TAX LITIGATION – TRENDS & STRATEGIES

17 October 2015

LIFE OF A TAX LITIGATION IN INDIA

TRENDS IN TAX LITIGATION• Every dispute is likely to be litigated either by the assessee or the Department up to the

Supreme Court• In view of CBEC guidelines prescribing low monetary thresholds for appeals by the Department, the

Department has been seen to appeal from every dispute above such threshold

• The result is a pendency of cases before various forums and a burdening of the judicial machinery. The pendency of cases, before each forum, is as follows:

Appellate forum Monetary limits

CESTAT Rs. 5 lakh

High Court Rs. 10 lakh

Supreme Court Rs. 25 lakh

Indirect Tax **

Forum 2010-11 2011-12 2012-13

Supreme Court 2,675 2,863 3,081

High Court 15,211 14,695 15,113

CESTAT 46,094 53,583 62,163

Commissioner (Appeals)

23,882 27,825 33,225

Direct Tax *

Forum 2010-11 2011-12 2012-13

Supreme Court 5,740 5,844 5,865

High Court 34,812 29,129 31,844

ITAT 30,999 31,299 31,914

Commissioner (Appeals)

1,87,182 2,30,616 1,99,390

*Ministry of Finance, Department of Revenue, Annual Report FY 2012-13 & 2013-14** Tax Administration Reform Commission (‘TARC’) Report

TRENDS IN TAX LITIGATION Age wise pendency of disputes (as per TARC report)-

Increasing trend in the number of appeals filed at all levels coupled with a slow disposal rate has lead to a huge pile of pending litigation, resulting in a dedicated tax Bench being appointed by the Supreme Court to expedite tax cases

The Government has made some recent attempts to curb tax litigation and / or reduce pendency • Introduction of a 30% interest rate for any tax remaining unpaid for more than a year, to disincentivise

assessees adopting litigious positions

• 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

Appellate authority

2012-13

<1 yr >1 yr - 3yr >3 yr Total

Supreme Court 462 1,229 1,390 3,081

High Court 3,913 4,331 6,869 15,113

CESTAT 17,011 25,076 20,076 62,163

Commissioner(Appeals) 21,301 9,622 2,302 33,225

REGULATORY & ENFORCEMENT STRUCTURE

Ministry of Finance, Government of India

Department of Revenue

CBDT CBEC Attached offices/ Other bodies

Directorate General of Income Tax (DGIT)

Narcotics Control Bureau

Directorate of Enforcement

Directorate of Revenue Intelligence

Directorate GeneralCentral Excise Intelligence

Narcotic Drugs and Psychotropic Substances

Act, 1985

Foreign Exchange Management Act, 1999Prevention of Money Laundering Act, 2002

Customs Laws Central Excise & Service tax

Joint Working Group / Directorate of Valuation for Custom and Transfer Pricing

Direct taxes

HIERARCHY OF THE FORUMS IN TAX LITIGATION

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Direct appeal to Supreme Court in the following cases:a.Rate of dutyb.valuation

Direct appeal in case of Order passed by the Commissioner

Life of a tax litigation in

India typically

ranges from 6-10 years

ALTERNATIVE ROUTES

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EVENTS IN THE INVESTIGATION PHASE

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• Wide powers to call for evidence and production of details/ documents

• Recording of statements

• Officer empowered to seize goods believed to be liable to confiscation

• Seizure of documents believed to be relevant

• Panchnama to be drawn up for seized goods

• Supratnama of seized goods under a bond and by providing security

• Arrest for offences where revenue involved is more than Rs. 50 lakh

• Authorities empowered to arrest even without a warrant for certain specified offences

• Non-cooperation during the investigation

• Making contradictory statements

• Seek Payment by way of a Deposit Pre SCN (always pay “under protest” and “without prejudice”

• Encashment of Bank Guarantees

• Freezing of Bank accounts

Regulatory and enforcement powers

Summons Seizure Financial Thrust Arrest

INVESTIGATION

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RECENT TRENDS IN INVESTIGATION

INVESTIGATION

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• Full and honest disclosure is imperative• Respectful, firm and credible demeanour

with investigating officers• Company expected to always act in a

cooperative manner• Cohesive briefing of Company personnel

to ensure consistency in statements• Best to seek time if the person whose

statement is being recorded is unaware of any issues

• Immediate retraction of incorrect/ inconsistent statement

• The “Friday evening statement”

• Critical to ensure that statements or submissions to protect one tax position does not create adverse consequences in relation to other regulatory/ tax compliances

• Appointment of one nodal attorney to ensure the relevance of all statements

• Guard against statements to the effect that “the head office knows”

• Lawyer can accompany but cannot intervene or influence

HOW TO PARTICIPATE PURPOSEFULLY

ADJUDICATION PROCEEDINGS

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FACTS

•This is the first fact finding forum and all relevant facts need to be clearly stated and evidenced

•Any factual allegations made need to be fully rebutted

EVIDENCE

•All evidence to be led should be introduced at this stage; if independent expert evidence is led, the experts must be offered for cross-examination

•Any evidence led by the Department must be rebutted; if the Department has relied upon expert evidence, seek cross-examination

LEGAL SUBMISSIONS

•Take all submissions of natural justice and jurisdictional deficiency upfront

•Any errors of law need to be highlighted, whether errors regarding statutory provisions or legal precedents

•If individuals are sought to be penalised, formulate a defence for individuals distinct from the company

PREPARATION OF APPEALS

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ISSUES OF FACT

• Fact finding exercise based on the material on record continues before the Commissioner (A) and Tribunal

• Fresh evidence can typically be introduced in appeal only in the following circumstances:

• Refusal of lower authorities to admit evidence which is admissible and ought to have been allowed on record

• Inability of assessee to furnish evidence sought by lower authorities , sufficient cause

• Insufficient opportunity provided to the assessee by the lower authorities to produce relevant evidence

• Necessity to produce further evidence on record where additional factual inquiries made by the appellate authorities

PREPARATION OF APPEALS

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NORMAL STRUCTURE OF GROUNDS OF APPEAL

• Raise any issue of natural justice

• Raise all issues of lack of jurisdiction by the authorities

• Highlight all errors of facts

• Highlight all errors of law – particularly, a misreading of provisions or a failure to follow binding precedents

• Address arguments on interest, penalty and other penal actions

• Senior Judges are normally not either technical or accounting experts. The key issue is to simplify rather than complicate

• Senior Judges respond to legal principles rather than accounting technicalities

APPEAL TO SUPREME COURT

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WRITS + SLPs

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ALTERNATIVE OPTIONS TO LITIGATION

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SETTLEMENT COMMISSION

ADVANTAGESKEY FEATURES

ALTERNATIVE OPTIONS TO LITIGATION

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ADVANCE RULING

• Only eligible applicants can apply

• Both parties bound by an AAR and cannot challenge it other than by way of a Writ

• Ruling will only be binding on the applicant and the authorities, and not on any other person

ALTERNATIVE OPTIONS TO LITIGATION

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REPRESENTATION

• Both the CBEC & CBDT have the power to issue clarifications/ instructions to bring about uniformity and certainty in the application / enforcement of the various tax laws

Certain limitations:

• The CBEC/ CBDT typically do not intervene so as to determine the result of pending adjudication/ appellate proceedings

• The CBEC/ CBDT may not act on issues of limitation but on substantive issues of taxability, eligibility of CENVAT credit, etc.

• Clarifications, so issued, are binding on the Department but not on the assessee or on the Tribunal or higher courts

THE CO-RELATION – CIVIL & CRIMINAL LIABILITIES• Civil consequences include recovery of duties, interest and penalties (including personal

penalties on senior officers of the Company)

• In addition to the civil consequences, there is also an exposure in cases of tax evasion to a criminal prosecution of the Company and senior officers

• Recent judgments of the Supreme Court have indicated that a criminal trial can proceed in parallel with the civil tax proceedings. The earlier view was that a criminal prosecution can proceed only after civil proceedings are concluded and tax has been held to be due

• Previously, there was a legal view that a Company cannot be criminally prosecuted. The view has changed after the Supreme Court decision in Iridium India Telecom Ltd. v. Motorola Incorporated and Ors that the intent of certain individual officers is attributable to the Company

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CONSEQUENCES – SENIOR OFFICERS• Both the civil and criminal liabilities for senior officers apply to officers “who are in charge of,

and responsible to, the company for the conduct of its business”• The focus of such proceedings is normally on the Managing Director, the CFO, the tax officers

and senior individuals in procurement or marketing• For senior officers the statutory defence against penalty and prosecution:

• No knowledge;

• Not responsible for the area of operation;

• Not acted in negligence;

• Had acted to prevent the ocurance of the issue;

• The maximum criminal liability of offices is imprisonment of 7 years and fine• As concerns civil penalties, the officers are penalized based on the quantum of evasion

• Normally, penalties range between Rs. 5 lakhs to Rs. 5 Cr.

• It is critical while defining the roles and responsibilities of senior officers to clearly demarcate those who are concerned specifically with tax decisions and compliance issues to reduce risk of those officers who do not have any tax functions

• Periodic review and obtaining of opinion from Senior Counsel or ex- Supreme Court Judges on any contentious issue is critical to establishing credibility of any tax decisions

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RECENT TRENDS

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• Certain recent measures taken by the Government in a bid to counter allegations of tax terrorism and usher in a more non-adversarial tax regime • Stated intent to expeditiously dispose of three of the largest tax disputes (in relation to

Cairn, Shell and Vodafone) by way of judicial tribunals, discussions or other methods• IT Department has written to Cairn stating than an arbitrator will be appointed in

relation to the USD 1.6 mn tax dispute • Bombay High Court judgement dated 10.10.2014 in Vodafone’s case, on the issue of

whether the issuance of shares at a premium to a non-resident holding company gives rise to any income from an international transaction under the transfer pricing provisions, accepted by the Government of India and no appeal filed to the Hon’ble Supreme Court

• Introduction of amendments to free FIIs and FPIs from paying MAT on capital gains from sale of shares effective from FY 2015-16, as well as a clarification for the period prior to FY 2015-16 that no MAT is payable by FIIs and FPIs who do not have a permanent establishment in India. Castleton case before the Hon’ble Supreme Court was also disposed off

RECENT TRENDS

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• Cellular operators are facing issues of non-deduction of tax on discounts offered to retailers, which the Department claims are in the nature of commission

• Real estate Sector hit by issues on taxability of development arrangements

• The insurance sector has been issued large demand notices in relation to recovery of tax from insurance agents

• The IT industry is facing various disputes qua eligibility for export of service benefits for offshore activities

• Various Customs and Excise issues are ongoing for non-mega power plants

• Various Service Tax issues are pending for the aviation sector (e.g. on payments to CRS companies, Interline / Codeshare arrangements etc.)

INDUSTRY WIDE ISSUES

RECENT TRENDS

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SPECIFIC ISSUES

INDIRECT TAX DIRECT TAX

HOME TRUTHS AND POINTS TO PONDER Caesar to Caesar to proceedings At the adjudication level, 99% of tax demands are confirmed

In appeals, approximately 86% of all revenue orders are set aside India adopts, local interpretation of all global tax laws The Indian Supreme Court, deals with more tax cases than the Supreme

Court of the fifty economies in the world (combined) Of the most publicized tax issues – potential recovery in excess of Rs. 25000

Cr were expected – How much did GoI actually recover? Pre-deposits – are we monetising bad orders and creating a method of

surrogate financing of Government by corporates Justification of arrest and coercive recoveries given appellate records Early stage distinction between issues of interpretation and acts of evasion Greater emphasis of new means and methods of settlement

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THE FUTURE

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