TAX CONTROVERSIES AND LITIGATION IN INDIA - AVOIDANCE AND THE SOLUTIONS. S.R. Wadhwa, Advocate 1

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1 TAX CONTROVERSIES AND LITIGATION IN INDIA - AVOIDANCE AND THE SOLUTIONS S.R. Wadhwa, Advocate 1

2 BY: S.R. Wadhwa Ph. No Website: wadhwataxconsultant.com S.R. Wadhwa, Advocate 2

3 While presenting the Budget for the Financial Year , the Finance Minister in his budget speech mentioned that tax demand of more than Rs 4 lakh crores is under dispute and litigation. He further stated that the Government is committed to provide a stable and predictable tax regime that will be investor friendly and spur growth. The Finance Act, 2014 has, therefore, provided several measures to avoid tax controversies and litigation. The important ones are the following:- S.R. Wadhwa, Advocate 3

4 (i) All fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of Assessing Officer will be scrutinized by a High Level Committee to be constituted by the CBDT before any addition is made. The Committee has since been constituted. It will consist of four members, namely; the (1)Joint Secretary Foreign Tax & Research I as Chairman and (2) the CIT (Appeals) (3) Joint Secretary (Tax Planning and Legislation-I) and (4) Director, Foreign Tax & Research I as its members. The Committee will give its decision after hearing the assessee and within a period of 60days or earlier if the assessment will be getting time-barred. S.R. Wadhwa, Advocate 4

5 (ii) The facility of obtaining an Advance Ruling has been extended to resident tax payers of specified categories as also for determination of an impermissible tax avoidance arrangement within the meaning of Chapter X-A of the Act. (iii) Authority for Advance Rulings has been strengthened by constituting additional benches to consist of a Vice-Chairman- a retired Judge of the High Court, a Revenue Member from the IRS of the rank of Principal/CCIT and a law Member from the Indian Legal Service of the rank of Additional Secretary to the Government of India. S.R. Wadhwa, Advocate 5

6 (iv) The scope of Settlement Commission has been enlarged so that more tax payers can approach the Commission for settlement of their tax disputes. The definition of case under clause (b) of section 245A has been amended to provide the facility to the following type of cases:- (a) Cases where a notice u/s 148 for assessment or reassessment has been issued (b) Pending proceedings for making fresh assessment in pursuance of an order u/s 254, 263 and 264 of the Incometax Act, 1961 (c) Pending search and seizure cases where notice u/s 153A or 153C have been issued (d) Regular assessments pending before the Assessing Officer (e) New cases where assessments not made. Situations not covered Cases pending in appeals before the CIT (Appeals) Completed assessments where no notice u/s 148 issued S.R. Wadhwa, Advocate 6

7 (v) Setting up of a High Level Committee to interact with trade and industry on a regular basis ascertaining areas where clarity in tax laws is required. Based on the recommendation of the Committee, the CBDT and CBEC shall issue appropriate clarification wherever considered necessary on the tax issues within a period of two months. S.R. Wadhwa, Advocate 7

8 Transfer pricing (vi) Strengthening the administrative set up of Advance pricing Agreements to expedite the disposal of applications. (vii) The Finance Act, 2014 has inserted sub-section (9A) in section 92CC w.e.f to provide roll back in the Advance pricing agreement scheme so that an advance pricing agreement entered into for future transaction may also be applied to the international transaction in previous four years in special circumstances. S.R. Wadhwa, Advocate 8

9 The sub-section reads as follows:- (9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm s length price or specify the manner in which arm s length price shall be determined in relation to the international transaction entered into by the person during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm s length price of such international transaction shall be determined in accordance with the said agreement. S.R. Wadhwa, Advocate 9

10 (viii) Introduction of range concept for determining the arm's length price. The Finance Act, 2014,the has inserted third proviso to sub-section (2) of section 92C w.e.f which reads as follows:- Provided also that where more than one price is determined by the most appropriate method, the arm s length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply. S.R. Wadhwa, Advocate 10

11 (ix) Transfer pricing regulations amended to allow multiple year data (x) Safe harbor rules - For determination of arm's length price u/s 92C or 92CA, the CBDT has issued rules for safe harbor to eligible assessees by the Income-tax (Sixteenth Amendment) Rules, 2013 w.e.f 18th September, Safe harbor means circumstances in which income-tax authorities shall accept the transfer price declared by the assessee. The Safe Harbor rules are contained in rule 10TA to 10TG of Income-tax Rules, 1962 and the application for opting safe harbor is to be applied to the AO in Form No. 3CFA. S.R. Wadhwa, Advocate 11

12 The safe harbor rule is applicable to the following types of international transactions:- (1) Provision of software development services (2) Provision of information technology enabled services (3) Provision of knowledge processes outsourcing services (4) Advance intra group loans (5) Corporate guarantee (6) Contract research and development services wholly or partly relating to software development services (7) Contract research and development services wholly or partly relating to generic pharmaceuticals drugs (8) Manufacturing and export of core auto components (9) Manufacturing and export of non-core auto components. Presumptive rates of profitability have been prescribed whose acceptance by the tax payers will absolve them of the responsibility of proving that the related party transactions are at arm s length. S.R. Wadhwa, Advocate 12

13 (xi) The CBDT has, from time to time, issued instructions to the income-tax authorities fixing the monetary limits for filing appeals before the Tribunals, High Courts and the Supreme Court. The latest Instruction No. 5 of 2014 dated has fixed the following monetary limits of tax effect for filing appeals:- (i) Appeal to the Tribunal Rs. 4,00,000/- (ii) Appeal u/s 260 before the High Court Rs. 10,00,000/- (iii) Appeal before the Supreme Court Rs. 25,00,000/- Not the only factor. Appeal to be filed strictly on merits. (Instruction No. 279/Misc-142/2007-IT(Pt) dated ) S.R. Wadhwa, Advocate 13

14 Reference to Dispute Resolution Panel (section 144C of the Act) (xii) An eligible assessee namely, any person in whose case variation has been made by Transfer Pricing Officer and any foreign company can file objection against the draft of proposed assessment order before the Dispute Resolution Panel constitute by the Board. The panel comprises of three Principal Commissioners or Commissioner of Income-tax who hear the objection and issue directions to the Assessing Officer for passing final order. S.R. Wadhwa, Advocate 14

15 Thank you S.R. Wadhwa, Advocate 15

FORM NO. 3CEFA (See sub-rule (1) of rule 10) Application for Opting for Safe Harbour

FORM NO. 3CEFA (See sub-rule (1) of rule 10) Application for Opting for Safe Harbour To, The Assessing Officer Sir/Madam, I propose to opt for the safe harbour rules under section 92CB of the Income-tax