Taxation Law

[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

[By Tanmay Doneria & Varsha Tanwar] The authors are students of Rajiv Gandhi National University of Law, Punjab.   Introduction The intersection of taxation and religion is a multifarious and contentious matter. It is vital to navigate this delicate landscape having far-reaching implications. The Hon’ble Supreme Court of India is set to adjudicate a significant legal question in the Institute of Franciscan Missionary of Mary v. UOI (SLP No. 10456 of 2019). The current SLP inter-alia has been filed to review the judgement rendered by the Hon’ble Madras High Court in Union of India v. The Society of Mary Immaculate. The case hinges on the issue of whether State governments are obligated to deduct Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act, 1961 (“Act”) while making grant-in-aid payments captioned as salary directly to the individual members of religious congregations, such as nuns, who render their services in educational institutions.  The present case presents a unique situation as the nuns and missionaries live in a state of civil death, they take a vow of poverty due to which they do not have any proprietary rights and their income is surrendered in entirety to the congregation. This has been argued before the Madras High Court stating that in accordance with the same, they should not be subject to TDS. However, rejecting this argument the Court held that Section 192 of the Act is a-religious and apolitical thus, the payments made to the nuns will be subject to TDS.  This article analyses the fundamental question, which was overlooked by the Hon’ble Madras High Court, of whether the payments made by the State government to nuns will qualify as “salary” under the Act thereby triggering the requirement of TDS under Section 192 of the Act. Furthermore, it will delve into the nuanced concept of ‘diversion of income,’ positing that the congregation’s overriding title to the nuns’ income, as dictated by their religious tenets, renders the payments made to them as diverted income.  The Payments made by the State Government does not fall within the ambit of ‘Salary’ under the Act No payment can be considered within the ambit of salary as defined under Section 15 of the Act unless there exists an employer-employee relationship between the payer and the payee. Furthermore, as Section 192 of the Act only applies to payments made under the head of salary, it can be stated that in order to attract the provisions of Section 192 of the Act, it is imperative that the payments must arise out of an employer-employee relationship. Therefore, in specific circumstances of the case at hand, there must be an employer-employee relationship between the State Government and the missionaries/nuns.   It is important to note that the Madras High Court did not adequately discuss the preliminary issue of whether these payments arise out of an employer-employee relationship. The Court had remarked that “Section 15, read with Section 192, obligates the State Government or the employer, be it educational institution or the State to deduct income tax at source.” This blanket statement is erroneous as it merely creates an assumption that the State Government can be considered as an employer of individual missionaries.   To shed light on this matter, we should examine the recent ruling of the Hon’ble Tripura High Court in Aparna Chowdhury Reang v. State of Tripura. Wherein, the court unequivocally established that an employee of a grant-in-aid school cannot be considered to be a government employee. On applying this precedent to the case under consideration, it can be argued that even though the nuns (payee) were receiving payments directly from the State Government (payer) as grant-in-aid through the Electronic Clearing Scheme (ECS), there exists no employer-employee relationship between the State Government and the individual missionaries. Consequently, in the absence of any employer-employee relationship, the TDS provisions under Section 192 of the Act would not be applicable in this scenario. Therefore, failing to qualify the preliminary requirement of an employer-employee relationship, the provisions under Section 192 of the Act cannot be attracted at all.   Surrender of Remuneration to the Congregation Constitutes Diversion of Income The concept of diversion of income, as outlined in Section 4 of the Income Tax Act, 1961, involves the diversion of income at its source before it reaches the assessee. This refers to instances where the income is re-directed to another entity having an overriding title, thereby preventing it from being subjected to tax under the Act. The test to determine the diversion of income was recently laid down in the case of National Co-operative Development Corporation v. Commissioner of Income Tax, wherein the Apex Court held that if a “portion of income arising out of a corpus held by the assessee consumed for the purposes of meeting some recurring expenditure arising out of an obligation imposed on the assessee by a contract or by statute or by own volition or by the law of the land and if the income before it reaches the hands of the assessee is already diverted away by a superior title the portion passed or liable to be passed on is not the income of the assessee.” Essentially, to apply the doctrine of diversion of income, there must be, firstly, an obligation on the Assessee by a contract, statute, law of the land or by own violation resulting in a recurring expenditure and secondly, income must be passed on or liable to be passed on by a superior or overriding title.   In the present case, the nuns are under an obligation to surrender their entire income to the congregation, this obligation is imposed on them by their own violation i.e., by taking their vow of poverty in accordance with the canonical law. Furthermore, their vow of poverty creates an overriding title of the congregation over any income earned by the Nuns/missionaries and thus, any income credited to the individual account of the nuns is liable to be passed to the congregation by virtue of this overriding title. It is evident that all the

[By Adwitiya Gupta & Suprava Sahu] The authors are students of Gujarat National Law University.   Introduction The Supreme Court in Mineral Area Development Authority v M/s Steel Authority of India, by an 8:1 majority, overturned the 1989 decision, which decreed that royalties paid by miners on minerals are a tax. This decision gives states the power to tax mining activities, through which the states can now collect more revenue through taxes in addition to the existing royalties.  One of the central questions put before the bench was whether or not royalty under Section 9 of the Mines and Mineral (Development and Regulation) Act,1957 (MMDR Act) is in the nature of tax.   Before 1990, most precedents held that royalty was not in the nature of a tax. Later, India Cement Ltd v. State of Tamil Nadu & Ors overturned the trajectory of judicial precedents by holding that ‘royalty is a tax.’ Various courts have relied on the decision taken in the case of India Cement Ltd v. State of Tamil Nadu & Ors. until 2004 when the SC pointed out a typographical error in the India Cements Case as a “constitutional, legal, and moral” obligation to correct the mistake, the court held that royalty was not a tax. An inconsistency arose regarding the India Cements case being decided by a nine-judge bench, whereas Kesoram being decided by a five-judge bench. Since a smaller bench does not have the power to overturn the decision, this resulted in a conflict between both judgments. Leaping into 2011 and the present case, the court observed the evident inconsistency between the two cases and opted to refer the matter before a nine-judge bench for a conclusive ruling on the legal stance.   Understanding Royalty and Taxes Royalty can generally be understood as a payment made by a lessee to the lessor based on the quantity of minerals extracted from the land. The concept of royalty on minerals dates back to ancient times when kings would impose a tax on those extracting minerals from their lands. According to the ancient law, mineral wealth was not vested in the king, but the king was entitled to receive revenue from his subjects. Post-independence, the Mines and Minerals Act of 1948 was passed with the objective of regulating mines and, oil fields and mineral development. Later, the MMDR Act of 1957 was enacted to centralize the regulation of mines and oil fields under the Union Government, replacing the earlier 1948 Act.   Section 9 of MMDR Act 1957 provides for royalty in respect to mining leases. The essential elements of royalty are:   It is a consideration or payment made to the proprietor of the minerals;  It flows from a statutory agreement (a mining lease) between the lessor and the lessee;  It represents compensation to the lessor for granting the lessee the privilege to extract minerals.   It is usually based on the quantity of minerals extracted.   Whereas Taxes, in general, are monetary charges imposed by the government on individuals or property to generate revenue needed for its functions. In the case of Commissioner, Hindu Religious Endowment, Madras v. Sri Lakshmindra Thirta Swamiar of Sri Shirur Mutt, the court enumerated essential characteristics of taxes as the following:   Tax is a mandatory exaction of money by a public authority;  It is imposed under statutory power irrespective of the consent of the taxpayer;  Demand to pay tax is enforceable by law;  It is imposed for public purposes to cover state expenses without providing specific benefits to the taxpayer;  It is a part of the common burden.   The Inconsistency Explained: Tax v/s Royalty. One of the key questions analyzed in the Mineral Area Development Authority v M/s Steel Authority of India was whether a royalty is a tax. In order to arrive at a conclusion regarding this crucial question, the court analyzed various judgments dealing with this question. In the case of Laddu Mal v. State of Bihar, the division bench held that a royalty is a levy in nature of tax owing to its compulsory nature of exaction. Further, in  Laxminarayana Mining Co. v. Taluk Development Board highlighted that the provisions of the MMDR Act pertaining to levy, fixation, and collection of royalty and recovery as arrears of land revenue provides that the expression ‘royalty’ under section 9 connotes the levy of a tax.   However, several High Courts observed a contrary view. In Dr.  Shanti Swaroop Sharma v. State of Punjab, the court disagreed with the decision of Laddu Mal and upheld royalty cannot be said to be a ‘compulsory exaction’ based on the rationale that compulsion to pay royalty arises out of the contractual conditions of the mining lease and not through the force of law. It relied on the fact that the State Government can collect royalty in a similar manner as unpaid land revenue, but that does not qualify it as tax. The India Cement case marked a significant change by defining royalty as a tax. Over the next decade, this influenced numerous high court and Supreme Court decisions, altering the judicial perspective on whether royalty and tax are the same or different.   In the case of State of MP v. Mahalaxmi Fabric Mills, the court deliberated on the possibility of a typographical error in the India Cements judgment.  However, the bench held that the arguments in the India Cements case concluded that royalty was in the nature of a tax, so there was no possibility of typographical error. In State of WB v. Kesoram Industries Ltd, the court again considered the possibility of an error in the India Cements case. Justice Lahoti felt duty-bound to correct the typographical error and held that the India cement judgment mistakenly conveyed that ‘royalty is a tax’ instead of conveying that ‘cess on royalty is a tax.’ Justice clarified that the intention of India Cement was to hold that “royalty” itself was not considered a tax, but the intended meaning was that “cess on royalty,” which is an additional charge, is viewed as a

[By Vibhor Maloo & Shubhanshu Dubey] The authors are students of HNLU, Raipur.   Introduction As tax evasion tactics become more sophisticated, India’s legal framework is changing significantly. The recent Telangana High Court (HC) ruling has initiated a debate on whether ​​General Anti-Avoidance Rules’ (GAAR) pervasive powers, which empower tax authorities to scrutinize and invalidate transactions primarily aimed at avoiding taxes, even if they comply with the letter of the law which preempt the more targeted approach of Specific Anti-Avoidance Rules (SAAR). SAAR targets particular types of transactions known to lead to tax evasion, such as bonus stripping of shares or dividend stripping. The interaction between GAAR and SAAR is crucial as it balances broad authority with specific rules. GAAR’s broader scope can override SAAR’s targeted approach, as seen in the Telangana High Court ruling, impacting how tax authorities enforce anti-avoidance measures and how taxpayers structure transactions. While SAAR has been amended to include bonus stripping of shares, this judgment underscores GAAR’s precedence and raises questions about its broader implications. Prior to the introduction of GAAR in Chapter XA of the Income Tax Act, 1961, tax evasion in India was mainly addressed through judicial decisions, often referred to as Judicial Anti-Avoidance Rules (JAAR). Simultaneously, the presence of SAAR in Chapter X of the IT Act aided in regulating certain specific transactions that led to tax evasion.  While the SAAR has been amended to encompass bonus stripping of shares, the judgment affirms GAAR’s broader application and precedence. However, it also highlights concerns about the lack of objectivity in GAAR provisions, the discrepancy with specific provisions under SAAR, and the risk of deterring legitimate transactions due to GAAR’s broad interpretation. In the post-assessment year 2018-19, GAAR was introduced to regulate complex tax avoidance outside SAAR’s scope. Over the years, strife has arisen between SAAR and GAAR, though the CBIT has clarified that both can co-exist.  Unraveling Tax Complexity: Role and Evolution of Anti-Avoidance Jurisprudence The Indian legislative landscape aims to negate Impermissible Avoidance Arrangements (IAA) under Section 96 of the IT Act, targeting arrangements designed to avoid taxes rather than serve a legitimate business purpose. These arrangements are primarily aimed at avoiding taxes rather than serving a legitimate business purpose and are based on the ‘purpose test’. The test involves analyzing the commercial intent behind the arrangement to determine its legitimacy under GAAR where it considers the business intent, the element which prompts detailed analysis of the arrangement, and the abuse of tax provisions. GAAR and SAAR, help to avoid these transactions that aim at preventing tax payments through illegitimate complex processes.   ​​​The Vodafone Case demonstrated flaws in the system of transactions outside the scope of SAAR. This case highlighted the limits of SAAR, which deals only with specific tax avoidance practices. Since the transaction did not fall under predefined categories, SAAR could not be applied. The case demonstrated the need for broader rules like GAAR to tackle complex tax avoidance schemes that go beyond the scope of SAAR. This eventually led to the introduction of GAAR in the Indian tax system. In the Common Law Jurisprudence, the case of  WT Ramsay v. Inland Revenue Commissioners, the purposive interpretation approach was considered, and it was held that the evaluation should be based on the impact in the entirety of the complete series of transactions, rather than the tax implications of each step. This concept applies only when the relevant legislation requires it, and each step severally does not have to be considered artificial for the principle to apply. This highlights the necessity of assessing transactions on their aggregate economic content rather than individual stages.  In Craven v. White explained the limitations of the Ramsay Principle which is a statutory interpretation principle to counter tax mitigation. The Ramsay principle seeks to contest tax avoidance strategies by scrutinizing ​​pre-ordained transactions, which are are pre-planned steps solely aimed at achieving tax benefits, lacking genuine economic or business purpose, that lack actual economic substance and are not justified by moral grounds, the same will lead to destructive commercial effects. In UK v. Duke of Westminster, it was held that every individual has the right to legally organise their affairs to reduce the tax burden, and if they succeed, they cannot be forced to pay more. The verdict reflects that a laissez-faire economy has to be considered where every person has the right to manage his tax affairs.  In contrast, the Duke of Westminster case emphasises the distinction between lawful tax avoidance and evasion, directing both GAAR and SAAR in India to ensure transactions are genuine rather than just tax-driven. In Mc​     ​Dowell & Company Limited v Commercial Tax Officer, it was clearly stated that controversial methods should not be used in tax planning, as they could lead to significant economic harm. Therefore, the consideration of IAA flows from a detailed jurisprudential debate considering primarily the business intent and the commercial substance; however the same has been disputed to date considering the complexity of the transactions involved.  Labyrinth of Anti-Avoidance: Interpreting Telangana HC’s Verdict  Mr Ayodhya Rami was investigated by the Income Tax Authorities (ITA) for discrepancies in the taxable income assessment, including issues of bonus stripping with shares of REFL, a limited company. Bonus Stripping of shares involves buying shares before a bonus issue, selling them at a loss after the bonus issue, and using the loss to offset capital gains. He disclosed the capital loss from the sale of REFL shares, subsequently, the ITA initiated proceedings against him. Mr Ayodhya argued that SAAR should apply instead of GAAR, claiming GAAR shouldn’t apply to transactions covered by SAAR. The court found Ayodhya’s argument contradictory and noted that SAAR’s interpretation did not cover bonus stripping.  The issue was whether the transactions including the issuing and transferring bonus shares were legitimate commercial transactions or merely a tax avoidance strategy. The Court determined that the transactions concerning the bonus shares and their sale lacked genuine business substance and were fundamentally deemed artificial arrangements intended to avoid tax requirements. Additionally,

[By Bhavana Sree Sagili] The author is a student of Damodaram Sanjivayya National Law University.   Introduction The US Supreme Court in Moore v. United States, addressed the constitutionality of the Mandatory Repatriation Tax (MRT) implemented under the 2017 Tax Cuts and Jobs Act. This case is pivotal because it will determine whether Congress can impose taxes on the “unrealized income” of American-controlled foreign companies.  While the final judgment is crucial, the underlying rationale of the decision holds even greater significance. If the Court rules in favor of Moore, it could set a precedent affecting various aspects of income tax law, potentially leading to substantial changes in how taxes on foreign income are structured and enforced.   The United States is the third largest investor in India, with investments totalling $65.19 Bn  from April 2000 to March 2024. This investment is crucial for the growth of Indian small-scale businesses, enabling them to expand and thrive (like Moore in KisanKraft). The Supreme Court judgment on Moore v. United States could significantly impact these investments and, by extension, the Indian economy. A ruling that affects the taxation of unrealized income may influence U.S. investors’ decisions, potentially altering the flow of investment into India.   The judgment has implications for the international taxation framework, as the   OECD’s Pillar Two global minimum tax aims to ensure multinational enterprises (MNEs) pay at least a 15% tax rate on their global income, thereby reducing profit shifting and base erosion. It establishes rules for a minimum effective tax rate on large multinational groups. If the U.S. faces challenges in implementing these rules due to constitutional issues, it could complicate global efforts to standardize international tax practices, impacting countries like India that support these initiatives.  Background Historically, Congress has treated certain business entities, such as corporations and partnerships, as pass-through entities for tax purposes, meaning the entity itself does not pay taxes on its income; instead, the income is attributed to the shareholders or partners, who then pay taxes on their share of the income, regardless of distribution. Since 1962, Congress has applied a similar approach to American-controlled foreign corporations under Subpart F of the Internal Revenue Code, taxing American shareholders on certain types of income, mostly passive, that the foreign corporation earned but did not distribute. The 2017 Tax Cuts and Jobs Act introduced the Mandatory Repatriation Tax (MRT), imposing a one-time tax on the accumulated, undistributed income of these foreign corporations to address the trillions of dollars that had accumulated without U.S. taxation, applying a tax rate of 8% to 15.5% on these earnings.  Moore Vs Us Charles and Kathleen Moore invested $40,000 in KisanKraft, an American-controlled foreign corporation based in India, receiving a 13% ownership share. From 2006 to 2017, KisanKraft generated substantial income but did not distribute any of it to its American shareholders, including the Moores.  With the enactment of the MRT, the Moores faced a tax bill of $14,729 on their share of KisanKraft’s accumulated earnings from 2006 to 2017, even though they had not received any actual income from these earnings. The Moores paid the tax but then sued for a refund, arguing that the MRT was an unconstitutional direct tax because it taxed unrealized income without apportionment among the states. They claimed this violated the Direct Tax Clause of the Constitution.  Judgment The Supreme Court upheld the constitutionality of the Mandatory Repatriation Tax (MRT), emphasizing Congress’s broad authority to tax income, including undistributed income from American-controlled foreign corporations. The majority opinion, delivered by Justice Kavanaugh, reinforced this power by referencing historical precedents where similar taxes had been upheld, validating the MRT within the framework of existing tax laws. Central to the Court’s reasoning was the Sixteenth Amendment, which allows Congress to tax “income” from any source without apportionment among the states. The majority held that the MRT fits this framework, as it taxes income the Moores were deemed to have earned through their investment in KisanKraft. Historical examples, such as Subpart F provisions, supported the constitutionality of the MRT.  In his concurring opinion, Justice Jackson emphasized Congress’s “plenary power” over taxation and the long history of taxing undistributed income. Justices Barrett and Alito, while agreeing with the judgment, highlighted the need for future examination of income attribution nuances. In contrast, Justice Thomas, joined by Justice Gorsuch, dissented, arguing that the Sixteenth Amendment requires income realization before taxation, which the MRT violates. The ruling referenced cases like Burk-Waggoner Oil Assn. v. Hopkins and Burnet v. Leininger, supporting taxation of undistributed income. This decision clarifies Congress’s authority to tax undistributed income from foreign corporations, reinforcing the government’s ability to address multinational tax deferral strategies while noting potential future challenges on income definition and attribution.  Impact on India The United States, being the third-largest investor in India, has injected substantial capital into the Indian economy, with investments totaling $65.19 billion from April 2000 to March 2024. These investments have been crucial for the development of various sectors, particularly small and medium enterprises (SMEs). For instance, the investment by Charles and Kathleen Moore in KisanKraft, an American-controlled foreign corporation based in India, highlights how American capital supports the growth of Indian businesses. Kisan Kraft’s growth, fueled by foreign investment, has enabled it to enhance operations and reach broader markets, contributing significantly to the local economy.  The potential changes in U.S. tax laws, as highlighted by the Moore v. United States case, could have a profound impact on these investment dynamics. If the Supreme Court’s decision leads to broader taxation on unrealized income, U.S. investors may become more cautious about investing in foreign enterprises. This caution could result in reduced investment flows into India, potentially slowing down economic growth and innovation. The Mandatory Repatriation Tax (MRT), which imposes a one-time tax on accumulated, undistributed income of American-controlled foreign corporations, might prompt U.S. investors to repatriate their earnings more quickly. This could affect the long-term investments in Indian companies, impacting their sustainability and expansion plans.  India’s tax policy has traditionally been designed to attract foreign direct investment

[By Vedant Sharma] The author is a student of National Law University Odisha.   INTRODUCTION The Indian Courts have consistently aimed to protect the substantial rights of the citizens. A presumption has been adopted in the Indian Jurisprudence by courts against the retrospective legislation unless the parliament manifest a clear intention for the law to have a retrospective effect. The issue of retrospective law could be traced back to the judgement of Golak Nath vs State of Punjab where the Supreme Court ruled that parliament could not amend fundamental rights retrospectively. The significance of retrospective law was brought to light in the case of the State Bank (Madras Circle) vs Union of India where it was highlighted that retrospective could relate to a variety of things such as changing a right or changing a procedure. The Income Tax Act, of 1961 has itself had more than 60 amendments in less than 30 years of existence. Prospective amendments being those which apply in the future dates are more likely to be easily applied than retrospective law which takes effect from the past.  Recently on 6 June 2024, the Dharwad bench of the Hon’ble Karnataka High Court in the case of SMT. Dhanashree Ravindra Pandit vs The Income Tax Department gave the landmark judgement addressing the complexities around the retrospective application of section 50 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which gives authority to revenue to initiate a criminal prosecution for wilful failure to furnish information under return of income as per sub-section (1), (4) or (5) of section 139 of the Income Tax Act, 1961. The respondent/petitioner took recourse to section 72(C) of the Black Money Act, 2015 (‘BMA’) to register a complaint invoking section 200 of the Criminal Procedure Code, 1973 that proceedings can be initiated under the act would still take place even if the assets were in existence before commencement of the act.   The court held in the instant case that section 72(C) of the BMA, 2015 being a deeming section which creates criminal liability should not be extended beyond the purpose of the act for which it is created or beyond the language of the act as per the judgement by the Hon’ble Supreme Court in the case of Kumaran vs the State of Kerala.   One of the major observations that were made by the court was the retrospective application of criminal prosecution under section 50 of the BMA, 2015 that violates the fundamental rights of the taxpayers under Article 20 of the Constitution of India who are convicted for an offence except for violation of law in force at the time of the commission of the act charged as an offence. The court referred to the Hon’ble Supreme Court judgment in the case of Rao Shiv Bahadur Singh v. State of Vindhya Pradesh which held that the retrospective application could not be in case of criminal offences being it violative of Article 20.   The Hon’ble Karnataka High Court also held that the judgement of Hon’ble Supreme Court in Union of India v. Gautam Khaitan would not be applicable in the present scenario as the judgement does not pertain to the issue of retrospective application of Sections 50 and 51 qua Article 20 of the Constitution. Thereby the court held that the prosecution cannot be made retrospectively as it does not pass the muster of Article 20 of the Constitution of India.  UNDERSTANDING THE ISSUES WITH THE PRESENT JUDGEMENT The Hon’ble High Court of Karnataka has taken a notable step in the realm of the BMA by declaring the retrospective application of Section 50 of the BMA, 2015 as not being applicable but there are still a lot of important issues that are left by the court to be decided.  AMBIGUITY IN LEGISLATIVE INTENT TO MAKE RETROSPECTIVE LAWS Legislative intent through provisions of Black Money Act   It is clearly stated in the BMA that the law shall come into force on 1st April 2016 as per Section 1(3) of the act and the charge of tax starting from Annual Year 2016-17 onwards as per Section 3. The language of the act in itself implies that the language of the act is intended for prospective application of the law.   Section 2(11) of the BMA defines “undisclosed asset located outside India”. The phrases “held by the assessee” and “he is the beneficial owner” used in Section 2(11) give an implication that the assessee should continue to hold assets.  Thereby a liberal interpretation of the provisions suggests that the assets should be held by the taxpayer even after the act has come into commencement which shows that the legislature did not intend to apply the act retrospectively (Srinidhi Karti Chidambaram v Pr CIT).   The legislation can be deemed to be retrospective if it is clarificatory or declaratory in nature as laid down by the Hon’ble Supreme Court in CIT v Vatika Township(P) Ltd. A declaratory act is one that removes doubt about common law or the meaning of a statute and an explanatory act is one that addresses obvious omissions or clarifies doubts regarding a previous act.1 The act can be deemed to be declaratory if the previous legislation, which it is trying to clarify was unclear or unambiguous.   In case of the BMA, it is nowhere mentioned that it is declaratory/clarificatory in nature it is deemed to be clarificatory/declaratory. It was not enacted to remove ambiguity or provide clarification or remove doubts of any previous legislation which shows that the legislature did not intend for retrospective application of present law.  Amendment in section 2(2) after Finance act 2019  The definition of  “assessee” was expanded by the Finance (No. 2) Act, 2019 with retrospective effect from the date of commencement of the act which is 1 July, 2015. The definition of assessee, under Section 2(2) of the BMA, 2015, which was restricted to a person as a resident within the meaning of Section 6 of the Income-tax Act. This was