EY Tax Alert. Executive summary. CBDT provides clarifications on Direct Tax Dispute Resolution Scheme, September 2016

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1 13 September 2016 EY Tax Alert CBDT provides clarifications on Direct Tax Dispute Resolution Scheme, 2016 Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent Circular [1] issued by the Central Board of Direct Taxes (CBDT), the apex administrative body of direct taxes in India, which contains CBDT s clarifications on various issues relating to operation of the Direct Tax Dispute Resolution Scheme, 2016 (Scheme). The clarifications touch upon aspects such as eligibility of a taxpayer to file declaration under the Scheme, quantification of amount payable under the Scheme, procedural compliances required by the taxpayer in connection with the Scheme, etc. [1] Circular No. 33 of 2016 dated 12 September 2016

2 Background The rising trend of litigation in the tax arena has been a matter of concern for the Government. The Finance Minister, while introducing budget for year 2016, had stated that litigation is a scourge for a tax-friendly regime and creates an environment of distrust; in addition to increasing the compliance cost of taxpayers and administrative cost of the Government. To reduce huge backlog of disputes pending with the first appellate authority (FAA), the Government, vide Finance Act, 2016 (FA 2016), introduced the Under the Scheme, appeals relating to any tax, interest or penalty which are pending before FAA as of 29 February 2016 can be settled by payment of disputed tax, specified interest and specified penalty as may be applicable. In addition, the Scheme also provides a one-time opportunity for taxpayers to settle the disputes which have arisen out of a retrospective amendment in the Income Tax Laws (ITL); which are pending before any appellate, arbitral or mediatory forum as of 29 February 2016; by payment of only the tax amount, without any interest or penalty. To settle the dispute, a taxpayer is required to file a declaration with the designated authority (DA). On satisfaction of conditions prescribed in the Scheme, the DA is empowered to conclude the dispute and grant immunity and/or waiver from interest, penalty and prosecution. The declaration can be filed on or after 1 June 2016, but, on or before 31 December 2016 [2]. There is a window period of seven months available for settlement of disputes covered under the The CBDT has also prescribed various Forms [3] for implementation of the [2] Notified by CBDT vide Notification No. 34/2016 [3] Notified by CBDT vide Notification No. 35/2016 Various representations were made by stakeholders requesting the Government and/or CBDT to provide clarity regarding the operation of various provisions of the In deference thereto, the CBDT has now released a Circular in connection with the Scheme which provides CBDT s clarifications on various issues raised by stakeholders. This Tax Alert summarizes the significant clarifications contained in the Circular. CBDT s clarifications in relation to settlement of disputes pending before FAA as of 29 February 2016: Effect of disposal of appeal by FAA prior to filing declaration: The Circular clarifies that the appeal, though pending before FAA as of 29 February 2016, cannot be settled under the Scheme if FAA has already disposed of the appeal by passing an order before a declaration is filed by the taxpayer. Stay of appellate proceedings if taxpayer expresses an intention to file declaration: If, pending disposal of the appeal by FAA, the taxpayer has filed a declaration or has intimated FAA of its intention to file a declaration, then, in order to facilitate settlement of such appeal under the Scheme, the Circular clarifies that FAA shall keep the appeal pending and DA shall obtain an endorsement from FAA that the appeal is pending as of 29 February 2016 and has not yet been disposed of by FAA. Effect on penalty appeal pending before FAA on settlement of appeal relating to disputed tax: If, in addition to appeal relating to disputed tax, an appeal relating to penalty levied in connection with such disputed tax is also pending before FAA, then, on settlement of appeal relating to disputed tax under the Scheme, the Circular clarifies that appeal relating to penalty shall be deemed to be withdrawn and the penalty levied in

3 excess of what is otherwise payable under the Scheme shall be deemed to be waived. Deemed withdrawal of appeal: The Scheme provides that appeal pending before FAA shall be deemed to be withdrawn consequent to filing of declaration. The Circular clarifies scope of the provision and states that the appeal shall be deemed to be withdrawn from the date on which DA issues a certificate setting forth particulars of tax, interest, penalty payable under the Applicability of the Scheme to cases involving reduction of loss: The Scheme applies to appeal involving disputed tax, interest or penalty. Issue arose on applicability of the Scheme to appeal filed against reduction of loss claimed by the taxpayer in the Return of Income. The Circular provides that: The Scheme shall not apply to an appeal filed against reduction of loss in course of assessment as it does not involve any disputed tax. However, the Scheme shall apply if the appeal relates to penalty levied on reduction of loss. Applicability of the Scheme to cases involving belated appeals: The Circular extends the scope of the Scheme to belated appeals filed before FAA after 29 February 2016, if the following conditions are satisfied: that if assessment for a particular tax year, say, , is completed based on incriminating documents found in a survey conducted by Tax Authority in a different tax year, say , the appeal filed against the assessment for tax year is not eligible for settlement under the Quantifying amount payable under the Scheme on settlement of penalty dispute: If the appeal pending before FAA relates to imposition of penalty, the Scheme provides that the taxpayer needs to pay 25% of the minimum penalty leviable, together with the tax and interest payable on the total income finally determined. Issues arose as to the scope of total income finally determined which forms the basis for computing tax and interest payable under the Issues also arose as to how tax and interest payable under the Scheme would be impacted if total income is varied as a result of appellate orders passed subsequent to filing of declaration under the The Circular provides that total income finally determined refers to total income as determined basis the appellate order passed on or before the filing of declaration under the The Circular provides that any variation in the total income as a result of appellate orders passed subsequently shall be ignored for the purposes of computing penalty payable under the As per ITL, the appeal to FAA had to be filed on or before 29 February 2016; The taxpayer has filed belated appeal along with condonation application to FAA before 1 June 2016; Delay in filing appeal is condoned by FAA. If the taxpayer has already paid penalty in excess of what is determined to be payable under the Scheme, the Circular provides that such excess shall be refunded to the taxpayer. However, the taxpayer shall not be entitled to any interest on such refund. Enhancement by FAA: The Circular clarifies that the Scheme shall not apply if the taxpayer has, before 1 June 2016, received a notice from FAA proposing to enhance the tax liability determined in course of assessment. Survey cases are ineligible: The Scheme provides that survey cases shall not be eligible for settlement. The Circular clarifies scope of the provision by stating Protective assessment: If there has been a protective assessment (i.e. same income is assessed to tax, in the hands of two different persons or in two different tax years in case of the same person), the Circular clarifies that the taxpayer should file declaration in respect of the substantive assessment. Once such declaration is accepted, the protective assessment will no longer be valid and will be rectified by passing of suitable order by the Tax Authority.

4 CBDT s clarifications in relation to settlement of dispute pending before FAA as also settlement of dispute arising out of retrospective amendment: Effect of settlement on appeals filed for other tax years: The Circular states that the Scheme is only for settlement of dispute and it does not result in adjudication of the dispute. Hence, if declaration is filed for a particular tax year, the taxpayer does not lose right of appeal on the same issues occurring in other tax years. Procedural aspects: For settlement of dispute under the Scheme, the taxpayer is required to pay the amount as determined by DA within 30 days of receiving intimation from DA. In absence of time limit prescribed under the Scheme, the Circular specifies following time limits for certain procedural compliances: The taxpayer shall intimate the fact of payment and submit proof thereof to DA within one month from the expiry of aforesaid 30 days. The taxpayer however shall not be eligible to avail the Scheme if it fails to pay, for any reason whatsoever, the amount as determined by DA to the credit of the Government within the specified due date. DA shall issue order for final settlement of dispute within one month from the end of the month in which intimation as aforesaid is received from the taxpayer. Comments The Circular addresses some of the ambiguities and concerns of taxpayers in connection with the The welcome clarifications include, for instance, staying the appellate proceedings if the taxpayer expresses an intention to file declaration and settle dispute under the Scheme, extending benefit of the Scheme to belated appeals, introducing time limits for the purpose of passing final order to settle the dispute. One hopes that CBDT will issue further clarifications in due course for success of the Some of the issues which remain yet to be clarified include, for instance, coverage of the Scheme for withholding tax, coverage of the Scheme to different kinds of penalty levied under the ITL, and possibility of automatic restoration of appeal in the event of rejection of declaration by DA. Under Indian jurisprudence, a circular issued by CBDT, for proper administration, is binding on Tax Authority even if it is contrary to legal provisions. This Circular, however, will not bind Taxpayers or Courts, if it is not in conformity with the law on any matter.

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