Taxsutra Conclave 2015 – International Tax at Crossroads ... · Taxsutra Conclave 2015 –...

Taxsutra Conclave 2015 – International Tax at Crossroads, Plotting the Future

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Table of Contents

1

BEPS 4 Taxsutra Brief Global Reactions 4 Experts’ Corner BEPS impact on inbound and outbound investment – an Indian perspective

- Punit Shah (Partner, Dhruva Advisors LLP) 8

Taxation of the Digital Economy – BEPS proposals and the Indian approach - Ajay Rotti (Partner, Dhruva Advisors LLP) & Hariharan Gangadharan (Associate Partner)

12

BEPS : India Insights - Sunil Shah (Partner, Deloitte India) & Pritin Kumar (Partner) 15

2

Goods & Services Tax (GST) 22 Taxsutra Brief Overview 22 Experts’ Corner GST – Through the Looking Glass

- L. Badrinarayanan (Partner, Lakshmikumaran & Sridharan, Attorneys) 24

GST and Out of Court Settlements - L. Badrinarayanan (Partner, Lakshmikumaran & Sridharan, Attorneys) 28

GST – India on the cusp of most awaited tax reform - Saloni Roy (Senior Director, Deloitte India) 32

3

International Tax Policy 35 Taxsutra Brief Overview 35 Limitation of Benefits Clause – Emerging Trends 38 Experts’ Corner Making India’s International Tax Policy more certain

- Ashutosh Dikshit (Principal Advisor, BMR & Associates LLP) 40 Can we make ‘Make in India’ better?

- Kumar Kandaswami (Senior Director, Deloitte India) 44

4

Litigation Trends 48 Taxsutra Brief India’s Tax Dispute Resolution Scenario 48 Around the world – APA developments in 2014-15 73 Most Viewed Tax Rulings 76 Experts’ Corner Tax Litigation in India – Trends & Strategies

- Rohit Jain (Partner, Economic Laws Practice), Rahul Khurana (Associate Manager) & Divya Jeswant (Senior Associate)

51

Administrative law principles in tax litigation : Missing arrow in your quiver? - Sujit Ghosh (Partner & National Head, Advaita Legal) & Sudipta Bhattacharjee (Principal)

55

5

Transfer Pricing 58 Taxsutra Brief Marketing Intangibles - Analyzing litigation trends post Delhi HC verdict 58 Experts’ Corner Business Restructuring

- Nitin Jain (Partner, EY) 62

Identifying commercial or financial relations between Associated Enterprises for applying Arm’s Length Principle - Rajendra Nayak (Partner, EY)

66

6 Black Money The Black Money Act – Success of Failure?

- Ameet N Patel (Partner, Manohar Chowdhry & Associates, CAs) 71



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BEPS

Taxsutra Brief: Global Reactions

“Taxation is at the core of countries’ sovereignty, but the interaction of domestic tax rules in some cases leads to gaps and friction.” Quoting so, in July 2013, the Organization for Economic Co-operation and Development (OECD) released its Action Plan on Base Erosion and Profit Shifting (BEPS). The report garnered significant attention in the wake of countries combating high profile tax evasions due to anomalies in the international tax systems. Two years post the beginning of concerted efforts of countries to counter BEPS, the domino effect is being felt across Continents. By the time the first speakers take to the dias at the inaugural Taxsutra Conclave and you flip through the articles in this booklet, the final BEPS reports shall be in the public domain. OECD has already finalized Action Plan 13 dealing with Transfer Pricing: Country-By-Country (CbC) reporting and

has also released the implementation package. While BEPS aims a coordinated implementation of various BEPS action plans, rather than an individual-country effort, some of the countries have started selectively implementing a few of the BEPS solutions . A case in point – Diverted Profits Tax legislated by Britain. Captured below is a highlight of how India and some other countries have taken note of OECD recommendations on BEPS –

A. The Indian Scenario

The Indian Government has taken steps to protect its tax base as witnessed by its spree of execution of automatic information exchange agreements, agreement with the US under Foreign Account and Tax Compliance Act (FATCA), the Black Money Law with a one-time compliance window and the ongoing re-negotiation of the India-Mauritius tax treaty. Specifically on the BEPS project, Indian Competent Authority, Mr Akhilesh Ranjan in a recent interview with Taxsutra, asserted that India will wait for all the reports to be submitted to G-20 and thereafter initiate actions and that too strictly in accordance with the outcomes of the BEPS project.



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With these legislative developments on one hand, the Tax Tribunals in India have had their share of discussion around BEPS in general and on OECD recommendations on BEPS Action Plans while deciding some of the cases. A gist of the recent rulings discussing BEPS / OECD’s work is provided below:

B. Asia The proportion of tax changes has been almost in conjunction with the relative size of the Asian continent. Almost, all the identified BEPS issues have had their share of limelight in the various tax proposals across the region. Prominent issues are digital economy, treaty abuse, anti-avoidance measures, Controlled Foreign Companies (CFC) etc.

• Enhanced substance/ Permanent establishment requirements introduced in favorable tax regimes such as Mauritius, Singapore etc.

• China, Russia and Vietnam have all introduced anti-abuse rules and beneficial ownership rules, or guidance to restrict treaty benefits to conduit situations.

• Russia has introduced rules for CFC in 2014 targeting certain types of entities. • Indirect tax on digital services introduced in Japan, South Korea and Israel. • Several countries like Korea, Singapore, Malaysia etc. have implemented transfer pricing

documentation / CbC reporting in accordance with OECD requirements.

• Baker Hughes Singapore Pte. Ltd. [TS-214-ITAT-2015(DEL)]: The assessee was a non-resident company engaged in various services relating to oil exploration work and claimed taxation u/s 44BB of the Income-tax Act. Revenue alleged that such a view would amount to BEPS and assessee’s income is taxable u/s 44DA of the Act. ITAT observed that BEPS is merely a tax policy consideration for law making and has no role in judicial process and that the judicial process will infringe neutrality if it is to be swayed by such policy considerations.

• Watson Pharma Pvt. Ltd. [TS-3-ITAT-2015(Mum)-TP]: The assessee, a subsidiary of a US Company was engaged in contract manufacturing and research services. The transfer pricing officer worked out adjustment on location savings on the basis of transfer of manufacturing activity from US to India. The Tribunal deleted the addition on location savings while noting that India is part of G20 countries, and that all G20 countries have concurred to the position on no adjustment for location savings in cases where, reliable local market comparable are available and can be used to identify arm's length prices.

• Mitsubishi Corporation India Pvt. Ltd. [TS-330-ITAT-2014(DEL)-TP]: The assessee, a subsidiary of Japanese Corporation (Sogo Shosha establishment) carried out transactions of provision of services, purchase of goods and other transactions. TPO rejected use of ‘Berry ratio’ adopted by the assessee. One of the reasons cited was that the assessee was not suitably compensation for location savings. Referring to the “4-step process” as per OECD report titled “Guidance on Transfer Pricing Aspects of Intangibles”, ITAT rejected location savings in the absence of any identification/quantification effort by the revenue.



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C. Europe , UK and Ireland The European region, not surprisingly has witnessed most of the activities around BEPS, coupled with developments under the European Union (EU). The major developments have been around implementing the three tier transfer pricing documentation and CbC reporting, taxation of digital services, tax information sharing and enhanced disclosure measures.

D. Australia & Africa Australia has also been proactive in addressing BEPS-issues with changes proposed in its 2015 budget. While the momentum is relatively moderate in the African continent, in a recently concluded African tax authorities meet, countries expressed the need to counter BEPS, to promote information sharing and resource enhancement. One of the concerns expressed was with respect to the higher threshold for

CbC reporting relative to their region and propose to explore a lower threshold.

• EU developments: o Amendments to the Parent Subsidiary directive to deny participation exemption on

distribution of profits that are deductible by the subsidiary, introduction of general anti-avoidance rules and deterrence against use of hybrid loan arrangements to benefit from double non-taxation.

o Sharing of tax rulings among the member states o Proposal to extend scope of CbC reporting to public disclosure along with financial

statements to the extent feasible. • Countries with already existing Patent box regimes such as Spain, have modified it in line with

OECD BEPS recommendations to Action Plan 5. Further, Ireland and Switzerland have initiated discussions for such a scheme.

• VAT on electronic services introduced in Luxembourg. Turkey, too has expressed its intent to introduce a similar tax.

• Several countries including Spain, UK have already approved the implementation of the three-tiered transfer pricing documentation and CbC reporting suggested by OECD w.e.f. January 2016.

• France, Austria and Spain have adopted rules to deny deduction to payments made to related parties and are subject to no or low taxation.

• Significant tax changes have been proposed in the UK in the Budget, 2015 and otherwise. The UK Government has introduced a new tax ‘Diverted profit tax’ at the rate of 25%, applicable to large multinationals with business in UK who enter into ‘contrived’ arrangements to divert profits from the UK by avoiding a UK taxable permanent establishment and/or by other ‘contrived’ arrangements between connected entities. Further enhanced disclosure mechanisms have been proposed for taxpayers to disclose their tax strategies, personal accountability of named board member to tax strategies etc.



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E. Americas The billion dollar question hanging over the BEPS projecct is the adoption of the BEPS outcomes by the US and so far the super-power is playing a bit tough to get; going by its decision to keep away from the process of development of multilateral instrument. The silver lining though – statement made by US Treasury officials Mr. Robert Stack that despite concerns expressed by senior Republican Congressmen, the US Administration has the powers to implement CbC reporting. But this is a space to keep a close eye on…

• Proposed revisions to the US Model Income tax convention was released in May 2015. The revisions target exempt permanent establishments, special tax regime, expatriated entities, anti-treaty shopping measures of limitation of benefits article and subsequent changes in treaty partner’s tax law. Expanding the CFCs regime, it is proposed to impose a minimum tax on foreign earnings above a risk-free return on equity invested in active assets.

• Discussions on introduction of patent box regime • US has also executed agreements under FATCA with several countries including India for

information exchange • Tax havens such as Cayman Islands, British Virgin Islands and Cyprus have launched the FATCA

notification and reporting mechanisms. Information obtained by the respective tax authorities will then be shared with US revenue.

• Mexico & South American countries such as Ecuador have adopted the CbC reporting and transfer pricing documentation requirements.

• Companies in Brazil are required to report information on tax-planning structures that leads to avoidance, reduction or deferral of tax if the transaction has no business purpose and economic substance; is done in an unusual manner or is identified in the guidance to be issued by the tax authorities. Brazil has also amended its CFC regime for selective consolidation for tax purposes.

• Chile has introduced CFC rules and adopted transfer pricing regulations for business restructuring. • Argentinean city has introduced withholding tax on payments to foreign providers of digital media.

• Australia to adopt transfer pricing documentation and CbC reporting by 2016. Also proposed indirect tax on digital goods and services and multinational anti-avoidance law to counter BEPS related structures that seek to avoid a taxable presence. It has further reduced the thin-capitalisation ratio from 3:1 to 1.5:1. Recently, Australian Senate Committee issued its interim report on corporate tax avoidance setting out recommendations, including greater tax transparency measures.

• South Africa has amended its CFC regime to exempt substantive business operations. It is also proposed to adopt the OECD CbC reporting with additional reporting requirements in relation to interest and royalty payments.



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Experts’ Corner

BEPS impact on inbound and outbound investment – an Indian perspective

Punit Shah, Partner, Dhruva Advisors LLP

Cross-border investment structures (both inbound as well as outbound) have come under increased scrutiny around the world in recent years. This is aimed at countering practices such as treaty shopping and use of inefficiencies in treaty structures to achieve double ‘non-taxation’. In addition to steps that are being taken to address these issues at multilateral level under the aegis of the OECD’s BEPS project, several countries are also taking steps at the unilateral and bilateral level in this regard. The combined impact of such multilateral, bilateral

and unilateral steps on cross-border investments must be considered in order to better appreciate the framework within which businesses have to operate. Overview of BEPS in the context of cross-border investment structures: At the multilateral level, there are several areas of the BEPS initiative that have a bearing on inbound and outbound investments. Specifically, Action Item 6 (dealing with prevention of treaty abuse) and Action Item 3 (strengthening CFC Rules) need to be considered in this regard. As regards Action 6, a Report was issued by the OECD in 2014 which set out a three-pronged approach to tackling treaty abuse:

With the increasing scrutiny of cross-border investment structures, various multilateral, bilateral and unilateral steps are taken by countries to counter treaty shopping and use of inefficiencies in treaty structures to achieve double ‘non-taxation’. Punit Shah [Partner, Dhruva Advisors LLP] provides an incisive account of what this means for the Indian Investment climate. Talking about the BEPS proposals, the Author expresses concern that investment through Mauritius and Singapore could be hit hard and double-non taxation arising from the fact these countries do not levy tax on capital gains could also lead to a potential denial of treaty benefits. Discussing about the Indian actions in this regard, the Author concludes that access to favourable treaties may be increasingly restricted, and investors and foreign corporations seeking to invest in India will have to largely rely on their own country’s treaty with India.

BEPS Action Item 6 • Express statement in

treaties that contracting states intend to avoid double non-taxation/treaty shopping

• Specific anti-abuse rule based LOB Clause

• General anti-abuse rule based PPT



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a) The inclusion in treaties of an express statement that the Contracting States, when entering into a treaty, intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements

b) The inclusion in tax treaties of a specific anti-abuse rule based on the limitation-on-benefits

provisions included in treaties concluded by the United States and a few other countries (‘LOB’)(based on factors such as the legal nature, ownership, and general activities in the contracting state)

c) The introduction of a general anti-abuse rule based on a

Principal Purposes Test (‘PPT’) intended to address other forms of treaty abuse, including treaty shopping situations that would not be covered by the LOB rule described above

BEPS impact on India: Once implemented, the OECD BEPS proposals could have a significant bearing on how inbound investments into India are structured. For instance, investments through jurisdictions such as Mauritius and Singapore could be particularly hit hard. In addition to challenges that many investors may face in complying with stringent LOB provisions, double-non taxation arising from the fact that Mauritius and Singapore do not levy tax on capital gains could also lead to a potential denial of treaty benefits. To some extent, a specific LOB article may help in bringing an element of objectivity as to the availability of treaty benefits. However, compliance with the PPT could prove far harder, particularly mindful of the subjectivity involved. The inclusion of an express statement that the treaty is not intended to create opportunities for double non-taxation or for treaty shopping may also, in an Indian context, guide Courts and Tribunals towards a more purposive, rather than a strict textual interpretation of treaty provisions. From an outbound perspective as well, Indian corporations may find it difficult to route investments through multi-tier structures overseas, as these could significantly curtail the availability of treaty benefits. Given the potential for litigation, legitimate structures involving regional holding companies could also be adversely hit. The outcome of the OECD’s work on Action Item 3 in the context of CFCs could also be a key factor in the context of cross border investments. The implementation of robust CFC rules will limit the attractiveness of multi-tier structures and will limit the use of non-operating entities in cross-border investments. India had proposed to introduce a fairly comprehensive CFC regime as part of the Direct Taxes Code Bill, 2010 which lapsed recently. Any potential re-introduction of CFC norms by India may borrow from the work being done in the OECD on this topic. Unilateral and Bilateral measures: Simultaneously with the work being undertaken at the OECD, parallel efforts are being undertaken by India at a unilateral as well as bilateral level to counter treaty abuse. Specifically, at a bilateral level, India has been pushing hard for renegotiation of several key treaties with a view to plug abuse and treaty shopping. For instance, a protocol has been

“The inclusion of an express statement that the treaty is not intended to create opportunities for double non-taxation or for treaty shopping may also, in an Indian context, guide Courts and Tribunals towards a more purposive, rather than a strict textual interpretation of treaty provisions.”



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signed with Singapore which sets out a LOB article in order to qualify for capital gains exemption. Reports indicate that the treaty with Mauritius is being renegotiated, particularly in respect of the capital gains exemption in India under the treaty. Additionally, most of the treaties that India has entered into in recent years or which have been modified through protocols provide for a LOB Article. Such LOB articles are not objective or comprehensive in nature and usually provide that treaty benefits shall not be available if the main purpose or one of the main purposes of setting up of such enterprise in the other contracting state is to obtain benefits under the treaty. Incidentally, such LOB clauses are somewhat akin to the PPT test that is contemplated as part of the BEPS project. Additionally, at a unilateral level as well, several steps are being undertaken by India which could have a bearing on the availability of treaty benefits in inbound situations. For instance, the Income-tax Act has been amended to make the availability of a Tax Residency Certificate mandatory for claiming treaty benefits. Additionally, a General Anti-Avoidance Rule (‘GAAR’) has been enacted (though not yet brought into force), which can be potentially invoked to deny treaty benefits. Additionally, it is provided that the provisions of GAAR will override tax treaties. At the field level too, the availability of treaty benefits, particularly in the context of Mauritius continues to pose practical challenges. There is a good deal of scrutiny of such claims under judicially evolved principles of anti-avoidance, which leads to litigation. This is notwithstanding favourable Circulars issued by the CBDT and several decisions from the judiciary upholding the availability of treaty benefits including the decision of the Supreme Court in the landmark AzadiBachaoAndolan case and more recently of the Punjab and Haryana High Court in the Serco BPO case. In conclusion, the tax treaty landscape, particularly in an Indian context, is likely to see far reaching changes in the years ahead. While a good part of such changes will be driven by developments at the OECD at a multilateral level, domestic law changes and bilateral renegotiations are likely to also play an equally significant role in this. Access to favourable treaties may be increasingly restricted, and investors and foreign corporations seeking to invest in India will have to largely rely on their own country’s treaty with India. Needless to mention, this could pose significant challenges, particularly in the context of collective investment vehicles and use of holding company structures. Existing structures too, will not be immune to such changes and may potentially have to be re-examined in the light of such changes.

“The tax treaty landscape, particularly in an Indian context, is likely to see far reaching changes in the years ahead. While a good part of such changes will be driven by developments at the OECD at a multilateral level, domestic law changes and bilateral renegotiations are likely to also play an equally significant role in this provisions.”



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Taxation of Digital Economy – BEPS proposals and the Indian approach

Ajay Rotti, Partner Hariharan Gangadharan, Dhruva Advisors LLP Associate Partner

It is now increasingly recognized that the current international tax regime which has evolved over the course of the last century is inadequate to deal with rapid changes that are taking place in global marketplace. Thanks to the increased digitisation of business, the difficulties in applying the traditional rules and principles designed in the context of a brick and mortar economy to the digital world are becoming increasingly widespread and affect both taxpayers as well as tax administrators. While businesses (both pure technology companies as well as companies that use technology to expand their geographical reach) face serious uncertainties on the tax front, Governments perceive an erosion of the tax base through transactions undertaken in the borderless digital world. The OECD’s BEPS Action 1 on addressing the tax challenges of the digital economy as part of the BEPS initiative is largely an outcome of this recognition. India is a part of this initiative and is expected to play a crucial role in influencing the ultimate outcome of this exercise. The BEPS proposals The BEPS initiative in relation to the digital economy focused on identifying the difficulties involved in applying existing international tax rules to the digital economy and to develop detailed options (both from a direct and indirect tax perspective) to address these difficulties. The Report released in September 2014 in this regard contains a detailed overview of the key features of the digital economy,

Global businesses speeding into the digital era has necessitated the need to reform the traditional tax concepts. Ajay Rotti [Partner, Dhruva Advisors LLP] and Hariharan Gangadharan [Associate Partner] trace the taxation of digital economy in India along with an analysis of the BEPS proposals. The Authors state that the initiative to address these challenges must not be viewed as a zero-sum negotiation game involving a conflict between ‘residence’ and ‘source’ based taxation. Finally, the Authors call for a for a wider debate as to whether India’s interests lie solely in gathering additional revenue, or in ensuring that the global rules for taxing the digital economy do not hamper the growth of India promising digital sector or block the penetration of new technologies and digital businesses in India.



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• Cannot ring-fence digital economy for tax purposes

• Development of ‘virtual PE’

• VAT, CFC and artificial avoidance of PE

various existing business models which present challenges from a tax perspective as well as potential options to address them. While no final conclusions emerged from this Report, the following key findings are nonetheless indicative of the approach being adopted to address this issue: a) The digital economy cannot be ring-fenced for tax purposes b) The development of a ‘virtual PE’ standard as an alternative

theory of nexus for digital commerce operations was considered, but not currently recommended

c) Other issues of relevance in relation to the digital economy are

to be addressed as part of other initiatives on VAT, CFC, and artificial avoidance of PE etc. d) The OECD task force on the digital economy is expected to continue its work and issue a

supplementary report by December 2015

The Indian approach Indians are increasingly becoming voracious consumers of digital goods and services and the Government tends to view the revenue implications of this trend with some concern. To counter this, India has long adopted an aggressive ‘source’ based approach to the digital economy. This inter alia entails:

a) Seeking to tax foreign companies in India by treating websites as permanent establishments b) Characterising payments for digital goods/services as royalties or technical fees c) Widening the scope of withholding payments for digital goods and services

Courts in India are now dealing with several such cases, and it is only likely that such cases will increase in number and complexity in the years ahead. Most of such cases are currently at the level of the Income-tax Appellate Tribunal (‘ITAT’), but are expected to be taken in further appeals to the High Courts and the Supreme Court. For instance, in the case of ITO vs. Right Florists Pvt. Ltd. (154 TTJ 142), the ITAT held that a website could not per se be regarded as a permanent establishment of a foreign company, unless the servers are located in India. It is

relevant to note that the Commentary to the OECD’s Model Convention states that where an enterprise carries on business through a website hosted on its server (leased or owned), the place where such server is located could constitute a permanent establishment of the enterprise if the other requirements of Article 5 are met. India has stated that it does not agree with such an interpretation. It is of the view that a website may constitute a permanent establishment in certain circumstances. However, it has not spelt out the circumstances under which it would consider a website as constituting a permanent establishment. The ITAT in the Right Florists case took note of the above reservations made by India. However, it concluded that such reservations made to the commentary would be relevant only for interpreting tax treaties entered into by India after expressing such reservations. In other words, it found that these reservations would not have any impact in interpreting the meaning of the term permanent establishment under treaties that India has entered into prior to 2008 (which is when such reservations were expressed).

“India has long adopted an aggressive ‘source’ based approach to the digital economy”

“In the case of ITO vs. Right Florists Pvt. Ltd. (154 TTJ 142), the ITAT held that a website could not per se be regarded as a permanent establishment of a foreign company, unless the servers are located in India”



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The characterisation of payments for digital goods and services as royalties or fees for technical services is also becoming the subject matter of litigation in India. Specifically disputes surrounding characterisation of payments for access to digital databases, e-learning courses etc. are also coming up before the Courts with increasing frequency. Media reports indicate that India is advocating such a source based approach in relation to the digital economy at the OECD as well. The way forward The multilateral initiative to address tax challenges arising from a digital economy is in its essence an attempt to build a global consensus for reforming the international tax regime. It must not be viewed as a zero-sum negotiation game involving a conflict between ‘residence’ and ‘source’ based taxation. Indeed, the very need for this exercise stems from the fact that the traditional concepts of ‘residence’ and ‘source’ are difficult to apply in the digital world. While India’s interests undoubtedly need to be protected, there is a need for a wider debate as to whether India’s interests lie solely in gathering additional revenue, or in ensuring that the global rules for taxing the digital economy do not hamper the growth of India promising digital sector or block the penetration of new technologies and digital businesses in India. Specifically, in the context of the Prime Minister’s ambitious ‘Digital India’ initiative, one would expect that India’s positions on the tax front, both domestically as well as in multilateral forums such as the OECD are geared to support the long term vision to transform India into a digitally empowered society and knowledge economy.



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BEPS: India Insights

Sunil Shah, Partner Pritin Kumar, Partner Deloitte India

Backdrop

The G20 had initiated the Base Erosion and Profit Shifting (‘BEPS’) project to ensure that profits are taxed where economic activities are performed and where value is created. At the request of the G-20, the Organisation for Economic Co-operation and Development (‘OECD’) developed an action plan to tackle BEPS in a comprehensive manner. India, being part of the G20, is bound by the final announcements on BEPS. In September 2014, the OECD published seven papers as a first tranche of deliverables under the BEPS project. There have been some revised papers and new discussion drafts issued in the past year and the eight papers forming the second tranche of deliverables is expected shortly.

Action items The OECD has identified 15 action points to combat BEPS as summarised in the table below.

Action 1: Address the tax challenges of the digital economy

“Gaps” Establishing international coherence of corporate income taxation

“Frictions” Restoring the full effects and benefits of international standards

“Transparency” Ensuring transparency while promoting increased certainty and predictability

In recent times, discussions on tax remain incomplete without reserving time for BEPS. Two years into its development, it is time for the curtains to be raised or perhaps already risen by the time you are reading this. While BEPS is of significance for the entire world, Sunil Shah [Partner, Deloitte] and Pritin Kumar [Partner, Deloitte] capture its essence in the Indian context. The Authors give an account of the relevance of each action plan vis-à-vis the present Indian tax regime. Further the Authors draw inference on India’s position out of the recent tax developments and India’s response to the UN questionnaire on BEPS. They also note the key actions in the tax world as a result of BEPS action plans such as LOB rule, deferment of GAAR, tribunal notings, etc. Stressing upon the need to be abreast with BEPS developments, the Authors conclude that constant change in tax policy matters affecting taxpayers’ rights and obligations provides taxpayers an opportunity to have a relook at their operational arrangements and investment structures and to assess the impact of the BEPS project on their business.



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Action 2: Neutralize the effects of hybrid mismatch arrangements

Action 6: Prevent treaty abuse

Action 11: Establish methodologies to collect and analyze data on BEPS and the actions to address it

Action 3: Strengthen controlled foreign company (CFC) rules

Action 7: Prevent the artificial avoidance of PE status

Action 12: Require taxpayers to disclose their aggressive tax planning arrangements

Action 4: Limit base erosion via interest deductions and other financial payments

Assure that transfer pricing outcomes are in line with value creation

Action 8: Intangibles

Action 13: Re-examine transfer pricing documentation

Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance

Action 9: Risk and capital

Action 14: Make dispute resolution mechanisms more effective

Action 10: Other high-risk transactions

Action 15: Develop a multilateral instrument

Action 1, dealing with digital economy cuts across all actions and impacts, and is in turn impacted by, all the other action points. Action 15 binds all the action items together and proposes a multilateral instrument, which would have the same effect as simultaneous renegotiation of the 3,000+ bilateral treaties that are currently in effect, for implementation of the BEPS actions.

BEPS in the Indian Context From a corporate tax perspective, the most important action is Action 6 dealing with treaty abuse. Broadly speaking, Action 6 proposes a principal purposes test [PPT] rule or a limitation on benefits [LOB] rule supplemented by a PPT rule. From an Indian standpoint, India has already legislated a general anti-avoidance rule [GAAR] in its domestic tax law – the GAAR empowers the tax authorities to look through arrangements, the main purpose of which is to obtain a tax benefit and which inherently lack commercial justification, amongst other conditions. The GAAR and LOB / PPT rule may, inter alia, impact intermediate holding companies for investing into India, which lack substance and have been interposed only to avail tax treaty benefits. Similarly, such rules may challenge and aggressive tax structures put in

place in India using intermediate companies in favourable treaty jurisdictions. Incidentally, Mauritius has been a popular intermediary jurisdiction for investing into India in view of the capital gains exemption – newspaper reports indicate that India is actively trying to renegotiate the tax treaty with Mauritius.

Corporate tax perspective: Action 6: “The GAAR and LOB / PPT rule may, inter alia, impact intermediate holding companies for investing into India, which lack substance and have been interposed only to avail tax treaty benefits.” Action 7: “India is ahead of the OECD on this Action.” Action 2: “the possibility of the tax authorities questioning hybrid financial instruments, especially imported mismatch arrangements (i.e. interposing an intermediate finance company leading to a hybrid mismatch), cannot be ruled out.”



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Action 7 dealing with preventing the artificial avoidance of permanent establishment [PE] status is also an important action from an Indian perspective. Interestingly, some of the tightening of norms under Action 7that are mentioned below are: (a) already in place under many of India’s tax treaties; or (b) the interpretation followed by tax authorities; or (c) India’s stated position in respect of the OECD model convention. Accordingly, India is ahead of the OECD on this Action. • Wide interpretation of the term ‘conclude contracts’

• Strengthening of the requirements for an agent to be considered ‘independent’ only if it acts on

behalf of various persons (and not only group companies)

• Exclusion of ‘delivery’ from the specific activity exemptions • Inclusion of insurance companies within the purview of PE Another interesting action from a corporate tax perspective is Action 2 dealing with hybrid mismatches –such hybrid mismatches could be on account of hybrid entities or hybrid financial institutions. Historically, hybrids have not been much of an issue from a tax perspective in India. A popular instrument that could be regarded as a hybrid in certain situations is compulsorily convertible debentures. With Action 2 of BEPS, the possibility of the tax authorities questioning hybrid financial instruments, especially imported mismatch arrangements (i.e. interposing an intermediate finance company leading to a hybrid mismatch), cannot be ruled out. From a Transfer Pricing (TP) standpoint, Action 13 is the most significant action from an Indian perspective – this action provides for a three-tiered approach to TP documentation:

(1) a Country-by-Country [CbC] report to provide a global financial snapshot; (2) a master file to provide a high-level view of a company’s business operations and important information on company’s global transfer pricing policies, with respect to intangibles and financing; and (3) a local file to provide an entity and transaction level transfer pricing analysis. Whilst the Indian transfer pricing regulations broadly cover the content of a local file, the regulations presently do not provide maintenance of the information contemplated in the master file and CbC template. It is pertinent to note that the new guidance will provide tax authorities with substantial information to assess if there is any transfer pricing risk resulting in artificial shifting of taxable income in tax advantaged jurisdictions. Accordingly, taxpayers that currently do not follow consistent transfer pricing policies on a global basis may find a need to do so in the near future along with centralised management, implementation and documentation of a group’s transfer pricing policies Action item 8, 9 & 10 deal with the aspects to assure that transfer pricing outcomes are in line with value creation. It includes special measures respectively (1) to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital (2) to clarify the circumstances in which transactions can be re-characterised, and (3) special measures for transfers of hard-to-value intangibles.

Transfer pricing Perspective: Action 13: “the new guidance will provide tax authorities with substantial information to assess if there is any transfer pricing risk resulting in artificial shifting of taxable income in tax advantaged jurisdictions.” Action 8: “while the revised guidance does not provide for any additional compensation for group synergies, provision of centralised services and subsequent allocation of costs and benefits have been a controversial issue in India.” Action 9: “is extremely open-ended and vague and may result in multiple interpretations resulting in increased TP disputes” Action 10:“Given the significant litigation in India in respect of intra-group services, this action is of immense significance for Indian tax authorities as well as the taxpayers.”



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Action 8 deals with guidance on TP aspects of intangibles. In determining compensation for use or transfer of intangibles, importance is given to contribution of the group companies in Development, Enhancement, Maintenance, Protection and Exploitation (‘DEMPE’) of intangible. While the Indian TP provisions have wider definition of intangibles, most of the guidance provided on

intangible by the OECD is in line with the practices followed by the Indian tax authorities. For instance, in the revised guidance on intangible, conduct of group companies is considered important than contractual arrangement between them for appropriate compensation in an intangible transaction. Similar approach has been followed in Circular No. 6/ 2013 (‘Circular’) issued by the Central Board of Direct Taxes (‘CBDT’) which deals with classification of Indian contract Research and Development (R&D) centres of overseas MNE entities bearing insignificant risks. It also emphasizes on conduct of the parties than contractual arrangement and considers the performance of significant people functions and control over service providers by foreign principal as important factors for determining the contribution of Indian R&D centre in the development of intangibles and its related

compensation. Jurisprudence in case of intangible transactions is still at a nascent stage in India. Tax authorities have, in recent audits, raised the issue of arm’s length returns to entities that are not legal owners of intangible assets but are seen to have economic ownership. However, there are certain views of tax authorities that contradict with position in the OECD guidance. The OECD guidance provides that no separate compensation for location savings / location specific advantages is required if there exist local comparable uncontrolled transactions. But, it is a belief of Indian tax authorities that such an approach may not consider the benefit of location savings which can be computed by taking into account the cost difference between costs in the low cost country and in the high cost country from where the business activity was relocated. Further, definition of intangible as provided in the revised guidance on intangible does not consider assembled workforce whereas the Indian TP regulations considers trained and organised work force as an intangible property requiring compensation for any related transaction. Moreover, while the revised guidance does not provide for any additional compensation for group synergies, provision of centralised services and subsequent allocation of costs and benefits have been a controversial issue in India. Action 9 relating to risk and re-characterization lays emphasis on ‘value creation’ and examination of ‘options realistically available” in identifying the commercial and financial relations between the AEs. The rules to be developed require alignment of returns with value creation. Further, it also provides that a transaction between AEs should have the “fundamental economic attributes of arrangements between unrelated parties” else, the tax authorities may resort to non-recognition or re-characterization of such transaction. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has



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provided capital. Action 9 is extremely open-ended and vague and may result in multiple interpretations resulting in increased TP disputes. Therefore, it is imperative that OECD may consider providing concrete and detailed definition or guidance to avoid arbitrary application and aggressive interpretations by the tax authorities. OECD Discussion Draft on Action 10 proposes a simplified transfer pricing approach for low value-adding intra-group services. The aim of this Discussion Draft is to reduce base erosion through excessive management fees and head office expenses, particularly in developing countries. In the said draft, the OECD has defined low value-adding intra-group services as those which are supportive in nature, are not part of the core business of the group and do not use or create unique and valuable intangibles involving significant risk. The draft recognises that the arm’s length price of such intra-group services is closely related to costs and provides mechanism to allocate the costs of providing each category of such services to those group companies which benefit from such services using consistent group-wide allocation keys with an associated consistent small mark-up. In Indian context, tax authorities have been closely scrutinised numerous cases on intra-group services and challenging the payments for such services based on factors such as demonstrating actual receipt of services, their benefits, their need, willingness to pay, lack of proper documentation, etc. In this regard, the proposed simplified approach to low-value adding services will be helpful for some MNE groups. However, India, in its response to the United Nations’ questionnaire on BEPS has indicated that one of the major ways in which base erosion takes place is through excessive payments to foreign affiliated companies in respect of service charges, management and technical fees, royalties and interest.

Further, as per the Discussion Draft, proposed provisions shall be applicable even in cases where the low value-adding services may be the core business activity of the legal entity providing the service (e.g. a shared service centre); as long as the same is not the core activity from the perspective of the operations of the MNE group. Accordingly, from a service provider point of view, many of such services provided by the shared service centres /captive back offices may classify as low value adding intra-group services and therefore, may qualify for the simplified approach and a suggested mark-up of 2% to 5% for such provision of services. However, the Indian tax authorities would challenge the arm’s length nature of the service fee earned by these entities which is much lower than the Safe Harbour rates prescribed by in India. Further, the mark-up required to be earned by service providers has been a contentious issue wherein Indian tax authorities expect significantly high mark-ups. Therefore, the suggested approach in this draft of classifying the said services as low value-adding and the proposed mark-ups may not find favour with the Indian tax authorities. Given the significant litigation in India in respect of intra-group services, this action is of immense significance for Indian tax authorities as well as the taxpayers.



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Last but not the least, is the development of a multilateral instrument in terms of Action 15 that binds the BEPS project. India, in its response to the UN questionnaire on BEPS (see the discussion in the section ‘India’s stated position on BEPS’ below), has indicated that developing a multilateral instrument is a high priority action because a multilateral instrument that is binding on all countries is of utmost necessity to combat tax treaty abuse, which is one of the primary concerns of developing countries like India. It is also interesting to note that India is a signatory to the SAARC limited multilateral agreement on avoidance of double taxation and mutual administrative assistance in tax matters and has recently signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.

India’s stated position on BEPS The UN Subcommittee on BEPS invited developing countries to provide feedback on experiences regarding BEPS issues in the form of a questionnaire. India, in its response to the UN questionnaire, has identified the following as the most common practices and structures from a BEPS perspective: • Excessive payments to foreign affiliated companies in respect of interest, service charges,

management and technical fees and royalties (this is despite the fact that India follows source-based taxation in relation to royalties and fees for technical services and imposes a withholding tax).

• Aggressive transfer pricing, including supply chain restructuring that contractually allocates risks and profits to affiliated companies in low tax jurisdictions.

• Digital enterprises facing zero or no taxation in view of the principle of residence-based taxation.

• Artificial avoidance of permanent establishment status.

• Treaty shopping.

• Incentives in the tax laws for attracting investment.

• Assets situated in India are owned and sold by companies located in low tax jurisdictions with no substance.

Another area highlighted by the administration is the fact that it is extremely difficult to obtain the relevant information needed to assess and address BEPS concerns, and to accurately apply the relevant transfer pricing rules. It’s been indicated that the lack of transparency on the part of the multinational firms, and the lack of adequately trained resources are the two biggest hurdles in determining whether a firm has reported the correct profits for taxation in India.



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Level of activity in India on account of BEPS

In the 2015 Budget, the GAAR, which was slated to be implemented from 1 April 2015, has been deferred by two years to 1 April 2017. One of the key reasons cited for the deferment of GAAR is that India is an active participant in the BEPS project and the reports on various BEPS action plans and recommendations regarding the measures to counter it are awaited – it is therefore proposed to implement GAAR as part of a comprehensive regime to deal with BEPS and aggressive tax avoidance. It is pertinent to note that India has already started re-jigging the existing bilateral tax treaties to prevent treaty shopping by insertion of PPT and LOB rules. Similarly, most of the new tax treaties of India typically contain a PPT / LOB rule. Incidentally, India has a special provision in its tax law that empowers the government to impose additional tax

burden and compliance requirements for certain notified countries if there is lack of effective exchange of information. Cyprus has been notified in terms of these provisions. Interestingly, Action 3 of the BEPS project deals with Controlled Foreign Corporation [CFC] rules. India does not have CFC rules in its legislature –going by the logic on GAAR, it is likely that India may introduce CFC rules after the finalisation of Action 3. The Delhi Tribunal in a recent ruling in the case of Baker Hughes has made some interesting observations in the context of BEPS. The Tribunal has observed that BEPS is a tax policy consideration which is relevant for the process of law making, but it cannot have a role in the judicial decision making process because judicial process will infringe neutrality if it is to be swayed by such policy consideration. It also observed that judicial authorities are to interpret the law as it exists and not as it ought to be in the light of certain underlying value notions. It is however pertinent to note that apart from the above, there has not been much development on the legislative front in the context of BEPS. On the contrary, the Indian legislature appears to be waiting for the BEPS actions to be finalised before taking any significant unilateral action. Conclusion BEPS seems largely targeted at getting the tax haven jurisdictions to tighten up their tax and disclosure laws. India as a large market and importer of capital has already independently put in place several anti-avoidance measures to counteract BEPS. The other requirements of the OECD BEPS initiative such as CbC reporting, hybrid instruments, etc. are not unique to India and will need to be implemented by all countries. Having said this, taxpayers need to be aware of and constantly monitor the ongoing BEPS Actions as well as the changes that India is bringing about in its domestic law and tax treaties. It will also be interesting to see how the Indian judiciary deals with the concepts of GAAR, LOB and PPT as well as other BEPS actions. Constant change in tax policy matters affecting taxpayers’ rights and obligations provides taxpayers an opportunity to have a relook at their operational arrangements and investment structures and to assess the impact of the BEPS project on their business.

“The Delhi Tribunal in a recent ruling in the case of Baker Hughes has made some interesting observations in the context of BEPS. The Tribunal has observed that BEPS is a tax policy consideration which is relevant for the process of law making, but it cannot have a role in the judicial decision making process because judicial process will infringe neutrality if it is to be swayed by such policy consideration.”



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Goods & Services Tax (GST)

Taxsutra Brief: Overview Since implementation of MODVAT (now CENVAT) in 1986 and VAT in 2005, GST will be by far, be the most significant indirect tax reform in India. Scope / features of current GST model in India: The “dual” structured GST, first envisioned by the Empowered Committee of State Finance Ministers in 2009, seeks to subsume both Central as well as State taxes as follows: • Central Excise Duty, Additional Excise Duties, Service

Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD), Central Sales Tax, Central Surcharges & Cesses etc. in CGST;

• VAT / Sales Tax, Entertainment Tax not levied by local bodies, Octroi & Entry Tax, Purchase Tax, Luxury Tax, Taxes on Lottery, betting & gambling, Taxes on advertisements etc. under SGST.

As per the Constitution (122nd Amendment) Bill 2014 passed by Lok Sabha in May 2015, alcoholic liquor for human consumption shall be exempt, while GST will not apply to (a) petroleum crude, (b) high speed diesel, (c) motor spirit (petrol), (d) natural gas, and (e) aviation turbine fuel, till a later date. Tobacco and tobacco products will be subject to GST with Centre empowered to impose excise duty additionally thereon. States shall have power to levy taxes on these items, except in case of imports and inter-state trade. Responding to the expectations of Revenue Neutral Rate (RNR) i.e. the rate at which there will be no loss to States after GST implementation, to be pegged at 27%, Union Finance Minister Arun Jaitley has assured Parliament that same would be much lower. As per the Bill, States where goods originate can levy 1% additional non-VATable tax over GST to make up any revenue loss for the first 2 years.

GST worldwide: With the increase of international trade in services, GST has become a preferred global standard. All OECD countries, except the US, follow this tax structure. GST was introduced in Australia in 2000. Whilst the rate is currently set at 10%, there are many domestically consumed items that are effectively zero-rated (GST-free) such as fresh food, education, and health services, as well as exemptions for Government charges and fees that are themselves in the nature of taxes.

Milestones in India’s indirect tax regime 1934 : Wide range of new articles brought within scope of central excise duty, alongwith sugar, matches and steel ingots 1956 : Central Sales Tax (CST) introduced to tax inter-state supply of goods 1986: MODVAT Scheme introduced to allow set-off of duty paid on purchased inputs against output liability 1994 : Service tax levied on certain services under Chapter V of Finance Act 2005 : Replacing the sales tax regime, Value Added Tax (VAT) implemented in most of the States 2016: GST ?



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Canada introduced GST in 1991 at a rate of 7%, later reduced to current rate of 5%. A Harmonised Sales Tax (HST) which is combined GST and provincial sales tax, is collected in some of the provinces of Canada. Common zero-rated items include basic groceries, prescription drugs, inward/outbound transportation and medical devices. Tax-exempt items include long term residential rents, health and dental care, educational services, day-care services, legal aid services, and financial services. Hong Kong failed to implement GST amidst political protests, where plan was finally withdrawn in December 2006 owing to lack of public support. Jersey, Channel Islands implemented GST in 2008. Current rate is 5% and businesses (predominantly in financial services sector) may be exempt if they obtain approval for International Services Entity (ISE) status. GST has been implemented in Malaysia w.e.f. April 2015 on most supply of goods and services, with 6% rate. Like India, GST Bill 2009 was delayed amid mounting criticism but was finally announced by Malaysian Prime Minister during Budget 2014. Agricultural products like paddy, fresh & chilled vegetables, essential foodstuff such as oil, salt & flour, eggs, livestock, and first 300 units of electricity for domestic use have been zero-rated; while sales / lease / rental of residential land / property, domestic mass public transportation, land for general use, private healthcare, education and diesel, RON95 petrol & LPG have been exempted from GST. All businesses with annual sales turnover of more than RM 500,000 were mandated to register under GST before December 31, 2014, while for those with lesser revenue, registration was optional. Rebate of RM 1,000 in the form of e-voucher had been given to company who purchased GST Accounting Software. Maldives adopted GST in 2011 with a rate of 3.5% from October to December 2011 and 6% from January 2012 to December 2012. From January 2013 to October 2014, the GST rate on tourism sector was at 8%, which has increased to 12% from November 2014 onwards.

New Zealand introduced GST way back in 1986 and is currently levied at 15%. From July 1989 to September 2010, GST was levied at 12.5%, and prior to that at 10%. In Singapore, GST was implemented in 1994 at single rate of 3%, with an assurance that it would not be raised for at least five years. The same was increased to 4% in 2003, to 5% in 2004, accompanied by an offset package to make average Singaporean household overall better off, even after accounting for additional costs imposed by the increase in GST rates. The rate was increased once again to 7% w.e.f. July 2007.

Country Implemented on

Australia 1 July 2000

Canada 1 January 1991 Jersey, Channel Islands 6 May 2008

Malaysia 1 April 2015

Maldives 2 October 2011

New Zealand 1 October 1986

Singapore 1 April 1994

Administered by:

Australia – Australian Taxation Office

Canada – Canada Revenue Agency

Jersey, Channel Islands – Comptroller of Taxes

Malaysia – Royal Malaysian Customs Department

Maldives – Maldives Inland Revenue Authority

New Zealand – Inland Revenue and New Zealand Customs

Singapore – Inland Revenue Authority of Singapore

In India, GST would be administered by both, CBEC at Union level & Commercial Tax departments at State level. GST Council, comprising of Union Finance Minister, Union Minister of State for Revenue and State Finance Ministers will recommend rates of tax, period of levy of additional tax, principles of supply, special provisions for certain states, etc.



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Experts’ Corner

GST - Through the Looking Glass

L. Badrinarayanan, Partner, Lakshmikumaran & Sridharan, Attorneys

The talk of the town today is GST (Goods and Services Tax). GST has been touted as solution to all the ills that plague our current taxing regimes. It is supposed to be progressive, clear and easy to comply. GST in whatever form is implemented in India can only be for the better. But before we really appreciate what is GST, we must understand what is the GST we are talking about and what it holds for us as companies and us as consumers. This article seeks to explain what it means to us and what we must be prepared for.

The Goods and Services Tax (‘GST’) has been one of the most ‘popular’ taxes in the world. In the last 50 years, it has spread to over 160 countries across the world. While there are variations, the economic concept has remained the same. The tax is a multi-stage destination based consumption tax. The legal concept continues to remain tax on ‘supply’ with credit of taxes paid at an earlier stage. By making consumption the centrepiece of the tax, GST reflects accurately the taxes that a State must receive. Any other basis i.e. tax on business or a particular event (eg. Manufacture, import,

entry, etc) can lead to a distortion in tax entitlement by tax avoidance at that stage or event. GST on the other hand disincentives distortions of this nature and is consequently successful. For India as a Federal State, GST is its biggest disruptor. GST has far-reaching (and unpredictable) consequences for the individual States. GST has attracted both love and hate. GST has pushed the States to seek assurances from the Centre. GST fundamentally changes the way States earn their revenue from taxes. Gone will be the days of origin-based VAT where producing States enjoyed the fruits of their investment. Goods,

GST, one of the most popular taxes adopted by over 160 countries in the world, has been marred by uncertainty in India. While Centre has succeeded to bring majority of States on board, there still remains few niggles, that are yet to be addressed. In this must read article, the Author L. Badrinarayanan [Partner, Lakshmikumaran & Sridharan, Attorneys] explains what this most sought after reform has in store for the corporates and the consumers, by way of an illustration. The Author highlights the current distortions to an ideal GST regime in the country such as conflicting views with regard to RNR as also levy of 1% additional levy on interstate supplies. However, Author believes that all the players who are not ultimate consumers for a particular goods or service would benefit as the actual cost of goods in their hands would go down; and exports made at any stage would become zero-rated, thereby fostering economic growth of the country.

“The Goods and Services Tax (‘GST’) has been one of the most ‘popular’ taxes in the world. In the last 50 years, it has spread to over 160 countries across the world.”



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Services & taxes will move to the State of consumption. Hailed by the Industry as being progressive, States are now tuned to introducing these tax reforms. With additional revenues in the form of tax on services and assurances from the Centre, the States look towards GST more favourably but not without doubts. The travails of the States are well documented and reported. The benefit to the Industry is well understood. But the implications for the end-consumer are not so clear. In a broad sense, it is assumed that it would be beneficial to the consumer. The rate also is discussed in terms of being revenue neutral, i.e. it is to reflect the current taxes collected by the authorities. Therefore, the general sense is that end-consumer is likely to not endure any increase except to face a higher absolute tax on his bills. It is this aspect that this article seeks to understand further. In order to achieve this, basic GST concepts are outlined and then their implications in form of an illustration are discussed.

What is GST? GST is a tax on the supply of goods and services. In the existing taxation regime different events in the lifecycle of a goods or service, like manufacture, sale, entry, etc., are taxed by the Central or the State Government in accordance with the powers conferred by the Constitution of India, the GST is a simultaneous levy of tax

by both the Governments on the ‘SUPPLY’ of goods or services or both. The tax levied by the Centre would be called Central GST (‘CGST’) and that by the State would be called State GST (‘SGST’). The interstate supply would attract Integrated GST (‘IGST’). CGST and SGST would apply simultaneously on intra-state supplies and IGST would be attracted on inter-state supply. The myriad taxable events would be a thing of the past and ‘SUPPLY’ will be the order of the day. Though ‘supply’ has not been defined as yet, reference to foreign jurisprudence would show that supply means making available either goods or services. Distortions to an ideal GST The reason I use the word ‘ideally’ is because, we are once again facing a situation where a band rate for standard rated goods is a distinct possibility. Some essential goods and services are likely to be taxed at a lower rate and some to be exempted. The Government is unable to settle on a Revenue Neutral Rate (‘RNR’). The RNR is a rate which would ensure the present level of revenue collection to the Government when GST is implemented. Present conflicting views place the RNR anywhere between 18 to 27 percent. This is an area of concern that shall affect the ultimate consumer the most. The relief from the 2% CST cost has been cut short by the additional levy of 1% on interstate supply for a consideration. This is not the ideal GST, but it is far better off than

where we are today. GST credit mechanism As mentioned earlier, credit of CGST, SGST and IGST paid on all goods and services would be available barring a few excluded items. The credit of IGST can be used for the payment of IGST, CGST and SGST and vice versa. The credit of SGST

used for payment of IGST shall be transferred by the exporting state to the Centre and likewise, the amount of IGST credit used for the payment of SGST would be paid by the Centre to the respective State Government. Cross utilization between CGST and SGST would not be allowed. The final redistribution of GST amongst the States would be made by the Centre depending upon the actual consumption of goods and services. This is the plan to unify India into a single market.

“This is not the ideal GST, but it far better off than where we are today.”

“The myriad taxable events would be a thing of the past and ‘SUPPLY’ will be the order of the day.”

“GST fundamentally changes the way States earn their revenue from taxes. Gone will be the days of origin-based VAT where producing States enjoyed the fruits of their investment.”

“Present conflicting views place the RNR anywhere between 18 to 27 percent. This is an area of concern that shall affect the ultimate consumer the most.”



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A closer look at GST Coming back to the question, whether GST is capable of delivering its promise? In transformations of such scale, the macro picture often overshadows the micro picture. A quick simulation of the GST model would throw light on the financial aspects of GST from both the business and consumer point of view. Let us assume a simple situation where a manufacturer produces goods in Maharashtra for Rs. 100, adds a Rs. 20 margin and stock transfers to say Madhya Pradesh against Form F without paying CST. Thereon, he sells it to a distributor. Assume the total VAT and local levies amount to 14.5%. The Excise duty is assumed to be 12.5%. The distributor adds margin of Rs. 20 and sells to a local retailer who adds further Rs. 30 margin and sells to the end customer. The numbers would look something like this: Maharashtra Madhya Pradesh

Manufacturer Depot Distributor Retailer Landed Cost 100

Landed Cost 136

Landed Cost 161

Landed Cost 184

Margin 20

Depot Cost 5

VAT Credit 20

VAT Credit 23 Excise Duty 16

Margin -

Actual Cost 141

Actual Cost 161

CST -

VAT 20

Margin 20

Margin 30 Final Price 136

Final Price 161

VAT 23

VAT 28

Final Price 184

Final Price 218

Note: Reversal of input tax credit on stock transfer of goods under Form F has not been considered. Assume GST to replace the existing tax regime. The same transaction with same margins would look as follows: Maharashtra Madhya Pradesh

Manufacturer Depot Distributor Retailer Landed Cost 100

Landed Cost 152

Landed Cost 159

Landed Cost 184

Margin 20

IGST Credit 32

CGST Credit 15

CGST Credit 17 IGST 32

Actual Cost 120

SGST Credit 19

SGST Credit 22

1% Levy -

Depot Cost 5

Actual Cost 125

Actual Cost 145 Final Price 152

Margin -

Margin 20

Margin 30

CGST 15

CGST 17

CGST 21

SGST 19

SGST 22

SGST 26

Final Price 159 Final Price 184 Final Price 222

Note: The landed cost for manufacturer may be lower in the GST regime due to removal of cascading effect. The same has not been considered in the illustration. The important points that need a close look are: Present Regime -‐ Excise duty becomes a cost for the onward transactions

-‐ The Central Government collection is limited to Rs. 16 and no share in onward value additions in

sale transactions

-‐ The total State Government collection is 28. Total imputed tax cost in price to consumer is Rs. 43 out of Rs. 218.



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GST Regime -‐ Both the Centre and States get a chunk of the

pie at each stage of movement of the goods till the final consumer.

-‐ The Central levy does not cascade and is available to be utilised against output liability at stages subsequent to manufacture.

-‐ The actual cost of goods at the depot, distributor and retailer stage in the GST regime is lower at Rs. 120, 125 and 145 as opposed to Rs. 136, 141 and 161 in the present regime.

-‐ The working capital blockage is higher in the GST regime. In the present regime, goods can be stock transferred (F Form) simply on payment of excise duty @ 12.5% against GST @ 27%.

-‐ Total tax collection in the GST regime for Centre is Rs. 21 and the States is Rs. 26 totalling Rs. 47 which is Rs. 4 higher than the present regime.

-‐ Though the States seem to be losing out on revenue as their collection on goods comes down to Rs. 26 from Rs. 28, the opportunity of taxing services would eventually lead to a net gain. The RNR must be decided accordingly

-‐ The price to the final consumer is Rs. 4 higher in the GST regime.

In spite of assuming the standard rate of Excise and VAT as 12.5% and 14.5% respectively, the goods for the final consumer gets costlier by Rs. 4. The lower rated goods in the present regime would be impacted to a greater degree. To add to the confusion, the Government is totally unclear about the RNR and the political debate is hinged upon it. A perusal of the National Institute of Public Finance and Policy report on RNR further highlights the lack of accurate data without which a just and exact

RNR cannot be determined. The cost of services for the ultimate consumer would definitely go up unless the benefit of erstwhile blocked credit exceeds the increase in tax rate and the industry passes on the benefit to the consumer. The benefits of GST would indeed trickle down to the ultimate consumer only if a correct RNR is agreed upon. Certain benefits of GST The brighter aspects of the proposed GST in its current shape are that all the players who are not ultimate consumers for a particular goods or service would benefit as the actual cost of goods in their hands would go down. Likewise, the exports made at any stage would be more competitive as they would be zero rated i.e. no output tax on export. The incentive to maintain the credit chain would create a larger tax base. Lowering of tax influence on business decisions, like setting up warehouses for avoiding a CST sale, would foster economic growth and more efficient use of the factors of production. GST may seem disadvantageous to consumer if the same supply chain is

implemented as in the current regime. However, once the dust settles and the companies optimize their process and distribution, it is likely to result in significant improvements for the companies and the consumer. View through the looking glass - GST does hold the potential to rationalize indirect taxation and deliver on its promise but whether it will do so is anyone’s guess at the moment. Note: The illustration provided in the article is purely to aid in understanding the concept of GST and cannot be considered as a representative for all transactions under the GST regime. The tax implications could vary according to the individual transaction.

“GST may seem disadvantageous to consumer if the same supply chain is implemented as in the current regime. However, once the dust settles and the companies optimize their process and distribution, it is likely to result in significant improvements for the companies and the consumer.”



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GST and Out of Court Settlements

L. Badrinarayanan, Partner, Lakshmikumaran & Sridharan, Attorneys

INTRODUCTION

An out of court settlement is an agreement reached between the parties in a pending lawsuit that resolves the dispute to their mutual satisfaction and occurs without judicial intervention, supervision, or approval. The vast majority of commercial cases are resolved without a trial. In a country like India, where the litigation route is fraught with long years of waiting and high legal costs, out of court settlement is a favoured method of dispute resolution for the Corporates. The outcome, other than parties relinquishing their rights to pursue judicial remedies, of most out of court settlements is the flow of some form of consideration between the parties to the dispute. This leads to a

very important question; whether the out of court settlement creates any supply for consideration? The potential GST implications of such settlements deserve in-depth analysis as the implications for Corporate India is huge. This article analyses the concept of ‘supply’ and the ‘nexus’ that must exist between payment and supply in order to establish the relationship of a ‘supply for consideration’.

In a country like India, where the litigation route is fraught with long years of waiting and high legal costs, out of court settlement is a favoured method of dispute resolution for the Corporates. Out of court settlement generally involves flow of consideration, and where there is a flow of consideration, follows is a question of ‘tax’. In this exhilarating piece of note, the Author L. Badrinarayanan [Partner, Lakshmikumaran & Sridharan, Attornerys] discusses the GST consequences of an out of court settlement. This article analyses the concept of ‘supply’ and the ‘nexus’ that must exist between payment and supply in order to establish the relationship of a ‘supply for consideration’, a key to GST levy. The Author throws light on these concepts as present in UK, New Zealand and Australia to infer the implications of GST. Stating the risk of GST and its allied concepts to create complexity in such payments, the Author ends with a word of caution to companies to identify risks early and to judicial and tax authorities to bear in mind the economic and social realties around such transactions.



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The article analyses each of the above concepts in a general sense, then more specifically within the context of court orders and out of court settlements. What is a ‘Supply’? ‘Supply’, according to the Macquarie Dictionary, means to ‘furnish’ or ‘provide’. It refers to things passing from one party to another. The supply may be one of particular goods, services or something else. ‘Supply’ is defined broadly in overseas jurisdictions, namely the United Kingdom, Australia and New Zealand. It is intended to encompass supplies as widely as possible1. In the UK the term ‘supply’ has been held to take its ordinary and natural meaning, that is, to furnish or to serve. In Australia, Subsection 9-10(1) of the GST Act defines ‘supply’ as ‘any form of supply whatsoever’. What is a taxable supply? In the UK, New Zealand and Australia you make a taxable if, amongst others, (a) you make the supply for consideration and, (b) the supply is made in the course or furtherance of an enterprise that you carry on.

Although this article focuses on the ‘supply for consideration’ requirement in analyzing the GST consequences of out of court settlements, this concept is important as a supply for consideration need not always necessarily be a taxable supply. For example, many settlements are likely to be outside the scope of GST because the entity making the supply does not intend to do so in the course or furtherance of an enterprise. What is consideration? The definition of consideration is very similar in the UK, New Zealand and Australian GST/VAT Acts. It is very comprehensive. In fact, in C of IR v. Databank Systems Ltd (1989) 11 NZTC 6093, Richardson J commented that the New Zealand definition of consideration ‘breathed comprehensiveness’.

Consideration includes any payment, or any act or forbearance if it is ‘in connection with’, ‘in response to’, ‘for the inducement of’ a supply2. It may include payments made voluntarily, and payments made by persons other than the recipient of a supply. The definition of ‘consideration’ has two elements to it. Both elements must be satisfied. The first is the payment of something by one entity to another. The second element is the nexus between the payment and the supply. Thus, there must be a sufficient nexus between a particular supply and a particular payment, which is provided for that supply, for there to be a supply for consideration3. The nexus requirement is explained and analyzed in the next section. 1 Saga Holidays Ltd v. Commissioner of Taxation (2006) 156 FCR 256 2 Subsection 9-15(1) of the A New Tax System ( Goods and Services Tax) Act 1999; Subsection 2(1) of the Goods and Services Tax Act

1985 (NZ); 3 Goods and Services Tax Ruling (GSTR) 2001/4 at para 75

“Sufficient nexus between a payment made under an out of court settlement or court order and a supply is essential to create the ‘supply for consideration’ relationship. The existence of this relationship is compulsory for it to be taxable under the GST/VAT Acts”



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When is a supply made for consideration? As already explained above, the ‘supply for consideration’ requirement is a cornerstone of the VAT/GST regimes in the UK, NZ and Australia. GST/VAT is only payable on supplies made for a consideration, i.e., there must be a nexus between the payment and supply. A mere existence of a payment and a supply is not enough. The nexus requirement in New Zealand and the European Community

As per the VAT law adopted by the states in the European Community, only transactions which are effected ‘for’ a consideration are taxable. It does not elaborate on the meaning of for used in that context. The Courts in the UK have adopted a ‘direct link’ test in determining whether consideration if ‘for’ a supply in those jurisdictions4. In contrast, the definition of consideration in the NZ GST Act itself describes the need for a link between the supply provided and a payment

made for the supply. Consideration is defined in relation to supplies of goods and services. It includes any payment (act or forbearance) in respect of, in response to, or for the inducement of, the supply of any goods and services5. The nexus requirement in Australia

Unlike the states of the EU Community and NZ, the nexus requirement under the Australian GST law is wider in nature and scope. The Courts have interpreted the words ‘in connection with’ used in the legislation is broader in scope than the word ‘for’ used in the UK VAT Act6. Therefore, in determining whether a payment constitutes consideration for a supply, under the Australian GST law, the test is whether there is nexus (whether direct or not) between the payment and supply. This broader scope of the test is capable of bringing in a wider range of cases

under the tax net in Australia as compared to that in the EU and NZ. GST CONSEQUENCES OF OUT OF COURT SETTLEMENTS As discussed above, a sufficient nexus between a payment made under an out of court settlement or court order and a supply is essential to create the ‘supply for consideration’ relationship. The existence of this relationship is compulsory for it to be taxable under the GST/VAT Acts. Out of court settlements can give rise to three type’s supplies. The meaning of each of these supplies and its GST implications are explained below. Earlier Supply Where the subject matter of the dispute relates to an earlier taxable supply, any settlement payment made in relation to the dispute is likely to be treated as having been made in consideration for the earlier taxable supply and may attract GST/VAT. These kinds of situations typically arise where the dispute is about non-payment for work done or goods purchased. 4 See Apple and Pear Development Council v. Customs and Excise Commissioners (1988) BTC 5116 5 Subsection 2(1) of the NZ GST Act 1985 6 Commissioner of Taxation v. Qantas Airways Ltd (2012) HCA 41; See also, Federal Commissioner of Taxation v. Reliance Carpet Co

Pty Ltd (2998) HCA 22

Out of Court Settlements - Three types of supply • Earlier Supply – may

attract GST/VAT • Current Supply – may

attract GST/VAT • Discontinuance Supply

– not likely to be taxed under GST/VAT



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Current Supply Where the rights and obligations created by the settlement give rise to a new taxable supply (or current supply), any settlement payment made in consideration for the current supply is likely to be treated as a taxable supply and may attract GST/VAT. As discussed above, the definitions of ‘supply’ and ‘consideration’ are very wide and comprehensive under the overseas GST/VAT legislations. A supply includes the creation, grant, transfer or assignment of any right. The creation of a right as part of the settlement typically arises in the context of intellectual property disputes; for example, in the creation of the right for one party to use the other party’s trade name in the future. Discontinuance Supply Generally, a discontinuance supply is not likely to be taxable under the GST/VAT laws as it does not have a separately ascribed value. If the only subject matter of a dispute in an out of court settlement is a discontinuance supply, the subject of the dispute is likely to be a damages claim. The discontinuance supply is an inherent part of the settlement or legal machinery to add finality to the dispute and it does not give rise to additional payment in its own right. It is more in the nature of a term or condition of the settlement, rather than being the subject of the settlement7. The Australian Taxation Office considers a discontinuance supply to be taxable only when there is overwhelming evidence that the subject matter of a claim is completely devoid in substance that the settlement payment could only have been made for the discontinuance supply. DAMAGES If, under a damages claim, a payment made under an out of court settlement is not in relation to any clearly identifiable earlier or current supply, the payment is likely to be treated as payment of damages claim and it is not likely to give rise to a taxable supply. Therefore, damage payments are not likely to be to GST/VAT. Examples include damages for property damage or personal injury or for negligence causing loss of profits. CONCLUSION The introduction of GST and its allied concepts are likely to bring an element of complexity in the treatment of payments under court orders and out of court settlements. It is important that Companies take measures to deal with such complexity at an early stage in order to manage the tax exposure. As for the judiciary and tax authorities, it is imperative that they bear in their minds the social and economic reality and the surrounding circumstances that existed when the agreement between the parties before deciding on the taxability of the transactions.

7 GSTR 2001/4 at para 107



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GST – India on the cusp of most awaited tax reform

Saloni Roy, Senior Director, Deloitte India

Globally, Value Added Tax (‘VAT’) or goods and services tax (‘GST’) system of indirect taxation has been implemented in over 160 countries, with France being the first in 1954 and Malaysia the most recent in 2015. Several nations are working towards introduction of GST, including India. A notable exception is the United States. The IMF has played a significant role in supporting and advocating this form of taxation. The Organization for Economic Cooperation and Development (‘OECD’) has embarked on a project to develop international VAT/GST rules to apply to cross border transactions with an aim to bring in certainty in applicability of law and reduce double taxation.

The seed for introduction of GST in India emanated from the Task Force on Implementation of the Fiscal Responsibility and Budget Implementation Act, 2003 (Kelkar Committee). The need for GST was primarily felt for widening the tax base in India and improving the revenue productivity of domestic taxes. GST is an awaited tax reform as it is believed that upon implementation the ills of the existing indirect tax system shall be considerably reduced. The proposed GST would replace the troubles of multiple indirect taxes which have their umpteen compliance requirements, varying tax rates, inconsistency in classifications and differing taxable events. The conspicuous shortcomings in the present indirect tax regime are: Tax cascading: Due to non-availability of set-off of state VAT against central levies such as service tax, excise duty etc. and vice versa, the present system of taxation causes a cascading effect of tax on tax. Further, restriction of credit of central sales tax levied on inter-state sales also contributes to additional indirect tax costs.

Shortcomings in the present indirect tax regime • Tax cascading • Sale vs. Service

debate • Lack of

uniformity in rates and provisions

The most awaited tax reform in India - the GST is expected to significantly eradicate the ills of the existing indirect tax system. The introduction date of GST in India of 1 April 2016 is couched in doubt as political parties are at loggerheads over its form and content. In this article, Saloni Roy [Senior Director, Deloitte India] traces the history of development of GST, the ills it aims to eradicate, highlights of the system and its impact on the Indian economy. Further, the Author also brings out the provisions that are impending the GST enactment. Expressing dismay on the progress so far, the Author ends with a hope for answers out of the winter session of the parliament.



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Complexity in determining the nature of transaction – sale vs. service: There are many transactions which are currently taxed both under service tax as well as VAT e.g. transfer of right to use goods, software licensing, etc which adds significantly to business costs. Similar issues are also observed in works contract transactions where the taxable base is more than 100%, at times. For instance, in certain works contracts, service tax is levied on 60-70%% of the value of the contract and VAT in the appropriate state is levied on 70-80 % of the total contract value. Lack of uniformity in provisions and rates: States have diverse classifications and rates of goods. Therefore compliance with state VAT laws is time consuming and cumbersome. It is expected that GST would bring the much needed panacea to indirect tax complexities in India. GST model proposed in India The proposed GST is a destination based consumption type VAT with dual tax features i.e. central and state GST. GST is expected to integrate taxes on goods and services across all supply chain for availing set-off and capture value addition at each stage of taxation. Suppliers at each stage would be permitted to set-off the GST paid on input goods and services against GST to be paid on the output supply of goods and services. A minimal negative list of restrictions of credit is also expected to be identified in the law. A 1 % additional tax to be paid to the originating state on interstate sale of goods is also proposed for 2 years. At present, indirect taxes are levied principally by central and state governments. Indirect taxes to be subsumed into GST are:

CENTRAL INDIRECT TAXES STATE INDIRECT TAXES

• Central Excise duty • Value Added Tax/Sales Tax

• Service tax • Entertainment Tax (other than the tax levied by the local bodies

• Additional Excise duties • Central Sales Tax • Excise Duty levied under the Medicinal and

Toilet Preparations (Excise Duties) Act, 1955 • Octroi and Entry Tax

• Additional Duty and Special Additional Duty of Customs • Purchase Tax

• Central cesses and surcharges in so far as they relate to supply of goods and services

• Luxury Tax • Taxes on lottery, betting and gambling • State cesses and surcharges in so far as

they relate to supply of goods and services

Basic custom duty, export duty, road and passenger tax, toll tax, taxes on railway fares and freights, electricity tax/duty, stamp duty, property taxes would not be subsumed under GST. The Government has further proposed to keep alcohol outside the purview of GST. Specific petroleum products i.e. petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel would be covered within GST from a date to be notified post GST implementation.



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IT preparedness A strong technology backbone is a prerequisite for successful implementation of GST. For this purpose, Goods and Service Tax Network (GSTN) was incorporated in March 2013. GSTN will provide a common platform for registrations, processing of returns, payment of taxes etc. This IT system will provide a standard interface for the taxpayer including registration, filing of returns and other nuances. Impact of GST on Indian economy Internationally, GST is a preferred system of indirect taxation. In India too, GST is projected to have an overall positive impact. GST is expected to bring in ease of doing business in India due to its promised

advantages of reduction in tax cascading, uniform compliances, reduction in ambiguities etc. The world over, introduction of GST has usually led to an increase in GDP. In India too, there is an anticipated increase in GDP between 0.9% - 1.7% in the medium term. The Government’s campaign of ‘make in India’ should get an impetus with introduction of GST, as largely the manufacturing sector is likely to benefit with reduction in effective indirect tax impact. Studies have shown that there is hope also of fiscal deficit being narrowed. Introduction of GST also has the potential to generate competitive pricing, reduction in business cost, rise in exports thereby resulting in increased GDP. Roadblocks to introduction of GST The Government’s stance has been that the GST system proposed may not be the ‘perfect GST system’ but it is a ‘good system’. However, introduction of ‘good GST system’ has been encountering roadblocks from opposition parties mainly on the following grounds:

Today, the introduction date of GST in India of 1 April 2016 is couched in doubt as political parties are at loggerheads over its form and content. Several questions have been raised on India’s preparedness for GST from an IT perspective. However, the recent awarding of a large IT contract by GSTN has brought a wave of positivity to India’s GST quest which seemed to have lost its sheen after Parliament’s monsoon session stalemate. Whether India would be able to implement GST by 1 April, 2016 is still a question, we can only hope that the winter session of Parliament brings some answers.

Roadblocks • removal of 1% additional tax • prescribing 18% as the maximum rate of GST within the Constitution • bringing tobacco, electricity, alcohol within the GST ambit • change in representation powers proposed in the GST Bill for centre and state governments

with further power to be given to state governments



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International Tax Policy

Taxsutra Brief: Overview International aspects of taxation have come to prominence in public debates. There is a deluge of tax discussions in all mediums. One can see the endless evolution in tax policies, behavior of taxpayers, change in laws and treaties and strengthening of the administration. Overwhelmed at the tax savings achieved by large multinational enterprises (MNEs), countries are now relooking at their tax policies to tighten the loopholes and protect their bases. One of the direct effects of this chaos is the G20-OECD project on Base Erosion and Profit Shifting. With this project on one side, countries independently are also trying their best to protect their tax bases through indigenous tax policies. Current International tax scenario “Patterns of FDI are impossible to understand without reference to tax considerations and this point is significant globally with relatively small countries accounting for very large share of global FDI” - states IMF policy paper: Spillovers in International Corporate Taxation, 2014. With the extent of globalization and digitization, the concept of ‘residence’ and ‘source’ have become much fragile and have given rise to the complex balancing act between the rights of source country and the resident country. Furthermore, identification of the ‘source’ of income is also becoming problematic given the complex structures of the MNEs & e-commerce transactions. Developments in International tax policy In the past years several countries have begun revamp of the tax regimes to address the complexities of globalization. The tax positions of top earning MNEs have garnered significant attention from the public and Governments are forced to act despite the risk of the negative effects on the investment climate. In the next few paragraphs, we have compiled some of the notable changes in this arena.

(a) The changing tax scheme

The foundation of tax concepts is undergoing significant changes across the world. Some of the notable developments are as below:

• Europe’s BEPS alignment: The European

Commission has published a new communication to the European Parliament and the European Council outlining steps to be taken towards a more unified European tax system, incorporating many of the key aspects of the OECD BEPS proposals. Amongst other things, the proposals aim at direct linking of taxation with value creation. The proposals include increased transparency and information exchange that can help tax administrators identify intragroup transactions and also a review of current preferential regimes to ensure compatibility with value creation.

• European Union targets direct linking of taxation with value creation

• US Model Income tax convention amended targeting double non-taxation and BEPS issues

• UN Model tax convention may see a new article on ‘fees for technical services’ providing right of taxation to source country



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• Proposed modifications to US Model Commentary: The US Treasury Department has released draft amendments to the US Model Income Tax Convention. The revisions target permanent establishments, special tax regime, expatriated entities, anti-treaty shopping measures of limitation of benefits article and subsequent changes in the treaty partners’ tax law. The proposals are intended to avoid instances of double non-taxation, whereby a taxpayer uses provisions in a US tax treaty, combined with special tax regimes, to pay no or very low tax in the treaty partner countries.

• UN work on taxation of services in source

country: The United Nations (UN) Committee of Experts on International Co-operation in Tax Matters is keenly working on the introduction of a new article on ‘fees for technical services’. Overall, the article will follow the principle that the country from which payments are made will be entitled to tax such payments on a gross basis without any threshold as to the presence in the country, irrespective of whether services are rendered within or outside the country. The proposal was extensively discussed in 2014 and one could expect an outcome post the Eleventh committee meeting in Oct 2015.

(b) Controlled Foreign Companies (CFC)

• Though existent in many countries, the concept of CFC continues to be evolving by finding

place in the OECD BEPS Action Plan. Of the famous BRICS nations, India is the only one yet to introduce a CFC regime with the recent adoption of CFC rules in Russia in 2014.

• Discussions on BEPS Action Plan 3 deals with strengthening of CFC rules have commenced in 2015 with the release of a discussion draft by OECD. Some of the key provisions include a benchmark tax rate of 75% or less of the Parent jurisdictions tax rate, considerations of intra-group payments and inclusion of non-corporate structures and permanent establishments. However, stakeholders have generally seemed to be unhappy with the provisions citing complexities and being too subjective. One would have to wait and watch till OECD releases the final report on CFCs and then how countries (including India) would go ahead in implementing the same.

(c) Automatic Exchange of Information

• Automatic Exchange of Information (AEoI) involves

systematic transmission of large amounts of information from the tax administration where the account is held to the tax administration where the taxpayer is resident.

• In July 2014, OECD released the ‘Standard for Automatic

Exchange of Financial Account Information in Tax Matters’. Further, in August 2015, OECD released a handbook to assist Governments in implementation of AEoI. The handbook provides an overview of the infrastructure required to implement the standard, detailed discussions on the standard including dealing with specific entities like trusts, financial institution and its interplay with US Foreign Account and Tax Compliances Act (FATCA).

• In 2010, the US enacted FATCA, requiring withholding

agents to withheld 30-percent of the gross amount of

• 61 countries (including India) have signed a ‘multilateral competent authority agreement’ to exchange information with intended first information date ranging from Sep 2017/ Sep 2018.

• Over 70 countries (including India) have signed the FATCA-Inter governmental agreement with the US, which includes tax havens such as British Virgin Islands, Cayman Islands etc.

• EU has proposed for automatic exchange of advance tax rulings and advance pricing agreements among EU member states starting Jan 2016.



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certain US connected payments made to foreign financial institutions unless such financial institutions agree to perform specified due diligence procedures to identify and report information about US persons that hold accounts with them to the US tax authorities.

• The European Union (EU) has also played its part in ensuring AEoI through amendments to

the already existing EU Savings Directive and the Directive on Administrative Co-operation expanding the scope from just interest income to specific incomes in the nature of dividends, capital gains, financial income and account balances.

(d) General Anti-Avoidance Rule (GAAR)

• GAAR has been a significant tool in countering harmful tax practices by disregarding treaty benefits. Several countries already have in place a detailed GAAR regime. The Indian GAAR shall take effect prospectively with effect from financial year beginning April 2017.

• In 2015, EU has adopted a binding GAAR in its parent subsidiary directive, requiring all

member states to comply by 31 Dec 2015. Based on the new rule, the member states shall not grant the benefits of the parent subsidiary directive to an arrangement put in place with the main purpose or one of the main purpose to gain tax advantage and those which are not genuine having regard to a series of facts and circumstances.

• China has introduced GAAR with effect from February 2015. It applies to cross-border

arrangements as a means of last resort when specific anti-avoidance rules and tax treaty provisions are exhausted. They are meant to target arrangements where the arrangement’s main purpose is to obtain a tax benefit or where an arrangement lacks economic substance.



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Analysis of LOB Clause(2)

subjective clause only

Bhutan Colombia Estonia Ethiopia

Fiji Finland Georgia Kuwait Latvia

Lithuania Luxembourg

Saudi Arabia(3)

Malaysia Malta

Mozambique Myanmar

Nepal Norway Poland

Syrian Arab Republic Taipei UAE UK

Uzbekistan

objective criteria also

Albania Armenia Iceland

Namibia Romania

Singapore(4) Sri Lanka Tajikistan Tanzania

United Mexican States

Uruguay USA

Limitation of Benefits Clause – Emerging Trends With the evolution of the Indian treaty policy, discussion seems more focused on what requirements should be satisfied before a resident of a foreign country is allowed to enjoy the benefits of the tax treaty with India. This naturally veers towards the ‘Limitation of Benefits (LOB) clause’ conveying the message that treaty benefit can no longer be claimed just on the basis of residency. With the advent of General Anti-avoidance Rules (GAAR) overriding treaty benefits, a LOB clause though viewed as a deterrent, may still offer comfort and certainty on the availability treaty benefits in a generally uncertain domestic tax regime. A witness to this attitude was when Singapore (treaty with LOB clause) toppled Mauritius as the top FDI contributor in 2013-148 when the Indian tax climate was perceived uncertain around GAAR. In this note, we provide an account of how LOB finds a place in Indian tax treaties and also how other countries are acting upon LOB. The Indian story India has a strong treaty network covering over 90 countries. Presently, over 30 treaties contain a distinct clause on LOB. Most of the LOB clauses can be categorized as being entirely subjective or including objective criteria. • A general subjective

statement found in these clauses is denial of treaty benefits “if the affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to take the benefits of this Agreement”.

• As an objective criterion, many clauses seem to specify type of entities such as government entities,

tax exempt entities, beneficial ownership requirements, listed securities etc. • Certain treaties specifically rule out benefits to categories of income which are taxed at lower or Nil

rate in the other state. For example, LOB clause in India-Namibia tax treaty allows India the right to tax income which has been exempted from Namibian tax as a result of it being foreign sourced for the purpose of Namibian taxes. Also, the LOB clause in India-Singapore tax treaty restricts benefits on certain income only to the extent remitted to the other country.

• Another point worth noting is in the India-Singapore tax treaty, wherein, the protocol contains

LOB specific to the stream of income characterized as ‘capital gains’. This clause goes on to establish more certainty by specifying the requirements of listing or satisfaction of minimum expenditure as the way to secure treaty benefits.

8 Source: http://dipp.nic.in/English/Publications/FDI_Statistics/2014/india_FDI_September2014.pdf - FDI from Singapore was $

35.6 billion during FY 2013-14 whereas FDI from Mauritius was $ 29.3 billion. 2 Source of Treaty: http://www.incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx 3 Article 26: Other Provisions 4 Also Refer Article 3 of the protocol



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Global Actions on LOB Not only India, several countries over the past few years have been stressing on LOB clauses in treaties and amending earlier treaties to include one. Some of the notable examples in this regard are as below: • The recently proposed draft revisions to the US

Model tax convention also include an amended LOB clause. The most significant change is the inclusion of a “derivative benefits test” which effectively widens access to the treaty. The test requires at least 95% of the company claiming benefits to be held directly or indirectly, by seven or fewer persons that are equivalent beneficiaries (i.e. a resident of any state that has a comprehensive treaty with US and is entitled to the same benefits as the subject company).

• The OECD BEPS Action Plan 6 on ‘Preventing

treaty abuse’ also proposed a LOB rule which was largely based on those contained in US tax treaties restricting treaty benefits to ‘qualified persons’ with certain exceptions. After much deliberation, OECD had finally proposed simplified LOB rule removing most of the complexities to the definition of ‘qualified persons’. In case of companies and persons other than companies, it just requires that shares or beneficial interests are traded on recognized stock exchanges or more than 50% of the beneficial interests are owned by qualified persons. Further the derivative benefits threshold was reduced from 95% to 75% with no prescribed number of equivalent beneficiaries.

• Spain-USA tax treaty was amended in 2013 to incorporate a more objective criteria of LOB

determined through shareholding, nature of operations etc. • Luxembourg amended its treaty with Poland introducing LOB clause disallowing the application of

treaty to income paid or received in relation to artificial arrangements or in cases considered as harmful tax competition according to the EU code of conduct group in charge of business taxation. Luxembourg has also amended its treaty with Russia in 2014 introducing a LOB clause.

• Argentina and Chile signed a new treaty in 2015 introducing LOB provisions.

Recent Updates • India and Mauritius are believed to have reached a tentative understanding on a revised tax

treaty. Awaiting formal announcements, it is expected to contain a LOB clause to check treaty abuse.

• India and Spain had signed a protocol amending the tax treaty which also introduces a unique LOB clause. It provides that domestic law provisions with respect to the abuse of law (including tax treaties) may be applied to the treatment of such abuse. Further, benefit of tax treaty would not be available if a person is not beneficial owner of items of income derived from other contracting state. Notably, the LOB article also clarifies that the Treaty does not prevent application of domestic CFC Rules. Treaty benefit would not be available if main purpose or one of the main purposes of creation, existence, incorporation or presence of such resident or transaction was to obtain such treaty benefit.



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Experts’ Corner

Making India’s International Tax Policy more certain

Ashutosh Dikshit, Principal Advisor, BMR & Associates LLP

Foreign investment into an economy by way of ‘greenfield’ investments, mergers and acquisitions or investment in the financial markets is based on the international investor’s evaluation of a number of factors about the economy. Prospects of economic growth, exchange rates, political stability and rule of law, strength of the financial sector, tax regime, capital controls and past experience in dealing with these are all inputs to a considered decision about such investments. Making India an attractive destination for direct investments and facilitating portfolio investments by international investors has been a stated goal of successive governments. The taxation of cross border investments is an added layer in the regulatory environment in which the international investor operates. The current global international tax regime involves countries negotiating bilateral tax treaties with separate rates and dispensations for particular types of income, the interplay of these tax treaties with the domestic tax law and with each other and the ‘transfer pricing’ evaluation of transactions made by an international investor with its affiliates. This makes international taxation an inherently complex process which requires the international investor to maintain an in-house international tax capability, seek country specific tax advice and take decisions on these issues at the highest managerial levels. Mitigating the complexity and time taken in this process would be a component of the government’s initiative to promote India as an attractive destination for foreign capital – the recent ‘Make in India’ initiative is a manifestation of this. Looking at this added layer of tax complexity faced by an international investor, some specific policy and implementation initiatives which could mitigate these for India are discussed below:

With the country echoing ‘Make in India’ everywhere, are there blockades in our tax system that could be detrimental? Ashutosh Dikshit [Principal Advisor, BMR & Associates LLP] pens down his analysis of just that in this article. The Author identifies the additional layer of tax and regulatory environment that is faced by an International Investor and notes the need for an in-house international tax capability. He further comments that mitigating the complexity and time taken in the process of dealing with these additional layers would be a component of the government’s initiative to promote India as an attractive destination for foreign capital. The Author also suggests specific policy initiatives that could mitigate the complexity faced by international investors in this arena. One point which is stressed upon is the immediate need to enhance resource capabilities of various functions in the tax administration to cope up with the dynamic tax regime. The Author also discusses the current alternate dispute resolution mechanisms, highlighting the flaws and suggestive actions. He ends with a note of hope that focussed attention of the government on the highlighted areas will assist in providing a stable international tax environment to international investors operating in India.

Need of the hour:

• Strengthening the resources of the tax policy function:

• Strengthening the advance rulings mechanism

• The Advance Pricing Agreement mechanism for Transfer Pricing:

• Strengthening the MAP for tax treaties



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Strengthening the resources of the tax policy function: The current architecture of the international tax system based on the identification of the source of income and the residence of a company and allocating it through bilaterally negotiated tax treaties is under increasing challenge in the face of globalization of international trade and capital flows. Under the G20-OECD project on Base Erosion and Profit Shifting (BEPS) initiated in 2012 after the global financial crisis, governments of major developed and developing countries decided to work together to address major tax avoidance opportunities which arise in the current system. The BEPS project aims to fulfil its 15 point action plan on various aspects of the international tax regime by 2015. It also aims to complete (in 2016) the work on a multilateral instrument reflecting the BEPS outcomes on tax treaty issues; the goal is that countries signing on the multilateral instrument would not need to renegotiate their respective bilateral treaties. At the same time, individual countries have also continued taking unilateral action to protect their tax base and are also renegotiating bilateral treaties in line with their strategic interests. While these changes in the international tax regime could be momentous, they do not signal reduction in complexity of the regime in the medium term. As a developing country, India relies to a greater extent on corporate taxes as a share of its total tax revenues than do developed countries. With the increase in international investment (both direct and portfolio investment) in the Indian economy, the corporate tax component emanating from international transactions is a significant portion of these tax revenues. In line with their increasing importance in the tax base and the higher degree of complexity involved in international transactions, the Indian government needs to urgently allocate additional resources and reallocate the current ones to build expertise in the area so as to pro-actively respond to the plethora of issues which constantly come up. Aligning domestic law and treaties with the consensus reached under BEPS and current issues like rules regarding the determination of the place of effective management (POEM) of a company, the forthcoming implementation of the GAAR provisions etc. need to be addressed on an ongoing basis rather than through the annual budget exercise. This requires a much larger allocation of skilled manpower to these policy functions than is currently invested by the tax administration. The recent manpower review (cadre restructuring) in the tax department has strengthened resources in

the assessment and appeal functions, but left the tax policy function untouched. This needs to be urgently reassessed if the tax administration is to respond in a timely manner to a variety of issues which arise in the arena of international taxation. Also, many of these issues have a strategic and potential economic growth component, which require analysis that goes beyond a static consideration of ‘revenue loss’. This kind of analysis requires a greater coherence in policy making and clearly spelt out reasons why the government is taking a particular decision in a treaty negotiation or on an international tax issue. The decisions therefore no longer remain purely that of revenue collection. An institutional mechanism where such issues are analysed, backed up with data and the global and historical context is needed which does not currently exist in the government’s policy making structure. Creating such an institutional mechanism should be a top priority given India’s increasing engagement in international tax policy and the complexities arising from it.

Strengthening the advance rulings mechanism: The institution of the Authority for Advance Rulings (AAR) (a judicial tribunal legally separate from the tax department) was set up in India more than two decades ago specifically to provide binding rulings to an international investor on his tax liability in advance of undertaking a particular

“Aligning domestic law and treaties with the consensus reached under BEPS and current issues like rules regarding the determination of the POEM of a company, the forthcoming implementation of the GAAR provisions etc. need to be addressed on an ongoing basis rather than through the annual budget exercise.”



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transaction. The ruling is supposed to be given within 6 months of filing an application. However, the Authority, owing to administrative and vacancy issues over the years, now takes an average of 3 years or more (as against the stated time limit of 6 months) to give its ruling on an application filed by the international investor. A concerted push towards putting in place additional benches and appointments for the Authority is urgently needed to quickly bring down the 3 years it takes for the Authority to pronounce a ruling to the 6 months originally envisaged. The Advance Pricing Agreement mechanism for Transfer Pricing: For an international investor, another layer of complexity in tax compliance, globally, arises from the specific evaluation by tax administrations of transactions made by the investor’s domestic entity with associate entities located abroad. India’s transfer pricing regime was put in place more than a decade ago and over subsequent years transfer pricing issues have become a rising component of tax disputes between businesses and the tax administration. Currently more than 50 per cent of transfer pricing assessments result in tax disputes and the adjustment amounts have been close to rupees fifty thousand crore every year9. As a result, in recent years, total taxes in dispute have jumped from about 15 per cent to more than 30 per cent of total direct tax collections (refer chart below)

Even with a fast track mechanism of a departmental Dispute Resolution Panel (specifically for Transfer Pricing disputes) in place and though not all cases go to the High Courts and the Supreme Court, the dispute may take close to a decade to resolve and until then would be repeated in all subsequent assessments of the taxpayer.

9Ministry of Finance press release dated August 30, 2013

14.79% 16.41% 14.27%

33.94% 41.56%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

0

100000

200000

300000

400000

500000

2009-10 2010-11 2011-12 2012-13 2013-14

Source: Figures from Receipts Budgets, 2009 to 2013 (Annex 10)

Direct Tax Collections Taxes in Dispute percentage

Company files return of income

Selection and Scrutiny Audit

process

Dispute Resolution

Panel Tax Tribunal

High Court and Supreme

Court

0 4 6 to 9 5 10 to 15

Time in years



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Taking cognisance of this, in 2012 the government has instituted an Advance Pricing Agreement (APA) regime for Transfer Pricing issues under which a business can reach an agreement with the tax administration regarding the valuation (Arm’s Length Price) of international transactions it plans to undertake. The scope of an APA has recently been enhanced to roll it back to similar transactions undertaken in earlier years thus enhancing the tax certainty for the transaction. 14 APAs have been signed so far, 13 of which are unilateral APAs including one with ‘rollback’ provisions and one a bilateral APA10. These APAs relate to various sectors like telecommunication, oil exploration, pharmaceuticals, finance/banking, software development services and Information Technology enabled Services (ITeS). The APA mechanism reduces the complexity, litigation and time expended in the Transfer Pricing process. The Government has stated its commitment to conclude a large number of APAs to foster an environment of tax cooperation and certainty. The APA process should be a collaborative one based on a premise of good faith in order for it to

have an advantage over the current adversarial litigation mechanism. To enable the further success of the APA mechanism, the tax administration needs to invest in it by way of posting, skilling and training additional human resources and a focussed attention to monitoring and removing any bottlenecks in the process so that APAs which are in process are concluded in a reasonable period of time. Strengthening the Mutual Agreement Procedure (MAP) for tax treaties: Bilateral tax treaties provide for MAP to resolve issues where the international investor is doubly taxed in both countries. Bilateral APAs, besides agreements between taxpayers and tax authorities also include one between the tax authorities of the two countries. For a number of transfer pricing issues, the ultimate resolution to the satisfaction of both the international investor and the tax authorities of the source and resident countries is the bilateral APA. There is also leeway for the Indian tax authorities to promote bilateral APAs even with countries where a specific provision (Article 9- allowing for corresponding tax relief arising from a transfer pricing adjustment) does not exist in the bilateral treaty by enabling this mechanism under the general MAP provisions which exist in every treaty. This would obviate the need to renegotiate these treaties only for this purpose, has no tax implications and would facilitate the bilateral APA process with the international investors from these countries. A bilateral APA is by definition a more complex process to negotiate. There are also a number of pending disputes on international tax and transfer pricing where taxpayers have invoked the MAP mechanism. India has recently arrived at a Framework Agreement with the United States under the MAP provisions of the bilateral tax treaty. The agreement creates a platform to resolve 200 past transfer pricing disputes relating to the Information Technology Software Services and ITeS sector. The progress of bilateral APAs and resolution of disputes under the MAP procedure again hinges on the resources, time and skill building which the tax administration is willing to allocate to this function. Focussed attention of the government on the highlighted areas will assist in providing a stable international tax environment to international investors operating in India.

10 Ministry of Finance Press release dated 6 August 2015

“To enable the further success of the APA mechanism, the tax administration needs to invest in it by way of posting, skilling and training additional human resources and a focussed attention to monitoring and removing any bottlenecks in the process so that APAs which are in process are concluded in a reasonable period of time.”



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Can we make ‘Make in India’ better?

Kumar Kandaswami, Senior Director, Deloitte India

The need for ‘Make in India’ is well understood. It is almost a matter of relief that we seem to have a road map that has the potential to transform the manufacturing economy of the country. And, there seems to be commitment to get it done. While there are voices that say not much has changed on the ground, it is also true that getting off the ground from where we were as a manufacturing economy was not going to be easy or quick. Elements of competitiveness The objective of this analysis is not to focus on what has been done so far but to determine how this initiative can potentially impact the manufacturing sector in India and what more needs to be done. For us to do that, we need to recognize competitiveness in manufacturing is likely to be determined by one or more of the following: • Scale • Technology • Brand • Innovation While they are listed as separate items, they are closely linked and lead to one another. For example, innovation leads to technology or brand results in scale. Countries that have been successful in manufacturing have had a strong tradition in one or more of the above. China, that emerged as the dominant manufacturing economy mastered scale and now seems to be pursuing its aspirations in brands and technology.

‘Make in India’ is one of the signature themes of the Modi government on the economic front. While there are facts and analysis to reflect the progress so far, Kumar Kandaswami [Senior Director, Deloitte India] in this article, seeks to determine how this initiative can potentially impact the manufacturing sector in India and what more needs to be done. The article provides an incisive analysis of the elements of competitiveness, the concept of ‘Make in India’ and the much needed extra mile beyond just the ease of doing business. The Author tries to capture the key success factors of some of the successful manufacturing economies and India’s relative comparability to such factors. Welcoming the changes contributing to ease of doing business, the Author calls for focus on strategic levers such as demand creation, developing Intellectual property, anew manufacturing eco-system and advanced manufacturing technologies. The Author concludes by noting that the initiative would be far more impactful and serve the country well for a longer time, if some of the strategies as discussed are incorporated.



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If one looks at India, there isn’t apparent strength in any of the above. We are not China in scale, Japan in technology, Germany in brand or USA in innovation. To be truthful, these countries also excel in areas other than what is listed against them. Contrast this with the brand that collectively Indian IT companies enjoy or their scale. Or the generics companies and their scale on account of low costs. Therefore, they are world-beaters. If this premise were to be true, what would be critically important for India to make a name in manufacturing? • Factor costs and conditions • Investment in applied research • Investment in fundamental research • Scale in a global sense to create brands • An ecosystem and capital for innovation

Given the fact that 60-70% of manufacturing is concentrated in a small handful of states, the factor conditions are unfavorable. Contrary to the popular notion, we are not a low cost country – there are areas where the costs are lower, but they do not seem to lead to a competitive advantage on account of other conditions that are not up to scratch. In a country where manufacturing is not based on innovative technology, it is critically important to have low factor costs. Add to this the cost of doing business here, it blunts any competitiveness that a company may have.

This brings us to the next important aspect – technology. We spend about 0.5 – 1% on R & D in the manufacturing sector, against the global norm of 3 – 5%. Given the size of companies, the low R & D spend doesn’t give companies a chance to compete on the basis of intellectual strength. Added to the low spend by the industry, the extent of academic and fundamental research is really low. The latter situation does not facilitate development of cutting edge, new-to-the-world technologies. While there is an ecosystem that is developing to support start-ups, in the absence of manufacturing technology they tend to be mostly info-tech or internet

based companies. To that extent, the manufacturing sector seems not to have exploited this ecosystem. Make in India Given this, let’s look at what ‘Make in India’ is and how it will make a difference to our manufacturing sector. New processes would certainly help in the area of factor costs/conditions, which in turn, can help build scale. New Infrastructure would not only add to easing the costs but also generate demand. Increased demand would in turn build scale. The “New Sectors” also would generate demand and help build scale. The ‘New Mindset’ pillar seems to promote the notion that there will be a new and improved interface with the government for the enterprises. It is also said that there is keenness to enhance the value addition in India – the Defence Procurement Policy is likely to incorporate this.

Make in India is said to be built on four pillars:

• New Processes o Ease of Doing Business

• New Infrastructure o Industrial Corridors o Industrial Clusters o Smart Cities

• New Sectors • New Mindset



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There are also steps that the government is taking that can have a significant impact on manufacturing competitiveness. Examples are GST, Elimination/reduction of black money, Land acquisition, Labour reform. These are great steps in the right direction. That said, many of these steps, if implemented well and expeditiously, would put India on par with the more successful or industrialized nations. It will be become easier and more cost effective for investors to run manufacturing operations from India. They may not provide any significant advantage over countries like Japan or Germany of the world in manufacturing. Therefore, the attraction for India will continue to be the promise of a large market. The philosophical question is: are we going to be happy with providing a reasonably efficient manufacturing platform where value perhaps disproportionately gets created elsewhere – as it is famously said, for every cell phone manufactured in China, the value created in China is a tenth or less compared to the value that is created outside of that country. This would mean manufacturing operations would flourish so long as there is demand locally, certainly generate jobs but not necessarily create value arising out of intellectual input to manufacturing. In this context, if one were to look beyond the ease of doing business type initiatives, which are hygiene in nature, one would find that the critical items of technology and brand as strategic levers have perhaps not received the attention they deserve. Higher education is still thought of as an employment generation platform as opposed to the one that creates new ideas/technologies for the coming generations. Beyond ease of doing business For manufacturing in India to achieve the 25% share of the GDP and sustain it, one would want to look at other strategic levers that are available with the government. Here are some of them. • Demand creation

o While the government spending on infrastructure has increased dramatically, it is still perhaps very inadequate relative to the requirement or, even, as a demand generation trigger. The discourse of PPP seems to have taken the back seat in the light of the impressive spending by the government. Admittedly, there are challenges to be overcome to create a robust PPP framework for widely differing sectors. It is intriguing that this is not even being discussed in TV shows! Given the weak commodity prices, does it make sense to maximize infrastructure building by accelerating private participation?

• Developing intellectual property

o India houses the engineering and R & D centers for virtually every auto OEM. The availability of talent and process know-how has improved dramatically. However, the enthusiasm of Indian manufacturing sector – beyond the few visible exceptions – in investing in R & D has not changed, as has been indicated earlier. Large parts of the sector are satisfied converting raw material into a component to be fitted on to someone’s final product based on the product manufacturer’s design. This leads low margins, high vulnerability to material price movement or price competition.

Beyond Ease of doing business

• Demand creation • Developing Intellectual property • A new manufacturing eco-system • Advanced manufacturing technologies



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o Manufacturing for a youngster who passes out of a top engineering school is not ‘cool’. Therefore, the sector is denied of the top talent that it desperately requires to create new technology and products

o The top educational institutions are

preoccupied with churning out graduates and not focused on fundamental research. It is absolutely the responsibility of the top engineering schools to generate new technology ideas. The reason why some of our top institutions get ranked low is perhaps due to this – low number of published papers and research. It is unfortunate that this is not being sought to be changed – at least from what one reads in the press. We hear of more IITs/IIMs, perhaps with the existing faculty travelling to teach. Lack of research is not a luxury we can afford any more – we lost out in the past years because we did not possess IP. In fact high quality academic research would also draw talent into the manufacturing sector, a happy by-product

• A new manufacturing eco-system o The stand-up – start-up India is a fantastic step. This will work better if the start-ups have

access to technology as much as rely on business model innovation. While this is being done, dramatically new and interesting models like the Maker Movement are developing and it would be important to embrace those. It is important to create or promote contemporary platforms for growth than rely on an earlier generation structures

• Advanced manufacturing technologies

o There are new material systems and manufacturing technologies like additive

manufacturing that are likely to change the definition of the sector. We will increasingly see blurring of sectoral boundaries and computing/communication technologies enable those methods that were not possible earlier. It is important to understand, master and promote these exciting areas, along with the conventional ones, to stay relevant in the future manufacturing world. As the reader would expect, success in this would depend on the quality of academic research and creation new ecosystems.

To summarize, Make in India is a great idea whose time has come. It is heartening, as a manufacturing practitioner, that the government has made this into a show-piece of its policy making. This would, undoubtedly, push along the manufacturing sector. However, the initiative would be far more impactful and serve the country well for a longer time, if some of the strategies discussed above are incorporated.



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Litigation Trends

Taxsutra Brief: India’s Tax Dispute Resolution Scenario

The above statement emphasizes the perceived importance of dispute resolution in the tax administration framework. A quick resolution of tax disputes resolution is essential for efficient administration as well as for providing business certainty. A step towards improving various aspects of tax administration was the constitution of TARC which was entrusted with the role to review the application of tax policies and tax laws in the context of global best practices and to recommend measures for reforms required in tax administration to enhance its effectiveness and efficiency. The next few pages present facts & figures in relation to the tax dispute resolution scenario in India as also covering major recommendations of the TARC. A. Statistics on pendency of tax disputes In India, pendency of tax cases at various levels of the dispute resolution fora, has been staggering. I. Direct taxes

1. No. of Cases pending for FY 2012-13 and FY 2013-14*

Forum Pendency as on Appeals Instituted during

April 1, 2012 April 1,2013 2012-13 2013-14 (up to December

2013) Supreme Court 5,844 5,865 868 524 High Courts 29,129 31,488 6,725 5,867 ITAT 31,299 31,914 21,993 16,131 *Includes cases filed by taxpayer as well as Tax Department 2. Statistics regarding disposal of appeal by CIT(A) for FY 2013-14 and 2014-1511

Particulars FY 2013-14 FY 2014-15 (upto October 2014)

Total number of pending cases before CIT(A) as on the end of the year 215,174 237,826

No of high demand cases in total cases pending before CIT(A) at the end of the year 42,322 54,394

Amount locked in total appeals at the end of the year (in Rs crores) 287,443 383,920

11 As per Finance Ministry Annual Report for FY 2014-15

“The credibility of the tax administration of a country depends to a very great extent upon the credibility of its dispute resolution mechanism. This is in terms of how quick, consistent, transparent and fair the dispute resolution mechanism is in the eyes of the taxpayer.”

-‐ Report of the Tax Administration Reform Commission (TARC)

• Recent press release in August 2015 by the Ministry of Finance pegged the number of cases pending in various High courts as on March 31, 2015 were 34,281 involving amount of Rs. 37,683.98 crores.

• As on January 1, 2015 the pendency of cases in ITAT crossed 1 lakh.



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About 20% of the cases pending before the CIT(A) are high demand cases and the status is only seen increasing in the subsequent year. The amounts locked in are also huge and where there is a case of refund, the absence of processing time limit hinders the taxpayer further. 3. Average dispute resolution time12 Hierarchy Time-frame Order passed by AO 1-2 years Appeal to CIT (Appeals) within 30 days 3-4 years (6-8 years in certain jurisdictions) Appeal to ITAT within 60 days 2-3 years (longer in certain jurisdictions) Appeal to High Court within 120 days 3-5 years (8-10 years in certain jurisdictions) Supreme Court 4-7 years (depending on the case) While the vastness of appeals is not always under control, a key to achieving efficiency in dispute resolution is by managing the disposal time. The above table lists the average time frame at each level observed in a study by FICCI. If there is a compelling matter waiting to pass through all levels, it is seen to take at least 13 years! II. Indirect taxes

1. No. of cases pending as on October 31, 201413

Appellate

Forum

Number of Appeals Amount Involved (Rs. In Crores)

Dept. Appeals

Party Appeals

Total Appeals

In Dept. Appeals

In Party Appeals

Total Amounts

Supreme Court 2,307 1,183 3,490 8,696.64 3,226.53 11,923.17

High Courts 7,167 7,967 15,134 9,627.25 10,418.65 20,045.90

CESTAT 20,409 51,343 71,752 19,298.73 112,081.60 131,380.33

Commissioner (Appeal) 4,366 32,890 37,256 959.04 9,618.60 10,577.64

Total 34,249 93,383 127,632 38,581.66 135,345.38 173,927.04

From the above statistics, one can infer that the first appellate authority is mostly facing appeals from the taxpayer, about 88% of the total appeals. Also, one can notice the reversing trend with the most number of appeals pending at the SC being filed by the tax department (around 66%), also indicating that Government itself is a major litigator. Nevertheless, the cases have accumulated over several years and it would be difficult to gauge the trend just on this basis. B. Highlights of TARC Observations & Recommendations TARC in its report14 has observed that primary concern regarding India’s tax dispute resolution system is protracted dispute and absence of effective means to prevent disputes. Highlights of specific observations are provided below:

PROTRACTED DISPUTES • Absence of stakeholders’ participation at the time of law making and legal drafting leading to

ambiguity in tax laws and lack of administrative guidance about interpretation of tax laws. Further, retrospective amendments have further undermined taxpayers’ trust in the system.

12 See page 230 of TARC Report dated May 30,2014 13 As per Finance Ministry Annual Report for 2014-15 14 TARC report dated May 30, 2014



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• Lack of proper training and industry experience and giving insufficient time to taxpayers for responding to notices lead to substandard quality of assessment.

• Arbitrary and aggressive additions leading to frivolous demands made in assessment because of revenue target linked performance evaluation and incentive policy for tax officers.

• Tax demand raised on protective basis on account of audit objections. • Insufficient accountability in current system while exercising reassessment jurisdiction and such

jurisdiction is exercised without ensuring that preconditions provided in tax legislation before exercise of such jurisdiction are fulfilled.

• Tendency to file appeal against the order in favour of taxpayers without giving due importance to merits of the case.

ADVANCE DISPUTE RESOLUTION MECHANISM

AAR Settlement Commission MAP DRP

This mechanism is not very effective due to limited rich, its nature as private ruling, lack of accessibility in absence of multiple benches across country

This has proved to be less effective due to considerable delay in disposal of settlement application and limitation of cases which could go to settlement commission

Taxpayers consider this mechanism when all the other remedies are exhausted. There are a few weaknesses in this system like bureaucratic overhang, lack of trust of taxpayer and lack of transparency, etc.

Practically it has been noticed that DRP rarely takes a position different from AO and the powers of DRP are limited as compared to powers of CIT(A). Further, DRP mechanism is available to limited categories of taxpayers and tight timelines for filing of objections by taxpayers also act as a hindrance. Finance Act, 2012 enabled the commissioner to file appeal against DRP directions, because of which DRP mechanism suffered a major setback as dispute resolution mechanism

Key Recommendations - TARC

• Retrospective amendment should be avoided as a principle. • Fundamental approach should be collaborative and solution oriented. • Both CBDT and CBEC must immediately launch a special drive for review and liquidation of cases

currently clogging the system by setting up dedicated task forces for that purpose. The review and liquidation should be completed within one year and the objective should be to decide all cases pending in departmental channels for longer than a year as on the start date of the action plan.

• Dispute management should be a functionally independent structure with adequate infrastructural support.

• Current practice of raising demands irrespective of merits should be discontinued. • The DRP in income tax should be made full-time panels. Their mandate should be expanded to include

corporate cases of resident cases as well. Same mechanism should be introduced in indirect taxes also, where collegium of three Commissioners would be deciding complex cases Broad-based selection filters for the risk assessment matrix should be put in place.

• Jurisdiction of AAR should be made available for domestic cases also. More benches of AAR should be established at Mumbai, Bangalore, Chennai and Kolkata, with the principal bench at Delhi.

• Settlement Commission should act as part of taxpayer services, and be made available to the taxpayer to settle disputes at any stage. There should also be an increase in the number of benches of the Settlement Commission.

• Appeals to high courts and the Supreme Court should only be on a substantial question of law. • On disposal of a case by Supreme Court/High Court and if the judgment is accepted by the Department,

an instruction should be issued to all authorities to withdraw appeal in any pending case involving the same issue.



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Experts’ Corner

Tax Litigation in India – Trends & Strategies

Rohit Jain, Partner, ELP Rahul Khurana, Associate Manager Divya Jeswant, Senior Associate

Out of the three sources of governmental funding, viz. tax revenue, non-tax revenue and capital receipts, more than half of the inflows of the Indian government are attributable to tax revenue. Given such high dependence on tax receipts, the Indian tax system has over time seen a rise in litigation before the various authorities and Courts, with the corresponding adverse impact on the speed and efficacy of the judicial and quasi-judicial setup. In his Budget 2014-15 speech, Finance Minister Mr. Arun Jaitley raised concerns stating that “Tax demand of more than 4 lakh crore is under dispute and litigation before various Courts and Appellate authorities...” While majority of these pertain to Government litigation, a close look suggests a dismal success rate of the Department before various appellate authorities across both direct and indirect taxes. This outcome is clearly influenced by the aggressive

approach of the tax authorities in initiating and pursuing disputes against assessees, in order to drive revenue collection so as to meet internal pressures.

As noted from the statistics in th foregoing pages , litigation in tax is a reality and needs special focus & attention of the taxpayers. Authors Rohit Jain [Partner, Economic Laws Practice], Rahul Khurana [Associate Manager] and Divya Jeswant [Senior Associate] provide an incisive analysis of the trends and strategies in tax litigation. Highlighting recent trends in litigation, the Authors comment that Revenue is noted as the litigator in most cases. Coming to litigation strategies, the Authors provide an overview of certain do’s and don’ts in each of the investigation, adjudication and appellate stages. Finally touching upon alternate dispute resolution mechanisms, the Authors stress the need for assessees to constantly review and assess their litigation strategies to remain well-placed against any adverse situations.



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Recent Trends In the recent past, a sharp rise in the investigations conducted by the tax authorities, including the intelligence authorities specifically designated for this task (such as the Directorate of Revenue Intelligence (DRI), Directorate General of Central Excise Intelligence (DGCEI) etc.), has also contributed to the growing body of litigation. The following developments, in particular, are noteworthy: (i) Industry-wide audits and investigations

have gathered substantial momentum (e.g. the automobile manufacturing industry, electronics industry and insurance industry are currently under the scanner of the tax authorities on issues relating to classification, valuation of imported goods admissibility of CENVAT credit etc).

(ii) Investigation proceedings initiated by one tax authority have also resulted in demands under other tax laws and / or regulatory laws (e.g. Customs export undervaluation proceedings may also give rise to Income Tax demands as well as disputes under the Foreign Exchange Management Act, 1999).

(iii) Investigations against MNCs may have a roll over effect for parents / subsidiaries / group entities / branches in other jurisdictions, on account of Indian tax authorities sharing details obtained during investigations with their foreign counterparts under Tax Exchange Information Agreements.

On the other hand, in the last year or so, the Government has made some attempts to curb tax litigation and / or reduce pendency. One of these was the introduction of a thirty per cent interest rate for any tax remaining unpaid for more than a year, to disincentivise litigious positions being adopted by assessees. Another was the introduction of a mandatory pre-deposit for filing of appeals under Customs, Excise and Service tax (akin to those already existing under various State VAT statutes), in order to do away with the need to determine stay applications at the Tribunal level and thereby reduce pendency. Given the above developments, handling tax litigation assumes greater significance as part of any business operations in India. Pre-dispute and Post-investigation litigation strategies INVESTIGATION STAGE At the pre-dispute stage, the tax authorities have wide powers to summon the production of various documents from an assessee, however voluminous, as also summon various personnel to record their statements. During the course of these proceedings, it is important that the taxpayer is cooperative with the authorities, and full disclosure of all relevant facts is made, which is essential to establishing bona fides while later defending against a demand. During the course of investigation, all appropriate factual assertions which are supportive of the assessee’s position should be placed on record. Further, the various statements given by personnel of the Company should reflect a consistent position.

• “All appropriate factual assertions which are supportive of the assessee’s position should be placed on record.”

• “Various statements given by personnel of the Company should reflect a consistent position.”

• “Any payments made must be strictly “under protest”, i.e. without prejudice to and reserving all legal rights and submissions under law.”



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In the event that any adverse statement is recorded either under duress or due to lack of complete knowledge of the facts, immediate retraction should be sought, failing which such statement could be relied upon by the authorities for the issuance and defense of a tax demand. One of the important issues which also arises at this stage is whether or not the assessee should make a payment of tax during the investigation. Any such payments should be made only after considering the various competing factors, such as the strength of the assessee’s stance, impact on other related proceedings, recurring nature of the issue, reputational issues etc. Any payments made must be strictly “under protest”, i.e. without prejudice to and reserving all legal rights and submissions under law. At this stage, the feasibility of amnesty schemes would also need to be examined if an assessee wishes to completely avoid further litigation. ADJUDICATION STAGE The post-investigation stage commences with the issuance of a demand and / or adverse order by the tax authorities. During this stage, it is imperative that the assessee ensures that all supporting legal submissions are canvassed from the very first level of adjudication. This will eliminate unnecessary remands of the matter, i.e. where the appellate fora believe that the lower authorities have not had a chance to consider a particular ground of challenge / evidentiary basis. It is also critical that any issue which is adverse to the assessee is addressed upfront, and not allowed to surface subsequently in the proceedings which may be far more damaging. As an alternative to defending against the demand, an assessee may also opt to discharge the tax dues, and seek a waiver of penalties before the Settlement Commission. APPELLATE STAGE Further to the adjudication stage, where the demand is confirmed, the assessee potentially has a four-stage grievance redressal mechanism, beginning with an appeal to the Commissioner (Appeals) and / or appellate tribunals, and with the dispute thereafter culminating before the High Court and / or Supreme Court. In any of the appellate proceedings, while submissions will be made to counter the findings in the adjudication order, the first attempt is to secure a stay of recovery of the demand, which would otherwise impact the assessee’s cash flow. The stay hearing does not delve into the issue on merits, but is limited to an examination of the prima facie case, balance of convenience and potential for undue hardship to the taxpayer. Subsequently, during the final hearing, the full-fledged case is presented before the appellate forum. In certain cases involving more serious evasions, the assessee may also have to defend prosecution proceedings launched by the Department in the parallel. Apart from the appellate remedies, in certain limited circumstances (e.g. violation of natural justice principles, demand in excess of jurisdiction etc.), an assessee may exercise his option to approach a writ Court (i.e. a High Court under Articles 226 and 227 of the Constitution or the Supreme Court under Article 32) seeking extraordinary reliefs against the Departmental authorities. This route is, however, largely eclipsed where the assessee has an equally efficacious alternative remedy at his disposal.

• “the first attempt is to secure a stay of recovery of the demand, which would otherwise impact the assessee’s cash flow.”

• “In certain limited circumstances, option to approach a writ Court seeking extraordinary reliefs against the Departmental authorities.”

• “ensure that all supporting legal submissions are canvassed from the very first level of adjudication.”

• “any issue which is adverse to the assessee is addressed upfront, and not allowed to surface subsequently in the proceedings which may be far more damaging”



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Alternative Dispute Resolution Options The time, effort and cost investment required in pursuing tax litigation has led both the Government and assessee to resort to various alternative dispute minimization and resolution options. Most tax statutes offer the option of an Advance Ruling / Determination of Disputed Questions, which allows an assessee to apply upfront for a binding order on issues of classification, rates, valuation etc. Similar options have also been introduced more recently in other growing litigious areas, such as the Advance Pricing Agreement (APA) program under the transfer pricing provisions. Assessees therefore need to constantly review and re-assess their tax litigation practices and strategies to ensure that they are well placed to prevent and / or defend any claims raised by the Indian tax authorities.



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Administrative law principles in tax litigation: Missing arrow in your quiver?

Sujit Ghosh, Partner & Sudipta Bhattacharjee, Principal National Head, Advaita Legal

Litigation in specialized areas of law often becomes a cocoon with practitioners not looking beyond the specific subject in question. It is in that backdrop that this piece aims to put the spotlight on usage of fundamental administrative law principles in the realm of tax litigation. Circulars, instructions, rules often flesh out various key aspects of tax liability, investigation and recovery. While it is crucial to analyze such delegated legislations threadbare on their own to finalize one’s arguments, it is also pertinent to evaluate the scheme of mother legislation to evaluate the very legal tenability of such delegated legislations – assailing legal tenability of delegated legislations using administrative law/Constitutional law arguments often leads to more effective results than pure-play arguments based on tax laws. In this regard, reference may be made to the Travelite (India) case [TS-310-HC-2014(DEL)-ST] where the Delhi High Court struck down erstwhile Rule 5A(2) of Service Tax Rules requiring production of records to audit party on demand and CBEC Circular dated January 1, 2008 pertaining to general audit, as ultra vires the Finance Act. It held that Parliament had clear intention to provide for only special audit u/s 72A of Finance Act on fulfilment of special circumstances, and it did not contemplate a general audit that “every assessee” may be subjected to “on demand” – the Delhi High Court categorically held that Rules must conform to the provisions of the mother statute and be within rule making powers of executive authority and to that extent, any attempt to include provision of general audit through backdoor is ultra vires the rule making power conferred under section 94(1) of the Finance Act. The Delhi High Court went further and even, rejected Revenue’s attempt to justify the Rule 5A(2) by invoking Service Tax Audit Manual, 2011 on the ground that the same is merely an instrument of instructions for service tax authorities with no statutory force. As a fall out of this decision, Section 94 was amended to insert a new clause (k), by Finance Act 2014 to lend legal

tenability to Rule 5A(2). Another aspect of administrative law principles emerges from the principles of natural justice which mandates grant of a fair hearing. While the most obvious application

“assailing legal tenability of delegated legislations using administrative law/Constitutional law arguments often leads to more effective results than pure-play arguments based on tax laws”

“Another aspect of administrative law principles emerges from the principles of natural justice which mandates grant of a fair hearing.”

Litigators often take aid of fundamental administrative law principles, while challenging the legal tenability of delegated legislations. Authors Sujit Ghosh [Partner & National Head, Advaita Legal] and Sudipta Bhattacharjee [Principal] analyze the usage of such principles in the realm of tax litigation. Authors highlight Delhi HC decision in Travelite (India) where it was held that Service Tax Rules must conform to provisions of mother statute, viz. Finance Act, 1994. According to them, another aspect emerging from administrative law is principles of natural justice, where even a non-speaking order would be exposed to being quashed. Authors also point out the ruling of Gujarat HC in Alstom India Limited where arguments in relation to 'attempted incorporation of substantive legal provisions merely by reference’, ‘'attempted assumption of quasi-judicial powers by a superior administrative authority’ and ‘unbridled discretionary powers’ under FTP were successfully presented before the Judges.



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of this is in a scenario when an adverse order is passed against an assessee without a hearing, this may apply in more nuanced/complex scenarios also. For example, when an assessee is heard by the adjudicating authority but his arguments are not specifically dealt with in an order against him, it

would be a non-speaking order and would be exposed to being quashed on account of violation of natural justice. A key success story where reliance upon arguments based on administrative law/Constitutional law yielded very effective relief would be the Gujarat High Court decision in the case of Alstom India Limited [2014 (301) ELT 446 (Guj.) = TS-33-HC-2014(GUJ)-FTP]. In this case, the Hon’ble Gujarat High Court struck down/read down certain provisions of the Foreign Trade Policy (“FTP”) and forms and procedures formulated thereunder - Para 2.3 of the FTP was read down and para 8.3.6 of the Hand Book of Procedures (“HoP”) and para 7 of the self-declaration under the ANF-8 Form (the application form to be filed for claiming deemed export benefits) were declared as ultra vires the Foreign Trade Development and Regulation Act, 1992 (“FTDR Act” or “the Act”) and

Articles 14, 19(1)(g), 246 and 265 of the Constitution of India. In this case, the following arguments based on fundamental administrative law principles were used successfully in a FTP context. - Vide paragraph 8.3.6 of the Handbook of Procedures (“HoP”) under the FTP the DGFT had tried

to incorporate the provisions of the Customs and Central Excise Duty Drawback Rules, 1995 (“DBK Rules”) merely through a reference to the DBK Rules. These DBK Rules contained powers to recover duty drawback erroneously granted. Against such 'attempted incorporation of substantive legal provisions merely by reference', the following was argued and accepted by the Gujarat High Court. In terms of para 2.4 of the FTP, power has been given to the DGFT to specify the procedure to be followed by the importer, exporter and the licensing authorities. In terms of the said power, DGFT has issued HoP. This implies that the HoP is procedural in nature. No legislative power has been granted to DGFT either under the FTDR Act or the FTP. Incorporation by reference of the DBK Rules is nothing but colourable exercise of power by the DGFT which is not permissible under the Constitution. Conferment of such power would amount to collection of tax without the authority of law in violation of Articles 246 and 265 of the Constitution. Further, incorporation of DBK Rules by reference (which are by and large substantive in nature) is an attempt by the executive to legislate which is strictly against the doctrine of separation of power which is part of the basic structure of the Constitution.

- Similarly, under paragraph 7 of the self-declaration under Form ANF 8, the applicant had to declare that it would “immediately refund the amount of drawback obtained” by them “in excess of any amount/rate which may be re-determined by Government as a result of post verification”. Against such 'attempted assumption of quasi-judicial powers by a superior administrative authority', the following was argued and accepted by the Gujarat High Court. The requirement of filing up of the said form emanates from para 8.3.1 of HoP which is in nature of an administrative guideline. Under the FTDR Act no power has been granted to the DGFT or its subordinates to re-determine or re-verify the deemed export benefits already granted except by way of review under section 16. In absence of any other provision the DGFT cannot assume a



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power to review under para 7 of the self-declaration under the ANF-8 form - by way of this para 7, DGFT was trying to derive quasi-judicial powers which is beyond the provisions of FTDR Act. Further, power to recover is a substantive power which should be provided in the statutory framework and cannot be done through administrative guidelines.

- Further, under para 2.3 of the FTP, DGFT is entrusted with the power to interpret the policy provisions, HoP and ITC HS classification. The provision also lays down that the decision of the DGFT shall be final and binding with respect to the above interpretation. Pursuant to powers vested thereunder the DGFT had interpreted the provisions of the FTP through which it had clarified in March 2011 that deemed export drawback was not contemplated to be granted as per the scheme of FTP to non-mega power projects. It is this interpretation that had led to issuance of recovery notices for deemed export drawback benefits conferred in the past to the non-mega power projects. Alstom challenged the validity of the unbridled discretionary power under para 2.3 on the following grounds. Para 2.3 confers very wide powers on the DGFT with regard to interpretation of the FTP and is without any restrictive covenant. Thus, this interferes with the quasi-judicial function of the subordinates of the DGFT like grant of duty drawback etc. as it binds them with the interpretation accorded by the DGFT. The subordinates do not have the liberty to independently apply their mind and adjudge. Further, under Section 15 of the FTDR Act, DGFT sits as an appellate authority against the orders passed by its subordinates under section 13. It is very unlikely that the DGFT will take a decision contrary to the interpretation placed by him. This makes the entire appeal mechanism a sham and vitiates fair play, justice and thus violative of article 14 of the Constitution. The Gujarat High Court read down para 2.3 of the FTP based on the above arguments.15

The above decision was relied upon by the Delhi High Court and provided relief not only to the

assessee in question but also to the entire power generation/power equipment manufacturing sector. While the Alstom decision is now pending before the Supreme Court (with other similar matters as a batch), it is a powerful example of how effective results can be obtained by administrative law principles.

15 Some parts of this article were published in another article by the same authors in the portal ‘Bar & Bench’ in 2014



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Transfer Pricing Taxsutra Brief: Marketing Intangibles - Analyzing litigation trends post

Delhi HC verdict The concept of marketing intangibles and adjustment following the ‘bright line test’ has been one of the hot button topics in Indian transfer pricing litigation over the past few years. In 2013, Special Bench of the Delhi Income-tax Appellate Tribunal (ITAT) in the case of LG Electronics India Pvt Ltd [TS-11-ITAT-2013(DEL)-TP] held that TP adjustment in relation to advertising, marketing and promotional (AMP) expenditure incurred by the taxpayer for creating or improving the marketing intangible for and on behalf of the foreign associate enterprise (AE) was permissible, and that the same can be benchmarked by applying the Bright Line Test which segregated routine and non-routine expenses (leading to creation of marketing intangibles). The controversy, to some extent, was put to rest by the Delhi HC in the case of Sony Ericsson Mobile Communications India Pvt Ltd [TS-96-HC-2015(DEL)-TP] when it delivered a landmark ruling in March 2015, setting out important principles on the concept of marketing intangibles. HC upheld AMP as an international transaction requiring determination of ALP, but rejected use of bright line test to work out non-routine AMP expenses for benchmarking. HC further held that “The Transactional Net Margin Method (TNMM) proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm‘s length price. Then to make a comparison of a horizontal item without segregation would be impermissible.” HC also held that “The Assessing Officer/TPO for good and sufficient reasons can debundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregate basis.” Post the Delhi HC ruling, there have been a spate of HC and Tribunal decisions wherein the Sony judgment has been analyzed, discussed or simply been followed. A gist of the same is provided in the ensuing pages.



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Decisions on Marketing Intangibles post Delhi HC ruling

A] In case of Assessee–Distributor Fact pattern

PARENT COMPANY

Assigns marketing

and Distribution

Functions

WOS IN INDIA

(Assessee)

Brand Promotion

and creation of marketing intangibles

Toshiba India Pvt Ltd

Wholly owned subsidiary of Toshiba Corporation, Japan

[TS-226-ITAT-2015(DEL)-TP] dated May 25,

2015

Trading in Consumer durables

and IT products

ITAT : Examining AMP 'functions' with

comparables mandatory in ALP

determination

Zimmer India

[TS-265-ITAT-2015(DEL)-

TP]dated June 5 2015

Wholly owned subsidiary of Zimmer Switzerland Holdings

Ltd.

Importing, marketing & distributing Zimmer

orthopedic implant and instruments

ITAT : AMP benchmarking

applying TNMM possible only after

conducting functional analysis of

comparables

Casio India

[TS-301-ITAT-2015(DEL)-TP] dated June 26,

2015

Wholly owned subsidiary of Casio

Computer Company Limited

Distributor of Watches,

calculators, etc.

ITAT : Cannot reduce AMP-reimbursement at ALP-computation stage when assessee

rendering brand-building service

Bausch & Lomb India

[TS-278-ITAT-2015(DEL)-TP] dated June 12,

2015

Wholly owned subsidiary of Bausch & Lomb South Asia

Inc. USA

Trading of Contact lenses & surgical

equipments

ITAT : Remits AMP-benchmarking for

distributor; Rejects aggregation under

TNMM absent demonstration of

rationale

Should AMP expenses be aggregated with other transactions under distribution activity and benchmarked under entity-level TNMM?



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B] In case of Assessee –Manufacturer Fact pattern

Bright Line Test While the Special Bench in the case of LG Electronics had upheld the use of Bright Line Test to benchmark AMP transaction, Delhi HC reversed the SB decision to that extent, holding that 'Bright Line Test' has no statutory mandate. Accordingly, Tribunals have rejected the Bright Line Test applied by TPOs in making transfer pricing adjustments on account of AMP as follows:

Manufacture Marketing Brand

promotion of parent company

Perfetti Van Melle India

[TS-246-ITAT-2015(DEL)-TP]

dated June 2 2015

ITAT : AMP cannot be aggregated with

manufacturing, directs independent

benchmarking without applying TNMM

Subsidiary of PVM

Manufactures Branded confectionary products

Valvoline Cimmins Pvt. Ltd

[TS-137-ITAT-2015(DEL)-TP]

dated March 31 2015

ITAT : Remands AMP-issue absent facts on record, directs AO to

follow Delhi HC ruling

JV between Valvoline International Inc. USA &

Cummins India Ltd.

Manufactures Lubricants, Greases, Industrial Oils

Maruti Suzuki India Ltd

[TS-395-ITAT-2015(DEL)-TP] dated August 26 2015

Manufacturers passenger cars

Subsidiary of Suzuki Motor Corporation, Japan

ITAT :Deletes Royalty adjustment; Directs fresh

determination of AMP adjustment considering

Sony ruling

TPO applied Bright Line test for AMP expenses even though other international transactions accepted at arm’s length under TNMM



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Fact pattern

Deduction for selling/ incentive expenses from AMP

The Delhi HC agreed with the Special bench decision in LG Electronics by holding that selling expenses cannot be considered as part of AMP expenses. Accordingly, Courts and Tribunals have ruled favourably on this issue as follows:

REEBOK INDIA:

• [TS-164-ITAT-2015(DEL)-TP] dated April 22 , 2015

• Delhi ITAT: Remits AMP-adjustment for denovo adjudication following Delhi-HC ruling

• Footwear, apparel,fitness equipments , sportwear

• Method: TNMM • PLI: 6.4% • Markup applied under BLT: 12.15%

SANYO INDIA:

• [TS-241-ITAT-2015(Bang)-TP] dated May 14 2015

• ITAT : Remits AMP-adjustment for denovo adjudication following Delhi-HC ruling

• Electric and electronic prodicts • Method: TNMM • TPO's Contention: AMP expenses incurred to promote brand "Sanyo" thus increasing sale of Sanyo Products

• Markup applied under BLT :12%

Amadeus India Pvt Ltd [TS-277-ITAT-2015(DEL)-TP] dated June 10, 2015 Delhi ITAT: Allows incentive expense exclusion, remits Amadeus's AMP determination for remaining expenses

ITAT rulings Delhi ITAT: Remits AMP

adjustment to ITAT considering Sony HC decision

Toshiba India Pvt Ltd [TS-269-HC-2015(DEL)-TP] dated April 22, 2015

Luxottica India Eyewear Pvt. Ltd [TS-267-HC-2015(DEL)-TP] dated May 20, 2015

Sharp Business Systems India Private Ltd [TS-268-HC-2015(DEL)-TP] dated May 26, 2015

HC rulings

Whether Bright Line Test can be applied for segregation of routine and non-routine AMP expenditure?



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Experts’ Corner

Business Restructuring

Nitin Jain, Partner, EY

The dynamic global business environment in the past couple of decades has led to a change in the business structure of many multi-nationals. The transfer pricing (TP) law globally and in India have endeavoured to keep pace with the increasing complexities of business. The Indian TP regulations recognize business restructuring16 as a transaction to which TP applies but does not contain guidance on what a business restructuring is and how the arm’s length price should be determined. Hence reliance could be placed on Organisation for Economic Co-operation and Development (OECD) TP Guidelines in this regard.

As per OECD, redeployment or rearrangement of the Functions and Risks (FAR) amongst Multi National Enterprises (MNEs) is considered to be an acceptable norm to constitute business restructuring. To understand this better, an example of a full risk manufacturer may be useful, who undertakes all the entrepreneurial functions & risks and also owns the manufacturing related Intangible Property (IP). Such an entity, when operating under arm’s length conditions may have profits or losses, depending on several factors such as business cycle etc, while selling its products to a related party. In case after a few years of operations, the entity is converted into a contract manufacturing entity for the related party, the entity should operate on an assured return basis. However, this change in the business profile will actually result in transfer of all super normal profits accruing on account of ownership of IP, to the related party. This would result in a passive transfer of the beneficial ownership of the IP developed by

16 In 2012, Explanation to Section 92B of income Tax Act’ 1961 was introduced which clarified that business restructuring, irrespective of

it’s bearing on the profit, income, loss or assets of an enterprise, will be considered as an international transaction.

With the multitude of changes happening in the global business environment, transfer pricing law globally and in India are under constant pressure to complement the evolution. One of the key change that seem to be challenging for these laws to tackle is ‘business restructuring’. In this article, Nitin Jain [Partner, International Tax-Transfer Pricing, EY], analyses the tax developments surrounding the concept of ‘business restructuring’. Touching upon the relevant OECD BEPS proposals, the Author also gives an account of the Indian tax and transfer pricing provisions that may ensnare business restructuring transactions. Commenting on the dynamic transfer pricing environment, the Author notes that business restructuring could be one of the key pressure points for its evaluation on TP and tax and stresses upon consideration of alternate dispute resolution mechanisms by businesses while undertaking restructuring.

“As per OECD, redeployment or rearrangement of the Functions and Risks (FAR) amongst Multi National Enterprises (MNEs) is considered to be an acceptable norm to constitute business restructuring.”



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the manufacturing entity, without ever undertaking the transaction of sale of IP. Such an arrangement may result in tax leakages if the compensation required for the passive transfer of rights is not duly made. A similar situation could arise where a full-fledged distributor having a well-established sales network is converted to a limited risk distributor. Transfer of IP to a central “IP owning” company could also be looked as a business restructuring transaction. At times, certain business restructuring transactions could be difficult to identify. Some of such instances may include - • Rationalisation, specialisation or de-specialisation of operations (manufacturing sites and / or

processes, research and development activities, sales, services), • Downsizing or closing of operations in relation to certain products, • Centralisation or de-centralization of certain business functions, • Shifting of manufacturing contracts to entities having lower capacity utilization Based on a fact specific analysis, any of the above may lead to a business restructuring transaction. Thus, from the perspective of the taxpayer also, it is becoming increasingly difficult to identify and report potential business restructuring transactions. The only way to achieve this could be a closer coordination and greater visibility between the tax and the commercial teams of the company. Once identified it needs to be ensured that all entities involved have been adequately compensated for the transactions undertaken and the profit potential lost. The underlying rationale is that, as a consequence of restructuring, the entity getting stripped off its functions and risks should be compensated for the loss of income or its potential in its tax jurisdiction. Hence, the aspects which are being increasingly evaluated by the tax authorities across the globe, is the remuneration of the transactions and the remuneration for the termination thereof, as both can be inter-related. Such remuneration for termination is termed as “Exit charge”. It is pertinent to note that the taxability of exit charges may need to be analysed on case to case basis in the context of capital gains taxation. The valuation of such exit charges is a fact driven exercise which may in some cases be driven by the loss of earning potential of one of the enterprises. A concern could be when an entity has been stripped of its risks and responsibilities on paper (i.e. contractually), but it continues in practice to carry out the same functions or assume the same risks. The entity will effectively be paid less for doing the same functions it was doing prior to the restructuring. It is pertinent to note that the India Chapter of the United Nation (UN) TP Manual states that Indian Tax Authorities are of the view that it is unfair to give undue importance to risk in determination of arm’s length price in comparison to the functions performed and assets employed. Hence, contractually stripping an entity of the risks that it undertakes, while continuing with the existing functions and thus changing the remuneration of an entity is likely to be closely reviewed by

the tax authorities. The tax authorities are increasingly questioning if in an uncontrolled scenario, entities are likely to enter into arrangements similar to the ones entered under controlled circumstances. Hence, the financial capability of an entity to undertake risk and functional capability to manage that risk should be kept into perspective while undertaking a business restructuring transaction. Another important factor is the commercial rationale behind the restructuring. In this regard, General Anti Avoidance Rule (GAAR) regulations, which have been deferred by two years, stated that if the

“The underlying rationale is that, as a consequence of restructuring, the entity getting stripped off its functions and risks should be compensated for the loss of income or its potential in its tax jurisdiction.”

“The onus to prove otherwise is also on the taxpayers as per the GAAR regulations. Hence, the commercial rationale of the restructuring should be clearly documented by MNEs..”



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main purpose of any restructuring is to obtain a tax benefit, the same may be disregarded by the tax authorities. The onus to prove otherwise is also on the taxpayers as per the GAAR regulations. Hence, the commercial rationale of the restructuring should be clearly documented by the MNEs, specifically in cases wherein one of the entities involved is operating out of a low tax jurisdiction. In recognition of several issues, including the ones highlighted above, in 2012 the OECD commenced work on Base Erosion and Profit Shifting (BEPS) project, which has been charged with examining the current rules for allocating taxable profits to locations other than where actual business takes place. Actions 8, 9, and 10 of the BEPS Action Plan relate to a number of closely related topics. These are as following – • The objective of Action 8 – Intangibles, is to develop rules to prevent BEPS by arbitrary

movement of intangibles among group members. One of the key aspects of Action 8 is to ensure that profit associated with the transfer and use of intangibles is appropriately allocated in accordance with value creation.

• Action 9 is designed to develop rules to prevent BEPS through the transfer of risks among/or the

allocation of excessive capital to group members. • Action 10 – Other high-risk transactions, intends to develop rules to prevent BEPS by engaging in

transactions which would not, or would only very rarely, occur between third parties. This will primarily involve adopting transfer pricing rules or special measures to clarify the circumstances in which transactions can be re-characterized and provide protection against common types of base eroding payments, such as management fees and head office expenses. In accordance with this mandate, Working Party No. 6 on the Taxation of Multinational Enterprises has released discussion drafts, and has also received public comments. The aforementioned guidance may have an indirect influence on the issue of business restructuring in several ways, including the aspects shared above. However, certain issues have been directly pointed out on the topic. It points out that while analysing business restructuring transactions, it is also important to take into consideration the locational advantages/disadvantages that are inherited

by an entity as a result of business restructuring. In such circumstances, the arm’s length price determination should take into account these locational factors and the influence that they may have in third party circumstances on price negotiations. In the Indian context, the Delhi ITAT in the case of GAP International Sourcing India Pvt Ltd has observed that location savings are generally passed on to end customers. This is a fact based analysis and it is important to determine if the location savings have been retained in the group or have they been passed on to end customers, before making any attempt to allocate location savings. Another important aspect of business restructuring addressed in BEPS guidance is that in some cases, an assembled workforce is

“Delhi ITAT in the case of GAP International Sourcing India Pvt Ltd has observed that location savings are generally passed on to end customers. This is a fact based analysis and it is important to determine if the location savings have been retained in the group or have they been passed on to end customers, before making any attempt to allocate location savings.”



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transferred from one entity to another as part of the transaction. In such circumstances, it may well be that the transfer of the assembled workforce along with other assets may save the transferee the time and expense of hiring and training a new workforce. It may be appropriate in such cases to reflect such time and expense savings in the form of comparability adjustments to the arm’s length price otherwise charged with respect to the transferred assets. It is also possible that the transfer of the assembled workforce results in limitations on the transferee’s flexibility in structuring business operations or it may also create potential liabilities if workers are terminated. In such cases it may be appropriate for the compensation paid in connection with the restructuring to reflect the potential future liabilities and limitations. India has been committed to the BEPS project and it seems that in the following few years, several changes in the transfer pricing domain may be influenced by the BEPS guidelines. Hence, the

above points recommended in BEPS assume paramount importance while analysing business restructuring transactions. As per the current provisions in India, a business restructuring transaction which does not have any bearing on the taxable profits of an enterprise, is also considered as an international transaction. Several advance rulings on this issue such as Dana Corporation and Amiantit stand overruled due to this provision, at least in the context of business restructuring. The assessee is thus required to disclose these transactions in Form 3CEB, irrespective of the fact that it may not have any bearing on taxable profits. One of the reasons for this could be the difficulty faced by the tax authorities in identifying such transactions. Profitability trends and contracts/agreements have been used by the tax authorities to identify such transactions in other jurisdictions. Other sources of such information could be the Chairman’s speech and Management discussion and analysis (MDA) published in the Annual reports. However, the strict law in India with regard to such transactions has made the task easier for the Indian revenue authorities. Given the dynamic transfer pricing environment, issues pertaining to business restructuring could be one of the key pressure points for its evaluation on TP and tax impact while any enterprise is going through any internal business restructuring. Hence, the tax payers must evaluate the option of alternate dispute resolution mechanisms such as Advance Pricing Agreement (APA) and Mutual Agreement Procedure (MAP), after undertaking the materiality and impact analysis.

“As per the current provisions in India, a business restructuring transaction which does not have any bearing on the taxable profits of an enterprise, is also considered as an international transaction... The assessee is thus required to disclose these transactions in Form 3CEB, irrespective of the fact that it may not have any bearing on taxable profits.”



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Identifying commercial or financial relations between Associated Enterprises for applying Arm’s Length Principle

Rajendra Nayak, Partner, EY

As per the provisions of section 92B of the Act, an “international transaction” means a transaction between two or more AEs, either or both of whom are non-residents having a bearing on the profits,

income, losses or assets of such enterprises. Further, a transaction entered into by an enterprise with a person other than an AE is deemed to be an international transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between such other person and the AE, or the terms of the relevant transaction are determined in substance between such other person and the AE, where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not. As per section 92F(v) of the Act, transaction includes an arrangement, understanding or

A comparability analysis is at the heart of the application of the arm’s length principle, and is based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises. There are two key aspects in such an analysis: the first aspect is to identify the commercial or financial relations between the associated enterprises (AEs) and the conditions attaching to those relations in order that the controlled transaction is accurately delineated; the second aspect is to compare the conditions of the controlled transaction with the conditions of comparable transactions between independent enterprises. In this article, Rajendra Nayak [Partner, International Tax Services, EY] discusses the first aspect i.e. the process of identifying the commercial or financial relations between AEs having regard to the concept of “international transaction” and “deemed international transaction” as defined in the Income-tax Act, 1961 (the Act). The Author stresses the need for analysis and explains the concept with the help of hypothetical illustrations on evaluating contractual terms through actual relations, differences between the two and identifying new relations based on actual conduct. In all, the Author accords to the fact that the analysis is of wide import and each relevant arrangement calls for an examination based on facts and conduct of the parties.



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action in concert whether or not formal or in writing or whether or not is intended to be enforceable. Correctly delineating international transactions is important not only from a comparability analysis perspective, but also to ensure proper compliance. Under the provisions of the Act failure to correctly report an international transaction can result in levy of penalty equal to 2 per cent of the value of the unreported international transaction. Such non-reporting could also provide a reason to believe to the tax authority that income has escaped assessment, which can extend the statute of limitation for assessments. Further, not properly identifying and documenting international transactions can challenge the taxpayer’s assertion that documentation has been prepared in good faith and with due diligence to avoid levy of penalty in case the tax authorities allege

concealment of income based on a transfer pricing adjustment. The process of identifying the commercial or financial relations between AEs follows from examining contractual terms governing those relations together with the conduct of the parties. Establishing the conduct of the parties involves examination of all of the facts and circumstances surrounding how those enterprises interact with one another in their economic and commercial context to generate potential commercial value, how that interaction contributes to the rest of the

value chain, and what the interaction involves in terms of the precise identification of the functions each party actually performs, the assets each party actually employs, and the risks each party actually assumes and manages. A transaction is the consequence or expression of the commercial or financial relations between the parties, and, the manner in which the transaction has been formalised by the taxpayer should be reviewed in light of the actual conduct of the parties. Where a transaction has been formalised by the taxpayer through written contractual agreements, those agreements provide the starting point for delineating the transaction between the parties and how the responsibilities, risks, and benefits arising from their interaction are to be divided. The terms of a transaction may also be found in communications between the parties other than a written contract. Where no written terms exist, or where the conduct of the parties shows that the contractual terms are ambiguous, incorrect or incomplete, the delineation of the transaction should be deduced, clarified, or supplemented based on the review of the commercial or financial relations as reflected by the actual conduct of the parties. Example I illustrating the concept of clarifying and supplementing the written contractual terms based on the identification of the actual commercial or financial relations. Company P is the parent company of a multi-national enterprise (MNE) group situated in Country P. Company S, situated in Country S, is a wholly-owned subsidiary of Company P and acts as a distributor for Company P’s branded products, primarily supplying independent retailers. The contract between Company P and Company S states that Company S will provide distribution services. The contract is silent about any marketing and advertising activities that Company S should perform. Analysis of the commercial or financial relations between the parties shows that Company S performs extensive marketing and advertising

“Under the provisions of the Act failure to correctly report an international transaction can result in levy of penalty equal to 2 per cent of the value of the unreported international transaction.”

“Where no written terms exist, or where the conduct of the parties shows that the contractual terms are ambiguous, incorrect or incomplete, the delineation of the transaction should be deduced, clarified, or supplemented based on the review of the commercial or financial relations as reflected by the actual conduct of the parties.”



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activities in Country S that seek to develop brand awareness through sponsorship and media campaigns. Based on a review of the functions actually performed, it may be concluded that the written contract does not reflect the full extent of the commercial or financial relations between the parties. Accordingly, the analysis should not be limited by the terms recorded in the written contract, but should be based on the conduct of the parties, and will need to identify further how the parties determine the nature and scale of the brand-building activities, and how the activities are conducted and risks managed. It should not be automatically assumed that the contracts accurately or comprehensively capture the actual commercial or financial relations between the parties. In transactions between independent enterprises, the divergence of interests between the parties ensures (i) that contractual terms are concluded that reflect the interests of both of the parties, (ii) that the parties will ordinarily seek to hold each other to the terms of the contract, and (iii) that contractual terms will be ignored or modified after the fact generally only if it is in the interests of both parties. The same divergence of interests may not exist in the case of AEs. It is, therefore, particularly important in considering the commercial or financial relations between AEs to examine whether the arrangements reflected in the actual conduct of the parties conform to the terms of any written contract, or whether the parties’ actual conduct indicates that the contractual terms have not been followed, do not reflect a complete picture of the transactions, have been incorrectly characterised or labelled by the taxpayer, or are a

sham. Where conduct is not fully consistent with contractual terms, further analysis is required to identify the actual transaction. Where there are differences between contractual terms and factual substance, the conduct of the parties in their relations with one another, and what functions they actually perform, the assets they actually employ, and the risks they actually assume and manage, in the context of the consistent contractual terms, should ultimately determine the delineation of the actual transaction. Example II illustrating the concept of differences between written contractual terms and conduct of the parties, with the result that the actual conduct of the parties delineates the transaction. Company S is a wholly-owned subsidiary of Company P. The parties have entered into a written contract pursuant to which Company P licenses Intangible property (IP) to Company S for use

“Where there are differences between contractual terms and factual substance, the conduct of the parties in their relations with one another, and what functions they actually perform, the assets they actually employ, and the risks they actually assume and manage, in the context of the consistent contractual terms, should ultimately determine the delineation of the actual transaction.”



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in Company S’s business; Company P also agrees to provide technical services to Company S, and Company S agrees to compensate Company P for the licence and services with a royalty. Observation of what the parties actually do establishes that Company P performs contract negotiations with third-party clients, provides regular technical services support to Company S, and regularly provides staff to help Company S deliver client contracts. A majority of customers insist on including Company P as joint contracting party along with Company S, although fee income under the contract is payable to Company S. The analysis of the commercial or financial relations indicates that Company S has never been capable of providing the contracted services without significant support from Company P, and is

not developing its own capability. Company S does not seem to be operating as a licensee. Under the contract, Company P has given a licence to Company S, but in fact manages and influences the business risk and output of Company S in a manner that indicates it has not transferred risk and function consistent with a licensing arrangement, and acts not as the licensor but the principal. The identification of the actual transaction between Company P and Company S should not be limited by the legal form of the contract. Instead, the actual transaction should be determined from the capabilities and conduct of the parties, leading to the conclusion that the parties have incorrectly characterised or labelled the transaction as a licence whereas in fact Company S provides services to Company P. In some circumstances the actual outcome of commercial or financial relations may not have been identified as a transaction by

the taxpayer, but nevertheless may result in a transfer of value, the terms of which would need to be deduced from the conduct of the parties. For example, technical assistance may have been granted, synergies may have been created through deliberate concerted action, or know-how may have been provided through seconded employees or otherwise. These relations may not have been recognised by the MNE, may not have been formalised in contracts, and may not appear as entries in the accounting systems. Where the transaction has not been formalised, all aspects would need to be deduced from available evidence of the conduct of the parties, including what functions are actually performed, what assets are actually employed, and what risks are actually assumed and managed by each of the parties. Example III illustrating the concept of determining the actual transaction where a transaction has not been identified by the taxpayer. In reviewing the commercial or financial relations between Company P and its subsidiary companies, it is observed that those subsidiaries receive services from an independent party engaged by Company P. Company P pays for the services, the subsidiaries do not reimburse Company P and there is no service agreement in place between Company P and the subsidiaries. The conclusion is that, in addition to a provision of services by the independent party to the subsidiaries, there are commercial or financial relations between Company P and the subsidiaries, which transfer potential value from Company P to the subsidiaries. The analysis would need to

“Where the transaction has not been formalised, all aspects would need to be deduced from available evidence of the conduct of the parties, including what functions are actually performed, what assets are actually employed, and what risks are actually assumed and managed by each of the parties.”



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determine the nature of those commercial or financial relations from the conduct of the parties, and would need to determine the terms and conditions of the identified transaction. The process of identifying the commercial or financial relations and accurately delineating the transaction also starts the process of identifying the economically relevant characteristics of the transaction. This is important since the application of the arm’s length principle depends on determining the conditions that independent parties would have agreed in comparable circumstances, and those circumstances need to take into account economically relevant characteristics. Before making comparisons with uncontrolled transactions, it is vital to identify the economically relevant characteristics of the commercial or financial relations as expressed in the controlled transaction. The concept of “transaction” and “international transaction” as defined in the Act is of very wide import. A detailed review of the financial or commercial relations between the AEs would be necessary to assess existence of an international transaction or a deemed international transaction. Determining existence of international transaction (or deemed international transaction) is a fact based exercise. Each relevant arrangement would need to examined based on facts and conduct of parties to ultimately determine whether international transaction/ deemed international transaction exists.



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The Black Money Act – Success of Failure?

By Ameet N Patel, Partner, Manohar Chowdhry & Associates, CAs The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (popularly known as the Black Money Act and hereinafter referred to as the Act or as BMA) got the President’s assent on 26th May, 2015 and it came into effect from 1st July, 2015 Chapter VI of the BMA provided a One Time Compliance Window (OTCW) for a period of 3 months – 1st July to 30th September, 2015 to enable defaulters to come clean and voluntarily disclose their foreign assets to the Indian government and in return, the Act promised a lower (relatively) tax outgo of 60% (including penalty) as compared to the tax, interest and penalty that is threatened to be levied if anybody is found to own undisclosed foreign assets which he/she does not disclose in the OTCW. The Statement of Objects and Reason to the Act clarified that only till the time Chapter VI - One Time Compliance Window is in existence, no evidence against the declarant shall be used for initiating penalty or prosecution under ITA, Wealth Tax Act, FEMA, Companies Act or Customs Act. It said that “It is merely an opportunity for persons to become tax compliant before the stringent provisions of the new legislation come into force”. Once the Act and the Rules were notified, practitioners started taking greater interest in it and then began the barrage of doubts and questions. Considering the huge implications of either making a declaration under the OTCW or of being caught with one’s pants down, naturally, anyone would want to be completely sure of the provisions of the Act and the Rules. The CBDT issued two sets of FAQs and the Finance Ministry promptly started deputing its representatives to various conferences and seminars to clarify the provisions of the Act. The then Revenue Secretary and the Chairperson of the CBDT as well as the Joint Secretaries, TPL have tried their very best to make people aware of the Act and the Rules. Now, the OTCW has closed very recently. As I write this, news is pouring in about the amounts declared in the period. 638 declarations have been received under the compliance window declaring undisclosed foreign assets amounting to Rs 3770 crore. These figures are subject to final reconciliation," the finance ministry said in a statement based on figures provided to it by the CBDT. As we all know, if the declaration made under the OTCW is found to be valid, then the declarant needs to pay a tax of 30% and a penalty of another 30%. Thus, a total of 60% of the value declared in the declaration would be collected by the Government of India. If the report of Rs. 3,770 crores being declared is correct and accurate, and presuming that all the 638 declarations are found to be valid, it means that the government will get Rs. 2,262 crores by way of revenues from the OTCW. Considering the amount of publicity given to the BMA in general and the OTCW in specific and also considering the political and economic ramifications and importance of the issue in our country, and also looking at in the perspective of the huge amounts that have been subject matter of conjecture and surmises in the media regarding the size of the black money booty stashed abroad, the question that arises is “Whether the BMA is a success or failure?”



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There are two components to the BMA – the OTCW and the rest of the Act. It is only the OTCW that has closed on 30th September. The Act continues to be in force even thereafter. To my mind, what is more important from the point of view of unearthing undisclosed Indian wealth stashed abroad is not the OTCW but how the Act is used now by the Finance Ministry to tackle the evaders who have not taken benefit of the OTCW. In all the meetings addressed by the then Revenue Secretary, it was made clear that the government already has a lot of information shared by the governments of other countries and a lot more information is expected to be received in the days ahead. That being the case, we are not far off from the day when the Government of India will have in its possession complete details of bank accounts held by Indians abroad. When this happens, what will be crucial (from the point of view of recovering taxes on those amounts) is how the BMA is used. The BMA contains stringent provisions. Time and again, it has been reiterated that the BMA is meant to be stringent. That being the case, the honest Indians are now eagerly waiting and watching how this law will be used by the NDA Government to nab and punish those who looted the country and took the money out of it illegally. It is only thereafter that one can really analyse the outcome and judge whether the BMA is a success or a failure. If one were to look only at the OTCW, I would feel that it has not been as successful as the government would have wanted it to be. The disclosed amount announced by the Government translate into an average of just Rs 6 crore per declarant. It is therefore obvious that the really big evaders have chosen not to comply. Analysts and experts have attributed the dampening response to the OTCW primarily to the following:

• time period (of 3 months) was too short and insufficient. • lack of trust in respect to keeping the information strictly confidential, • onerous disclosures and valuation rules

It is clear that the government has no intention of extending the OTCW. Whether the time given was too short or not is only an academic question now. The government, however, must take every care possible to ensure that the confidentiality that was promised is maintained. The credibility of the government is at stake on this issue. Now that the OTCW is closed, the government must live up to the noises that were made earlier about stern action against defaulters who do not take advantage of the OTCW. Any and every offender caught must be dealt with a heavy hand. There must not be any exceptions. The government has to showcase its intention by swiftly taking action in respect of the information made available to it by other governments. Getting money back from abroad should be a low hanging fruit for this government. The Prime Minister and the Finance Minister must not lose sight of the fact that a lot of people who voted them to power did so because they were fed up of the corruption scandals and scams of the earlier government. If the culprits are not punished then a whole country will be disappointed. The citizens of India are clearly looking at the addition of at least 2-3 zeros to the figure of revenue collection from undisclosed income stashed abroad. This kind of a Revenue collection would ease the pressure on the honest tax payers of the country who have to bear the brunt of the Budget and the targets set by the Finance Ministry for the various tax ranges in the country. For far too long, the regular and honest tax payers who are already within the system and the mainstream have had to bear tax terrorism. Its high time that the crooked people also start contributing to the nation’s coffers.



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Litigation Trends (Contd..)

Taxsutra Brief: Around the world – APA developments in 2014-15 One of the steps taken to reduce tax uncertainty in transfer pricing is implementation of the Advance Pricing Agreement (APA) programs in many industrialized countries. The years 2014-15 has seen many APA developments worldwide. While the APA statistics have shown a significant growth in some countries, some others have simplified their APA procedures, introduced new APA procedures / rollback rules etc. to make it a taxpayer friendly process. Taxsutra brings to you a snapshot of the key APA developments around the world in the years 2014-15.

INDIA The chronological history of APA in India is as below: July 1, 2012 : APA provisions introduced vide the Finance Act, 2012 take effect Aug 31, 2012 : Central Board of Direct Taxes (CBDT) notifies detailed rules for implementation of APAs by way of a notification in the official gazette Mar 14, 2015 : APA Rollback rules notified Of the three alternate dispute resolution options available with Indian taxpayers, namely, APA, Mutual Agreement Procedure (MAP) and the Safe Harbour Rules, the APA scheme has received maximum attention. In the last three years, India has received over 600 applications from the taxpayers. The Indian APA regime allows unilateral, bilateral or multilateral APAs, and also rollback of APAs for previous four years is now allowed under specified circumstances. APA Statistics

(Source: CBDT Press Release dated 6th August, 2015)

UNITED STATES The US IRS, in August 2015, issued the final Revenue Procedure on APA after consideration of public comments. It provides guidance on the process of requesting and obtaining an APA from the Advance Pricing and Mutual Agreement (APMA) Program and on administration of executed APAs. Even though APA is to cover issues for the prospective years, the APMA might consider a rollback for one or two earlier years even without the request of the taxpayer. Further, the IRS has clearly set out its preference for preference for bilateral and multilateral APAs over unilateral APAs. A taxpayer is required to substantiate a unilateral APA request filed in respect of any issue which could be covered under a bilateral or multilateral APA.

• Total of 14 APAs signed till date (13 unilateral and 1 bilateral). • CBDT signed the first batch of 5 Unilateral APAs on 31st March 2014. These agreements were

signed within one year as against the international norm of two years. • India signed its first bilateral APA with Japan on 19th December 2014. • The first APA with a “Rollback” provision was signed on 3rd August, 2015.



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APA Statistics

(Source: 16th annual APA Report issued by IRS for calendar year 2014)

CANADA Canada’s 14th APA Program Report issued by Canada Revenue Agency on August 17, 2015 indicates that APAs are best suited for current transactions that will likely continue into the future with little / no change to the transactions themselves and where the underlying assumptions that form the basis of an APA transfer pricing methodology do not change over the duration of both the immediate pre-APA period and the APA period itself. Transactions involving one-time events, such as corporate restructuring of a significant nature, generally reside outside of the intended scope of the APA program. APA Statistics

(Source: 14th APA Program Report for fiscal year ending 31 March 2015)

AUSTRALIA

On 23 July 2015, the Australian Taxation Office (ATO) released its revised policies and procedures for the APA program. The refined APA process will focus particular attention to the global supply chain and not just the Australian activities. A ‘Triage Review Panel’ has also been introduced, which outlines 3 stages of the APA process: the early engagement process (incorporating ATO triage review of the application, preliminary discussions and an internal workshop), formally lodging the APA application, and an Annual Compliance report (as part of the monitoring stage).

European Commission A latest available statistics released by European Commission in October 2014, shows average time taken in concluding bilateral APAs as follows:

Country Time taken with EU country Time taken with non-EU country

Germany 24 months 38 months Spain 20 months Not available France 15 months 25 months Netherlands 24 months 24 months Austria 43 months 59 months Poland 7.5 months 33.5 months Sweden 40 months 40 months UK 23 months 31 months

Source:http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/

final_apa_statistics_2013_en.pdf

• 108 APA applications filed • 101 APAs completed • Total number of APAs concluded lower by 30% • 72% of total bilateral APAs concluded were with 3 countries – Japan, Canada & UK. • For services transactions, majority of cases applied CPM/TNMM. • 41% of executed APAs had a 5-year term.

• 31 APAs completed – 29 bilateral & 2 unilateral. • 22 cases accepted into APA program during the year. • Closing inventory - 94 cases - the lowest level experienced in the last 5 years. • TNMM most prevalent transfer pricing methodology (used in 62% cases in process). • 61% of in-process APAs with the United States.



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ITALY Italy recently extended the scope of its Patent Box regime which is based on the “nexus approach” set out by the OECD. The new regime now reduces the number of instances in which it is necessary to obtain an APA, which previously was obligatory in all cases.

SOUTH KOREA

On 18th May 2015, a simplified Advanced Pricing Agreement (APA) was introduced in South Korea. The simplified APA program is aimed at SME foreign companies with revenues of 50bn Korean won (US$ 46 million) or less from selected industries- manufacturing ,wholesale/retail and service industries. These industries are targeted due to the simplicity of their related party transactions. SMEs can look forward to effectively optimizing their tax position in a timely and cost-effective manner with the application for a simplified APA in South Korea.

INDONESIA

Indonesia’s Minister of Finance recently issued guidelines regarding the procedures for establishing and executing an APA, effective 12 April 2015.

TURKEY

The revenue administration in Turkey in early April 2015 published APA draft guidelines as information for taxpayers that may be interested in applying for an APA.



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Litigation Trends (Contd..)

Taxsutra Brief: Most Viewed Tax Rulings

The year 2015 so far has witnessed noteworthy decisions rendered by the Courts and Tax Tribunals in India. Rulings range from the very fundamental concept of ‘source’ rule, the pull factor of ‘permanent establishment’, never-ending disputes over royalty and technical services, the sharing at source through withholding taxes to the future tax reductions arising as a result of set off of losses. That part of tax which has become a subject in itself – ‘transfer pricing’ has also had its share of important rulings on the topics of marketing intangibles, location savings, guarantee, comparables and rights of the transfer pricing officer. Certain significant rulings on these tax concepts have garnered maximum attention in the current year. The below cases are the ones that got the highest clicks from Taxsutra readers. (a) Income-tax 1. Serum Institute of India Limited [TS-158-ITAT-2015(PUN)]

ITAT : Sec 206AA not a charging section, can't override beneficial DTAA rates • Assessee while making payments to non-residents deducted tax u/s 195 of the Income-tax Act,

1961 (‘IT Act’) at rates provided by the tax treaty. In the absence of furnishing PAN, revenue contended tax to be deducted at 20% as per S. 206AA of the Act. ITAT ruled that S.206AA is not a charging section but is part of procedural provisions dealing with collection of TDS and provisions of Chapter XVII-B was not subordinate to S.90(2) and it cannot override provisions of S.4 and S.5 of the IT Act.

2. Infosys BPO Limited [TS-408-ITAT-2015(Bang)]

ITAT : DTAA prevails over Sec 206AA TDS rate; Such adjustment beyond AOs jurisdiction u/s 200A • In a similar issue of tax rate under DTAA v. S.206AA, ITAT held that S.206AA cannot be

applicable when DTAA benefit is available. ITAT further held that applying the rate of 20% without considering the provisions of DTAA and consequent adjustment while framing the intimation u/s 200A was beyond the scope of the said provision. Chapter XVII-B was not subordinate to S.90(2) and it cannot override provisions of S.4 and S.5 of the IT Act.

3. IBM India Private Ltd [TS-305-ITAT-2015(Bang)]

ITAT : Quarterly expense-provision through suspense attracts TDS de hors income-charge u/s. 4(1) • Assessee quantifies expenses every quarter and credits provisions to suspense account where

invoices and other details are not available. Disallowances u/s 40(a)(i) and 40(a)(ia) were being made as appropriate. Revenue contended TDS liability at the time of credit to suspense account and levied interest on TDS u/s 201(1A). ITAT held that once there is disallowance u/s 40(a)(i) and 40(a)(ia) and the liability u/s 201(1) cannot be different and they arise out of the same default. Also the statutory provisions dealing with the collection and recovery of tax under Chapter XVII of the Act clearly envisage collection at source de hors the charge u/s 4(1) of the Act.

4. V S Lad and Sons [TS-807-SC-2014]

SC : Dismisses Revenue's SLP; HC upheld penalty deletion; Expounds law on Sec 271(1)(c) • SC dismissed Revenue’s appeal against Karnataka HC ruling. HC had ruled that levy of

penalty u/s 271(1)(c) is not automatic post additions to income. In some of the underlying cases, assessee accepted income by filing revised return or not contesting in appeal. While deleting penalty, HC had expounded the law on initiation and imposition of penalty. HC observed that the object behind enactment of S.271(1)(c) was to provide remedy for loss of revenue and penalty is a civil liability.



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5. GVK Industries Ltd & Anr [TS-61-SC-2015] SC : 'Source' based taxation in consonance with 'nexus' theory, not an extra-territorial levy

• SC upheld HC order that payment of ‘success fee’ by the assessee to a Swiss Co. acting as a

financial advisor is taxable as fees for technical services u/s 9(1)(vii)(b) of the IT Act. The Court explained ‘source’ doctrine and observed that ‘Situs of residence’ and ‘Situs of source of income’ have witnessed divergence in international tax field. The Court held that source rule is in consonance with the nexus theory and does not fall foul of the said doctrine on the ground of extra-territorial operation.

6. Skillsoft Ireland Limited [TS-429-AAR-2015] AAR : E-learning revenues taxable as 'royalty'; Rejects 'copyrighted article' plea for software license

• Applicant, an Ireland Co. was engaged in providing on-demand e-learning course offerings.

AAR held payments received from an Indian distributor as ‘Royalty’ under the India-Ireland tax treaty. AAR also held that software and computer databases created by the Applicant are included within the ambit of ‘literary work’. The AAR rejected the applicant’s plea of ‘copyrighted article’ for the software licence.

7. GE India Industrial Private Ltd [TS-357-ITAT-2015(Ahd)] ITAT : Beneficial ownership u/s 79 unchanged, allows loss set-off claim

• ITAT ruled in assessee’s favour on interpretation of beneficial ownership u/s 79 and allowed

set-off of business loss pertaining to AY 1997-98 against profits for AY 2004-05. Assessee had argued that Section 79 refers to "persons" in plurality, and since the group collectively continued to hold more than 51% of the shares of the assessee company in the year of incurring loss and in the year of claiming set off, there was no change in beneficial ownership. ITAT upheld CIT (A)’s order that since AO allowed assessee’s set-off claim for AY 2005-06 (based on details of losses and shareholding pattern submitted by assessee), there was no reason to deny set-off in subject AY 2004-05.

8. Swiss Re-insurance Company Limited [TS-55-ITAT-2015(Mum)]

ITAT : No PE; Subsidiary personnel not rendering services as de-facto employees • Assessee, a Swiss Co. receives income from providing re-insurance services in India. Such services

are specifically excluded from the PE definition in the tax treaty. Revenue contended assessee’s wholly owned Indian subsidiary to be its PE in India. ITAT observed that there was nothing on record to show that the Indian company’s employees rendered services to the assessee. Thus, held that there is no PE also in light of the specific exemption under the tax treaty.

9. Marriot International Inc [TS-4-ITAT-2015(Mum)]

ITAT : Brand related agreements, Colourable device; Lifts corporate veil; Receipts taxable as royalty • Assessee, a US company received certain amounts from Indian company which was claimed

to be reimbursement for advertising and marketing activities. The group structure consists of Co.1- owner of brand, Co.2- authorized by Co.1 to give licence to hotels and receive royalty and Co.3- assessee, responsible to promote brand value. ITAT held that all transactions are interlinked and ultimately controlled by Marriot group, hence receipts are taxable as royalty.

10. Qualcomm Incorporated [TS-70-ITAT-2015(DEL)]

ITAT : Propounds source rule for royalty payments; Situs of ‘technology use’ determinative factor • Assessee, a US Co. received royalty from foreign manufacturers on sale of CDMA technology

enabled handsets to Indian companies. Acknowledging the controversy, ITAT ruled that when royalty is for the use of technology in manufacturing, it is to be taxed at the situs of manufacturing the product, and, when royalty is for use of technology in functioning of the product so manufactured, it is to be taxed at the situs of use. Propounding the source theory on royalty, ITAT ruled that the taxation of royalty is in the source jurisdiction in which related business is being carried on by a person, rather than the jurisdiction in which he is a tax resident.



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(b) Transfer Pricing 1. Canon India Pvt Ltd & Ors [TS-96-HC-2015(DEL)-TP]

HC : 35 key observations of Delhi HC in the marketing intangibles case • The Delhi HC in the case of Canon India and several other connected matters upheld the tax

department’s jurisdiction to advertisement, marketing and sales promotion (AMP) expenditure as International transaction subject to transfer pricing. Among several significant findings, the HC held that distribution and marketing are intertwined functions and can be analyzed together as a bundled transaction and segregation of non-routine AMP expenditure using the bright line approach is not appropriate.

2. Maersk Global Service Centres (India) Pvt Ltd [TS-13-ITAT-2015(Mum)-TP]

ITAT : Functionally comparable company cannot be rejected, merely for following different accounting year • ITAT followed special bench decision in assessee’s own case for AY 08-09 for comparable

selection. The assessee, a Maersk group company, is engaged in providing back office support to its associated enterprises. While dealing with the comparable companies, ITAT ruled that the comparable cannot be rejected merely because it was following a different accounting year (ie calendar year).

3. TIBCO Software India Pvt Ltd [TS-62-ITAT-2015(PUN)-TP]

ITAT : Detailed discussion on software-developer comparables; coding/testing forms part of software-development

• ITAT ruled on selection of comparables for AY 08-09 for assessee engaged in software-

development. ITAT excluded companies engaged in sale of software product, providing ITES services etc. ITAT also dismissed Department's contention for rejection of comparable merely because it was loss-making for this year, especially when not established as an abnormal business condition. ITAT further, held that coding, testing activities of a comparable as part of the process of software development, thus functionally comparable.

4. Cotton Naturals (I) Pvt. Ltd [TS-117-HC-2015(DEL)-TP]

ITAT : TPO not empowered to restructure transaction; Agreed commercial terms to be respected

• Assessee received payments from AE for sale and interest @4%,which was submitted to be

comparable with export packing credit rate obtained from independent banks in India. Revenue adopted interest rate of 12.20% (based on range of Prime Lending Rate (PLR) fixed by RBI), after observing that the loan was given on fixed rate of interest out of shareholder funds. HC disagreed with TPO’s approach that extends TP adjustment to mean power to also restructure the transaction to reflect maximum return as a benchmark for determining interest payable by subsidiary AE. HC ruled that the currency in which loan is to be repaid determines the return on money lent and interest rates should not be computed on the basis of interest payable on the currency of the place or country of residence of either party.

5. Cypress Semiconductor Technology India Private Limited [TS-146-ITAT-

2015(Bang)-TP] ITAT : Excludes companies on functional dissimilarity grounds; Applies turnover RTP filter

• ITAT ruled on selection of comparables for assessee engaged in providing software

development and testing services to AEs as a captive service provider; Excluded KALS Information Systems Ltd and Accel Transmission Ltd on the basis of functional dissimilarity following Trilogy E-business ruling; Excluded Tata Elxsi as engaged in product development, Infosys Ltd as giant company and Lucid Software Ltd due to non-availability of segmental data, followed Logica Pvt Ltd ruling; Applied turnover filter of Rs 200 crores to exclude companies, followed Trilogy E-business ruling and applied RTP filter of 15%, relies on 24 X 7 Customer.Com ruling.



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6. Videocon Industries Ltd [TS-37-ITAT-2015(Mum)-TP] ITAT : Relief on Corporate Guarantee; Rejects reliance on Vodafone HC ruling for share-application advances

• Assessee had received share application money on which it charged interest on LIBOR basis.

Relying on the Vodafone HC ruling, assessee contended that no additions are required pertaining to share application money as these were capital in nature. ITAT held that no material was placed on record to show that the transaction was capital in nature and also assessee had received interest computed at LIBOR rates and thus rejected the contention. Relying on judicial precedents and observing that the Revenue had brought no material on record to show that corporate guarantees issued by assessee to its AE involved any cost or bearing on profits, income, losses or assets of the AE, ITAT deleted adjustments on corporate guarantee.

7. Watson Pharma Pvt Ltd [TS-3-ITAT-2015(Mum)-TP] ITAT : Deletes location savings adjustment for contract manufacturer, accepts selection of Indian comparables

• The assessee, a subsidiary of a US Company was engaged in contract manufacturing and

research services. The transfer pricing officer worked out adjustment on location savings on the basis of transfer of manufacturing activity from US to India. The Tribunal deleted the addition on location savings while noting that India is part of G20 countries, and that all G20 countries have concurred to the position on no adjustment for location savings in cases where, reliable local market comparable are available and can be used to identify arm's length prices.

8. TNS India Pvt Ltd [TS-161-ITAT-2015(HYD)-TP]

ITAT : Cannot exclude high turnover companies when low turnover companies included as comparables

• ITAT ruled on selection of comparables for assessee engaged in providing market research

services and IT enabled back office data processing services to AEs; Followed HSBC Data Processing India ruling to exclude companies having extraordinary events during the year and functionally dissimilar companies; Held HCL Comnet and Wipro cannot be considered as incomparable to assessee only on basis of turnover, states “when the assessee is not objecting to such low turnover companies, applying the same logic he should not object to high turnover companies also, when the difference in turnover is more or less within the same range”.

9. Everest Kento Cylinders Ltd [TS-200-HC-2015(BOM)-TP]

HC : Corporate guarantee distinct from commercial bank guarantee, comparison inappropriate; Confirms ITAT's relief

• Assessee had issued corporate guarantee on loan availed by AE from ICICI bank and had

charged guarantee commission @0.5%, while Revenue contended it to be 3%. HC observed that Revenue’s contention was based on instances restricted to commercial banks providing guarantees, and did not contemplate issue of corporate guarantee and held that the considerations applicable for issuance of Corporate guarantee are distinct and separate from that of bank guarantee, accordingly, commission charged cannot be called in question in the manner Revenue has done.

10. Prolifics Corporation Limited [TS-497-ITAT-2014(HYD)-TP]

ITAT : Upholds TP adjustment on interest free loans and guarantee, being a service

• Assessee had created a special purpose vehicle (AE) to facilitate acquisitions and paid

consideration by way of loan and corporate guarantee. ITAT approved the interest adjustment holding that "commercial considerations advanced by assessee cannot be considered while examining ALP of transactions". ITAT also noted that guarantees increase credit worthiness of AEs with risk being borne by the assessee and thus rejected assessee's contention that no service was rendered to AE by providing guarantee.

© TAXSUTRA All rights reserved



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About Taxsutra Launched in 2011, B2B portal – www.taxsutra.com is a trusted online resource for corporate tax directors, policymakers and practioners. Taxsutra’s instant news alerts & incisive analysis on both domestic and international tax, coupled with unique features like tax ring, Taxsutra Insight, Litigation Tracker, Taxsutra TV and blogs make it a “must-have” for every tax professional. Given the increasing focus of tax administrations on Transfer Pricing, www.tp.taxsutra.com was launched in October 2011, as India’s first exclusive exclusive portal on TP. The Transfer pricing portal has gained a loyal following over the last couple of years and is the most dependable ally of Transfer Pricing professionals across the country. Taxsutra’s thought leadership and continuous engagement with tax professionals has been on display through several unique nitiatives/microsites/special coverage on burning tax issues, controversies and

important developments, be it APA, the $2bn Vodafone tax case, BEPS, our roadblocked coverage of Union Budget and even some light tax banter with our microsite on Soccer World Cup & tax! Taxsutra has also championed various niche events and workshops.

In 2013, Taxsutra also launched the portal on Central Indirect Taxes – www.idt.taxsutra.com Taxsutra’s endeavour to provide a one stop solution pertaining to Central laws on Indirect Taxation including Service Tax, Excise, Customs, and Foreign Trade Policy.

Company Law, IPR and Competition Law professionals can now enjoy the Taxsutra edge with the launch of our Corporate laws portal in January 2015 - LawStreetIndia.com. The editorial team of Taxsutra comprises of experienced professionals with media and consulting background.

For details relating to subscription and pricing to Taxsutra’s 4 quality portals, contact [email protected]



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About LexisNexis LexisNexis Legal & Professional is a leading global provider of content and technology solutions that enable professionals in legal, corporate, tax, government, academic and non-profit organizations to make informed decisions and achieve better business outcomes. As a digital pioneer, the company was the first to bring legal and business information online with its Lexis® and Nexis® services. Today, LexisNexis Legal & Professional harnesses leading-edge technology and world-class content to help professionals work in faster, easier and more effective ways. Through close collaboration with its customers, the company ensures organizations can leverage its solutions to reduce risk, improve productivity, increase profitability and grow their business. LexisNexis Legal & Professional, which serves customers in more than 175 countries with 10,000 employees worldwide, is part of RELX Group plc, a world-leading provider of information solutions for professional customers across industries. LexisNexis, a division of RELX Group plc, provides authoritative information to legal, corporate, government and academic markets, and publishes legal, tax, regulatory and other information, via online and print formats, conferences and trainings and custom publishing. Disclaimer: The contents of this publication are for general information purposes only and should not be construed as legal advice. The publishers, editors, contributors and endorsers of this publication each excludes liability for loss suffered by any person resulting in any way from the use of, or reliance on, this publication. © LexisNexis, 2015 Printed in India



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Taxsutra Conclave 2015 – International Tax at Crossroads ... · Taxsutra Conclave 2015 –...

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