Tax Controversy 2022 Comparisons

India follows a regime of self-assessment, where the taxpayer makes a self-assessment of their tax liability by filing their returns. The genesis of tax controversy in India usually involves the relevant department's scrutiny or audits of the taxpayer’s returns. The Indian tax authorities are also empowered to reopen a concluded assessment if any additional facts come to light to suggest escapement of taxable income, which often leads to tax controversies. Further, Indian tax authorities’ refusal to grant a lower or NIL withholding tax certificate may also lead to a tax controversy between the authority and taxpayers.

There are frequent disputes relating to computation of income and denial of exemptions by tax authorities as far as corporate income tax is concerned. In the international tax arena, transfer pricing claims arising out of arm’s-length pricing adjustments and selection of comparables are a subject matter of regular litigation.

Tax controversies pertaining to consumption taxes are common. Highly litigated aspects of consumption taxes include undervaluation of transactions; classification of goods and services for ascertaining the appropriate rate of tax; refund of taxes, etc. While rare, similar disputes may also arise in relation to transactional taxes such as stamp duty and excise taxes on alcohol tax, etc.

There could be various reasons for tax controversies in India, including:

• aggressive interpretation of the tax law provisions by either the taxpayer or the tax authority;
• lack of clarity or scope for interpretation of legal provisions or procedures established under the law;
• conflicting judgments/orders pronounced by the appellate forums;
• efforts by the tax authorities to emphasise source-based taxation for cross-border transactions.

Tax controversy mitigation strategies involve a mix of compliance with the law and co-operation with the tax authorities. To this end, taxpayers should ensure:

• proper vetting of legal documents by competent tax professionals to support disclosures in tax returns;
• opting for non-aggressive tax positions;
• full disclosure and complete co-operation with the tax authority at the time of audits; and
• timely compliance and rectification of the tax returns upon discovery of any mistake.

Apart from this, taxpayers may also opt for the advance ruling mechanism to clarify tax positions on critical transactions. Similarly, in transfer pricing cases, taxpayers can mitigate controversies by seeking an advance pricing agreement (APA) whereby the transfer price is decided in advance to avoid any future litigation, and gain certainty.

Adopting the above measures to avoid tax controversy can further help the taxpayer prevent penalties and fines.

India is fully aligned with and actively follows the BEPS movement and has enacted amendments to its domestic law and tax treaties to align with BEPS standards. These include introducing Indian digital tax, ie, an equalisation levy and provisions relating to Significant Economic Presence (SEP) to combat tax challenges arising from the digital economy. While the impact of BEPS recommendations on tax controversies has yet to be practically noticed, it is the author’s assessment that such implementations will go a long way in curbing tax avoidance strategies.

Further, India has also introduced general anti-avoidance rule (GAAR) requirements into its domestic law. As a result, tax authorities are empowered to reject tax benefits in case the primary purpose of an arrangement is to obtain a tax benefit.

In its tax return, the taxpayer must disclose the amount of income tax payable. However, upon assessment by a tax officer, an additional tax liability may be imposed upon the taxpayer.

Even if the taxpayer decides to contest the assessment order, the taxpayer must deposit the amount of tax determined by the tax officer before approaching the First Appellate Authority. However, the First Appellate Authority may, on the taxpayer's request, exempt the taxpayer from paying taxes before submitting the appeal. This benefit is awarded if the taxpayer can demonstrate a reasonable and adequate basis for not paying the tax before submitting the appeal.

Similarly, the taxpayer can also request a full/partial stay against tax demands at the time of the second appeal before the Income Tax Appellate Tribunal (ITAT).

Under indirect tax law, ie, Goods and Services Tax (GST), a taxpayer at the time of filing an appeal must pre-deposit an amount equivalent to 10% of the tax demand. Similarly, in the case of a second appeal before the GST Appellate Tribunal, an additional amount equivalent to 20% of the tax demand must be deposited before filing the appeal. The balance tax and penalty demand remain suspended until the disposal of respective appeals.

If the taxpayer loses the appeal, they would be required to deposit the balance tax amount as determined by the tax authority along with any appropriate interest and penalty. However, if the taxpayer succeeds in their appeal, then the amount deposited by the taxpayer is refunded.

Under income tax laws, a taxpayer who is a business enterprise must get the books of accounts audited by a certified professional if the sales, turnover, or gross receipts of the business exceed the prescribed threshold limit. Further, a tax officer at any stage of the proceedings before him may direct the taxpayer to get the accounts audited by a chartered accountant. A tax officer may mandate an audit when there are doubts about the correctness of the reports, the multiplicity of transactions in the funds or the specialised nature of the business activity.

Apart from the above, certain returns are selected for further scrutiny by the tax department on a random basis, wherein the transactions and deductions claimed are scrutinised in detail.

Similarly, under GST, every registered taxable person whose turnover during a financial year exceeds the prescribed limit is subject to audit, and such taxpayers must get their books of accounts audited by a qualified professional. Further, the tax authority is empowered to conduct tax audits upon issuing appropriate notice. The tax officer can also direct a special audit, wherein the tax officer shall appoint a qualified professional. However, it is advisable to conduct an internal audit to avoid the discovery of any discrepancies during the departmental audit. 

Under income tax law, the taxpayer liable to produce an audit report must file it by September 30th of the immediately succeeding financial year. Where the tax department directs an audit, then this must be completed within 180 days from the date of such a direction.

Under GST, the taxpayer liable to get his accounts audited must file his audit  report along with his GST annual returns. In the case of special audits directed by the tax officer, the audit must be completed within three months from the date of commencement of the audit. This period of three months can be further extended to six months by recording the appropriate reasons in writing.

A special audit may also be initiated by the assistant commissioner if he is of the opinion that value has not been correctly declared, or incorrect credit has been availed during any stage of scrutiny/inquiry/investigation.  A special audit may be conducted by the tax department even if the accounts have been already audited under any other provision.

Under income tax provisions, where the tax officer directs the audit, the audit is typically conducted at the office or the place of work of the business. In such a case, the taxpayer must submit all the necessary documents to the qualified professional appointed to conduct the audit. Upon filing the prescribed forms, the audit is completed by a qualified professional.

Under GST, the tax audit shall be conducted by an authorised officer at the place of business and in the office of the registered taxpayer. The taxpayer shall be issued a notice at least 15 days before conducting such an audit. At the time of the tax audit, the taxpayer must provide the necessary facility to verify the books of accounts or other documents, and give information and assistance for the timely completion of the audit. Once the audit is complete, the officer must inform the taxpayer within 30 days of its completion about its findings, his reasons, and the rights and obligations of the taxpayer.

While conducting a tax audit, tax officers mostly concern themselves with cases where the taxpayer has either evaded tax or avoided paying tax – for instance, whether there is any undisclosed income of the taxpayer, or where an exemption/deduction is claimed by the taxpayer. Specifically, this includes a mismatch between accounting treatment in books of accounts vis-à-vis intercompany agreements; scrutiny of large or questionable items in the returns; misreporting of capital gains; mismatch of tax deducted at source reported by the deductor and of that claimed in the return of income; non-disclosure of income or investments made; and so on.  Under international tax law, most tax audits concern transfer pricing adjustments and selection of comparables.

Under GST, the tax authorities during an audit put special emphasis on classification adopted by the taxpayer for the purpose of tax rate, valuation of supplies, tax exemptions and input tax credits claimed by the taxpayer. 

There has been an increasing focus on sharing of information between Indian tax authorities with their foreign counterparts. As a part of G20 and OECD countries, India is working towards developing a Common Reporting Standard (CRS) on Automatic Exchange of Information (AEOI), which requires financial institutions to collect and report information to the relevant tax authorities about account holders “resident” in other countries. Such information is automatically transmitted to the tax authorities in other jurisdictions.

The exchange of information is primarily meant to determine if there is a case of tax evasion or tax avoidance by the taxpayer. The tax department also obtains the required information from foreign tax authorities to conduct an effective assessment. Such an exchange of information can be upon specific request by the other country under the tax treaty. These initiatives by the tax authorities make it important for the taxpayer to provide correct information while filing a tax return and align this with their global responses.

There are many points that a taxpayer must keep in mind before or during a tax audit.

Firstly, prior to the filing of a tax return, the taxpayer should ensure adequate documentation in support of its tax positions. Such documentation should include intercompany agreements, internal and external email correspondence, etc.

Specific to international transactions, a taxpayer must ensure arm’s-length price when the transaction is between related entities. If any offshore transaction may result in a change in ownership of an Indian entity, this becomes taxable in India, and hence must be reported correctly.

Secondly, once the taxpayer has been served notice for the commencement of the tax audit, they must reassess the tax liability and tax return before challenging the contentions put forward by the tax officer. The materiality of the exposure to the tax implications shall also be determined by the taxpayer such that the taxpayer does not suffer any injustice at the hands of the tax officer.

Thirdly, the taxpayer must have a clear picture of the factual background and legal submissions, to respond to the tax officer’s assessment and to be able to support the tax positions adopted by the taxpayer. There must not be a position where the taxpayer is learning facts at the instigation of the tax officer. The taxpayer must have all the requisite documents and must undertake filing as per the laws laid down under the respective legislations.

Upon scrutiny of tax returns, the assessing officer may reject the self-assessment and confirm a tax demand on the taxpayer. In this case, the assessing officer will issue an assessment order. Such an assessment order can be appealed before the First Appellate Authority, which is essentially an administrative authority having powers concomitant to the powers of the tax officers.

Recently, a Faceless Assessment and Appeal Scheme was introduced whereby all assessments and appeal proceedings up to the First Appellate Authority shall be conducted through a designated online portal without any physical interface. However, appeals relating to serious fraud, major tax evasion and international tax matters have been kept out of this scheme, for now.

In matters involving transfer pricing adjustments, a slightly different procedure is available. In such matters, the assessing officer is required to make a reference to another administrative officer specialising in transfer pricing for determining the proper arm's-length price. After recommendations from the transfer pricing officer, the assessing officer is required to pass a draft assessment order. Objections against the draft assessment order can be filed by the taxpayer to the Dispute Resolution Panel (a panel consisting of three commissioner-level officers). The assessing officer is required to pass the final assessment order giving effect to the directions of the Dispute Resolution Panel. In such cases, an appeal can be filed directly to the appellate tribunal bypassing the first appeal before the First Appellate Authority.

Under GST, the authorities issue a show cause-cum-demand notice to the taxpayer as an outcome of the scrutiny of returns or audit proceedings. The taxpayer is required to file a response to the notice and a personal hearing is granted to the taxpayer before an order is passed. Upon receipt of the order, the taxpayer/tax department may refer an appeal before the First Appellate Tribunal.

Under Indian income tax, an order of assessment must be made within 21 months from the relevant assessment year. However, the tax officer may pass a reassessment order after that period in case any income has escaped assessment. The time limit for filing an appeal before the First Appellate Authority is 30 days from the date of receipt of the assessment/reassessment order.

Under GST laws, the tax officer is not required to pass any assessment order. However, where the tax officer is of the view that tax has been short-paid or an erroneous refund has been granted, a demand order may be passed within three years from the due date of filing the GST annual return. The order can be passed by the tax officer only after issuing a show cause notice and giving an opportunity for a personal hearing. An appeal against the order may be filed before the First Appellate Authority within three months from the date of the communication of the order of assessment.

Under direct tax laws, an appeal from the order of the First Appellate Authority lies before the Income Tax Appellate Tribunal (ITAT). Thus, where either the taxpayer or the revenue authorities are not satisfied with the order of the First Appellate Authority, they may file an appeal before the ITAT. The ITAT is a quasi-judicial body comprising a judicial member and an accounting member. Similarly, appeals under GST are filed before the GST Appellate Tribunal (GSTAT). The appeal before the ITAT/ GSTAT marks the beginning of the judicial tax litigation process in India.

Alternatively, the taxpayer may directly approach the High Court under its writ jurisdiction challenging the notice or order of assessment. However, the High Court’s writ jurisdiction can be invoked on very limited grounds challenging the decision-making process. For instance, where the authority has failed to give a hearing or acted in gross error of law or exercised power where none exists, then the High Court may interfere under the writ jurisdiction. The High Court would exercise its jurisdiction wherein it is demonstrated that no alternative remedy is available to the taxpayer. Pertinently, the factual basis behind the decision cannot be challenged as it is a subject matter of appeal.

Against the order by the First Appellate Authority, an appeal before the jurisdictional ITAT must be filed within a period of 60 days from the date of communication of the order. This appeal is filed electronically on the online portal in the prescribed form and upon payment of the prescribed fees. The form is a detailed document that requires a taxpayer to provide basic information, income details, disputed tax amount, statement of facts, grounds of appeals, etc. Also, once an electronic copy has been filed by the taxpayer, the same must be deposited with the tribunal in physical form.

After filing of the appeal, the Tribunal lists the matter for hearing, where both the taxpayer and the tax department are represented by their legal representatives. After hearing both sides, the Tribunal may issue an order either confirming, modifying, or annulling the decision or order appealed against – or it may refer the case back to the Appellate Authority or the revisional authority, or the original adjudicating authority, with such directions as it deems appropriate, for a fresh adjudication or decision, as the case may be, after taking additional evidence if necessary.

Under GST, a similar procedure has been envisaged. An aggrieved taxpayer or the revenue authority may file an appeal against the order of the First Appellate Authority before the GSTAT within three months from the date of the order. It is important to note that GSTAT has a two-tier structure. Where the dispute relates to determination of place of supply, the appeal is to be filed before the National Bench of the GSTAT. In other cases, the appeal must be filed before the State Bench of the GSTAT. In both cases, the appeal must be accompanied by payment of 20% of the amount of tax in dispute. Given that GST law is relatively nascent, due to certain legal and administrative issues, the GSTAT is in the process of being constituted.

Taxpayers must submit all documents, evidence, certificates, etc in support of their case before the First Appellate Authority as well as the ITAT. All relevant documents and evidence must be on record before the judicial authority decides the issue. Any witnesses including expert witnesses are examined very rarely, and only before the assessing officer or before the First Appellate Authority. The ITAT is the final fact-finding authority that considers all arguments and materials placed on record before it. Based on the adjudication of all facts and documentary evidence, the ITAT renders its findings on facts.

As a rule, any evidence not placed before the First Appellate Authority cannot be placed before the ITAT. However, in limited cases where admission of evidence is necessary for deciding a dispute, the ITAT may allow admission of additional evidence.

The Indian courts have laid down the foundational principles on the burden to prove valid taxation. Essentially, the onus of establishing that the conditions for taxability are fulfilled is always on the tax authorities. Similarly, the onus to prove that the taxpayer has evaded tax is also on the tax authorities. The burden of proof may be discharged by demonstrating facts and circumstances through which it can be reasonably inferred that the taxpayer has, in fact, attempted to evade tax lawfully payable by it. Once the burden of proof is discharged by the tax authorities, the burden then shifts onto the taxpayer to disprove the case of the tax department.

However, in cases where a taxpayer is claiming an exemption from tax, the burden of proof would be on the taxpayer to show that it qualifies within the parameters of the exemption.

The manner of managing litigation varies depending on the specific facts of the case. While a general standard procedure may not be followed, experience helps in selecting the best path to follow.

Strategic issues occur at various phases of tax litigation. Strategic issues arise, for example, when deciding whether to appeal to the tribunal after the jurisdictional commissioner's order; what grounds of appeal to present; how much detail to include when doing so; and what relevant case laws to show. Separately, it is of strategic importance to identify whether the matter can be challenged under the High Court’s writ jurisdiction or whether it is a subject matter of appeal. Depending upon the relief sought, the taxpayer may choose to go to appeal or under the High Court’s writ jurisdiction.

Therefore, the taxpayer must look at all the probable options available to him before proceeding with a tax litigation such that an effective result can be obtained. The taxpayer may also opt for alternative dispute resolution mechanisms in order to solve the tax dispute (see 6. Alternative Dispute Resolution (ADR) Mechanisms).

The Indian legal system follows a hierarchical system of binding precedent where decisions of higher courts bind the authorities below. Supreme Court decisions are a declaration of the law and are binding upon all lower courts in India. Similarly, the decisions of High Courts are binding upon the authorities within its territorial jurisdiction. Further down, the decisions of a tribunal are binding on the First Appellate Authority, ie, the jurisdictional commissioner.

In the Indian legal system, foreign court decisions, while not binding, do have persuasive precedence. As such, where no contrary decisions have been rendered by Indian courts, tribunals may give effect to foreign court decisions in cases where the provisions are similar or identical to those of the foreign jurisdiction.

Upon issuance of the ITAT order, aggrieved parties may appeal against the order before the High Court within 120 days of its receipt. The appeal before the High Court is filed in a prescribed memorandum of appeal, setting out the questions of law involved. The appeal before the High Court is not a statutory right, and the appeal is entertained only where the High Court is satisfied that the matter involves a “substantial question of law”.

The High Court may admit the appeal and proceed to formulate the substantial question of law. After hearing the case, the High Court will decide the question of law so formulated and deliver its judgment, giving reasons. In addition, the High Court may determine any issue which has not been determined by the ITAT, or an issue which has been wrongly decided.

An appeal against the decision of the High Court can be filed before the Supreme Court. The appeal to the Supreme Court would lie by way of a special leave petition to appeal, or where the High Court certifies that it is a fit case for appeal. The High Court can grant a certificate of appeal on its own or upon application by the taxpayer. In case, the High Court refuses to grant the certificate, the taxpayer may file a special leave petition against this before the Supreme Court.

In GST, an appeal against the judgment of the State Bench of the GSTAT is filed before the High Court of the relevant state, and an appeal against the judgment of the National Bench of the GSTAT is filed before the Supreme Court. The appeal is admitted only where there is a substantial question of law involved.

The different stages in tax appeal procedures have been listed below.

• An appeal against the adjudicating authority’s order must be filed before the jurisdictional commissioner, which is the First Appellate Authority. The First Appellate Authority shall take into consideration the evidence and pass an appeal order.
• Upon issuance of the order by the First Appellate Authority, an appeal can be filed before the tribunal.
• Upon issuance of the tribunal’s order, the aggrieved person can approach the High Court. The appeal shall only be heard by the court if a substantial question of law is involved.
• Once an order is passed by the High Court, an appeal against the order lies with the Supreme Court.
• The Supreme Court may grant special leave to appeal in a fit case and decide the matter where it deems fit.

Appeals, in the first instance, are decided by the First Appellate Authority, who is an officer of the tax department. Thereafter, in the second instance, the appeals go to the ITAT, which comprises two members, ie, a judicial member and an accountant member. While the accountant member is an officer of the tax department or an experienced chartered accountant, the judicial member is an experienced professional (ie, a lawyer or district court judge) or a retired judge of the High Court/Supreme Court. All members of the ITAT are full-time members.

Appeals before the High Court and Supreme Court are decided by sitting judges (two or three). In India, judges of the High Court and Supreme Court must have law degrees. These judges are appointed from the lower judiciary or practising advocates with sufficient years of experience.

There are multiple options for ADR in tax disputes. Under direct tax laws, taxpayers may avail themselves of any of the following options.

• Dispute Resolution Committee (DRC): the DRC was recently introduced to provide tax certainty to small taxpayers. The DRC has the power to reduce, waive any penalty or give immunity from any offence punishable under the Income Tax Act.
• Dispute Resolution Panel (DRP): taxpayers have the option to approach the DRP for filing objections against transfer pricing adjustments made by the assessing officer. The DRP is a collegium of three officers of the tax department and must issue its directions within nine months. Until the conclusion of the matter before the DRP, the tax demand cannot be recovered from the taxpayer.
• Board for Advance Ruling (BAR): taxpayers also have the option to file an advance ruling seeking clarifications on the taxability of a prospective/proposed transaction. The advance ruling mechanism thereby ensures certainty for taxpayers. The BAR comprises two officers of the revenue department and its rulings are binding on both the taxpayer and the tax authorities.
• Mutual agreement procedure (MAP): a MAP request may be made by a taxpayer when it considers that the actions of the tax authorities of the treaty partners will result in taxation not in accordance with the DTAAs. The competent authorities of both jurisdictions have to endeavour to reach an appropriate solution if the claim appears to be justified. India allows suspension of tax collection under a memorandum of understanding signed with a treaty partner. The suspension of collection is based on furnishing a bank guarantee of the amount of the disputed demand, including interest charges imposed.
• Advance pricing agreements (APAs): For transfer pricing matters, taxpayers and tax authorities can voluntarily and mutually agree on transfer pricing issues in advance under the APA programme. The Indian APA programme has been considered largely successful and has led to a significant reduction in transfer pricing litigation.

Similar to the BAR for income tax cases, the GST Authority of Advance Ruling (AAR) and GST Appellate Authority of Advance Ruling (AAAR) has been constituted for taxpayers to obtain advance rulings on GST issues.

India has also witnessed increasing reliance on ADR mechanisms such as APA, MAP, etc for the settlement of tax disputes. Further, the Indian government has also taken a similar stance that aims to promote ADR/non-litigation modes for settlement of tax disputes. The government has taken robust measures to introduce time-effective ways of resolving tax disputes viz a faceless assessment scheme, the E-Advance Rulings Scheme, etc.

There is no mechanism under Indian law where the tax, interest or penalty may be reduced through an arbitration or mediation process. However, the government of India routinely adopts several measures to settle disputes and reduce tax litigation in India. Various schemes of the government under direct tax and indirect tax laws have been introduced to reduce litigation by waiving a substantial part of the tax, interest or penalty for the settlement of disputes.

Advance rulings can be used by a non-resident to determine the income tax aspects of a proposed or current transaction. Advance rulings can also be used by an Indian resident entering a transaction with a non-resident to determine tax liability. The obvious advantages are advance clarity and tax certainty on the covered transactions as well as enhancing the ease of doing business.

The advance rulings are binding on the applicants as well as the jurisdictional tax officers. However, the applicant does have the option to challenge the advance ruling before the High Court, in case the applicant is not satisfied with the advance ruling pronounced by the relevant authority. Under GST law, taxpayers regularly apply for advance rulings to obtain clarifications on interpretational aspects. 

As noted earlier, the ADR mechanism has limited applicability and the provisions do not allow tax arbitration or mediation for the settlement of tax disputes in India.

In contrast to other jurisdictions, in India there is no formal Alternative Dispute Resolution (ADR) mechanism for the settlement of transfer pricing disputes with the tax authorities. Taxpayers may, however, opt for the mutual agreement procedure (MAP) under the treaty, and post-adjustment by the tax authorities. For mitigating tax disputes, safe-harbour provisions and unilateral and bilateral APA mechanisms may be adopted by taxpayers.

Tax infringements may come to light pursuant to assessments carried out by the revenue authorities. Indian income tax law views tax infringements very seriously and any wilful misconduct may constitute either an administrative or criminal tax offence.

In the course of tax assessments, if it is apparent that a person has wilfully failed to pay taxes, failed to furnish returns, suppressed income, failed to furnish correct books of accounts, etc, then criminal proceedings may be initiated by the tax authorities. On the other hand, if the taxpayer defaults on procedural issues, such as a delay in furnishing returns, payment of self-assessed tax, or failure to file statements, then prescribed penalties are levied.

Any disputes which arise due to a favourable interpretation of law adopted by the taxpayer do not invite criminal prosecution. The element of mens rea, ie, a wilful intention to suppress facts and evade tax, is the determinative element for initiation of criminal prosecutions.

Apart from the penalty for defaults, the Income Tax Act also empowers tax authorities to initiate criminal proceedings against taxpayers for various offences. While administrative offences are visited by a monetary penalty, criminal offences would attract far more rigorous punishments, including fines and imprisonment.

The Income Tax Act considers tax evasion as a serious offence and prescribes rigorous punishment for tax evaders including by way of fines and imprisonment. Tax authorities in India are responsible for the initiation of criminal proceedings. The punishment for any offence is imprisonment with or without fines. The duration of imprisonment will depend on the crime committed and discretion exercised by the criminal judge.

For initiating administrative processes, Indian tax authorities can initiate scrutiny proceedings against a taxpayer, by issuing a show cause notice. The taxpayer is then given an opportunity to demonstrate why a proceeding should not be instituted against him. If he is unable to do so, then he can either accept the charges and the accompanying punishment, or file an appeal in the order in which forums are discussed in 7.1 Interaction of Tax Assessments with Tax Infringements.

Criminal proceedings can only be commenced by high-ranking officials of the Department of Revenue, namely the Principal Commissioner of Income Tax or Commissioner of Income Tax, by issuing instructions to initiate such proceedings. Once the instructions are received from such officials, the criminal proceedings are instituted against the evaders by filing a criminal complaint. The offences are then tried in a criminal court under the Code of Criminal Procedure. A court not inferior to a Presidency Magistrate or a Magistrate of the First Class can try any offence under the Income Tax Act.

Indian income tax law provides for a four-tiered appellate mechanism against an administrative process initiated against a taxpayer for tax infringement. The procedure is similar to tax assessment and appellate mechanisms.

At the first level, an aggrieved taxpayer can file an appeal before the First Appellate Authority, whereafter the appeal may be filed before the ITAT. Thereafter, on a substantial question of law, appeals may be filed before the jurisdictional High Court. Finally, the taxpayer may approach the Supreme Court of India appealing the decision of the High Court.

Under GST, the tax authorities follow a similar approach, in which they issue a show cause notice to the taxpayer, giving them an opportunity to state their case, followed by the assessing authority issuing a speaking order. The assessing authority's order may be appealed to the GSTAT. Following the appellate tribunal's order, an appeal may be filed with the High Court, which has authority for the case's question of law. The Supreme Court is the last and final resort in the event of an unsatisfactory judgment by a High Court.

Proceedings pertaining to criminal tax cases follow the Code of Criminal Procedure, 1973. The Code does not prescribe any special procedure/treatment for tax evasion cases but follows the general procedure applicable in respect of criminal offences. The judges must hear both sides of the case and pass a reasoned order. The orders passed by the criminal courts are the subject matter of appellate jurisdiction of the Court of Sessions, High Court, and Supreme Court.

Under the Income Tax Act, the penalty proceedings can be contested by the taxpayer before the First Appellate Authority and thereafter before the ITAT. Penalties imposed by the taxpayer can be set aside by the Appellate Authority where the condition precedents for imposition of a penalty are not met. A similar procedure is followed under GST law as well, where the penalty proceedings can be contested before appellate authorities.

Under Indian income tax laws, a person may apply to the Principal Commissioner or Commissioner for settlement under Indian tax law. A settlement order provides for immunity from criminal prosecution. Under the settlement proceedings, a compounding fee is imposed by the Principal Commissioner or Commissioner for the settlement of cases.

The quantum of the compounding fee depends on various factors such as gravity of the offence, taxpayers’ conduct, evaded tax amount, etc. Upon payment of the compounding fee, the criminal proceedings are not initiated against the offender. However, it is noteworthy that the application for immunity shall not be made after the institution of criminal prosecution proceedings.

An appeal against the order of the court of first instance is available before the Court of Sessions. An appeal against the order of the Court of Sessions would lie before the High Court.

Challenges to transactions under GAAR have not been initiated to date by the Indian tax authorities. However, specific anti-avoidance provisions under the law and transfer pricing normally give rise to administrative tax cases. Criminal procedure is not invoked unless the authorities suspect fraud or blatant misrepresentation. For these challenges, the same set of procedures and regulations apply as for assessments and appeals set out in 4. Judicial Litigation: First Instance and 5. Judicial Litigation: Appeals.

Any administrative claims or actions of tax authorities towards denial of benefit under the double taxation avoidance agreement are countered by taking recourse to domestic litigation. Such recourse may be obtained either through appeals before the tax authorities or directly to the High Court under writ jurisdiction. Alternatively, taxpayers may occasionally choose to adopt MAPs. 

Chapter X-A of the Income Tax Act includes GAAR provisions, which have an overriding effect on the other provisions of the Act. GAAR will apply to transactions, notwithstanding any other provisions of the Act. GAAR applies to any arrangement that is considered an Impermissible Avoidance Arrangement.

Furthermore, under its provisions, certain transactions are deemed to lack commercial substance. GAAR is not merely restricted to cross-border transactions but also applies to domestic arrangements. Once the revenue authorities decide to treat an arrangement as an Impermissible Avoidance Arrangement, the onus to prove otherwise is on taxpayers. Consequently, they are required to substantiate the commercial reasons for such arrangements and that availing of tax benefit was not the main purpose for these transactions. The government of India has recently notified the first GAAR Panel.

Indian TP regulations are based on the arm’s-length principle. Indian TP regulations provide that any income arising from an international transaction between associated enterprises shall be computed with regard to the arm’s-length price (ALP).

A major challenge in international transfer pricing adjustments pertains to the comparability analysis conducted by the authorities. Owing to increased complexity in international transactions, comparability analysis in the determination of arm’s-length price is a major source of litigation between the taxpayer and the tax revenue authorities. From a tax policy standpoint, there has been an increasing challenge to assimilate “market analysis” within the traditional FAR analysis for profit attribution.

The purpose of an advance pricing agreement (APA) is to provide a means by which taxpayers and tax administrations can voluntarily and mutually agree on transfer pricing (TP) issues in advance. This process may be bilateral in nature, involving tax administrations in other countries in which the taxpayer has transactions with associated enterprises. Alternatively, it could be unilateral where a tax administration of the resident country enters into an agreement with the taxpayer on the relevant TP issues. Under Indian law, both unilateral and bilateral APAs are recognised.

The Indian APA programme has received more than 1,500 applications. In the financial year 2021–22, India entered into 62 APAs. This includes 13 bilateral APAs and 49 unilateral APAs. As of March 2022, a total of 421 APAs have been signed by India.

Most cross-border litigation in India arises out of international tax issues pertaining to tax planning, permanent establishment, the applicability of beneficial DTAA provisions, transfer pricing adjustments, etc.

No information on this topic is available for this jurisdiction.

No information on this topic is available for this jurisdiction.

No information on this topic is available for this jurisdiction.

No information on this topic is available for this jurisdiction.

India has not opted to apply Part VI to its covered tax agreements, which require mandatory binding arbitration. India does not accept a mandatory binding arbitration mechanism specifically for tax disputes on grounds of sovereignty. Despite India’s reservations on mandatory binding arbitrations for tax disputes, some non-resident taxpayers like Vodafone and Cairn have invoked India’s bilateral investment treaties (BITs) resulting in long-running tax disputes over India’s retrospective taxation regime. Hence, in the revised model BIT, taxation matters have been excluded.

The government of India has taken a policy stance that taxation is an integral function of the state's sovereignty. Hence, India has not agreed to the position that such matters may be escalated under the treaty dispute settlement mechanism.

Since India has not opted for mandatory arbitration, the disputes relating to any treaty benefits cannot be submitted to arbitration.

Since India has not opted for mandatory arbitration, the baseball arbitration and independent opinion procedure is not applicable for any treaty disputes.

Not applicable to this jurisdiction.

Since India has not opted for mandatory arbitration, the disputes relating to any treaty benefits cannot be submitted to arbitration.

Not applicable to this jurisdiction.

This is not applicable since India has not opted for mandatory arbitration.

Tax disputes under the Indian legal system are settled through litigation before the appellate authorities and thereafter before the High Court and Supreme Court. In certain cases, ADR mechanisms may be employed, as have been detailed in 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction.

This is not applicable since India has not opted for mandatory arbitration.

Litigation costs to tax disputes before administrative forums vary for each authority. At the first level of litigation, ie, the assessment stage, no fee is generally payable by the taxpayer. Also, the fee payable for filing an appeal before First Appellate Authority is also a very nominal fee. However, such disputes may also involve professional fees for representation before the authorities and other incidental expenses and costs.

Every judicial forum mandates payment of court fees for filing any appeals, including tax appeals. Besides these fixed court fees, taxpayers often need to deposit a certain percentage of the tax demand before approaching any forum against the aggrieved order for filing an appeal.

Any fee charged by the administrative authority and judicial courts is not refunded to the taxpayer irrespective of the result of the proceedings. Awarding costs of litigation in tax disputes is rare and each party must bear its own costs and expenses.

The Indian tax departments are not required to indemnify taxpayers even if the latter succeed in their contentions before any forum. There may be an exception where costs of litigation are awarded by the judges. Only in situations where the relief pertains to a refund of taxes already recovered/paid by the taxpayer is the tax department bound to refund the tax amount, along with applicable interest.

Not applicable to this jurisdiction.

As matters stand, there are between 120,000 and 140,000 cases pending before the ITAT and other tax tribunals. Before the High Court, there are approximately 40,000 to 50,000 cases pending, while before the Supreme Court there are approximately 6,000 tax cases pending, as of the last financial year.

No figures are available to indicate how many cases are initiated and decided each year for different taxes.

There are no official statistics available regarding the success of litigation by taxpayers and tax departments. However, it has been observed that in the majority of cases, the taxpayer succeeds in litigation. This is primarily due to the aggressive approach of the Indian tax department, which often files appeals even in cases where there are slim chances of success.

It is essential that tax audits and lower-level litigations are handled proactively since these procedures become the basis for future litigation or alternative dispute resolution processes. In order to minimise the risks of prolonged litigation, it is advisable for taxpayers to involve tax experts at the initial stages and maintain robust documentation as much as possible.

It is also strategically important to decide whether the litigants want to continue pursuing appeals before judicial forums, or consider alternative dispute resolution options.

Depending on their complexity, tax disputes in India can meander within the judicial system for years. It is important for all parties to approach disputes in India from an efficient resolution standpoint. In other words, the aim should be to pursue the best possible strategy for the litigating parties. There is no “one size fits all” while handling tax controversies, and it all depends on the complexity of the issues involved. Strategised communication, discussions, and efficient strategies all play an equally critical role.