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DESTINATION INDIA: SOLVING TAX PUZZLES & DISPUTES
AT HANNOVER MESSE
Germany| April 13, 2014
Speakers
Ruchi Biyani: Head – European Office
Sahil Kanuga: Senior Member, International Dispute Resolution Practice
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Indian Tax System
� India has a five-tier appellate hierarchy for resolving
conflicts between the revenue department and
taxpayers.
� Lack of reforms in tax administration also resulted in
unprecedented increase in litigation and backlog of
cases.
� Tax controversies, most notably the Vodafone case
attracted lot of global attention to India's tax
litigation system.
� Tax demand of more than USD 73 billion was under
dispute and litigation before various Courts and
Appellate authorities.
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Supreme Court
High Court
Income Tax Appellate
Tribunal
Income Tax
Commissioner (Appeal)
Assessing/ Transfer
Pricing Officer
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Tax system under India’s New Management
� In a span of a year, India has moved from a castaway market to investor friendly
jurisdiction.
� Reforms in tax policy and administration contributed substantially in re-establishing
credibility of the Indian economy:
• Round-the-clock, round-the-year Government
• Focus on low cost and higher yield tax
• Minimum government and maximum governance
• Avoid sudden surprises and instability in tax policy
• Provide improved and non-adversarial tax administration
• Improved certainty in taxation of cross border transactions
� The existence of an independent judiciary puts India on a different pedestal as
compared to several other countries.
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Tax Puzzle – Cross border Transactions
What is India’s position on taxation of Indirect Transfers?
As per Budget 2015, Indirect Transfer tax applicable only when value of India assets
exceeds INR 10 million AND constitute 50% of value of global assets. It also provides certain
exemptions in case of business reorganisation.
Emphasis on disclosure: Indian companies required to report all indirect transfers – no
minimum threshold
Does transfer pricing provisions apply in case of issue of shares?
Bombay High Court in the case of Vodafone ruled that no transfer pricing to apply in such
cases. Further, Government has decided not to appeal.
Relief to 20 other companies which were involved in similar tax-related dispute with the
Indian Revenue Authorities.
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Tax Puzzle - GAAR
What is GAAR?
GAAR is a broad general anti-avoidance rule to tax ‘impermissible avoidance arrangements’.
Why is GAAR a matter of concern?
GAAR is likely to create significant tax risks for investors and MNCs doing business in India.
GAAR entails wide powers to disregard several conventional tax planning / avoidance
structures, entities and transactions, re-characterize and re-allocate income, shift residence
of entities, and deny tax benefits or even treaty relief. The ambiguities in the statutory
provisions creates significant uncertainty with respect to application of GAAR.
When does GAAR come into force?
GAAR shall come into force from April 1, 2017 (deferred from April 1, 2015).
However, GAAR is relevant to present transactions, arrangements and structures that may
generate income subsequent to April 1, 2017.
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Tax Puzzle – PAN
How much tax will be withheld if PAN is not furnished
by the non-resident recipient of money?
Finance Act, 2009: Provision introduced prescribing that
if PAN is not furnished by non-resident, tax shall be
withheld at 20%
Tax notices issued where tax withheld under treaty
rates- short deduction of tax- interest and penalty.
� Pune Tribunal: Treaty benefits should be allowed to
taxpayers to the extent that they are more
beneficial than the provisions of the ITA.
� Withholding provisions are merely procedural and
cannot trump treaty benefits. Tax should be
withheld at rates under treaty.
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Should treaty benefits be available to
taxpayers that do not file returns but
claim NIL tax under treaty based on TRC?
• Requirement to file returns is only
procedural - should not impact treaty
benefits, so long as TRC is available.
• But non-compliance may result in
penalties (even up to 3 times the
demand amount) under the ITA.
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Risk Mitigation Measures
� Industry and business model based risk identification;
� Strategic plan based on worst case scenario to address legal, regulatory and tax perspectives
� Integrating documentation, disclosures, filings, website, etc. with strategic plan and maintaining consistency between them.
� Advance Ruling
� Bilateral investment treaties (BITs)
� Client attorney - Privileged Communication
� Training and education to employees to
comply with applicable law.
� Gross-ups, indemnities, insurance, or escrow carefully drafted to cover varied risks
� Contractual representations: Parties may include clear representations with respect to various
facts which may be relevant to any potential claim raised by the tax authorities in the relevant
agreements
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Arbitration in Joint Venture & M&A Disputes
� Arbitration Versus Litigation
� Arbitration has evolved as the preferred dispute resolution mechanism
� Neutral seat
� Enforceability
� Confidentiality
� Ad-hoc Vs. Institutional
� Arbitration in Joint Ventures (“JV”) and Mergers and Acquisitions (“M&A”)
predominantly revolve around shareholder disputes
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Statutory remedies
� Oppression and Mismanagement
� Bombay High Court in Rakesh Malhotra v. Rajinder Kumar
Malhotra - oppression and mismanagement claims fall outside
the purview of arbitration proceeding
� Court carved an exception to this rule - if such claims have
been ‘dressed-up’ to avoid arbitration, then it can be referred
to arbitration
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Joinder
� Supreme Court of India - in case of several agreements constituting a
composite transaction, may refer non-signatory parties to arbitration
� Typical JV / M&A transaction has SPA/SSA/SHA/Employment
Agreement(s)/Technology Transfer Agreements and more!
� Single forum to resolve disputes possible: exception and not the rule
� Supreme Court: erstwhile Director of a signatory can be impleaded
to arbitration proceedings if they have perpetrated fraud upon the
parties
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Director’s liability & Indemnity
� Is your nominee director exposed to liabilities in India under Indian law?
� How does indemnity work in the cross border context?
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Arbitration: the law as it stands
� Bhatia International v Bulk Trading SA (”Bhatia”) - Part I of the Arbitration and
Conciliation Act, 1996 is applicable to even foreign seated arbitrations, unless
expressly or impliedly excluded by the parties – resulted in increased judicial
interference
� Bharat Aluminium v Kaiser Aluminium (“BALCO”) overruled Bhatia - adopted the
territoriality principle - the law governing the arbitration would be determined by
the seat of the arbitration
� BALCO - prospectively applicable - only applicable to arbitration agreements entered
into after September 06, 2012
� Two parallel streams of law – developing concurrently
� Of late, we see a pro-arbitration stance of minimal/reduced judicial interference in
arbitration related matters
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