be part of the project as Associates, ie. on an equal footing with OECD members.
Other non-members could be invited to participate as Invitees on an ad hoc basis.
Political Expectation is Very High from BEPS

Works of OECD
Consultation with non-governmental stakeholders is also key. Business and civil soci-
ety representatives will be invited to comment on the different proposals developed
in the course of the work. The OECD’s core relationship with civil society is through
the Business and Industry Advisory Committee and the Trade Union Advisory Com-
mittee to the OECD. Nongovernmental organisation, think tanks, and academia will
also be consulted. The OECD’s work on the different items of the AP will continue to
include a transparent and inclusive consultation process, and a high-level policy dia-
logue with all interested parties will be organised on an annual basis.
Role of Exchange of Information in Combating Tax Evasion/Avoidance

The significance of information exchange, progressive in automatic manner, across
countries to combat increasing instances of BEPS and tax avoidance, has been
brought in sharper focus by OECD’s BEPS Works. AP 13 on TP Documentation and
Country-by-Country reporting proposes fundamentals reforms to the manner of doc-
umentation. AP 13 is focused on the following action:
“Develop rules regarding transfer pricing documentation to enhance transpar-
ency for tax administration, taking into consideration the compliance costs for busi-
ness. The rules to be developed will include a requirement that MNE’s provide all rel-
evant governments with needed information on their global allocation of the income,
economic activity and taxes paid among countries according to a common template”
In response to the requirement, a three-tiered standardized approach to TP doc-
umentation has been developed.
First, the guidance on TP documentation requires MNEs to provide tax admin-
istrations with high-level information regarding their global business operations and
TP policies in a “master file” that is to be available to all relevant tax administrations.
Second, it requires that detailed transactional TP documentation be provided in
a “local file” specific to each country, identifying material related party transactions,
the amounts involved in those transactions, and the company’s analysis of the TP
determinations they have made with regard to those transactions.
Third, large MNEs are required to file a Country-by-Country Report that will pro-
vide annually and for each tax jurisdiction in which they do business the amount of
revenue, profit before income tax and income tax paid and accrued. It also requires
Political Expectation is Very High from BEPS Works of OECD ® 153
MNEs to report their number of employees, stated capital, retained earnings and tan-
gible assets in each tax jurisdiction.
Finally, it requires MNEs to identify each entity within the group doing business
in a particular tax jurisdiction and to provide an indication of the business activities
each entity engages in.
Taken together, the above three-tiered approach to documentation (i.e. master
file, local file and Country-by-Country Report) will require taxpayers to articulate
consistent TP positions and will provide tax administrations of relevant jurisdictions
with useful information to assess TP risks, make determinations about where audit
resources can most effectively be deployed, and, in the event audits are called for, pro-
vide information to commence and target audit enquiries.
This information should make it easier for tax administrations to identify whether
companies have engaged in TP and other practices that have the effect of artificially
shifting substantial amounts of income into tax-advantaged environments.
Consistent and effective implementation of the TP documentation standards and
in particular of the CBC Reporting guidelines is essential. Therefore, effective imple-
mentation requires the master file and the local file to be delivered by MNEs directly
to local tax administrations. CBC Reports should be filed in the jurisdiction of tax res-
idence of the ultimate parent entity and shared between jurisdictions through auto-
matic exchange of information, pursuant to government-to-government mechanisms
such as the multilateral Convention on Mutual Administrative Assistance in Tax Mat-
ters, bilateral tax treaties or TIEAs. In limited circumstances, secondary mechanisms,
including local filing can be used as a backup.
Emerging from final reports on BEPS works, OECD’s recommendation to imple-
ment the CBCR fiscal years beginning on or after January 1, 2016, is a welcome move
as the MNEs are provided with sufficient time to establish an appropriate mechanism
for exchange of information within the Group, to enable reporting as required in the
CBCR template. As it is, given the one-year timeline for preparation of the CBCR (after
close of the fiscal), companies will be due to file CBC reports at the earliest in Decem-
ber 2017, and for companies that have year endings other than in December, even
later, sometime in 2018, all of which should make for sufficient lead time.
It is also imperative that the CBCR implementation should also be coordinated
and be in line with the AP 14 - Making dispute resolution mechanisms more effective,
as the additional reporting requirements would likely result in enhanced audit activity
(given its utility as a risk assessment tool) and could thereby give rise to more dis-
putes between countries. The AP14 is intended to establish a monitoring mechanism
to ensure proper implementation of the political commitment to effectively eliminate
double taxation that is not in accordance with the tax treaty in question.
Resolving Cross Border Disputes

Amongst most significant APs, AP 14 ‘Making Dispute Resolution Mechanisms More
Effective’ has already received lion’s shares of tax policy makers globally. One of the
major cause of protracted TP dispute has been absence of an effective forum for res-
154 @ Key Tax Policy Reforms
olution of such disputes through a bilateral negotiation process under the framework
of tax treaties.
The existing MAP mechanism, prevalent under most of the contemporary tax
treaties, albeit a well-intentioned forum, cannot boast of enough teeth, and has largely
failed due to lackadaisical approach to MAP resolution by the Competent Authorities
of treaty countries.
AP 14 seeks to improve the effectiveness of MAP in resolving treaty-related dis-
putes. The relevant part of the AP reads as follow:
“Develop solutions to address obstacles that prevent countries from [re]solving
treaty-related disputes under MAP, including the absence of arbitration provisions in
most treaties and the fact that access to MAP and arbitration may be denied in certain
cases”
Whilst the Draft suggested a three-pronged strategy for revitalizing the MAP
framework -
(i) Political commitment to effectively eliminate taxation not in accordance
with the tax treaty;
(ii) Provide new measures to improve access to the MAP and improved proce-
dures; and
(iii) Establish a monitoring mechanism to check proper implementation of the
political commitment.
As a part of developing the political commitment, the OECD identified key
guiding principles for implementation of measures pertaining to MAP, indicating
anticipated obstacles and possible solutions for each principle. Acknowledging that
MAP discussions may not be fruitful in every case, the Draft encouraged countries to
adopt mandatory MAP arbitration provision with a limited scope. Alternatively, Most
Favoured Nation (“MEN”) provisions could be used as an elective mechanism for
quick implementation of MAP arbitration between a country and its treaty partners
where that country determines in the future that MAP arbitration should be included
as part of its treaty policy. To avoid potential differences, participating countries could
agree to mutually develop criteria for appointment/qualifications of arbitrators, and
also consider means to reduce costs of MAP arbitration procedures.
Interestingly, the Draft notes that not all countries associated with the OECD/
G20 BEPS Project agree that mandatory and binding arbitration is an appropriate
tool to resolve issues that prevent Competent Authority agreement in a MAP case.
Pursuant to release of the Draft, the Committee on Fiscal Affairs invited comments
from all stakeholders (business, tax professionals, thinktanks, etc.) on various aspect,
including additional measures to tackle identified obstacles and list of obstacles not
addressed in the Draft. Following through the comments received from stakeholders
and subsequent deliberations, the OECD released the final report on AP 14 on 5 Octo-
ber 2015.
OECD’S Final Report on BEPS Works

The final report (“Report”) reflects commitment by countries to embrace a minimum
standard on dispute resolution, along with a set of complementary best practices. The
Political Expectation is Very High from BEPS Works of OECD ® 155
Report also states that countries agree to establish a monitoring mechanism to ensure
that commitments contained in minimum standard are effectively satisfied. Further,
the Report lists countries which have committed to adopt and implement mandatory
binding arbitration to resolve disputes that are otherwise not resolved through MAP.
The elements of minimum standard and supporting best practices are discussed
in brief below.
(i) Implementation by countries of Article 25 of the OECD Model Tax Conven-
tion in good faith and that MAP cases are resolved in a timely manner
The Report states that provision of Article 25 must be fully implemented in
good faith to provide a framework through which Competent Authorities
resolve differences or difficulties regarding the interpretation or application
of the convention on mutually agreed basis. Countries should accordingly
include paragraphs 1 through 3 of Article 25 in all tax treaties, as interpreted
in the commentary. Access to MAP should also be provided in TP cases
to eliminate the economic double taxation that may follow from treaty
partner’s adjustment.
The Report provides that Countries should provide MAP access in cases in
which there is a disagreement between the taxpayer and the tax authorities
making the adjustment as to whether the conditions for the application of
a treaty anti-abuse provision have been met or as to whether the applica-
tion of a domestic law anti-abuse provision is in conflict with provisions of
a treaty. Additionally, the Report states that countries should commit to the
following -
(a) Resolve MAP cases within an average timeframe of 24 months.
(b) Enhance Competent Authority relationships and work collectively to
improve the effectiveness of the MAP by becoming members of the
Forum on Tax Administration MAP Forum (“FTA MAP Forum’).
(c) Provide timely and complete reporting of MAP statistics which could
serve as a tangible benchmark to evaluate country’s performance on
the minimum standard.
(d) Agree to ‘peer review’ of compliance with minimum standard.
(e) Maintain transparency with respect to positions on MAP arbitration.
(ii) Countries should ensure implementation of administrative processes that
promote access to MAP
This element of minimum standard addresses obstacles related to admin-
istrative processes and practices of the tax administration and Competent
Authorities. This element would comprise of following commitments to be
made by countries:
(a) Publish rules, guidelines and procedures relating to access/use MAP
and country MAP profiles.
(b) Staffin charge of MAP has authority to resolve MAP cases, independent
of approval tax administration personnel making subject adjustments.
(c) Evaluating performance of Competent Authority functions and staff
on performance indicators such as, number of MAP cases resolved,
consistency in treaty application, time to resolve.
(d) Ensure that adequate resources are provided to the MAP function,
including, personnel, funding, training and other programme needs.
(e) Clarify that audit settlements between tax authorities and taxpayers
do not preclude access to MAP. Countries may limit access to the MAP
with respect to matters resolved through administrative/statutory
dispute settlement/resolution process independent from the audit
function.
(f) Countries with bilateral APA programmes should provide for ‘roll-
back’ in appropriate cases.
(iii) Countries should ensure that taxpayers that meet requirements of Article
25(1) can access MAP
This element of minimum standard requires countries to ensure that Com-
petent Authorities of both Contracting States are made aware of the MAP
requests submitted pursuant to paragraph 1 of Article 25 and have the
opportunity to provide views on acceptance of the request. To achieve this,
countries should may either amend paragraph 1 of Article 25 or alterna-
tively, implement bilateral notification/consultation process for cases with
respect to which the Competent Authority to which the case is presented
does not consider taxpayer’s objection to be justified.
Countries are required to publish MAP guidance identifying the specific
information and documentation a taxpayer is required to submit with a
request for MAP, to avoid declining access to MAP on account of insuffi-
cient information being provided by the taxpayer. Further, the minimum
standard requires countries to allow MAP outcomes to be implemented
notwithstanding time limits enshrined in domestic law of the Contracting
States. The countries not agreeable to this should include alternative provi-
sions in tax treaties limiting the time during which a Contracting State may
make an adjustment pursuant to Article 9(1) or Article 7(2), to avoid late
adjustments with respect to which MAP relief will not be available.
In addition to the above elements, the Report also identified following best
practices countries can adopt for supporting the objectives of minimum
standard.
(a) To include paragraph 2 of Article 9 in their tax treaties.
(b) Publish agreements reached pursuant to Article 25(3) to provide guid-
ance that would be useful to prevent future disputes.
(c) Develop ‘global awareness’ of audit/examination functions involved
in international matters through FTA’s ‘Global Awareness Training
Module: All audit functions involved in adjusting taxpayer positions
on international matters must be aware of (a) the potential for creating
double taxation, (b) impact of proposed adjustments on tax base of
one or more other jurisdictions, and (c) processes and principles by
which competing jurisdictional claims are reconciled by Competent
Authorities.
(d) Implement bilateral APA programmes to provide increased level of
certainty in both jurisdictions and proactively prevent TP disputes.
Developments in Domestic
Tax Policy @ 157
(e) Develop appropriate procedures to permit, in certain cases and after an

initial tax assessment, taxpayer requests for multiyear MAP of recurring
issues subject to verification of facts and circumstances on audit.
(f) Take appropriate measures to provide for suspension of tax collections
during the pendency of MAP, similar to a person pursuing domestic
administrative or judicial remedy.
(g) Implement appropriate administrative measures to facilitate recourse
to the MAP to resolve treaty-related disputes. MAP should be available
to taxpayers irrespective of judicial and administrative remedies pro-
vided by the domestic law.
(h) Publish guidance on relationship between the MAP and domestic law
administrative and judicial remedies, in particular, regarding whether
the Competent Authority is legally bound to follow a domestic court
decision.
(i) Publish guidance allowing taxpayers an access to the MAP in the case
of bona fide taxpayer-initiated foreign adjustments.
(j) Clarify the consideration of interest and penalties in the MAP.
(k) Provide guidance on multilateral MAPs and APAs.
Whilst OECD has delivered on the tough task it had set for itself, the real success
of BEPS initiative would lie in smooth implementation of suggested tools and best
practices. The countries will need to balance the twin objectives of eliminating double
non-taxation and sustaining the investor confidence in tax policies to make BEPS ini-
tiative successful. Insofar as Action Point 14 is concerned, OECD would now develop
an inclusive framework for monitoring mechanism for adherence to proposed min-
imum standard and best practices. Specifically, from India’s standpoint the task of
evolving MAP as a more effective dispute resolution mechanism, and the preferred
option amongst the foreign investors, is relatively uphill given the existing inefficien-
cies plaguing the Competent Authority function, rigid positions on mandatory arbi-
tration and the lack of clarity on critical aspects of MAP process.
Developments in Domestic Tax Policy

Over past few years, increased sense of urgency is witnessed in India’s approach
to embracing best practices in global tax policy and administration. As part of the
Government’s endeavour to providing a stable, non-adversarial and predictable tax
regimes, both for direct and indirect taxes, the government has undertaken a set of
reforms in domestic tax law. Some of these reforms are summarized -
One fundamental tax policy reform that’s much overdue is introduction of GST
to replace extant indirect tax regimes, which is fraught with multiplicity of taxes and
statutes (more than 50 such statutes are presently in force), and inherent cascading
effect which creates distortion in value chain. The Constructional Amendment Bill is
presently lying before the Upper House of the Parliament, pending political consen-
sus on contours of the new legislation. It remains to be seen whether India can afford
to begin with an ideal EU-like GST regime, given significant difficulty faced with the
government in eliciting all-party consensus; speaking from the standpoint of mac-

ro-economic gains likely to emerge with successful introduction of GST (nearly 2 per-
cent points of GDP), it is in wider interest of the country to usher in less-than perfect
GST, with clear roadmap for transition from present regime.
More recently, the India has demonstrated its commitment to evolving the new
order in global tax policy, through active participation at various multilateral forums,
including G20, OECD, UN, ICC Tax Commission, WTO, etc. Historically, India has had
an observer status on OECD’s Committee on Fiscal Affairs, alongside other BRICS
nations, i.e. Brazil, China and South Africa.
The Committee on Fiscal Affairs is the main forum for the OECD’s discussions on
taxation, covering international and domestic tax issues and tax policy and adminis-
tration. It has an extensive partnership programme with non-OECD economies that
enables them to participate in the development of international tax arrangements.
The partnership is implemented by means of multilateral, regional and bilateral pro-
grammes.
In relation to BEPS Works led jointly by G20 and OECD, India was invited to
participate in the project as Associate, i.e. on an equal footing with OECD members
(including at the level of the subsidiary bodies involved in the work on BEPS), and
will be expected to will be expected to associate themselves with the outcome of BEPS
Project. While it’s early to anticipate definitive outcomes in response to BEPS package,
India’s tax policy and jurisprudence has indeed evolved over the years to deal with
several contentious issues, outlined in various APs. Meanwhile, the Indian Compe-
tent Authority’s remark that BEPS measures could broadly shape the architecture of
impending tax reforms sets out the theme. There are a number of anti-avoidance mea-
sures which are due to be legislated and implemented in tax laws, e.g. GAAR, CFC.
Evolution of BEPS package through continuous consultative process will certainly
accelerate the pace of domestic tax law reforms too.
Besides announcements in 2016 budget of the government, it is anticipated that
subordinate legislation by way of administrative circular and rules shall guide India’s
actions towards BEPS.
In addition, in July 2015, India has become signatory to the Multilateral Agreement
on automatic exchange of information; the move underlines India’s commitment to
adopting best practices in tax administration. To ensure compliance with Foreign
Account Tax Compliance Act (“FATCA’), India is adopting inter-government
agreements, in tandem with revised disclosure norms prescribed by the Department
of Revenue to track reportable transaction of financial institutions. Enhanced rigors
on disclosures in tax matters is bound to promote governance standards. Evidently,
India’s engagement at multilateral forums has significantly increase and that bodes
well insofar as growth of cross-border trade is concerned.
GST — An Overview
The Minister of Finance, Government of India officially declared the intent to trans-
form the indirect taxes arena in 2007 with his proposal to shift to a comprehensive
GST regime. Since then various officials have deliberated over the idea and even pro-
GST-An Overview ® 159
posed a structural mechanism for GST. On this premise in 2011, the Government of
India introduced the Constitution Amendment Bill to bring in place GST in India. This
Bill was threadbare examined by the Parliament’s Standing Committee on Finance
which in its report” has reiterated that GST is recognized internationally as a destina-
tion based consumption tax which is least distortionary.
The broad objectives of introducing the GST in India are to expand the tax base
through wider coverage of economic activities and reduction in exemptions; mitigate
cascading and double taxation and enable better compliance through the lowering of
overall tax burden on goods and services. By removing hidden or embedded taxes, it
would improve the competitiveness of domestic industry vis-a-vis imports and in inter-
national markets. By harmonizing the tax structure across States, this reform would also
lead to the development of a common national market for goods and services.
It has also been noted that internationally, comprehensive goods and services tax
has already been introduced in more than 100 countries across the world. The report
states that the key benefits of GST for business and industry would be ease of compli-
ance, removal of cascading, improved competitiveness. For Central and State Govern-
ments, the key takeaways would be simple and easy to administer tax regime, better
controls on leakage, consolidation of tax base and higher revenue efficiency. For the
consumer, the benefits would be single and transparent tax proportionate to the value
of goods and services and reduction of prices.
Taking cue from the Report and other suggestions, the Government of India
introduced in 2014 a revised Constitution Amendment Bill in the Parliament. This
Bill was passed in the Lower House of the Parliament in 2014 itself and thereafter
has been scrutinized by a Select Committee comprising of representative members
of the Upper House of the Parliament. It is expected that the Upper House will also
endorse the Bill soon. Thereafter the applicable laws can be passed by the concerned
legislatures such that GST becomes a reality.
There can be no views on the fact that an efficient dispute resolution structure
under GST is imperative, essentially because the number of taxpayers expected to fall
under the ambit of GST is very large and will increase year on year and also for the
reason that GST has been showcased as a single tax system to be prevalent across the
country and hence it creates a requirement of common dispute resolution mecha-
nism for all the States.
It is important to point out that a Bill to amend the Constitution to bring GST was
introduced in the Parliament by the previous Government in 2011. This Bill provided
for establishment of a new constitutional body to be known as the “Goods and Service
Tax Dispute Settlement Authority” [“GSTDSA’]. The GSTDSA was however envisaged
for settlement of disputes between States in a scenario where recommendations of GST
council were not followed by the States. It was provided in the Bill of 2011 that the said
GSTDSA shall consist of a Chairperson and two other members where the Chairman
“shall be a person who has been a Judge of the Supreme Court or Chief Justice of a High
70 Standing Committee on Finance (2012-13) presented its report on the GST related Constitutional
(115") Amendment Bill 2011 on August 7, 2013 and is the latest summary of views of various
stake holders on this issue.
Court to be appointed by the President on the recommendation of the Chief Justice of

India” and the other two members “shall be persons of proven capacity and expertise in
the field of law, economics or public affairs to be appointed by the President on the rec-
ommendation of the Goods and Services Tax Council” The GSTDSA was invested with
the power to issue “suitable orders” before the disputes brought before it. It was pro-
vided that only Central Government or State Governments could lodge their disputes
or complaints before the GSTDSA which would be adjudicated by it in cases “arising
out of a deviation from any of the recommendations” of the GST Council in the event
these deviations resulted “in a loss of revenue to a State Government or the Government
of India or affects the harmonised structure of the goods and services tax.’””! The Bill of
2011 therefore provided a well-defined process for dispute settlement under the GST
regime. The Bill introduced by the incumbent government in 2014, however, does not
carry this provision. Instead the 2014 Bill stipulates that the GST Council “may decide
about the modalities to resolve disputes arising out of its recommendations’’” Thus in so
far as the current Bill pending consideration of the Upper House is concerned, the exact
modalities of dispute resolution will be known at a later date. It appears that in such
scenario the members of the GST Council shall resolve their disputes inter se without
referring them to the specialized dispute settlement institution such as the GSTDSA.
The absence of the GSTDSA in the 2014 Bill is perhaps attributed to a Parliamentary
Report of 2013 (addressing the 2011 Bill) which cited the concerns of the State Govern-
ments that a distinct institution examining the correctness of States’ legislative action
was “construed as undermining the supremacy of the Legislature” (Ministry of Finance
2013).’”* The incumbent Government seems to have accommodated this concern by not
providing for the GSTDSA in the 2014 Bill. However from the publicly available discus-
sion amongst the key political parties in India it appears that there is a possibility of the
GSTDSA being reintroduced. Whether this GSTDSA will be on similar lines as the one
proposed in 2011 is unclear at this stage.
Report on the Implementation of GST (CBEC 2010)” has been released which pro-
poses two alternate models of dispute resolution under the GST regime for the taxpay-
ers. The central and state legislations currently provide similarly the three-tiered dispute
settlement design i.e. first level departmental-adjudication followed by quasi-judicial
appellate authorities/tribunals and a final judicial review by constitutional courts.
Both the proposed models are based on similar broad structure, albeit with cer-
tain changes in the detail. However the principle design-challenge the GST regime
faces on the dispute settlement front is to bridge the wide difference in laws and prac-
tices between the dispute settlement actors and stakeholders currently operating
under the central and state indirect tax legislations respectively. These models seems
to align these divergent aspects. The first model proposes different adjudicatory and
appellate authorities for Central and State component of GST with the appeals flow-
ing to a common quasi-judicial tribunal and thereafter to a National level tribunal
71 Article 279B proposed to be inserted by clause 12 of the 2011 Bill.

72 Article 279A(11) proposed to be inserted by clause 12 of the 2014 Bill.
73 Ministry of Finance 2013, Standing Committee on Finance, 73" Report, para 61.
74 CBEC 2010, Report of the Group on Implementation of Goods and Service Tax, CBEC, December
2010. :
GST -An Overview @ 161
which would be amenable to judicial review of the constitutional courts. The second
model differs in approach to establish a common dispute settlement regime for both
the Central and State component of GST at all levels. These two models can be dia-
grammatically described as under;
Figure 5.1: MODEL - |
Supreme Court
National Tribunal High Court

{[NGSTAT] (Under Article 226 and 227]
State Tribunal
[GSTT]
CGST/IGST Commissioner SGST Commissioner

(Appeals)/Commissioner (Appeals)/Commissioner
(Adjudication) (Adjudication)
CGST/IGST SGST Asjudicating

Adjudicating Authorities Authories
Figure 5.2: MODEL - Il
Supreme Court
National Tribunal High Court

'_ [NGSTAT] [Under Article 226 and 227]
State Tribunal
[GSTT]
CGST/IGST/SGST Commissioner
(Appeals)/Commissioner
(Adjudication)
CGST/IGST/SGST
Adjudicating Authorities
The Report does not provide for the methodology which will be followed in so far
as resolution of existing disputes is concerned. Whether the institutions currently in
vogue will be continued even under the GST regime until their resolution or the exist-
ing disputes will be addressed by the proposed dispute resolution mechanism is one
issue which survives.
In so far as the two models are concerned, in our view duplication of authorities
would not be conductive as difference in interpretative issues between the Central
and State authorities may only be a replication of the existing state-of-affairs. Thus
Model - II is better positioned. However merging Central and State authorities, as
envisaged in Model - IJ, would require political-will and thus remains a major deci-
sion to be taken at the highest levels.
Additionally, this Report on the Implementation of GST proposes a multi-tiered
review mechanism to ensure that routine appeals are not filed at higher levels and
reasonable orders of lower authorities are accepted and unnecessary appeals are not
filed. The Report also proposes three authorities towards an Alternate Dispute Resolu-
tion Mechanism; Authority for Advance Rulings; Settlement Commission; and Office
of Ombudsman.
The current constitution of AAR is proposed to be continued with few changes in
the scope and validity of the orders passed by it. However the scope of AAR is proposed
to be enlarged to cover all the taxpayers and the rulings of AAR are also proposed to
be binding on all the parties which was the major lacuna in the current form of AAR.
The current form of Settlement Commission (SC) is proposed to be continued in
the upcoming legislation. Nothing specific has been described regarding the changes
from the current form but it would be appreciable if SC can be brought under the
reach of taxpayers at all levels of dispute resolution process.
The office of Ombudsman is proposed to be set up in each state and combined
office for smaller states. The role of Ombudsman is not clear in the proposed legisla-
tion. We may advert to the fact that currently Service tax laws contains a provision of
Ombudsman. However the office has largely remained defunct in view of clarity on
its powers as also lack of authority to it, to pass binding orders in pending disputes. In
our view instead of Ombudsman a separate clarificatory wing can be setup to hear the
taxpayer's grievances which would be entrusted with powers to enforce compliance
and resolve disputes.
Minimizing disputes: Wish list on administrative-setup under GST regime
Having drawn the experience from the working of the tax-administration in the
current regime one can draw the following list of expectations” which will go a long
way to minimize disputes under the GST regime.
Lead Time Before Implementing New Law or Amendment

It is a natural phenomenon in current tax regime that when a new legislation or an
amendment is passed the litigations and disputes tend to increase due to interpreta-
75 FICCI's “Ease of Doing Business in GST Regime” - Presentation by Rajeev Dimri.

Review of Representations on New Law or Amendment ® 163
tion issues and lack of foresightedness of tax authorities on the impact of such amend-
ment. Hence before introducing any amendment in the law at least three months lead
time should be allowed. It will help in the taxpayers and other industry specialists to
provide their inputs on the said amendment. The impact of the amendment can be
easily drawn out if the parties affected by the amended legislation are given time to
study the implications. It will also provide time to the tax authorities to interact with
various stakeholders to make them understand the need of such legislative change
and benefits which may be foresighted by such change. Thus it will be a two way
process of amending the legislation which will increase stakeholder participation in
framing or amending the legislation. This will increase the trust among the taxpayers
and may result in lowering down the probability of disputes at a later stage.
Explanatory Notes Accompanying the New Law or

Amendment
The tax authorities often provide the amendments in legislation by means of notifica-
tions etc. The language used in such notification is purely based on legal terminology.
The taxpayer is not always well versed with such legal terminology and hence he gen-
erally lacks interest in referring the amendments or new legislations. The tax authori-
ties can issue explanatory notes in addition to each and every legislative change which
should elaborate the need of change, impact of change on taxpayers and other com-
pliance related issues. It will help the taxpayer to better understand the changes in
legal framework and impact of the same on individual to individual basis.
Review of Representations on New Law or Amendment

At the time of implementing any new legislation or change in legislation the tax
authorities call the comments from various verticals of trade and industry. Currently
this is undertaken only on an annual basis at the time of finalization of Annual Budget.
Itis proposed that the scope of this exercise be increased to even cover the amendments
proposed/introduced during the year such the members of trade and industry can
provide their comments and representations to the tax authorities. The tax authorities
may setup a separate group of officers who will be reviewing the representations and
comments received from the various members of trade and industry. The group can
analyse the key concerns and suggestions of various stakeholders and adopt the same
if deemed necessary in the upcoming legislation.
Common Views of Central Government & State Government

The Central government and State government should not have different views on
the same issue. The differences in the views of both the lawmakers creates havoc
for taxpayers as well as tax authorities who have to deal with both these authorities.
The clash in opinion of Central and State governments should be minimized to the
maximum possible extent in order smoothly implement new legislation. For this a
joint forum may be created where participants from Central government as well as all
164 @® Key Tax Policy Reforms
the State governments are given a platform to discuss the issues faced by the taxpayers
in a particular situation and way to deal with the same. This will help to mitigate the
interstate and central and state government clashes on issues which ultimately impact
the taxpayers.
Provision of Reasonable Limitation Period

In legislative provisions where no limitation period is defined in the law, there ought
to be a reasonable limitation period which may vary from case to case basis. It is an
inherent right of the taxpayer and the dispute redressing authorities should provide
this benefit to the taxpayer while adjudging the case even if there is no specific clause
in the legislation regarding the period of limitation. Also the proceedings related to a
financial year must be closed within a definite period and suitable restrictions needs
to be applied in reopening or reassessing the past cases.
Proceedings to be Dropped if No Order Passed in

Prescribed Time
The adjudication process should be time-bound and must be stringently adhered
by the tax authorities. The provisions should be enacted to make the adjudicating
authorities accountable for the quality of adjudicating process and compliance of all
the procedures defined in the legislation. Non-passing the order within prescribed
time limit should result in the dropping of proceedings against the taxpayer. Any loss
to the revenue due to these reasons must be taken in account by the tax authorities
and responsible adjudicating officers must be held responsible for such loss. This will
lower down the hardships for taxpayers and make the adjudicating authorities more
accountable and responsible towards overall quality of adjudication. This approach is
not unprecedented as some of these provisions already exist in direct tax laws.
Review of SCN Beyond Certain Monetary Limits

In the current scenario there is no qualitative assessment of notices leading to vague
SCNs without proper review of factual and legal position. In order to prevent such
occurrences in the GST regime, a review panel of senior departmental offices may
be setup which will review the SCNs beyond a specific monetary demand. This panel
may review the facts on the basis of which such SCN is issued and sustainability of the
issue mentioned in future course of adjudication. It is expected that this procedure
will significantly reduce unwarranted disputes at their very origin.
Avoid Calling Same Information Repeatedly

At times it is observed that the departmental authorities call for details from the tax-
payers which are already available in the database of the tax authorities. Also same
Adhere to Clarifications of Expert Guidance Cell @ 165
information is called by the authorities adjudicating the case at different level which
is already provided by the taxpayer at some point of time during the adjudication pro-
cess. The taxpayer suffers due to this both in terms of time and cost. To avoid this a
database should be maintained by the tax authorities which can be accessed by the
adjudicating authorities at any level of adjudication.
Adhere to Clarifications of Expert Guidance Cell

An expert guidance cell set up by the tax authorities issues their clarifications on
certain issues. Before issuing a SCN if a clarification on issue under investigation is
available from the expert guidance cell, than the adjudicating authority must refer the
same before issuing the SCN. And in case the clarification provides a strong reason to
believe that the taxpayers stand is correct than the adjudicating authority should not
issue the SCN by overriding such clarification
en wate: © Ses ere tt sew a pet cee
Protee tgs to bs Dropped if No Ordey Paztedtn |
Se ees eiee few 4s oni!8 bo Us0s Sail 1 Aa pose be ingety riered

oe Ge set Gee ee “She Oriidees Mild
&: Cue BY St ane
CRs ween! 2 Oy 6s Maly & vj Depiing yoor’sS and Perr
Sp ieee ier 2-Seee & Su edalicd Gon-peudes:
Ne le eA pC
Gee Tet Gk at “« @ b bracing ptr Onde De weaayee Sse
¢ 26 =e > © Gee rowan sore lar 1S) i Ketone by tee ee Ql
@U696e: © 4° firs sy \/hver ces bo hel pes bee cP om, A
meet eee Ge ba, hoe fa erpurers ont! tnaie Cy Reni coi See
(eee qeSe |. —wont owl Qa! nate: De qebeee. “|
pte @= 8s 4) see = a & Ome
Forties (Se e tee,
Soar @ GON Bey o-4 Certain Monetary Units

“4 Ap ews @& ow pore acy i co ot GEG
of Diese
ee eee Bey (sees tee & a: eles W goer, HES
1a we ancien oa Ts ene cae a
os -_ 7 aa ~yirec? @ (pp Paar Set.
Pewee Ga tani ee Ea eee a
— : “W Bulan, oe es eye ere
- i ee Pgh Carey eS -
References
Aa eee ee rer era ee)
Planning Commission, Government of India, A Macro Perspective and Scope of Tax Revenue: 2000-01
to 2006-07 in: Report of The Advisory Group on Tax Policy and Tax Administration for the Tenth Plan,
pp. 27-52.
Planning Commission, Government of India, Tax/GDP Trends in the 1990s and Future Prospects,
‘Report of The Advisory Group on Tax Policy and Tax Administration for the Tenth Plan} pp. 53-72.
Ministry of Finance, Department of Economic Affairs, Economic Division 2015, Indian Public Finance
Statistics 2014-15, Available at: http://finmin.nic.in/reports/IPFStat201415.pdf, accessed in May 2016.
Report No. 7 of 2015 (Indirect Taxes-Central Excise).
Ministry of Finance 2014, ‘Third Report of the Tax Administration Reform Commission’
Report No. 4 of 2015 (Indirect Taxes-Service Tax).
SSS
SU Report No. 2 of 2016 (Indirect Taxes-Central Excise) and Report No. 1 of 2016 (Indirect Taxes-Service
Tax).
& Finance Commission, India 2015, Report of the Fourteenth Finance Commission, Available at: http://
fincomindia.nic.in/ShowContentOne.aspx?id=9&Section=1, accessed in May 2016.
Ministry of Finance 2015, Report on the Revenue Neutral Rate and Structure of Rates for the Goods
and Service Tax (GST).
CAG Report No. 12 of 2014 (Indirect Taxes-Customs).
Ministry of Finance, Government of India, Second Report of the TARC.
Planning Commission 2001, ‘Report of Advisory Group on Advisory Group on Tax Policies and Tax
Administration for the Tenth Plan’ headed by Dr Parathasarathi Shome, Ministry of Finance 2002,
Report of the Task.
is ¥ Ministry of Finance, Statement of Revenue Impact of Tax Incentives under the Central Tax System: FYs
2013-14 and 2014-15.
14. National Academy of Customs, Excise and Narcotics, ‘Detailed Study Report on Authority for Advance
Rulings; NACEN, India.
NS Ministry of Finance 2015, Eleventh Report of Standing Committee on Finance, presented to the Lok
Sabha on April 24, 2015 and laid before the Rajya Sabha on the same date.
16. UN 2015, World Investment Report 2015, Available athttp://unctad.org/en/PublicationsLibrary/
wir2015_en.pdf, accessed in May 2016.
1
fe World Bank Group 2015, Doing Business 2016 Going Beyond Efficiency, A World Bank Group Flagship
Report, 13th edition, Available at http://www.doingbusiness.org/reports/global-reports/doing-busi-
ness-2016, October 27, 2015, accessed in May 2016.
18. World Economic Forum 2015, The Global Competitiveness Report 2015-16, Available at http://www.
weforum.org/reports/global-competitiveness-report-2015-2016, accessed in May 2016.
1G). Report of the CAG 2015, Department of Revenue - Direct Taxes, Report No 3 of 2015, India.
20. Report of the CAG 2016, Department of Revenue - Direct Taxes, Report No 3 of 2016, India.
Ze The 87th Report of the Public Accounts Committee presented in the Lok Sabha on August 29, 2013, Tax
Administration, India.
22s First Report of TARC, 2014, Available from http://www.finmin.nic.in/the_ministry/dept_revenue/
First_report_TARC.pdf, accessed at May 2016.
23. Ministry of Finance, Department of Revenue, Annual Report 2014-15.
24. Padmakishan, M, 2013, I-T department to review orders of Settlement Commission, The Economic
Times. Available at http://articles.economictimes.indiatimes.com/2013-10-24/news/43366208_1_or-
ders-direct-taxes-cbdt., October 24, 2013, accessed in May 2016.
167
168 ® References
20: Seth, D, 2015, ‘I-T Dept inks 11 agreements to solve transfer-pricing issues, ‘I-T Dept inks 11 agree-
ments to solve transfer-pricing issues: November 24 2015.
26. Department of Justice 2015, Statistical Summary: Use and Benefits of Alternative Dispute Resolution
by the Department of Justice, Available at http://www.justice.gov/olp/alternative-dispute-resolu-
tion-department-justice, accessed in May 2016; (as specified, the data is based on detailed case re-
ports submitted by lead trial counsels in all cases where a private neutral conducted an ADR process
in department litigation across the country.)
Pile CRA 2014, 2013-2014 MAP Program Report, Available at http://www.cra-arc.gc.ca/tx/nnrsdnts/cmp/
mp_rprt_2013-2014-eng.html, accessed in May 2016.
28. OECD 2007, ‘MEMAP; Available at http://www.oecd.org/ctp/38061910.pdf, accessed in May 2016.
and UN 2010, ‘Guide to the Mutual Agreement Procedure under Tax Treaties’ Available at http://
www.un.org/esa/ffd/wp-content/uploads/2014/10/6STM_GuideMutualAggrementProcedure.pdf,
29: FTA, ‘Multilateral Strategic Plan on Mutual Agreement Procedures: A Vision for Continuous Map
Improvement: Available at http://www.oecd.org/site/ctpfta/map-strategic-plan.pdf, accessed in May
2016.
30. Law Commission of India 2015, Analysis of the 2015 Draft Model Indian Bilateral Treaty. Available at
http://lawcommissionofindia.nic.in/reports/Report260.pdf, accessed in May 2016.
31. OECD 1998, Harmful Tax Competition, An Emerging Global Issue.
32; OECD 2011, OECD Tax Transparency Report, 2011.
So: OECD, ‘Tax Information Exchange Agreements: Available at http://www.oecd.org/tax/ex-
change-of-tax-information/taxinformationexchangeagreementstieas.htm, accessed in May 2016.
34. Standing Committee on Finance (2012-13) presented its report on the GST related Constitutional
(115th) Amendment Bill 2011 on August 7, 2013 and is the latest summary of views of various stake
holders on this issue.
35. Ministry of Finance 2013, Standing Committee on Finance, 73rd Report, para 61.
36. CBEC 2010, ‘Report of the Group on Implementation of Goods and Service Tax; CBEC, December
2010.
Subject Index
A
Advance Pricing Arrangement (APA), 44-45, 125-127, 137-138
Alternate Dispute Resolution (ADR), 113-144
advantages of, 114
in Australia, 130-131
in Brazil, 133
in Canada, 131
forms of, 113-114
forums, 40-45
AAR, 40-42, 118-121
APA, 44-45, 125-127
DRP, 43-44, 123-125
MAP framework, 45, 127-128
Settlement Commission, 42-43, 121-123
in India, 114-118, 134-141
legislative framework for, 139-140
in New Zealand, 129-130
in South Africa, 133-134
in United Kingdom, 128-129
in United States of America, 131-133
Arbitration and Conciliation Act, 1996, 116-118
Australia
ADR in, 130-131
dispute resolution in, 104
tax disputes, 78-79
Authority for Advance Ruling (AAR), 40-42, 135
B
Base erosion and profit shifting (BEPS), 146-151
methodology, 151-152
monitoring implementation and impact, 151
political expectation, 152-157
timing, 151
Bilateral Investment Treaty (BIT), 141-142
Indian model, 142-144
relevance of, 142
169
170 ® Subject Index
Brazil
ADR in, 133
tax disputes, 81-82
C
Canada
ADR in, 131
tax disputes, 79-80
Capital assets, taxability of ‘indirect transfer’ of, 47-49
Central Board of Excise and Customs (CBEC), 24-27
CESTAT, 38-39
Collaborative Dispute Resolution (CDR), 106
Commissioner (Appeals), 96-99
Cost-benefit trade-off, 55-59
D
Direct tax
AAR, 41
CBDT for, 21-24
key administrative and procedural aspects of, 20-31
Settlement Commission, 42-43
Direct Tax Dispute Resolution Scheme, 2016, 98
Dispute resolution, 95-112
in Australia, 104
in Brazil, 105
in Canada, 105
traditional forums, 96-112
Commissioner (Appeals), 96-99
High Court/Supreme Court, 101-103
in India, 106-110
ITAT/CESTAT, 99-101
Domestic tax policy
developments in, 157-158
DRP forum, 43-44, 123-125, 137
E
E-commerce, 52-53
Foreign Capital, importance of, 59-60

Subject Index @ 171
G
Goods, valuation of, 53-54
Goods and services tax (GST), 158-162
H
High Risk Corporates Programme (HRCP), 105-106
IBM, 51-52
Income Tax Appellate Tribunal (ITAT), 38-39
India
tax demographics, 13-16
tax disputes in, 1-63
tax-law making in, 9-13
Indirect tax
AAR, 41-42
adjudication in, 30-31
CBEC for, 24-27
controversies, 52-55
key administrative and procedural aspects of, 20-31
Settlement Commission, 43
Indirect Tax Dispute Settlement Scheme Introduced by Finance Act, 2016, 98-99
Intangibles, taxation of, 54-55
M
MAP framework, 45, 127-128, 137-139
Maruti Suzuki India ltd, 49-50
N
National Tax Tribunal (NTT), 110-112
New Zealand
ADR in, 129-130
Nokia, 50-51
O
OECD (Organisation for Economic Cooperation and Development), 521-522
R
Retrospective amendments, 68-69
Revenue foregone, 16-18
S
Sanofi Pasteur Holding, 48-49
172 ® Subject Index
Settlement Commission, 42-43, 121-123, 136-137

Shell India, 49
Sony Ericsson, 49-50
South Africa
ADR in, 133-134
tax disputes, 452
Tax collections, 15-16

significance of, 3-4
Tax controversies, 46-55
Tax demands
quantum of, 66
uncollected, 18-20
Tax disputes
in Australia, 78-79
in Brazil, 81-82
in Canada, 79-80
identification and prevention, 65-93
in India, 1-63
causes of, 82-91
judiciary (state HCs and SC), 45-46
resolution framework, 37-46
protracted, reasons for, 67-76
reduction of, 91-93
resolution (see Dispute resolution)
in South Africa, 452
in United States of America, 80-81
Tax-law making, in India, 9-13
Tax officer, accountability of, 72-73
Taxpayers base, 13-15
and revenue, 16-18
Tax policy, significance of, 4-9
Tax recovery, 50-51
Tax reforms
history of, 31-34
in indirect taxes, 34-37
Traditional appellate forums for tax matters
Commissioner (Appeals), 38
ITAT/CESTAT, 38-39
Subject Index @ 173
U
United Kingdom (UK)
ADR in, 128-129
dispute resolution in, 105-106
tax disputes, 76-78
United States of America
ADR in, 131-133
tax disputes, 80-81
V
Vodafone International Holdings, 47-48
Budget Titles 2016 - 17 @ LexisNexis:
Law, Practice B Procedure of

==, :
| : :
, :
S E RV |i E 4 : cps ; Pocket Guide to
=
AsamendedbytheFinanteAct,2016
Fala = al — | Capital Gains Tax

LAW AND PRACTICE
27,250/-
ger oF 2905
Chaturvedi & Pithisaria’s Chaturvedi & Pithisaria’s
INCOME TAX INCOME TAX

PETES ace with Relevant Texts of Allied Acts
2016 201
Chaturvedi & Pithisaria's

MASTER GUIBETO
INCOME TAX
RULES i
2016
z995/- /
i
|
DIRECT TAXES FI & ‘ ae India Needs

Ready Reckoner 2016-17 ——— = T ay
TAX DEDUCTION aa st
AT SOURCE
SIMPLIFIED
“f a
e-bookstore: www.lexisnexis.in
To avail discounts & for more details, write to us at marketing.in@lexisnexis.com with subject line ‘L6LNAD’
or call our toll free nos.- Airtel: 1800-102-8177, BSNL: 1800-180-7126 orvisit us at www.lexisnexis:in
Ui
oY]
)
yD
ZENS
y
Saal la teeta
’ @ LexisNexis:
LexisNexis Two Minutes Customer Survey - We Value Your Opinion & Time
What our customers tell us via this survey is highly valuable, and as a direct result of the
feedback we will be able to implement improvements to our products, solutions and services
that provide significant value to our customers like you and help you take more confident,
efficient and productive decisions. This survey should take only about 2-3 minutes.
As a token of appreciation of your effort for completing this special quick short survey, we will
be happy to provide you two weeks access to Lexis®India - Revolutionizing Legal Research.
Also, 20 lucky respondents every month will get free LexisNexis book voucher worth INR 500/-.
To complete the survey, please fill up the below questionnaire.
Name:
Email:_
Mobile/Phone No.:
Company/Organization: =e: ee ee ee eee eee

y Name of the LexisNexis® Book Recently Purchase
Author eee
ee 2S TItle En.
1. Onascale of 0 (not at all likely) to 10 (very likely), how likely are you to recommend our
books to a colleague, associate or friend?
2. In your own words, what is the single most important reason for giving the above rating?
After filling up the questionnaire, tear off the page and send us to our postal address:
Marketing Department
LexisNexis
14th Floor, Building No. 10B
DLF Cyber City, Phase 2
Y Gurgaon - 122002
You can also email your survey response to marketing.in@lexisnexis.com with the subject-line
“NPS”. Also, you can submit the survey online via - http://bit.ly/LexisNexisNPS.
Library
Norton Rose Fulbright

3 More London Riverside
London
SE1 2AQ
The Treatise is a formidably researched piece of work that few (if any) but Mr. Butani
would be able to bring off so effectively. It describes the complex Indian system well,
and addresses its structure and developments (or otherwise) in the context of wider
international trends.
Michael Lennard, Chief, International Tax Cooperation Section
U.N. Dept. of Economic and Social Affairs
It is plain truth that in India it is easier to change tax laws than the approaches of tax
administration. Possibly it depends on intellectual persuasion which the likes of
experts like Mukesh can do. Good luck to these efforts.
N Rangachary, Former Chairman, Central Board of Direct Taxes &
Insurance Regulatory Authority of India
Tax planning and compliance for investments in India requires patience and wisdom.
Bring your own patience; this treatise provides terrific wisdom that will benefit anyone
who seeks to investin India.
Peter Barnes, Professor, Duke Law University
Former Head of International Tax, General Electric
A timely volume that continues to push for the right kind of tax administration and
reform. It cogently brings to attention the improvements as well as continuing
constraints for the ease of doing business. It narrows down on the crucial area of
dispute prevention and alternative dispute resolution.
Dr Parthasarathi Shome, Chairman,

International Tax Research & Analysis Foundation
Former Chairman, Tax Administrative Reforms Commission
Advisor to the Finance Minister
Perfect in every regard; right topic at the right point in time, deeply technical and full of
good-to-know details - and the best, it's even entertaining to read. But, well, that's no
surprise when you see who the author is and who contributed.
Dr Christian Kaeser, Global Tax Head, Siemens

Chair of ICC Tax Commission
Mukesh Butani's hands-on experience and extensive research for effective and
expeditious dispute resolution in tax matters makes this book of tremendous
significance for all those interested in global growth by promoting business in India.
Dr Lalit Bhasin, President, Society of Indian Law Firms
|
N_ 9789350356722
@ LexisNexis: Ill
i
<793

Tax Dispute Resolution - Challenges and Opportunities in India - 9789350356722 - Anna's Archive

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tax Dispute Resolution - Challenges and Opportunities in India - 9789350356722 - Anna's Archive

Uploaded by

Copyright:

Available Formats

e

ookkeeping profi > finances4 budger balance

Dr Isher Judge Ahluwalia

Norton Rose Fulbright

Dr Isher Judge Ahluwalia

Printed and bound in India.

9" June, 2016

Challenges of Indian Tax Administration comes at an opportune time when much

June 2, 2016 Dr Isher Judge Ahluwalia

eAagivesy ine nie ctihbw ade ey hace bel Le

aang Cet welcrsilrg eselge, iqveatmort,

The author wishes to thank

Foreword by Arun Jaitley Vv

Chapter 1 Tax Disputes in India 3

Chapter 2 Dispute Identification and Prevention 65

(xii) Failure of LTU 73

Chapter 3 Dispute Resolution 95

Chapter 4 ADR Framework 113

Chapter5 Key Tax Policy Reforms 145

Political Expectation is Very High from BEPS Works of OECD 152

Subject Index 169

@)"\ (etiwe aw ene Gee _ ioe

AAR Authority for Advance Rulings

CDR Collaborative Dispute Resolution

G8 Group of Eight (currently known as Group of Seven), G8 is a

LBS Large Business Services

SAAR Specific Anti-Avoidance Rules

5 howe Upton benal

_ >: mol Cee

Overview of the Indian Tax System

underlined the importance of achieving fiscal discipline by way of external-debt

Table 1.1: Trends in Deficits of Central Government Post Enactment of FRBM

Significance of Tax Policy

1 Ministry of Finance 2015, Budget at a glance, Available at: http://indiabudget.nic.in/ub2015-16/

Fiscal Tax to GDP TaxtoGDP — Tax to Growth in

2004-05 39 6.93 8.31 15.25 4.52

2005-06 4.0 7.32 8.59 15.91 4.33

2006-07 3.3, 8.18 8.98 17.15 C19

2007-08 25 8.81 8.64 17.45 175

2008-09 6.0 7.87 8.39 16.26 -6.82

2009-10 6.5 7.05 8.40 15.45 -4,98

2010-11 4.8 Lok 9.00 16.31 5.57

2011-12 57 6.99 931 16.29 -0.12

2012-13 4.8 7.34 9.63 16.97 417

22013-14 (PA) 4.5 7.36 S73 17.09 0.71

22014-15 (BE) 4.1 Teas) 9.83 17.38 1.70

Table 1.3: Recent Trends in Central Tax to GDP Ratio

Your Tax to GDP ratio - Tax to GDP ratio - See :f

2004-05 2.94 3.99 6.93

2005-06 S19 4.13 Tose,

2006-07 3.83 4.34 8.18

2007-08 4.64 4.17 8.81

2008-09 4.16 S71 7.87

2009-10 4.04 3.01 7.05

2010-11 3.94 3:37 (od

Year —Ss-—saXtoGDPratio- —Tax to GDP ratio - pg Ae ee .

2012-13 3.88 3.46 7.34

2013-14 (PA) 3.92 3.45 7.36

2007-08 2,315,700 2,079,770 872,690 3,435,130 9.801

2008-09 2,342,180 2,091,010 937,630 3,783,680 3.891

2009-10 2,616,840 1,948,510 1,153,110 4,289,970 8.480

2010-11 3,071,210 2,627,470 1,437,010 5,580,960 10.260