Author name: CBCL

[By Megha Bhartiya & Sneha Bharti] The authors are students of Rajiv Gandhi National University of Law, Punjab and Symbiosis Law School, Noida respectively. Introduction India introduced the patent box taxation regime through Section 54 of the Finance Act, 2016. It presents itself as a unique tool to promote and foster innovation by emerging from the conflux of taxation law and intellectual property (“IP”) rights law. The patent box regime is a tax incentive mechanism and offers reduced tax rates on certain qualified incomes which are generated from patented innovations.  This blog pivots around the Organization for Economic Cooperation and Development (“OECD”)’s Action 5: Agreement on Modified Nexus Approach for IP Regimes and its resultant implications for India. With the recent buzz around a potential new law for direct income tax in India, this is a crucial time for the legislature to consider reworking the patent box provision i.e., Section 115BBF of the Income Tax Act, 1961, in order to better utilize it. The blog will thus focus on determining the reasons behind the dormancy of the regime in India. This will be done through a critical appraisal of Section 115BBF which would lead us to two fatal flaws in the provision that have long been overlooked. What is the Patent Box Regime? The separate and patent specific taxation provision in India is referred to as the patent box regime. It allows the companies that qualify its requirements to avail a decreased tax rate for the profits they have generated from their patented inventions. The rationale behind allowing a different reduced tax rate for profits on patents is rooted in the objectives of the IP Rights regime, i.e., it acts as a strong incentive for the companies to invest into innovation, and research and development (“R&D”) activities.  ​Why do we need a Patent Box Taxation Regime? At present, the dominating school of thought is that reducing subsidies and substituting them for a lower corporate tax is a more effective approach as opposed to offering outright subsidies as it interferes less with the market mechanism and is hence termed as a market-friendly instrument.   It is accepted by economists that if industrial R&D is primarily conducted by private sectors, then it comes with the risk that they will under invest in the area, resulting in lesser research than what is socially and scientifically desirable. This tendency to underinvest stems from the issue of appropriability where the private sectors are unable to fully appropriate the returns of their investments. In addressing this, governments worldwide have incorporated patent box regimes as one method to encourage businesses to continue investing in R&D.  OECD’s Modified Nexus Approach In 2015, the OECD released its Action 5 report as part of the Base Erosion and Profit Shifting (“BEPS”) project, which aimed to combat tax avoidance strategies used by multinational enterprises. The OECD guidelines on the patent box regime emphasise the importance of aligning tax benefits with substantial economic activities. According to the guidelines, countries should ensure that their patent box regimes are compliant with the “nexus approach,” which requires a direct link between the R&D activities that generate the income and the income that benefits from the reduced tax rate. ​According to the nexus approach, only the income generated through qualifying R&D activities should be eligible for the subsidized tax rate.-​     ​​​​​​. This means that countries implementing a patent box regime must establish a clear criteria for determining which R&D activities qualify for tax benefits, hence ensuring a level and fair playing field.   The Nominal and Ineffective Patent Box Regime in India Recent years have witnessed India grow as a centre for innovation globally in light of the increasing number of firms investing in the R&D activities. In India, the potential benefits of the patent box regime were recognized and introduced via the Finance Act, 2016, which inserted Section 115BBF in the Income Tax Act, 1961. The section provides a 10% tax rate on income by way of a royalty for the patent developed and registered in India. The provision provides for certain qualifying requirements – firstly, the Company must have the patent granted under the Indian Patents Act, 1970, and secondly, the patentee must be a resident of India. Additionally, the aspect of the patent being “developed” in India alludes to the mandatory condition of R&D also being conducted in India. These conditions together align India’s patent box regime with OECD’s 2015 modified nexus approach which posits that the income arising from the exploitation of a certain IP should be taxed in the jurisdiction where substantial R&D activities were undertaken, not simply where the legal ownership lies. This has also been attributed as one of the rationales behind the introduction of the regime in India.  The Fatal Flaws: Challenges to the Use of the Patent Box Taxation Provision in India While the patent box regime offers significant tax benefits to companies engaged in R&D activities, it also poses challenges in terms of implementation and compliance. There are several reasons for the current dormancy of the patent box provision in India, one of them being its restricted scope of application. The complete lack of use of the provision in the past several years directs us to the first flaw –   FLAW 1: Missing Links in Definitions of Key Terms ​​Section 115BBF of the Income Tax Act, 1961, provides for tax on income from patents and refers to the assessee as an “eligible assessee.” ​Subsequently, the definition of “eligible assessee” can be referred to in Explanation (b) of the section, which defines it as a person who is an Indian resident and who is a patentee. ​​​​​The use of “and” indicating that both conditions must be fulfilled. ​     ​​T​he definition of “patentee” which is provided in explanation (f) indicates, in explicit phrasing, that patentee means the person who is the true and first inventor. According to the principles of patent law, a true and first inventor can only be a natural person. The same has also been upheld

[By Lovish J Goyal] The author is a student of NALSAR University of Law, Hyderabad.   Introduction Electricity Regulatory Commission(s) (‘ERC’) are instrumental in shaping India’s electricity sector. They are established under various statutes to regulate the electricity sector in their jurisdictions. These statutory bodies are responsible for granting licenses and determining tariffs to ensure an uninterrupted and reliable electricity supply. ERC are also vested with quasi-judicial powers, which enable them to regulate the industry effectively.  However, the license fees collected by ERC on the grant of licenses have recently become a contentious issue due to Goods and Services Tax (‘GST’) authorities seeking to levy GST on such collections. A landmark development occurred when the Delhi High Court quashed the levy of GST on license fees collected by the Central Electricity Regulatory Commission (‘CERC’) and the Delhi Electricity Regulatory Commission (‘DERC’). Similar legal challenges are pending in various other High Courts. The legal questions about the problem become relevant in light of similar activities undertaken by similar statutory bodies. Different industries have various regulatory authorities regulating them, ranging from Pollution Control Boards to Education Boards through issuing licenses and collecting fees. There have been instances wherein GST has been levied on license fees collected by different statutory authorities. Thus, the answer to this question would have broad ramifications across industries. This makes it imperative to have a clear law laid down on this issue. The Delhi High Court judgment becomes vital in light of the significance of the subject matter of the case.   Judicial Development The Delhi High Court, in the case of CERC v. Additional Director DGGI (‘Additional Director’), quashed the demand for GST, which was confirmed by the GST Department. The court based its decision on the finding that the ERC perform quasi-judicial functions. The court relied on the judgment of PTC India v. CERC (‘PTC’) to borrow the principle that the licensing function of CERC is a quasi-judicial function. Schedule III under the CGST Act provides that services by any court or tribunal established under any law for the time being in force shall not be treated as a supply. This makes the activities of any court or tribunal exempt from the levy of GST. It further held that these commissions primarily execute their statutory mandate and, therefore, should not be subjected to GST.   Furthermore, the court went into the contention of whether services rendered by these bodies are in furtherance of any business. An act has to be in furtherance of a business in order to make it exigible to GST. The court held that the power to regulate could not be considered akin to trade, commerce, manufacture, profession, and other activities enumerated in Section 2(17)(a), which defines “business.” Further, it holds that CERC is not akin to local authorities, Central Government, or State Government. Section 2(17)(i) makes any activity or transaction undertaken by the Central Government, a State Government, or any local authority as a public authority also constitute a business. Based on the aforementioned considerations, the High Court held that the licensing activities of CERC cannot be made exigible to GST. However, several questions remained unanswered during the course of this case.  The Unaddressed Questions Whether granting licenses is a quasi-judicial function? The court heavily relied on PTC to conclude that granting licenses is a quasi-judicial function performed by CERC without going into a critical examination of the underlying issues. However, the court failed to appreciate the context in which the decision in PTC was based. The case pertained to whether regulations framed by CERC to regulate the electricity industry can be challenged before the Appellate Tribunal for Electricity. In this context, the Apex Court in PTC held that framing of regulations cannot be challenged as it is a regulatory function;i however, granting a license is not a regulatory function but a quasi-judicial function and thus can be challenged. However, this judgment was in an administrative law context. It was, therefore, on the High Court in the case of Additional Director to determine whether a quasi-judicial authority for the purposes of administrative principles would also automatically become a quasi-judicial authority for taxation purposes. The High Court, rather than delving into this question, uncritically followed the law laid down in PTC.   A similar conundrum exists in the context of arbitration tribunals as well. In the case of Central Organisation for Railway Electrification v. ECI SPIC SMO MCML, the Apex Court considered an arbitration tribunal to be a quasi-judicial tribunal while arriving at the further conclusion of determining the legality of a Unilateral Arbitrator Appointment Clause. The case considered whether such clauses would allow impartial decision making on account of arbitration tribunals being quasi-judicial bodies. However, CBIC, vide Circular No. 193/03/2016 had already clarified that service tax was to be liable for services provided by an arbitral tribunal. Whereas Section 65B(44)(c) of the Finance Act 1994 also provided an exception to fees collected by courts or tribunals, still service tax used to be levied on the fees collected by the arbitration tribunals similar to the exception provided in CGST Act. Moreover, various arbitration centres across the country still charge GST on the arbitration fees collected by them.  The situation becomes similar as much as classification of CERC and arbitration tribunals into quasi-judicial body is concerned. However, both these entities differ in the way they are treated under taxation laws after the decision in the case of Additional Director..This takes us back to the same question: can a quasi-judicial authority for administrative law purposes also be considered one for taxation purposes? Answering it becomes more imperative in light of the broad application of this legal question.  The purpose of quasi-judicial bodies in administrative laws is to extend the principles of natural justice to the decision-making of these bodies. This has been recurrently stated by the Apex Court in landmark cases such as the Province of Bombay v. Khushaldas Advani and AERA v. Delhi International Airport. However, the purpose of determining quasi-judicial bodies for taxation purposes is

[By Khushbu Mathuria] The author is a student of Rajiv Gandhi National University of Law, Patiala.   Introduction With the incoming of the Trump administration, the US has withdrawn from the Global Tax Deal via a presidential memorandum issued on January 20, 2025. The memorandum states that the Global Tax deal (“The Deal”) signed in 2021 under the Biden administration has no force or effect in the US. It further stated that the US shall take “protective measures” against countries who are in non-compliance with any tax treaty with the US or in compliance with any extraterritorial tax rules that disproportionately affect American companies. As nations are adjusting to the sudden political shift, the future of the tax deal necessitates navigation of both domestic and international interest amidst the rising tensions and trade conflicts. The article delves into how this withdrawal not only disrupts the progress made so far but also prompts various countries to reconsider their commitment to the deal and to reinstate unilateral measures, in response to the perceived inequalities..   OECD’s Two-Pillar Approach to Global Tax The Global Tax Deal is a multilateral agreement, signed by over 137 countries on October 8, 2021,to bring a global shift in the traditional approach of the taxation system and to further the aim of Base Erosion and Profit Shifting (“BEPS”) via a two-pillar approach. This two-pronged solution aimed to prevent a race to the bottom in corporate tax rates. However, despite this concerted attempt, after almost three years, the deal is thrown off course in the midst of a political maelstrom. The Deal has two Pillars:  The Pillar One undertakes reallocation of taxing rights for market jurisdiction over the excess profits underscored by Multinational Enterprises (“MNEs”) and large companies. The implementation of Pillar One involves the application of Amount A and Amount B. Amount A compliance involves a set of rules applicable to MNEs with a global revenue over USD 20 billion and total profits exceeding 10% of their global revenue subject to certain exclusions, reallocating 25% of the excess profit to market jurisdictions. Amount B on the other hand is a three-step analysis to price baseline marketing and distribution activities to further simplify the application of arm’s length principle via delivering a pricing matrix.   Pillar Two of the framework, introduces a framework for a global minimum tax of 15% for MNEs groups with the annual revenue higher than € 750 million. The underlying intent is to ensure that all streams of income within such MNE groups, regardless of the jurisdiction, either source or resident are taxed at the minimum rate of 15%. In this respect, OECD through the course of 2022 released draft provisions for the Pillar Two Global Base Erosion Rules (“GloBE Rules”), a commentary, and a set of illustrative examples to clarify the working of the rules.   The GloBE rules include the Income Inclusion Rule (“IIR”), which imposes a Qualified Domestic Minimum Top-up Tax on a main enterprise or the parent entity of an MNE group for income earned by its subsidiaries and Permanent Establishments (“PE”), that are taxed below a 15% minimum effective tax rate (“ETR”) in source jurisdictions. The taxing right under the IIR is offered first to the jurisdiction of the ultimate parent entity and, if unexercised by it, shifts to the jurisdiction of the next downstream entity. The Under-taxed profit rule complements the IIR by denying deductions or requiring adjustments if the top-up tax is not applied to low-taxed constituent entities. A de minimis threshold excludes jurisdictions with turnover below €10 million and profits below €1 million, and investment funds and Real Estate Investment Trusts are outside the scope of GloBE. These rules require integration into domestic tax systems for effective implementation.  The third rule, i.e., the Subject to Tax Rule (“STTR”) is a treaty-based provision that applies to related-party payments, such as interest and royalties, when they are not subject to a combined 9% ETR across both the resident and source jurisdictions. Unlike the GloBE rules, the STTR prioritizes the taxation rights of the market jurisdiction. Additionally, the IIR functions as a complimentary measure under Pillar Two enabling market jurisdictions to tax payments that might otherwise go untaxed in both the source and recipient jurisdictions.  Unilateral Measures, Trade Tensions and Global Hurdles in Implementation The two-pillar framework was introduced as a multilateral solution for taxation of MNEs who derived profits in countries without having a PE. While the OECD was attempting to formulate a global solution, prior to 2021, when the global consensus was not in sight, countries had already started taking independent measures by implementing what we refer to as a Digital Service Tax (“DST”).  Indian for Instance, implemented a 2% Equalization levy (“EL”) in 2020, on companies who had a significant economic presence. As a result of the DST and EL, which the US claimed, disproportionately targeted US based companies, the USTR initiated investigations under Section 301 of the Trade Act of 1974 and started imposing retaliatory tariffs on imports from Austria, France, Italy, Spain, Turkey, United Kingdom, and India.   However, in 2021 pursuant to the ongoing discussions of the OECD framework, the US under the Biden Administration suspended such proceedings for 180 days. Subsequently, in October 2021, 136 IF members reached an agreement on the two-pillar approach and issued a joint statement under which Austria, France, Italy, Spain, the United Kingdom and the US compromised to take back DSTs and other relevant unilateral measures. Pursuant to the Joint statement, Ministry of Finance, India issued a Statement (“MoF Statement”) that excess EL paid by MNEs will be available as a credit for set off against their corporate liability determined under Pillar One. This transitional approach came in the backdrop of dropping off of retaliatory measures by the US. Following this, in 2024, India completely did away with the 2% EL. As a consensus, most countries with DSTs agreed to a moratorium pursuant to the negotiations of Pillar One.   Despite their efforts, the OECD’s Pillar One framework faces criticism from experts

[By Runit Rathore & Amal Shukla] The authors are students of Hidayatullah National Law University, Raipur.   INTRODUCTION  “Rule 86A of the Central Goods and Services Tax Rules (CGST Rules), 2017 is not a machinery provision for recovery of tax or dues under the Central Goods and Services Tax Act” (CGST Act). Rule 86A of the CGST Rules grants the Commissioner or any other officer authorized by him, not below the rank of Assistant Commissioner, to block utilization of Input Tax Credit (ITC) upon the satisfaction of specific conditions stipulated under the said rule. It was inserted through the Central Goods and Services Tax (Ninth Amendment) Rules, 2019.   Rule 86A of the CGST Rules was inserted with the aim to curb the increasing fake invoicing incidents to avail ITC. Section 74 of the CGST Act also deals with the problem of counterfeit invoicing and it aims to address and deter efforts by taxpayers to evade taxes, claim excessive input tax credits, or secure unwarranted tax refunds through fraudulent actions, intentional misrepresentation, or suppression of facts. Under Rule 86A of the CGST Rules, a taxpayer’s ledger can be blocked even prior to the conclusion of proceedings under Section 74 of the CGST Act.   The provision of Rule 86A was added to give powers to the authorities to curb the menace of fake invoicing and abuse of ITC. However, the provision with benevolent aims ended up giving excessive and arbitrary powers to the authorities. This article critically examines the potential for abuse of the power conferred by Rule 86A of the CGST Rules and how it violates the principles of natural justice. It further delves into the concept of borrowed satisfaction and addresses the issue of negative blocking. Finally, it evaluates the wider implications of Rule 86A on the interests of the Assessee.  ABUSE OF AUTHORITY: DARK SIDE OF RULE 86A   Rule 86A of the CGST Rules gives overreaching powers to the authorities as it allows them to block Electronic Credit Ledger (ECL) on the basis of their subjective discretion or voluntary satisfaction, without requiring objective evidence or prior notice to the assessee. Further, the text of Rule 86A does not provide for any checks and balances against the use of this power. Unlike Section 73 and 74 of CGST Act, the text of Rule 86A does not provide an opportunity for the assessee to present his case against the blocking of electronic ledger. The text of Rule 86A is such that it remains subject to discretionary abuse by the authorities. It is a sound rule of interpretation that a statute should be so construed as to prevent mischief and to advance the remedy according to the true intention of the makers. Since its inception, Rule 86A of the CGST Rules has been susceptible to misuse in several ways, including blocking input tax credit based on borrowed satisfaction, freezing the ECL without affording the assessee an opportunity to be heard, and imposing negative blocking.  JUDGEMENT ON BORROWED SATISFACTION:  The issue of borrowed satisfaction arises when an officer, as provided under Rule 86A of the CGST Rules, blocks the electronic ledger of an assessee who is relying on the satisfaction of another officer or an officer having command over him. For the application of Rule 86A, the officer must have reason to believe which must be formed based on his own inquiry and satisfaction and not on satisfaction borrowed from any other officer. In this context, it is necessary to refer to Circular No. CBEC-20/16/05/2021-GST/1552 (hereafter Circular) dated 02.11.2021, wherein it has been stated that for blocking of ledger under Rule 86A the CGST Rules the concerned officer has to apply his mind and consider all necessary facts including the nature of fraud. Nevertheless, tax  officers have acted arbitrarily and blocked accounts either being compelled by superior officers or relating to the satisfaction of another officer. The Karnataka High Court, addressing the issue of borrowed satisfaction in the case of K-9 Enterprises v. The State of Karnataka has stated that it is incumbent upon the officer (as referred in Rule 86A) to arrive at his own satisfaction by proper application of mind. Again, the Rajasthan High Court in a Sumetco Alloys v. Deputy Commissioner (Sumetco Alloys), held that the blocking of the ITC ledger should be kept in abeyance as it was based on borrowed satisfaction.  BLOCKING WITHOUT DUE PROCESS: A BREACH OF JUSTICE  Rule 86A of the CGST Rules also departs from the natural law principle of Audi Alteram Partem (let the other side be heard) and does not provide any opportunity for the assessee to present his case against blocking of his ITC ledger. Although the text of Rule 86A does not explicitly provide for a chance to be heard before blocking the ITC ledger, nevertheless it shall remain subject to principles of natural justice. Furthermore, as provided in the Circular, blocking as contemplated under Rule 86A cannot be arbitrary and has to be based on reason to believe formed by application of mind. Nevertheless, the income tax authorities have violated  the principles of natural justice and have blocked the assessee’s ITC ledgers without granting them an opportunity to be heard. Further in Sumetco Alloys, where the ECL was blocked under Rule 86A without hearing the assessee, the court  observed that blocking of electronic ledger without giving notice to the assessee and hearing was in violation of principles of natural justice. Further it was held that, even though the rule does not expressly incorporate the principles of natural justice, competent authority is obliged to hear the affected person.  EXCEEDING LIMITS BY NEGATIVE BLOCKING   Rule 86A of the CGST Rules has two aspects i.e. Positive Blocking and Negative Blocking. Positive Blocking refers to the restriction imposed by tax authorities on the ECL of a taxpayer, preventing the utilization of a specific amount of ITC suspected to be fraudulently availed. On the other hand, Negative blocking under Rule 86A refers to a situation where the authorities block an amount in the taxpayer’s