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    Act RulesIncome Tax
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    Assessing Officer jurisdiction defined by place of business or residence; intra departmental determination and strict time bars follow.
    Section 242 defines Assessing Officer jurisdiction vested by directions/orders under section 241(1)-(3): jurisdiction for businesses attaches to the place of business or principal place, and for others to residence. Jurisdictional disputes are to be determined by specified income tax authorities or, where those authorities disagree, by the Board or a Board designated authority. The section bars late challenges to jurisdiction by reference to specified notice periods and assessment completion events, requires AOs to refer unresolved timely challenges for departmental determination before assessing, and preserves AO powers over income within the vested area; the enacted text omits certain cross references present in the originating bill.
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    Taxpayer's Charter: Board empowered to adopt and direct administration, granting wide administrative discretion over implementation.
    Section 240 obligates the Board to adopt and declare a Taxpayer's Charter and to issue orders, instructions, directions or guidelines to other income-tax authorities for its administration; the Board is not defined here and the phrase "as it considers fit" grants wide administrative discretion. The provision is enabling and administrative in character, lacks Charter content, enforcement mechanisms, timelines and definitions of affected authorities, and the practical effect depends on subsequent instruments implementing the Charter.
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    Board power to issue binding administrative instructions, limited to avoid directing case outcomes and protecting appellate discretion.
    The Board is empowered to issue binding orders, instructions and directions to subordinate income tax authorities for uniform administration while being expressly prohibited from directing a specific outcome in any particular case or interfering with appellate officers' discretion. The Board may issue general or special orders to set procedural guidelines, publish them for public guidance, authorise non appellate authorities to admit time barred claims to alleviate genuine hardship, and relax specified procedural requirements where non compliance was beyond the assessee's control, subject to reasons and parliamentary laying of such relaxation orders.
    Act RulesIncome Tax
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    Appointment powers: Central Government may appoint and delegate tax authority appointments, subject to service rules and orders.
    Section 237 vests plenary appointment power for income-tax authorities in the Central Government, allows delegation to the Board and specified senior tax officers to appoint officers below the rank of Deputy Commissioner or Assistant Commissioner, and permits Board authorised income-tax authorities to appoint necessary executive and ministerial staff; both delegation and staffing powers are expressly qualified "subject to the rules and its orders regulating the conditions of service of persons in public services and posts."
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    Tonnage tax reserve requirement ties tax benefits to reinvestment and training; non compliance ends tonnage tax option.
    Section 232 requires tonnage tax companies to credit a mandated proportion of book profit from qualifying shipping activities to a Tonnage Tax Reserve Account annually, permitting use of the reserve within a fixed period for acquisition of qualifying new ships or for operating qualifying ships while prohibiting distributions or offshore asset creation; misuse or non utilisation causes apportionment and taxation of the relevant shipping income, and repeated failures in reserve creation or in meeting training and charter in limits lead to cessation of the tonnage tax option. Reporting, separate books and prescribed certificates are required, and several operational details are left to delegated rules.
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    Tonnage tax election: structured application, limited renewal and extended re entry bar on opting into the regime.
    Tonnage tax election requires a qualifying company to apply to the Joint Commissioner in the prescribed form and manner within the statutory initial window; the Commissioner may request documents, must afford a reasonable opportunity to be heard before refusing, and must issue a written order within a fixed decision period. Approval makes the scheme applicable from the tax year of election and keeps the option in force for a defined multi year term; cessation events and a restricted renewal window are specified, and a prolonged bar prevents re entry after voluntary opt out, default, or exclusion.
    Act RulesIncome Tax
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    Exclusion of deductions and losses: tonnage tax confines shipping losses within the tonnage regime, barring cross set off.
    The tonnage tax regime confines tax treatment of qualifying shipping operations by treating general loss and deduction provisions as having been applied within each relevant tonnage tax year, prohibiting carry forward or set off of specified losses relating to qualifying ships while under the scheme, and requiring depreciation and pre option loss treatment to reflect deductions as if claimed and allowed; any apportionment of pre option losses must be made on a reasonable basis.
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    Depreciation allocation for tonnage tax assets: apportioned WDV creates separate qualifying blocks and governs capital gains treatment.
    Clause 229 requires first-year depreciation for the tonnage tax scheme to be computed on the tax written down value apportioned between qualifying and non-qualifying ships using book WDV proportions; the apportioned qualifying amount forms a separate block for depreciation, transfers between blocks follow prescribed proportional formulas on change of use, and disposals of qualifying assets are taxed as capital gains with section 74 applied to the qualifying block's WDV.
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    Relevant shipping income exclusion from book profit narrowed to a specific book profit computation, clarifying tonnage tax scope and compliance.
    Relevant shipping income comprises profits from enumerated core ship operations and prescribed incidental activities for a tonnage tax company; incidental receipts above the prescribed threshold are excluded from the tonnage measure and taxed generally. Transfers between tonnage and non tonnage businesses are to be tested at market value or, where impracticable, computed on a reasonable basis by the Assessing Officer. Common costs and depreciation must be reasonably allocated, losses in relevant shipping income are ignored for tonnage computation, and the book profit or loss from relevant shipping activities is excluded from the company's book profit for the specified computation under section 206.
    Act RulesIncome Tax
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    Tonnage tax scheme requires separate business treatment and distinct computation for qualifying shipping operations upon exercise of option.
    An elective tonnage tax scheme treats qualifying shipping operations as a separate business requiring separate computation of profits; operation includes owned, chartered and partial charter arrangements. Tonnage income is computed under the Part's computation provision and deemed to be profits of business, with relevant shipping income not chargeable where the scheme applies. The regime is available only if the company exercises the statutory option; absent the option, general provisions apply.
    Act RulesIncome Tax
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    Tonnage tax option for ship operators permits elective computation and deems such income as business income.
    The provision allows companies operating qualifying ships to elect a special tonnage computation and deems the resulting amount to be profits and gains of business or profession, while the enacted text limits the clause's non-application by preserving the operation of certain specified provisions.
    Act RulesIncome Tax
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    Deeming rule: distributions retain trust character, requiring payer reporting and trust taxation at maximum marginal rate.
    Clause 223 deems distributions by a business trust to retain the same character and proportion in the hands of unit holders, charges the trust's total income at the maximum marginal rate subject to qualifying statutory mechanisms, treats specified scheduled items as unit holder income in the year of receipt, excludes certain sums from the deeming rule, and requires payers to furnish prescribed statements detailing the nature of distributed amounts.
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    Tax on investment income: enacted wording omits explicit treatment of long term capital gains on non specified assets, creating rate uncertainty.
    Special tax rates apply to certain income categories of a non-resident Indian: a specified rate on income from investment, a separate concessional rate on long-term capital gains from a "specified asset," and general rates for residual total income; the enacted text omits an explicit allocation of long-term capital gains on non-specified assets into the investment-income category, creating uncertainty whether such gains attract the special investment rate or fall to residual rates.
    Act RulesIncome Tax
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    Foreign exchange asset classification determines tax treatment of income from assets acquired in convertible foreign exchange.
    Definitions for sections 213-218 tie asset status to acquisition in convertible foreign exchange: a foreign exchange asset is any specified asset acquired with convertible foreign exchange; investment income is any income from such an asset; long-term capital gains are capital gains on a foreign exchange asset that is not short-term; non-resident Indian is a person not resident who is either an Indian citizen or of Indian origin; specified asset lists shares, certain debentures, certain deposits and Central Government securities, with a government notification power and a changed statutory cross-reference for government securities between Bill and Act.
    Act RulesIncome Tax
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    Taxation of foreign institutional investors' securities income: fixed-category rates apply and residual income taxed under general rates.
    The provision creates a category-based tax regime for Foreign Institutional Investors and specified funds, requiring segregation of securities income and capital gains into prescribed heads and applying fixed tax rates to each head, with residual income taxed at general rates. Specified funds are taxed only on amounts attributable to units held by non-residents (attribution to be prescribed). Where gross total income is solely securities income, routine deductions are disallowed; where mixed, specified incomes are excluded for deduction computations. A specified loss-set-off mechanism is excluded for the listed capital gains.
    Act RulesIncome Tax
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    Tax on foreign currency bonds and GDRs: clarified computation and fixed-source tax treatment for non resident incomes.
    Non residents are subject to special tax treatment on interest from specified bonds and dividends on GDRs acquired in foreign currency through an approved intermediary, and on long term capital gains from transfer of those assets; the enacted section prescribes separate tax treatment for each income head, clarifies computation by requiring income tax be computed at the specified rate applied to the corresponding income, and conditions applicability on foreign currency acquisition, intermediary approval, specified deduction exclusions, return filing exceptions and transitional/amalgamation treatment.
    Act RulesIncome Tax
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    Preferential tax regime for offshore fund income from foreign currency purchased units, segregating specified incomes and limiting deductions.
    Section 208 creates a separate tax regime for overseas financial organisations investing in specified Indian units: income from units purchased in foreign currency and long term capital gains on transfer of such units are taxed at fixed rates while remaining income is taxed ordinarily. The provision restricts deductions when gross total income consists solely of those specified incomes and requires segregation of specified incomes so Chapter VIII deductions apply only to the residual income. Eligibility depends on arrangements with specified Indian entities and SEBI approval.
    Act RulesIncome Tax
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    Head specific tax rates for cross border dividends, royalties and technical fees, with restricted deductions and targeted concessions.
    A head specific source taxation regime imposes fixed tax rates on dividends, specified interest, distributed income, unit income, royalties and fees for technical services for non residents and foreign companies, aggregates tax as the sum of prescribed head rates plus tax on residual income, prescribes targeted preferential rates for certain investment vehicles, and restricts deductions in specified scenarios while relying on cross references to other provisions for definitions and exclusions.
    Act RulesIncome Tax
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    Minimum tax regime deeming book profit/adjusted income taxable when regular tax is below prescribed minimum, imposing MAT/AMT.
    Section 206 creates a minimum tax regime whereby, if tax under general provisions is less than a prescribed percentage of book profit (for companies) or adjusted total income (for others), that book profit/adjusted total income is deemed total income and taxed at the prescribed rate. The provision prescribes formulaic add backs and reductions to compute book profit, addresses IND AS transition adjustments, specifies exclusions and carve outs, mandates an accountant's certificate in prescribed form, and provides carry forward and credit rules for excess MAT/AMT paid.
    Act RulesIncome Tax
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    Concessional tax computation limited by eligibility rules, asset provenance constraints, and AO power to recharacterise excess profits.
    Clause 205 sets that, for specified concessional provisions, total income must be computed without certain listed deductions or exemptions, conditions eligibility on the origin and nature of the business and on limits for previously used plant, and empowers the Board (with Central Government approval) to issue guidelines subject to parliamentary laying. The Assessing Officer may determine and attribute profits reasonably deemed in excess of ordinary profits where arrangements inflate returns, applying the arm's length principle for specified domestic transactions.

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      Introduction of concept of mediation and Advance Ruling System for Residents to reduce tax litigation and more clarity

      15 September, 2020

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      2020 (9) TMI 496 - Supreme Court

      While decided an issue pertaining to AY 1976-77, honorable Supreme Court has wrote two postscript with the following note:

      We have been persuaded to write two postscripts on account of the backbreaking dockets which are ever increasing and as a move towards a trust between the Tax Department and the assessee, and we hope that both the aspects meet consideration at an appropriate level. [Para 21]

       

      Postscript 1:

      1. The Indian legal system is reeling under a docket explosion.

      The Government and public authorities are active contributories to this deluge. To top it, a number of litigations arise inter se the Government and its bodies and, thus, the only question, as stated in the beginning, is which pocket of the Government will be benefitted?

      2. The aforesaid position resulted in a judicial innovation with the Supreme Court passing orders in Oil and Natural Gas Commission & Anr. v. Collector of Central Excise [1991 (10) TMI 58 - Supreme Court] requiring that such cases must be referred to a Committee to be appointed by the Government to facilitate a resolution of such disputes and that no case should be filed without the approval of this Committee. This system was a failure as is apparent from the facts of the present case, where the SLP filed by the appellant-Corporation was initially dismissed with liberty to revive the same in case the High Powered Committee granted such a permission which was so granted in a meeting held on 14.08.2009. The said Committee discussed the legal ramifications, and in some way opined in favour of the appellant-Corporation, as is apparent from the discussion aforesaid. But the ball was again lobbed back into the Court to adjudicate the said issue rather than a resolution being reached. The result was only the revival of the appeal, and the consequent decision which has seen the light of the day only now.

      3. The aforesaid failure of the system resulted in the Supreme Court recalling its orders in the ONGC cases vide Electronics Corporation of India v. Union of India. [2011 (2) TMI 3 - Supreme Court].

      4. The Central Government and the State authorities have been repeatedly emphasising that they have evolved a litigation policy. Our experience is that it is observed more in breach. The approach is one of bringing everything to the highest level before this Court, so that there is no responsibility in the decision-making process – an unfortunate situation which creates unnecessary burden on the judicial system. This aspect has also been commented upon in a judgment of this Court in Union of India & Ors. v. Pirthwi Singh & Ors., [2018 (4) TMI 1586 - Supreme Court]   albeit between the Government and the private parties, where the question of law had been settled and yet the appeal was filed only to invite a dismissal. The object appears to be that a certificate for dismissal is obtained from the highest court so that a quietus could be put to the matter in the Government Departments. Undoubtedly, this is complete wastage of judicial time and in various orders of this Court it has been categorized as “certificate cases”, i.e., the purpose of which is only to obtain this certificate of dismissal.

      5. The 126th Law Commission of India Report titled ‘Government and Public Sector Undertaking Litigation Policy and Strategies’ debated the Government versus Government matters which weighed heavily on the time of the Courts as well as the public exchequer. This was as far back as in 1988. It was only in the year 2010 that the National Litigation Policy (for short ‘NLP’) was formulated with the aim of reducing litigation and making the Government an efficient and responsible litigant. Five (5) years later it reportedly saw a revision to increase its efficacy, but it has hardly made an impact. In the year 2018, the Central Government gave its approval towards strengthening the resolution of commercial disputes of Central Public Sector Enterprises (for short ‘CPSEs’)/ Port Trusts inter se, as well as between CPSEs and other Government Departments/Organisations. The aim was and is to put in place a mechanism within the Government for promoting a speedy resolution of disputes of this  kind, however it excluded disputes relating to Railways, Income Tax, Customs and Excise Departments. It has now been made applicable to all disputes other than those related to taxation matters. This was pursuant an order passed in The Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India -SLP (C) Diary No. 35567 of 2019 [2020 (3) TMI 1250 - SC ORDER] by a bench of which one of us (Sanjay Kishan Kaul, J.) was a part.

      6. Insofar as non-taxation matters are concerned, the Administrative Mechanism for Resolution of CPSEs Disputes was conceptualised to replace the Permanent Machinery of Arbitration and to promote equity through collective efforts to resolve disputes. It has a two-tiered structure.

      7. At the first level, commercial disputes will be referred to the Committee comprising Secretaries of the Administrative Ministries/Departments to which the disputing parties belong and the Secretary, Department of Legal Affairs. In case the two disputing parties belong to the same Ministry/Department, the Committee will comprise Secretary of Administrative Ministry/Department concerned; the Secretary, Department of Legal Affairs and the Secretary, Department of Public Enterprises. If a dispute is between a CPSE and a State Government Department/Organisation, the Committee will comprise of the Secretary of the Ministry Department of the Union to which the CPSE belongs, the Secretary, Department of Legal Affairs and the Chief Secretary of the State concerned. Such disputes are ideally to be resolved at the first level itself within a time schedule of three (3) months, and in the eventuality of them remaining unresolved, the same may be referred to the Cabinet Secretary at the second level, whose decision will be final and binding on all concerned.

      8. We are of the opinion that one of the main impediments to such a resolution, plainly speaking, is that the bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement. In order to make the system function effectively, it may be appropriate to have a Committee of legal experts presided by a retired Judge to give their imprimatur to  the settlement so that such apprehensions do not come in the way of arriving at a settlement. It is our pious hope that a serious thought would be given to the aspect of dispute resolution amicably, more so in the post-COVID period.

      9. In most countries, mediation has proved to be an efficacious remedy and here we are talking about mediation inter se the Government authorities or Government departments. India is now a signatory to the Singapore Convention on Mediation and we understand that a serious thought is being given to bring forth a comprehensive legislation to institutionalise mediation, in furtherance of this function to which India has committed itself.

      Postscript 2:

      10. We now turn to the issue of matters pertaining to CPSEs and Government authorities insofar as taxation matters are concerned,  because they are consistently sought to be carved out as a separate category of cases. One of the largest areas of litigation for the Government is taxation matters. The petition rate of the tax department before the Supreme Court is at 87%. - See ‘Economic Survey 2017-19 – Volume 1’ by the Department of Economic Affairs, Ministry of Finance, Government of India So, the question is can something be done about it?

      11. In our opinion, a vibrant system of Advance Ruling can go a long way in reducing taxation litigation. This is not only true of these kinds of disputes but even disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity. Instead of first filing a return and then facing consequences from the Department because of a different perception which the Department may have, an Advance Ruling System can facilitate not only such a resolution, but also avoid the tiers of litigation which such cases go through as in the present case. In fact, before further discussing this Advance Ruling System, we can unhesitatingly say that, at least, for CPSEs and Government authorities, there would be no question of taking this matter further once an Advance Ruling is delivered, and even in case of private persons, the scope of any further challenge is completely narrowed down.

      12. It is as far back as in 1971 that a report was submitted by the Direct Taxes Enquiry Committee under the Chairmanship of Dr. K.N. Wanchoo, recognising the need for providing Advance Ruling System, particularly in cases involving foreign collaboration. The aim was to give advance rulings to taxpayers or prospective taxpayers, which would then considerably reduce the Revenue’s workload and decrease the number of disputes. This finally resulted in a scheme of Advance Ruling being brought into effect in 1993, with the introduction of a new Chapter in the Income Tax Act, 1961 (hereinafter referred to as the ‘IT Act’). A quasi-judicial tribunal was established as the Authority for Advance Rulings (for short ‘AAR’) to provide certainty and avoid litigation related to taxation of transactions involving non- residents. The scope of the transactions on which an advance ruling can be sought from the AAR has gradually increased to now include both residents and non-residents, who can seek the same for issues having a substantial tax impact. Chapter XIX-B of the IT Act deals with advance rulings and it has been defined in Section 245N(a) of the  IT Act. These rulings are binding both on the Income Tax Department and the applicant, and while there is no statutory right to appeal, the Supreme Court has held in Columbia Sportswear Company v. Director of Income Tax Bangalore [2012 (8) TMI 105 - Supreme Court]  that a challenge an advance ruling first lies before the High Court, and subsequently before the Supreme Court. The advance ruling may be reversed in the event a substantial question of general public importance arises or a similar question is already pending before the Supreme Court for adjudication.

      13. The ground level situation is that this methodology has proved to be illusionary because there is an increasing number of applications pending before the AAR due to its low disposal rate and contrary to the expectation that a ruling would be given in six (6) months (as per Section 245R(6) of the IT Act), the average time taken is stated to be reaching around four (4) years!- See Deloitte Report on Advance Rulings in India: Delivering Greater Tax Certainty (Deloitte Tax Policy Paper 5, 2019)  There is obviously lack of adequate numbers of presiding officers to deal with the volume of cases. Interestingly, the primary reason for this is the large number of vacancies and delayed appointments of Members to the AAR. ibid In view of the time taken, the very purpose of AAR is defeated, resulting in the mechanism being used infrequently as is evident from the ever- increasing tax related litigation.

      14. We may notice a significant development in Section 245N of the IT Act. It was through Notification No.11456 dated 3.8.2000 that public sector companies were added to the definition of ‘applicant’, and in 2014, it was made applicable to a resident who had undertaken one or more transactions of the value of ₹ 100 crore or more.

      15. Insofar as a resident is concerned, the limit is so high that it cannot provide any solace to any individual, and we do believe that it is time to reconsider and reduce the ceiling limit, more so in terms of the recent announcement stated to be in furtherance of a tax friendly face-less regime!

      16. We may refer to the international scenario where there has been an incremental shift towards mature tax regimes adopting advance ruling mechanisms. The increase in global trade puts the rulings system at the centre-stage of a robust international tax cooperation regime. The Organisation for Economic Cooperation and Development (for short ‘OECD’) lists advance rulings as one of the indicators to assess trade facilitation policies, making it an aspirational international best practice standard. For example, Australia and New Zealand have a robust system of advance rulings wherein the decisions (which are public rulings affecting a large number of taxpayers) are given teeth by being made binding on the revenue authorities. New Zealand has gone a step further and innovated “status rulings” under which a taxpayer can apply to the Commissioner for a ruling on how a change in the law impacts an existing ruling.

      17. In the United States, there is a mechanism for the Treasury to authorise guidance in the form of revenue rulings, procedures and notices. The mechanism again, has been bolstered by subsequent practice and interpretations of the United States courts, where rulings have indicated that taxpayers may be penalised if they act inconsistently with legal interpretations set out in the revenue rulings, procedures or notices.

      18. Tax transparency has been a hallmark trait of the Swedish legal system. Swedish law requires public disclosure of ex ante tax administration such as advance rulings. Both the taxpayer as well as the Swedish Tax Agency can request an advance tax ruling, these rulings are published without information identifying the taxpayer that requested them. The Skatterättsnämnden, or the Council for Advance Tax Rulings is the Swedish Government agency which is vested with this power. The advance ruling system has played a crucial role in Sweden’s position as a country with one of the highest tax compliance rates in the world.

      19. The aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in the litigation process.

      20. We, thus, consider it appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

       


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      2020 (9) TMI 496 - Supreme Court

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