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.

By Aseem Chawla, Aurica Bhattacharya, and Priyanka Duggal

On February 28, 2011, India’s Finance Minister, the Honorable Pranab Mukherjee, unveiled the Finance Bill, 2011, which would make a number of significant changes in Indian tax law.  The changes proposed in the Finance Bill, 2011 also aim in facilitating the introduction of the planned Direct Taxes Code (“DTC”) and the Goods & Service Tax (“GST”).

The DTC proposes to introduce a modern and lucid direct tax legislation scheme aligned with internationally accepted best practices.  In addition, the proposed GST represents an ambitious plan to subsume most indirect tax legislation, including but not limited to the central excise, service tax, and value added tax.

Direct Tax Proposals

With respect to direct taxes, the Bill proposes a marginal increase in the basic exemption limit for individual taxpayers.  While the rate of surcharge would be reduced from 7.5% to 5%, the proposed increase in the minimum alternate tax from 18% to 18.5% could hurt industries, particularly those eligible for tax holiday incentives.  The Bill also extends the applicability of minimum alternate tax to include hitherto exempt special economic zone developers and units.  Furthermore, special economic zone developers would be subject to a tax at the rate of 15% on dividends distributed to their shareholders.

The Bill also seeks to introduce an alternate minimum tax on limited liability partnerships.  The proposal to tax foreign dividends received by an Indian company from a subsidiary of the foreign company at an incentivised rate of 15% over the present corporate tax rate would encourage outbound investments.

The Bill also introduces a number of administrative and substantive measures to counter tax abuse and reduce tax avoidance, such as extending the transfer pricing regime to transactions by residents with parties located in notified offshore jurisdictions.  It also proposes to mandate the filing of annual information by the liaison offices of foreign entities in India.

Indirect Tax Proposals

The Bill has made an effort to streamline the provisions of all indirect tax laws by eliminating various exemptions and aligning duty structures, in order to increase taxation of goods and services.  The ultimate objective is a smooth transition to GST. Since the proposed GST envisages a single rate of tax for all indirect tax laws, provisions have been introduced to align duty structures of various laws.  For example, the concessional excise duty rates and central sales tax rates have been fixed at 5%.  Currently, the Value Added Tax (“VAT”)/sales tax on many goods in most states is also 5%.  Basic customs, excise and service tax rates remain at 10%.  130 items that were hitherto exempt are now taxable under the excise tax at the rate of 1%.

One of the most important changes made under the service tax laws is the introduction of “point of taxation rules,” which would change the basis of tax collection from receipt basis to accrual basis, consistent with the existing  provisions of excise and sales tax laws.

The service tax net has also been expanded with the introduction of new taxable services, such as services rendered by restaurants serving alcohol and short term accommodation provided by hotels   In addition, the scope of many services has been expanded, including healthcare, legal, air travel, and life insurance.  Of note, the scope of legal services that are taxable has been considerably expanded.

In a nutshell, the Finance Minister has reaffirmed his commitment to introduce the Direct Taxes Code and the Goods & Service Tax, which, if passed, would bring an unprecedented change in the fiscal policy regime.  The proposals seek to further simplify and improve voluntary tax compliance and at the same time, deter tax evasion and take serious measures in situations where unethical practices have been followed.  For the moment, the big bang tax reforms are being eagerly awaited.

Mr. Aseem Chawla is the practice leader, and Ms. Aurica Bhattacharya and Ms. Priyanka Duggal are associates with the tax practice group at Amarchand & Mangaldas & Suresh A. Shroff & Co in New Delhi. They can be contacted at aseem.chawla@amarchand.com; aurica.bhattacharya@amarchand.com; and priyanka.duggal@amarchand.com.