By Gagan Kumar

All expatriate employees working in India, including those from the United States, are subject to Indian income tax laws. Such exposure is based on factors such as the period of stay in India and the character of the employment. This article provides an overview of income tax payable by expatriate employees working in India.

RESIDENTIAL STATUS OF AN INDIVIDUAL TAXPAYER
Under the Indian Income Tax Act, 1961, individual assessees can have either resident or non-resident status in India. A ‘resident in India’ can be either a resident-and-ordinarily-resident or a resident-but-not-ordinarily-resident.

The residential status of a person is determined by the number of days in which the person is present in India during the previous fiscal year(s), which in India is from April 1 to March 31.

A stay in India of less than 182 days qualifies one as a non-resident. The “basis condition” of one who is a “resident and not ordinarily resident” is if one stays in India for over 182 days. One can also be a resident-and-not-ordinarily-resident if one stays in India for less than 60 days during the previous year and more than 365 days altogether during the four years immediately preceding the previous year. Additional conditions that make one a resident-and-not-ordinarily resident are if one is either (a) resident in at least two out of the ten previous years immediately preceding the relevant previous year, or more than 750 days during the seven years immediately preceding the relevant previous year. A resident-and-ordinarily-resident is one who falls within the same “basic condition” as a resident-and-not-ordinarily-resident, or both of the “additional conditions” of a resident-and- ordinarily-resident. There are additional categories which are not relevant for the purposes of this discussion.

TAX IMPLICATIONS OF INDIVIDUALS UNDER RESPECTIVE RESIDENTIAL STATUS
The tax incidence of a taxpayer qualifying under different residential status is as follows:
Non-Resident: Only income which is received (or deemed to be received in India) (Indian Income) is taxable.
Resident-But-Not-Ordinarily-Resident: The Indian Income and income from business controlled (wholly or partly from India) or profession set up in India is taxable.
Resident-And-Ordinarily-Resident: Both Indian Income and Foreign Income would be taxable Foreign Income is income not received, or deemed to be received, in India AND income which does not accrue or arise, or does not deem to accrue or arise, in India.

CONDITIONS OF RESIDENTIAL STATUS SATISFIED IN BOTH THE HOME STATE AND FOREIGN STATE: TIE BREAKER RULE

The India and United States Double Taxation Avoidance Agreement (India-U.S. DTAA) provides a mechanism to ascertain the residential status of an expatriate employee who qualifies to be a resident of both India and US (under the respective domestic laws). The following considerations, in turn, need to be taken into account to ascertain the above:
(a) Permanent place of residence of the employee; (b) Vital interests (personal and economic relations) of the employee; (c) Nationality of the employee; or (d) Mutual agreement of the contracting states.

INCOME FROM SALARY

Income defined as salary is deemed to accrue or arise at the place where the service is rendered. Further, salary is chargeable to tax either on a due or receipt basis, whichever occurs earlier. Generally, most of the components of a salary (such as bonus, advance etc.) are taxed in the above manner, unless specifically exempted under any provision of the Act.

Home Salary

The Supreme Court of India has held that salary paid by an entity to an expatriate employee, albeit outside India, would be taxable in India. CIT vs. Eli Lilly and Company Private Limited (312 ITR 225 [SC]). The court ruled that if home salary paid to an expatriate employee has any connection or nexus with his rendition of service in India then such payment would constitute income which is deemed to accrue or arise to the expatriate in India under the Act.
Generally, expatriate employees make contributions towards social security programmes in their home country. The Act does not provide for any exemption in relation to such contribution towards social security overseas. While there is case law holding that contributions towards social security is deductible from the salary income of the expatriate employee. Galotti Raul vs ACIT [1997] 61 ITD 453 (Bom), based on the Act and Eli Lilly, it should be assumed that social security contributions made by the expatriate employees are taxable in India.

“Off Period” Salary

Where an expatriate employee leaves India (for any reason, including vacation) during which time she receives her salary without rendering services in India, her salary would be taxable in India. This was an open issue until the Act was amended to state that income earned during a ”rest period” or ”leave period” which preceded or succeeded the period in which services were rendered in India, and which formed a part of the employee’s employment contract, would be construed as salary earned in India.

Short stay exemption Under Domestic Tax Laws
The Act exempt certain foreign nationals from payment of tax subject to fulfilment to certain prescribed conditions.
The Act provides that the remuneration payable by a foreign enterprise to a foreign national on its payroll for services rendered in India would be tax exempt if all of the following conditions are met:
(a) the foreign enterprise is not engaged in any business or profession in India;
(b) the foreign national does not stay in India for more than 90 days in the relevant year; and
(c) the remuneration is not liable to be deducted from the income of the foreign enterprise chargeable under the Act.

Additionally, foreign nationals working on a foreign ship and those working as employees of a foreign government etc. and present in India during the relevant year would be exempt from payment of tax subject to fulfilment of certain specified conditions.

Under Double Taxation Avoidance Agreement
Under the India-U.S. DTAA, the remuneration earned by a U.S. resident, shall be taxable in the U.S., unless such employment is in India, in which case, the remuneration shall be taxed in India.
The remuneration is taxable in the U.S. if:
(a) the expatriate employee is present in India for a period not exceeding 183 days in the relevant taxable year; and
(b) the remuneration is paid by an employer who is not resident in India; and
(c) the remuneration is not paid by the Permanent Establishment of the U.S. employer in India.

More Beneficial Of The Laws To Be Adopted
The Act provides that the provision of the DTAA or the Act, whichever are more beneficial to the expatriate employee shall apply. In other words, the expatriate employee is entitled to avail the benefit of the legislation favourable to it.

Tax Equalization
The principle behind tax equalisation is that an expatriate should be no better or worse position (for tax purposes) as a result of being sent on a foreign assignment. This concept appears to have evolved to encourage expatriates to work for their employers wherever they may be sent, and to ensure that they are not placed in a disadvantageous tax position.
Broadly, under a tax equalization, an expatriate employee is assured by the country of her residence that she would not have to bear the burden of more taxes that what she would have paid had she been working in her own country and not gone to the foreign state for work.
For instance, several organisations offer Tax Equalization policies to their employees who are sent on foreign assignment to ensure that they are in no better or worse tax position by having taken the foreign assignment. If taxation is greater in the foreign state, then such additional taxes paid by the expatriate employee are normally reimbursed by his “legal and original” employer. Courts in India have suggested that the reimbursed amount would qualify as salary be subject to tax. Jaydev H. Raja, Mumbai vs. DCIT, ITA No. 2021/M/98, Assessment Year 1994-95 (Income Tax Appellate Tribunal, Mumbai).
Under Indian law, provisions relating to tax deduction at source (TDS) would be applicable to the gross sums (all of which may not constitute income) receivable by the expatriate employee in relation to the services rendered in India, except for the part of the additional tax liability of the employee which has been agreed to be borne by his employer.

PERMANENT ESTABLISHMENT
A foreign company which sends its employees to India on deputation basis (whether to its own subsidiary or otherwise) exposes itself to being deemed Permanent Establishment (PE) in India, in which case, the income of the foreign company from India would be subject to tax at the rate of approximately 42% if the income is less than INR 10 million on a net income basis.

Fixed Place PE
In case an expatriate employee is provided a dedicated place from where such employee renders its service (and such place being at its disposal during his tenure while serving the foreign entity), then such place may lead to the constitution of a fixed place PE.

Service PE
As per the India-US DTAA, the activity of rendering services (other than included services specified in Article 12) in India, by an enterprise, through its employees or personnel, provided that, such activities continue in India for a period of more than 90 days in a twelve month period (a consecutive period of 12 months in a financial year or spreading over 2 financial years) would constitute a Service PE. Further, in case the services are rendered for an associated enterprise for even a day, then it would result in constitution of a ‘Service PE’ in India.
The commonly recognised methodology adopted by foreign entities at the time of deploying/seconding their employees (expatriate employees) to India for rendering services is as follows:
(a) Such employees remain on the payroll of the foreign entity, but work under the directions of the Indian entity (i.e. the US entity remains the ‘de-jure’ employer and the India entity becomes the ‘economic’ employer).
(b) The foreign entity is liable to pay the employees remuneration in the home country. Such remuneration is subsequently reimbursed by the Indian entity on at-cost basis.

Taxability of Reimbursement
It is pertinent to note that there has been a divergence of judicial opinion on the taxability of the reimbursement (described above). Before proceeding further, it is, however, important to understand the meaning of ‘deputation’ and ‘secondment’. The distinction between these two terms is subtle. ‘Deputation’, in simple words, may be defined as a transfer of an employee outside the parent department or entity for a temporary period of time, on expiry of which, the concerned employee reverts back to his original position in the parent entity. The remuneration of such deputed employee is generally borne by the parent company and parent company also has the employee under its control and supervision, thereby making it the legal and economic employer of the deputed employee. It is important to note that courts, while dealing with a situation of ‘deputation’ have held that an employee of a parent company when deputed to another company does not become an employee of such other company because the employee hold a lien on his employment with the parent company, during the subsistence of which, he continues to be under the control andsupervision of the parent company [DIT vs. Morgan Stanley 292 ITR 416 (SC)].
A ‘secondment’ on the other hand, thoughalso involving transfer of an employee from the parent entity, is at slight variance fromthe concept of ‘Deputation’. Generally, in the case of ‘secondment’, the seconded employee remains under the control and supervision of the company to which the employee is transferred. Further, such company also bears the remuneration payable to the employee, in some form or the other. In essence, in the case of the secondment, though the parent entity remains the legal employer of the employee (on account of the fact that the employee may be on its rolls), the company to which the employee is transferred becomes the real and economic employer of the employee during the term of the secondment. It is important to highlight that the distinction between the concept of deputation and secondment is very fine and determination of the nature of an expatriate’s employment being a ‘deputation’ or a ‘secondment’ would require a detailed examination of the facts and circumstances of each case. Needless to mention, this issue currently is and remains contentious and open to further debate/discussion.

Courts in one instance have held that where an Indian company pays all expenses incurred by a foreign parent company towards employees seconded to Indian company, such payment, being pure reimbursement, neither can be regarded as income in hands of foreign company; nor would it amount to fees for technical services. Consequently, it held that reimbursement of salary costs to a foreign company under a secondment agreement does not involve a profit element and is not liable to income tax[Abbey Business Services (India) Private Limited, [2012] 23 taxmann.com 346 (BANG. – ITAT)].

However, an Indian court called the Authority for Advance Rulings (AAR),has held that salary reimbursement of seconded employee would be taxable as Fees for Included Services (normally characterised as FTS in other DTAA’s) (FIS) under the India-US DTAA and FTS under the Act [Verizon Data Service India Private Limited[2011] 337 ITR 192 (AAR)] (Verizon Case).

A similar view has been taken in Centrica India Offshore Private Limited[2012] 249 CTR 11 (AAR),which, inter alia, concluded that secondment of employees creates a Service PE of the foreign company in India.
It may however, be note that rulings given by the AAR are binding only on the applicant and are not binding precedents. Further, it may be noted that Verizon Case has been challenged and is currently pending adjudication before the Supreme Court of India.

The ‘make available’ proposition
As per the provisions of the India-US DTAA, for a payment (in consideration of any technical or consultancy service) to constitute FIS, such service should, inter alia, make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design (A consideration constituting FIS would be taxed as ‘Business Profits’ under the India-US DTAA).

Courts while analysing the ‘make available’ concept,have held that for technical knowledge, skills, know-how etc. to be regarded as ‘make available’, the following need to be satisfied:
(a) the service rendered should result in transmission of technical knowledge etc. so that the payer of service could be able to derive an enduring benefit; and
(b) the technical knowledge etc. of the service provider should be imparted to, and absorbed by the recipient so that the payer of the service can deploy similar technology or technique in future without depending on the service provider[Intertek Testing Services India Private Limited[2008] 307 ITR 418 (AAR)].

However, it is pertinent to note that the above understanding of ‘make available’ may not be considered settled as ruling of Perfetti Van Melle Holding B.V[2012] 342 ITR 200 (AAR)have significantly differed in the interpretation of the term ‘make available’.
Therefore, from a perusal of the above, it is palpable that, owing to the variance in the view of courts in interpretation of the legal propositions (relevant to taxability of expatriate employees), it would indeed be difficult to conclusively clinch this issue and establish a cut and dry formula for ascertaining the taxability of expatriate employees.

Characterisation: Intra Group or Shareholders Activity
The OECD Transfer Pricing Guidelines, 2010 (Guidelines), carves out a distinction between an ‘intra group’ service and a ‘shareholders’ service under the arms-length principle. An ‘intra group’ service, broadly, is a service which an enterprise can procure from independent entities but obtains from an associated enterprise. ‘Intra group’ services generally include those which are typically available externally from independent enterprises (such as legal or accounting services).

Under the arms-length principle, the question whether an ‘intra group’ service has been performed or not should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an ‘intra group’ service under the arms-length principle. Such activities include services for a particular type of operations, advice or in some case assistance in day to day management.
On the other hand, a shareholders activity would be one that a member of a group of companies (usually the parent company or regional holding company) performs solely because of its ownership interest in other group member companies, i.e. in its capacity as a shareholder.

Implications of TP Guidelines
In general, an activity performed by a group member company for another group member company would not constitute ‘intra group’ activity if it merely duplicates a service which such receiver company performs for itself.
An oft-seen industry practice is that parent companies deploy their personnel on foreign assignments to their subsidiaries for various purposes regardless of whether such subsidiary companies require such services. In such a situation, the act of deploying such personnel may very well constitute a ‘shareholders’ activity rather than an ‘intra group’ activity.The Supreme Courtappears to have suggested that ‘stewardship’ activities (which is a term similar to but wider than ‘shareholders’ activity) are essentially to safeguard or protect the interests of the receiver of the service[DIT vs Morgan Stanley and Others 292 ITR 416 (SC)].
Thus, in case an activity qualifies to be a ‘intra group’ activity, then it needs to be examined whether any payment for it to the provider company would constitute FTS or FIS.
Gagan Kumar is a partner in Krishnomics Legal, a New Delhi- based law firm specializing in corporate taxation. Gagan can be reached at gagan@krishnomics.in

By: V. K. Garg

India’s central and state governments have been holding discussions on the structure of a newly proposed Goods and Services Tax (GST). The proposed GST will be a comprehensive value-added tax, which is aimed at replacing the present system of myriad provincial and federal levies on the movement and sale of goods and services with a unified national VAT. The reform is considered important to prepare India as a common single market and remove a large number of tax distortions that hamper the competitiveness of Indian business.

A bill to amend the Constitution was introduced in Parliament in March 2011. The amendment is being evaluated by a parliamentary committee in consultation with stakeholders, including the states and potential tax assessees. The amendment can pass only if approved by a majority of the members of both houses of Parliament and two-thirds of those members present and voting. In addition, the amendment must pass by a majority of at least half the legislatures of the states. It would be highly desirable if the bill could be passed with overwhelming majority, if not complete consensus.

Indian GST is proposed to be a dual GST, with both the central and state governments levying, as well as collecting, their respective GSTs (to be known as Central GST and State GST) on an identical tax base. Since GST will be collected by two different tax authorities it is of the utmost importance to achieve a high level of uniformity and harmonization in business processes between centre and states, but more importantly across all the states. It is here that a number of issues need to be sorted out before the GST becomes a reality.
The paramount issue is that many states perceive that the proposed GST would restrict their fiscal autonomy to levy their own taxes or grant exemptions. This demand, though otherwise legitimate, needs to be balanced with the need to avoid both predatory competition and opportunities of tax arbitrage that are imminent if rates vary widely across borders.

States levy a plethora of taxes in the existing regime and any replacement of these taxes by GST has natural consequences, which are at times not fully palatable to the affected parties. Thus some states, who are rich in minerals or are centres of industrialization, are arguing that the amendment threatens their existing revenues from origin-based taxation on inter-state movement of goods, which is slated to be replaced with taxation on destination principle. Some others feel impacted by the possible abolition of a tax on the entry of goods in the geographical boundary of a local municipality.

Other issues have been raised by business. The foremost amongst these would be that GST should be far more comprehensive and include petroleum, electricity and alcohol (which are presently outside), so as to help business remove the impact of input tax that goes in the manufacture or sale of these products. Small business and retailers, who are presently handled exclusively by the state administration, are apprehensive of the dual control that may become inevitable when the two GSTs are imposed and collected by both centre and states.

Recent Consensus
Over the last few months much headway has been made in achieving a broad consensus on the various contentious issues. Centre and states are now agreeable to a standard rate as a floor rate, with autonomy to fix tax rates over and above this threshold within a narrow band. There will be a lower rate for necessities and a separate rate for bullion. Both rates are expected to be applied uniformly. There is agreement to allow states to grant additional exemptions beyond the standard exemptions for goods of local importance and to the centre, so long as the exemptions are applicable to the entire country.

An important understanding is the identification of the basic features of the GST, which will be implemented uniformly across the entire country. These will cover all the essential contours of the GST such as basic definition, taxable event, valuation, classification, provisions relating to time and place of supply, business procedures, input tax credit provisions, and the method of levying tax on inter-state transactions.
There is also broad consensus that petroleum products need not be kept out of the constitutional amendment, though they may not be subjected to GST to start with.

The issue of dual control has achieved a broad consensus with both sides working on a threshold below which tax-payers could be handled exclusively by state administration. A similar threshold could also be considered above which tax-payers could be handled exclusively by the centre.
Having achieved a broad consensus on the constitutional design of the GST, the states are seeking greater clarity on certain operational aspects before taking the final plunge. Three committees of officers drawn from centre and states have been tasked to submit their reports by the middle of May this year on aspects such as determination of the GST rate, standard exemptions and thresholds for exemption and eliminating dual control, place of supply rules and the IT design for inter-state supplies.

GST Network
A common IT portal, to be known as GST Network (GSTN), is being established as a non-profit company and its chairman has been recently appointed. GSTN will be owned with 51% equity participation by some leading private financial institutions and 24.5% with the central government and the remaining 24.5% with all state governments, equally distributed.

GSTN will provide the logistic support to carry out practically all the business processes relating to the actual implementation of GST. It will also serve as a clearing house to settle the tax dues between the states on the inter-state movement of goods and services.

Interstate Supplies Of Goods And Services
Unlike GSTs in many other parts of the world, India is attempting a nation-wide GST with seamless movement of goods and services and a near rarity with two separate tax collecting authorities. This would require that the tax chain remains unbroken when goods and services are supplied from one state to another.
Borrowing somewhat from global models, India is attempting its own version for taxing interstate supplies at a federal rate that will be sum of central GST and state GST. The federal rate on interstate supplies will be called integrated GST or IGST and will be collected at the point of origin. The state GST portion of the IGST will be transmitted to the state of destination through the mechanism of a clearance house.

IGST paid on inter-state supplies at the point of origin will be available as input tax credit at the point of destination. Rules of business allow the adjustment of IGST first to settle any liability on account of IGST on outputs and then to pay central GST and lastly state GST. As already mentioned a committee of central and state officers is looking into certain aspects of the new model so that it meets all the various diverse concerns on the subject.

Acclimatizing Business
The broad consensus achieved so far and ongoing work in the three committees is expected to be placed before the parliamentary committee evaluating the GST constitutional amendment bill.
Even as the constitutional amendment is under consideration, the federal government has been introducing some key changes under the existing central laws relating to indirect taxes. The aim of these early legislative proposals is to get a head start at this stage to acclimatize both businesses and tax administrators with the impending changes and thereby reduce the lead time once the constitutional amendment is passed.
The foremost amongst these changes has been the introduction of a negative list of services (i.e., a list of services that is exempt from service tax) in 2012, replacing the current list of specified services that are subject to service tax.

Services constitute nearly 65% of GDP. Yet the services sector contributed only about 25% in consumption taxes. The new changes are designed to eliminate overlapping definition of specific heads of services that were prevalent earlier, and at the same time significantly expand the tax base taking it closer to the contribution of services to GDP.

The centre had a list of 370 exemptions while the states had 99. This gap has been considerably reduced in recent times. In the area of imports it is now mandatory to declare the destination where goods are meant to be finally used so as to be able to reach the revenue in the GST scenario to the destination state.
Another major change is the introduction of Place of Provision of Services Rules in July 2012. As the federal government levies and handles service tax, the rules for now will mainly address cross border services and to a minor extent transactions with the State of Jammu and Kashmir, where the present statue does not apply. However, they are the harbinger for GST where the distribution of revenue from services amongst states will depend on the place of their consumption.

In this respect the new changes are consistent with international best practices. The default rule, which covers a large majority of business-to-business transactions, is entirely based on OECD guidelines that the place of supply is the location of the recipient.

The rules may undergo some changes when GST is finally introduced in light of the suggestions from the states. But the rules are expected to principally provide the basic framework for taking the discussion further.
Point of Taxation Rules were introduced earlier to align the time of taxation of services with international practices and to a considerable extent with accrual based taxation in the case of goods. The new rules provide that the time of taxation of services will be the time of issue of invoice or time of payment whichever is earlier. A period of 30 days (45 days for the banking industry) is provided to issue an invoice from the date of completion of service, failing which the date of completion of service will reckon as the time of taxation.

The 2012 Budget has largely adopted the OECD guidelines relating to neutrality about the distortive practice of businesses passing through their burden of taxes to the end consumer. Budget 2012 has removed cascading in a number of services like hotel accommodation, restaurants, construction, life insurance, transportation by railways by permitting utilization of tax credits that were earlier blocked by a rather complex system of taxation of partial values of such services. (Cascading taxes are taxes that must be paid at every stage in the supply chain, without any deduction for the tax paid at earlier stages.)

Voluntary Compliance Encouragement Scheme
Budget 2013 has recently proposed a new scheme to help service tax defaulters, who have failed to file their tax returns in the past, to make truthful declarations and pay their past dues without the burden of interest or penalties. The scheme will help many potential tax-payers who failed to approach the tax authorities in the past for the fear of being hauled up for past violations. This will set the stage for a smooth transition once the GST is rolled out.

On the whole, despite some delays in meeting the deadline, India is much closer to an eventual GST, and both businesses and tax administrators are far more confident about handling it when it is finally implemented. By recent indications, that date does not appear to be too far off.

The author is Joint Secretary with the Ministry of Finance, Government of India and heads its Tax Research Unit (“TRU”) in New Delhi. He is also a key member of the team assigned with the task of implementing GST in India. An officer of the Indian Revenue Services, he has nearly 30 years of experience in the design and implementation of indirect tax laws in India and is the recipient of the President of India Award for distinguished record of service. The views expressed are personal. The author can be reached at vkgarg111@gmail.com)

By Saloni Jain and Khushboo Sukhwani
Additional Contributions by Pooja Dutta

Trademark squatting is not new to the corporate world. Virtually every industry has been affected by trademark squatting and trademark cyber-squatting. Trademark squatting refers to register-ing names similar or identical to popular trade-marks, with the intent to extort the trademark holder.

Like the People’s Republic of China, India has a “first to file”—as opposed to “first to use”—registration system. Under China’s Trademark Law of 1983 and India’s Trade Marks Act of 1999, “first to file” rule, where two or more applicants apply to register identical or similar trademarks for use on the same or similar goods or services, the first application for registration will be awarded the trademark.

The failure of owners of well-known global trade-marks to file them promptly in China and India when trade relations thawed in the early 1990s opened the floodgates to trademark squatting in both countries. Global trademark owners are be-ginning to pay for their failure to file promptly and are now have to deal with squatters if they want to exploit opportunities from growing consumption demand in both countries. In addition to exploiting the “first to file” law, trademark squatters in India take advantage of the carelessness of trademark owners in failing to register their trademarks, their unwillingness to enforce their rights, and the country’s poor enforcement mechanism.
An exception in China to the “first to file” rule is if the mark, whether registered or not, is a “well-known” mark. Proving notoriety, however, can be an uphill task. A “well-known” mark in China is one that is widely recognized in China and enjoys a positive business reputation with the Chinese public. Prior to 2002 only trademarks registered in China could qualify for “well-known” status but in 2002 an interpretation of the Supreme People’s Court extended “well-known” mark protection to marks that were not registered in China. In general, Chinese courts have broad discretion over interpreting the meaning of “well-known” and tend to favor Chinese businesses over foreign companies whose products may be widely recognized and enjoy a positive business reputation in China.

While Article 14 of China’s Trademark Law defines a “well-known” mark, the law is enforced under the Anti-Unfair Competition Law (UCL). The UCL prohibits the unauthorized use of a name that is identical or substantially similar to a well-known brand name, especially when that use causes consumer confusion. There are, however, cases where “well-known” global brands have lost out to Chinese entities who have registered their trademarks first in China. For instance, a Shanghai snack maker successfully took the name and logo of the popular computer game “Angry Birds”.

In order to satisfy China’s “well-known” standard, the trademark owner must demonstrate public recognition of its trademark in trading areas, the duration for which the trademark has been in use, the duration and extent of its advertising and the geographical areas the advertising has covered, the records of protection it has gained as a well-known trademark; and any other factors establishing that the trademark is well-known.
India, too, has the “well-known” standard. How-ever, this requires lengthy and expensive litigation which can be avoided by the simple expedient of registering the trademark in India. Registration is prima facie evidence of ownership.

Furthermore, unregistered “well-known” trade-marks in India, or internationally, are also pro-tected against misuse in India under common law, but, again, the burden of proving that a brand is “well-known” lies with the owner. Registration, of course, is the best proof. Relying on India’s backlogged judicial system to protect and enforce non-registered trademarks is inadvisable simply because the owner might have to wait for over a decade for its day in court, let alone a judgment in its favor.

India also has a “transborder reputation” rule. For example, Walmart challenged a Delhi-based Indian firm which infringed its trademark by using the name Wal-Mark. Wal-Mart was successful in obtaining an injunction because it had a preexisting transborder reputation. The Wal Mart decision followed the finding in the case of NR Dongre and Ors v Whirlpool Corp. (1996 VIAD SC 710), where Whirlpool successfully argued that its lapsed trademark registration should be over-looked given the transborder reputation of the Whirlpool name. Transborder reputation, however, is a difficult standard to satisfy, and it can be costly, and time-consuming to have a squatter’s registration canceled based on this ground.

In part to counter squatting, India also introduced the “propose to use” standard, which, ironically, has had the opposite effect. The “propose to use” provision is similar to the U.S.’s “intent to use” rule. India’s “propose to use” provision provides that no prior use of that mark is required for its registration. The provision allows a brand owner to get its mark protected by registering it in India even though the owner is not using it and merely intends to do so in the future. Again, however, a continued lackadaisical attitude in registering has opened the door to trademark squatters who register under the “propose to use” provision first.

Immediate trademark registration should be a critical priority for any brand wanting to enter the Indian market. Registration is a relatively inexpensive alternative to litigation.
India does have an alternative to taking the squat-ter to court. The Ministry of Commerce has a trademark dispute resolution mechanism for registered trademarks. In what could be worrying news for businesses, however, the Commerce Ministry disclosed in 2011 that it had over 126,000 trademark dispute cases pending and lacked the manpower to examine them.

DOMAIN NAME SQUATTING IN CYBER SPACE

Trademark owners also face cyber squatting or domain name squatting—a problem not limited to China or India. Cyber-squatting involves simply registering a domain name similar or identical to a well-known and/or registered trademark with the intent to take advantage of the goodwill in that trademark.
India has witnessed many instances where the do-main of well-known trademarks are registered by squatters in the hope of selling them to the owners of those marks (or rival owners) or simply to take advantage of the reputation attached to those marks. Domain names are valuable intellectual property for every company in every industry. With the advancement of internet communication the domain name may be as important as a trademark.
In a case that was arbitrated by the World Intellectual Property Organization’s Arbitration and Mediation Center, Armani claimed that an artist who registered the domain name armani.com was a trademark squatter. In his defense, the artist argued that his name was Mani, and his first two initials were A.R., which entitled him to register his domain named as ARMani.com. The arbitrators ruled in A.R. Mani’s favor as he had registered the trademark before Armani. The arbitrators also found that Mr. Mani had made reasonable counteroffer to Armani’s original offer to buy the domain name from him. G. A. Modefine S.A. v. A.R. Mani, Admin. Panel Decision, Case No. D2001-0537 (2001).

In 2005 the .IN Registry was created in India by the National Internet Exchange of India to protect domain names with an “.in” extension. But it remains the duty of the trademark owner to protect its trademark from any kind of infringement. For instance, http://www.walmart.in, http://www.cnn.in and http://www.rediff.in are not owned by the respective companies. Several companies have had to face lengthy disputes before obtaining injunctive relief against squatters. E.g., Yahoo! Inc. v. Akash Arora, 1999 PTC (19) 201 (Delhi).

In conclusion, companies entering or planning to enter the Indian market must take the following precautionary measures:

• File early, File often. India’s “propose to use” system for trademark registration, combined with the trademark office’s backlog, makes it essential for brand owners to file a trademark well in advance.
• The cost for the registration of a trademark in India is comparatively low and minuscule com-pared to the cost of litigation.
• Register not just the English-language brand name but also Indian versions of the brand name (which may be more popular in the local market than the English equivalent).
• Due to India’s class filing system, companies need to protect their brands across all sectors, not just those in which they are active. The World Intellectual Property Organization website shows that there are 34 classes of goods and 11 classes of trademark registration in India. This limits the potential for a trademark squatter to register trademarks associated with non-traditional products.
• Subscribe to a trademark watching service that will monitor trademark applications in India. Various firms provide this service for the Indian market.
• Last but not the least, register the domain name with all the major gTLDs (generic Top Level Domains).

Saloni Jain and Khushboo Sukhwani are second year students at National Law University, Delhi. They can be reached at
khushboo.sukhwani11@nludelhi.ac.in and
salonijain195@gmail.com.

Pooja Dutta is a partner in LawQuest, Mumbai, specializing in intellectual property, bankruptcy and immigration law. She can be reached at pooja@lawquestinternational.com.

By Rupak Saha, Girish Gurnani, Amit Rana

India’s aggressive source-based taxation approach is clearly manifest in its attempt to tax much of the outbound remittances from the country, particularly those made under the “current account”. Any consideration paid for imports into India of goods and services, including usage and other licenses, are closely scrutinized by the Revenue to determine whether the resulting income, or part thereof, can be argued to have been sourced from India. These have often led the Revenue to make startling tax claims against foreign recipients of such income or on their Indian payers. Often, Revenue makes the kinds of creative claims that would not find support in any tax regime.
The controversy has focused on the taxability of cross-border software license fees. Revenue initially adopted its position without any significant support in law, and contrary to international practice. Predictably, with few exceptions, the Indian courts ruled in favor of taxpayers in a number of cases. The controversy was expected to reach the Supreme Court of India for a final adjudication, but the law was changed earlier this year in an ungainly attempt by Parliament to legitimize Revenue’s contention. Worse, the changes were made applicable retroactively, along with multiple other retroactive and regressive amendments. Not surprisingly, the Government of India has faced a barrage of criticism for its tax policy in the past few months from investors and businesses. Fortunately, this criticism has caused the government to reconsider its position and has resulted in the convening by the Prime Minister of an expert committee (the “Rangachary Committee”) to make appropriate recommendations for the Government to correct its course. (N. Rangachary is a former chairman of the Central Board of Direct Taxes as well as of the Insurance Development & Regulatory Authority.)

The controversy over software relates to whether cross-border payments for use of standardized computer software (often referred to as shrink wrap) is a royalty under the Indian Income Tax Act of 1961 and provisions of tax treaties. The purchase of standardized software (such as operating systems like Windows or applications like MS Word) is accompanied by a license which entitles the buyer to use the software and protects the intellectual property (IP) of the seller by restricting any copying, modification or exploitation of the software.
Under the Act, as it stood before the recent amendment, royalty was defined as a consideration paid for the transfer of any or all rights in a copyright (including the right to grant license). Revenue has contended that the retrospective amendments have clarified that a transfer for use of software generates a royalty. India’s tax treaties, however, contain different language and do not consider a transfer for use to be a transfer of rights in the copyright in software. Accordingly, taxpayers have argued that payments for licenses for use of any software where the seller retains the right to exploit the copyright commercially, do generate a royalty under the Act and most tax treaties.

Revenue has argued in court that a payment under a software license is a royalty because it is a consideration for a right to use the copyright in the software. Taxpayers have argued conversely that the payment for use of a license of software is a consideration for the use of the software (i.e. the copyrighted product), and not the copyright in the software, and hence it cannot be considered as royalty. In short, taxpayers have argued that a license to use software does not convey the ownership rights in the copyright of the software. This is consistent with the view of the OECD and with most international tax jurisprudence.

In the case of CIT (International Tax), Bangalore v. Samsung Electronics Co Ltd (ITA No. 2808 of 2005), which is the leading case supporting Revenue’s view, the Karnataka High Court (Bangalore) held that under section 14 of the Indian Copyright Act, 1957, the right to make a copy of software is considered a right in the copyright. Therefore, the copy created by a user licensee of software to use the software in his computer system is the exercise of a right in the copyright. Hence the consideration to the licensor should be regarded as royalty. Section 52 of the Copyright Act, however, provides that making a copy for use or backup of software is not considered an infringement of rights in a copyright. Under sections 14 and 52 of Copyright Act, the right to create a copy is a right in the copyright, but creating a copy for one’s own use or backup (versus copying for commercial exploitation) is not considered an exercise of the copyright.

Recently, the Delhi High Court took a different view. In DIT v. Nokia Networks OY (TS-700-HC-2012 [Delhi]), the court distinguished between the copyrighted article and copyright. It held that payment received by a foreign company for sale of software to run a telecommunication system in India is not taxable as a royalty, despite the retrospective amendment to the Income Tax Act, 1961, because the applicable double tax avoidance treaty (in this case with Finland) did not view such a transfer as a transfer of the copyright in the software. Nokia contradicted Samsung, without specifically referring to it.

Parliament’s amendment of the Income Tax Act, 1961, to retroactively define all payments for a license to use software as a royalty, even where the purchaser only makes a copy for his or her own use, and even where no rights in the underlying copyright are in any way commercially exploited, has only created more uncertainty and controversy.
The most important issue, of course, is the regressive impact of the retrospective nature of the amendments. A more compelling concern is whether the retroactive aspects of the amended law will apply to India’s tax treaties. In Nokia Network OY, the Delhi High Court made note of the retroactive changes in the Act but agreed with taxpayer that the law’s retroactive provisions did not apply to the India-Finland Tax Treaty.
Virtually all tax treaties contain interpretation provisions which state that terms undefined in the treaty will take meaning from domestic law. Fortunately for the taxpayer, royalty is already defined in most of India’s tax treaties, as it was in the tax treaty with Finland. There is little cause for concern that the retroactive nature of the amendment will apply to India’s tax treaties. Yet some fear that Revenue will find ways to argue that royalty is not defined in tax treaties. While the Nokia judgment held that the amendment cannot apply to tax treaties, there is no sufficient reasoning and analysis behind this conclusion, which may open the door to Revenue continuing to litigate the issue.

The retroactivity of the changes have been decried by investors in India and internationally. Despite India’s respected judiciary, which largely keeps some of Revenue’s excesses in check, the tax regime has generally been perceived negatively by investors. Such retroactive changes, which seem to be undertaken on tax collection considerations alone, do not help to alleviate such negative perceptions, and indeed, defeat other positive steps the Government of India takes to improve investor confidence.

India, like many countries, is plagued by government deficits. It is also a major importer of software. Most will agree that software imports should be taxable. Few can legitimately object to the Government’s determination to garner as much tax revenue as it can from this source. Businesses expect to pay taxes, but require certainty, clarity and adequate advance notice for such taxes so that they can be factored into their business decisions. If prospective changes are made in the tax laws, businesses can take an objective view on whether they want to continue to operate in the Indian market. But retroactive application of newly enacted laws is bad policy simply because it destroys business confidence. Retroactive laws in business matters are no different from arbitrary laws. No one doubts the Government’s ability to flex its muscle by cobbling together a majority in Parliament to enact laws to retroactively override judicial interpretation of longstanding statutory law. But the Government should consider that its victories in passing retroactive laws may merely be Pyrrhic ones. Retroactive legislation destroys business confidence.

The Rangachary Committee, officially known as the Committee to Review Taxation of Development Centres and the IT sector, is to look into issues faced by the IT sector, including the taxability of software. (“Development Centres” are where many multinational corporations carry out research and development activities). As the Rangachary Committee ponders its recommendations it would do well to be mindful that global software vendors are unlikely to accept Indian taxes on their receipts from Indian customers.

Indeed, Revenue may simply not see the kind of tax receipts it hopes for because global software vendors are certain to pass through their Indian tax obligation to the Indian importers. This may well add to Indian industry’s costs sufficiently to slow growth in information technology and outsourcing both of which are large importers of software. More than that, the Government seems oblivious to the possibility of retaliatory taxes by other countries, as happened with Japan a few years ago.

Finally while India has, and must chart, its own tax policy, it cannot afford to isolate itself from tax norms around the world. Availability of capital is scarce, and India needs to be sensitive to how such capital is being allocated. India needs to be aware that it lives in a competitive world. In short, India needs to be cognizant of how other capital importers are conducting their tax regime and whether India is straying violently away from the mainstream.

Amit Rana is Vice President, Tax, at GE India based in Gurgaon and is responsible for direct / indirect taxes for multiple GE businesses in India including aviation, energy and financial services. He can be reached at amit.rana@ge.com

Girish Gurnani is Vice President, Tax at GE India, based in Gurgaon, and is responsible for various industrial business. He can be reached at girish.gurnani@ge.com

Rupak Saha is India Tax Head for GE India / GE capital businesses, based in Gurgaon. He can be reached at rupak.saha@ge.com

By Sujit Ghosh and Sudipta Bhattacharjee

In 1789, Benjamin Franklin wrote to Jean-Baptiste Leroy that “…in this world nothing can be said to be certain, except death and taxes.” At that time, he would scarcely have realized how much of an anachronism his comment about the certainty of taxes would become in years to come. With the economic downturn in the recent years and the consequent aggressive attitude of tax administra-tors, particularly in emerging economies like India, it would not be an exaggeration to state that the only thing certain about taxes today is the uncertainty of its application.

Given this backdrop, a holistic and more pro-active approach to tax controversy management becomes necessary. In fact, the concepts of tax controversy management now ought to be firmly entrenched in the realm of corporate governance. This article aims to shed light on few key aspects of tax controversy management specific to India that would be relevant for multinational companies that are operating in India or are even exploring opportunities or finalizing business plans for investment into India.

Tax controversy may broadly arise out of three areas: (i) tax authorities disagreeing with tax posi-tions adopted by a company on legal grounds; (ii) tax authorities disagreeing with tax positions adopted by a company on account of erroneous contract drafting that does not reflect the intended tax positions; and (iii) difference in interpretation of tax clauses in a contract.

I.CONTROVERSIES ARISING OUT OF TAX AUTHORITIES DISAGREEING ON LEGAL GROUNDS WITH TAX POSITIONS ADOPTED BY A COMPANY

In a country like India, with an increasingly aggressive tax administration, any tax position that does not literally emerge from the language of the statute tends to be disputed by the authorities. Given the multiplicity of taxes, this problem gets magnified manifold in the realm of indirect taxes in India (e.g., there are federal taxes like the customs duty, excise duty and service tax that are regulated by the Central Government, state-level taxes like VAT and entry taxes, and federal taxes/cesses like Central Sales Tax and Building Cess, which are administered by the respective State Governments). Given the large number of tax-jurisdictions, tax controversy management is essential.

1.Document The Rationale Behind Every Tax Position

The first step towards sound tax controversy management is to document the rationale behind every tax position. For any tax position that does not seem to be supported by a simple literal interpretation of the relevant tax statute, a legal opinion ought to be obtained explaining the legal basis behind such a position. These opinions help to establish the bona fides of a taxpayer, should litigation be initiated by the various State/Central Government tax authorities (referred to hereinafter as “Revenue”). In addition, detailed disclosures should be made to the relevant tax authorities about any such tax position, along with reference to a supporting legal opinion.

The fact that a legal opinion has been obtained should be disclosed to the tax authorities even if the actual opinion is not actually provided. In a decision of the Central Excise and Service Tax Tribunal (“CESTAT”) in the case of Poonam Spark Private Limited v. Commissioner of Central Excise, (2004 [164] E.L.T. 282 [Tri. – Del.]), the Tribunal found that the taxpayer had not acted in good faith, as the legal opinion obtained by him in support of its tax position was never mentioned or disclosed to the authorities.

It is also always prudent to make clear and cogent disclosures in tax returns, about the sensitive tax position that a taxpayer may have adopted. Statu-tory return formats, however, often do not provide space for such disclosures (as most returns are now being required to be filed electronically). In such cases, it is always advisable to submit a print of the return and attach a covering with appropriate disclosures, and file it with the tax authorities.

These steps help establish the bona fides of the tax-payer before a court/tribunal and avoid penalties even if the court rejects the tax position. For example, in a CESTAT decision in the case of Mangalore Chemicals and Fertilizers v. Commr. Of Cent. Excise (2009 [248] E.L.T. 647), timely declarations by the taxpayer went a long way avoiding penalties. Establishing bona fides in this way also helps prevent the tax authorities from invoking the draconian extended period of limitation which could result in re-opening tax positions taken by the taxpayer over the previous five years.

2.Obtain Advance Rulings On Key Tax Positions

Having taken care to establish bona fides, the second step in tax controversy management is to try to obtain confirmation of the tax position adopted. The following options are generally available under most tax statutes.

Advance Rulings For Federal Taxes

For federal taxes (like Income Tax, Customs, Excise, and Service Tax), a foreign company exploring the option of setting up a business in India can approach the Authority for Advance Ruling (“AAR”), based in New Delhi, for an advance confirmation of its critical tax positions.

While the process may take about six months, it may be time well spent, given that it provides the foreign company with some certainty. Conversely, an adverse advance ruling becomes binding on the taxpayer without any statutory appeal and the only option in that case would be to approach the jurisdictional High Court (the highest court in a State) for a writ remedy against the AAR’s order.

From a practical standpoint, this option should be exercised only when there is an obvious ambiguity with regard to applicability and/or interpretation of any provision of law. That is to say, it is never a good idea to seek such a ruling in cases where the interpretation is clear and unambiguous. A negative ruling in such cases, could cause more hardship than any benefit to the applicant.

Advance Rulings Under State VAT Laws

Most State VAT statutes also provide for similar advance ruling mechanisms through what is com-monly known as ‘Determination of Disputed Questions’ (“DDQ”). While, these are not as effective as the AAR, the DDQ route can be used effectively to engender certainty with regard to State VAT positions.

Ground level officers of the tax department are often less receptive to a nuanced tax position – more so with respect to State level taxes like VAT. Often, proper appreciation of the legal basis behind a nuanced VAT position is found only at a High Court level or Supreme Court Level. Given that DDQs are usually administered by State VAT authorities such DDQs are tilted against the taxpayer.
However, even such negative results may provide the taxpayer (tactically) a quicker and out-of-turn access to the High Court for a proper appreciation of the legal arguments and a confirmation of the taxpayer’s position. That is the real value proposi-tion of the DDQ process. To elaborate, ordinarily, before a question of law can be raised before the High Court, a taxpayer must exhaust all alternate remedies available under the tax statues, such as tax assessment, departmental appeal, tax tribunal, among others. This means that the lead time for a taxpayer before it can approach the High Court in the regular appellate procedure could be anywhere between four to six years. Such a long lead time can be truncated, however, by opting for the DDQ route. Appeal from a DDQ ruling handed down by the Commissioner of VAT lies directly to the High Court via writ petition.

(i) Formal clarifications

Unfortunately, the option of seeking an AAR ruling or DDQ is often restricted to prescribed/defined sets of issues (such as taxability of transactions, the applicability of a given tax exemption). For the remaining universe of issues, there are no institutionalized mechanisms for upfront quasi judicial/judicial confirmation.

In these cases, one of the options available is to seek a written “administrative clarification” from the Revenue. For example, Section 37B of the Central Excise Act authorizes the Central Board of Excise and Customs (“CBEC”) to issue orders, instructions and directions “for the purpose of uniformity in the classification of excisable goods or with respect to levy of duties of excise on such goods”.

Such clarifications are binding on the Revenue, though not on the quasi-judicial/judicial authorities and the taxpayer. That is to say, once a clarification has been obtained, the Revenue cannot take a view contrary to the clarification to the detriment of the taxpayer concerned.

Strategically, seeking such a clarification also serves two additional purposes.

First, if a clarification issued by the Revenue is patently erroneous in law and against the taxpayer’s interest, a writ petition can be filed before the High Court and a quick and out-of- turn resolution to the tax issues can be expected. However, if no such clarification was ever obtained, the taxpayer would have had to exhaust all alternate remedies available under the tax statutes, such as tax assessment, departmental appeal, and tax tribunal, before it is permitted to approach the High Court. This means, while the lead time for a taxpayer before it can approach the High Court in the regular appellate procedure is anywhere between four to six years, such a long lead time can be entirely circumvented by adopting this route, thereby enabling expeditious dispensation of justice

Second, even if a clarification is not provided by the Revenue ( for any reason) despite the taxpayer having approached them, the efforts undertaken in obtaining such a clarification helps to establish the bona fides of the taxpayer before a tribunal/court and thereby shields it against any penal implications at a later date.

(ii) Advance Pricing Agreements (“APAs”)

While provisions to facilitate execution of APAs were introduced in the Income Tax Act, 1961 (‘Act’) through the Union (Federal) Budget of 2012, the framework for the APA scheme was announced relatively recently through a circular dated August 30, 2012, by the Central Board of Direct Taxes.

APAs provide a method for taxpayers (having cross-border transactions with ‘related parties’) to agree on a price, method or assumption. Interna-tionally, APAs have been effectively used by the tax administration and large entity taxpayers to come to an understanding regarding an arm’s length price in advance of implementing a transaction, and can go a long way in curbing transfer pricing litigation in India

(iii) Mutual Agreement Process (“MAP”)

In case of disputes arising out of interpretation of Double Tax Avoidance Agreements (“DTAA”), a taxpayer seeking treaty relief has the alternative option of approaching the Competent Authority located in its home jurisdiction. Such Competent Authority would then negotiate with the Compe-tent Authority of the counter party State to arrive at an amicable solution. Once such a proceeding has been initiated, any dispute with the Reve-nue/appellate authorities regarding the assessment year in relation to which MAP has been initiated would be kept in abeyance. Further, tax demands also get stayed in context of Indo US/ UK treaties.

The outcome of MAP, however, is not binding on the taxpayer, although it is binding on the Revenue. The advantage of MAP is that it bypasses protracted litigation with the domestic tax authorities and multiple appellate forums and thus achieves a quicker resolution of disputes.

(iv) Payment of tax under protest

Payment of tax/ duty under protest is another op-tion which can be exercised under indirect tax laws. By opting to pay the tax under protest the taxpayer can mitigate the interest and penalty implications that may arise if the tax position adopted by the taxpayer is subsequently overruled by the appellate bodies. It also assists in triggering a tax-related cause of legal action. Once the tax has paid under protest, the Revenue would be forced to initiate tax proceedings against the taxpayer. Such early initiation of tax proceedings helps in early resolution of the dispute.

3.Best Practices To Manage Tax Litigation Optimally

If efforts to obtain advance confirmation of a tax position fail and tax litigation becomes unavoida-ble, some of the best practices during litigation are as follows:

(i) Capturing factual subtleties comprehensively at the first adjudication stage

Tax litigation in India typically commences through a show cause notice from the tax authorities. In response to the show cause notice it is important to set forth all the factual nuances of the matter, including relevant references to underlying documents like contract clauses, invoices, tax payment receipts, books of accounts. The probability of success in tax litigation depends on how clearly the facts have been presented before the tax authorities/adjudicating forums. If all the facts have not been introduced at the lower adjudicatory level, it is generally impermissible to introduce such facts at the higher appellate stage.

(ii) Effective usage of writ remedy as a tax contro versy management tool

State High Courts in India are vested with the power to issue writs and directions to any person or authority, including any Government within their territorial jurisdiction. Unlike the Supreme Court of India, High Courts are not limited to en-forcement of fundamental human rights guaran-teed under the Constitution. The write jurisdiction of the High Courts extends to “any other purpose” as set forth in Article 226 of the Constitution. Similarly, under Article 227, High Courts have been granted a power of superintendence over “all courts and tribunals” in their territorial jurisdiction.

Thus, Article 226 read with 227 of the Constitution of India, grants wide powers to the High Courts, and taxpayers can use this avenue effectively for tax controversy management. Typically High Courts are reluctant to interfere in tax matters un-der Article 226 and 227 because of the existence of alternative remedies. However, as was held in Asst. Collector, Central Excise v. Dunlop India Ltd., AIR 1985 SC 330, 332, the High Court can intervene where“statutory remedies are entirely ill-suited to meet the demands of extraordinary situations, as for instance where the very vires of the statute is in question….” The types of writ remedies usually pertinent for tax matters are certiorari and mandamus.

Occasionally, clarifying circulars/instructions are issued by tax authorities that are patently against the statutory provisions. Statutory appellate pro-ceedings will not remedy such clarifying circulars and aggrieved taxpayers should not hesitate to explore writ remedies to challenge them. Another instance where writ remedy may be appropriate is where the taxable base under Central and State taxes overlap, leading to a potential exposure to double taxation. Software is a typical example where, in some transactions, State VAT and Service Tax are being assessed and paid on the same taxable base. Writ remedies are also useful when there are apparent contradictions between legislations. For example, the scope and extent of tax benefits envisaged under the laws governing Special Economic Zones often contradict the relevant provisions under the respective tax statutes.

The High Courts’ power of superintendence over lower courts under Article 227 also opens up ave-nues for remedy if faced with an adverse order from a tribunal under the relevant High Court’s territorial jurisdiction.

Until very recently it was not clear whether writ remedies against an AAR order could be pursued in a High Court or only before the Supreme Court. It is only through the recent judgment by the Supreme Court in the case of Columbia Sportswear [2012 (7) SCALE 53] that the issue stands settled in favor of High Courts having jurisdiction.
While challenging a ruling from the AAR, the question of which High Court to approach becomes contentious at times. The Delhi High Court appears an attractive answer because the AAR is located in Delhi. However, if the aggrieved party is located in another State, the High Court of that State may be an appropriate forum as well. In the case of GSPL India Transco Limited [2012-TIOL-665-HC-AHM-ST] the Gujarat High Court issued writ remedy to the aggrieved party (based out of Gujarat) against a patently erroneous AAR order.

(iii) Doctrine of Precedence (and risk of blind application of past decisions) & Doctrine of Merger

Under Article 141 of the Constitution of India, law declared by the Supreme Court has the status of the law of the land and binds all judicial forums. Consequently, taxpayers rely upon Supreme Court precedent when taking a tax position or embarking upon tax litigation with the Revenue.

However, the doctrine of precedence has several exceptions, which ought to be factored by a taxpayer, before it relies on the same. These exceptions are as follows:

• Reversal of the decisions
• Overruling of the decisions
• Refusal to follow
• Distinguishing the decisions on facts
• Per in curiam- when a judicial decision has been rendered without considering a binding court decision/ legal provision
• Precedent sub silentio
• Inconsistency with earlier decisions of higher courts
• Inconsistency with earlier decisions of the same rank
• Decisions of equally divided courts

With respect to the sub silentio precedent, Supreme Court in MCD v. Gurnam Kaur [AIR 1989 SC 38] lucidly explained this as follows: “The Court may consciously decide in favor of one party because of point A, which it considers and pronounces upon. It may be shown, however, that logically the court should not have decided in favor of the particular party unless it also decided point B in his favor; but point B was not argued or considered by the court. In such circumstances, although Point B was logically involved in the facts and although the case had a specific outcome, the decision is not an authority on Point B. Point B is said to have been passed sub-silentio.”

At times, both the taxpayer and the Revenue use the route of filing “Special Leave Petitions (SLP)” before the Supreme Court to challenge the order of a lower court. The Supreme Court is selective in granting the leave to appeal under the SLPs. It is often argued that rejection of an SLP against a lower court order denotes a stamp of approval by the Supreme Court of such lower court order

Such an argument would is only partially correct. The concept of the doctrine of merger (i.e., when the decision of the lower courts merge with that of the higher court), does not apply to cases where the SLPs have been dismissed whether by a speaking or non-speaking order. Therefore, taxpayers would be taking a great risk in relying on such dismissals to argue that the decision of the lower court in a given situation has, in effect, been affirmed by the Supreme Court. Moreover, the doctrine of merger cannot be invoked unless SLPs are admitted and converted into civil appeals and such civil appeals are disposed of on merits by the Supreme Court.

II. TAX CONTROVERSIES ARISING OUT OF TAX AUTHORITIES DISAGREEING WITH TAX POSITIONS ADOPTED BY A COM-PANY ON ACCOUNT OF ERRONEOUS CONTRACT DRAFTING

Tax controversies of this nature are common and arise wherever the tax and legal departments in companies work in silos. While the legal depart-ment is in charge of finalizing the contract and the tax team is in charge of the tax positions, often, tax nuances that ought to have been incorporated in the contract slip through the cracks and later get challenged by the tax authorities. It is important, therefore, that the tax team articulates the key imperatives of the tax positions/planning options factored by them to the legal team, who in turn should ensure that such imperatives are duly articulated in the contract documents.

III. TAX CONTROVERSIES BETWEEN PRI-VATE PARTIES ARISING OUT OF DIF-FERENCES IN INTERPRETATION OF TAX CLAUSES IN A CONTRACT

Tax controversies between private parties arising out of different contractual interpretation are common and often lead to significant time and cost expenditures in negotiations, arbitration proceedings, and court proceedings. While these proceedings may not be completely avoidable, effective mitigation is possible to a large extent by comprehensive documentation of tax planning options and a commercial understanding between the parties on key tax points. The biggest areas of dispute arise out of interpretation of clauses dealing with change in tax laws/statutory variations and the extent of reimbursement of taxes. In this context, the following key points are critical to be documented in a lucid and comprehensive manner to avoid future disputes:

(i) What are the taxes to be borne by each party?

(ii) If the contract price is to include all taxes, does it also include taxes which are statutorily payable by the customer (such as service tax on a reverse charge basis, customs duty etc)? If yes, that should be clearly specified along with the necessary modus operandi (for example, would customs duty or service tax paid on a reverse charge basis by a customer be deducted from future payments to be made to the contractor);

(iii) For taxes/cesses such as entry tax and building cess which can be the statutory liability of either the customer or the contractor depending on various factors, who bears the responsibility?

(iv) For taxes that would be reimbursed by the customer, what would be the basis for such reim-bursement? What sort of documentary proof would be required?

(v) If certain tax benefits have been factored which are contingent upon specific certifica-tion/documentation requirements, who bears the risk of non-availability of such certifica-tion/documentation? In general, who bears the risk of the tax positions?

(vi) The scope and extent of the clause dealing with impact of change in tax laws ought to be comprehensively documented:

a. The contract should clearly indicate whether it includes change in taxes only for direct transactions between the contracting parties or whether sub-contract level change in taxes would also be covered;

b. Ideally, for the critical taxes in a high-value contract, there ought to be a detailed price schedule specifying the quantum and rate of such taxes factored on the date of the contract, so that calculation of impact of change in tax laws is easier;

c. If the contract in question spans over a 2-3 year period, it needs to be documented as to who bears the risk of big-ticket tax reforms like introduction of the Direct Taxes Code, comprehensive Goods and Services Tax etc and how these changes are to be dealt with;

d. What constitutes a ‘change in tax laws’ needs to be very clearly discussed and documented to avoid future disputes.

Section 64A of the Sale of Goods Act, 1930 provides for indemnification of affected party on imposition/ remission or increase/ decrease of customs/excise duty and tax on sale/purchase of goods, subject to a contract to the contrary. In fact, in the recent decision of Pearey Lal Bhawan Association (2011-TIOL-114-HC-DEL-ST), the Delhi High Court relied upon Section 64A to decide a civil money suit for claim of service tax not originally envisaged under the contract and overruled a specific contractual clause mandating the lessor (i.e., the service provider) to bear all the “municipal, local and other taxes”. By doing so, the Delhi High Court has effectively, extended the concept of Section 64A to service transactions as well. Thus, failing to clearly document the impact of ‘change in tax laws’ may lead to unforeseen consequences in a litigation/arbitration.

CONCLUSION

While complete mitigation of tax controversies would not be possible in today’s dynamic business environment, the best practices outlined above would help optimize tax controversy management in India. What is required is an integrated and pro-active approach to crystallize the concepts and best-practices of tax controversy management as a part of the overall corporate governance framework.

While it is true that “justice delayed is justice denied”, often times what is also practiced by the judiciary is the concept of “justice hurried is justice buried”. Therefore, the art of Indian litigation management is perhaps to imbibe the virtues of “patience, coupled with some of the best practices mentioned in this article”!

Sujit Ghosh is a Partner at BMR Legal and leads the tax litigation practice of the firm. He has over 17 years of experience in the field of taxa-tion. He specializes in indirect taxes (Customs, VAT, service tax and Excise laws) and is an in-dustry expert in the Power, Aviation, Defense, and Infrastructure Sectors. He is admitted to the Bar Council of Delhi and is an arguing counsel before various quasi-judicial and judicial forums including the Supreme Court of India. Sujit can be contacted at Sujit.Ghosh@bmrlegal.in.

Sudipta Bhattacharjee is an Associate Director with BMR Legal and has significant experience in advising clients in the Infrastructure Sector. He has over seven years of experience in the field of taxation. Sudipta can be contacted at Sudipta.b@bmrlegal.in.