Taxation Law

[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

[By Kushagra Dwivedi] The author is a student at Dr. Ram Manohar Lohiya National Law University.   INTRODUCTION Escrow agreements are a dominant payment mechanism for M&A transactions. Escrow agreements are a form of deferred payment where the consideration for a contract is payable at a future date rather than the date of disposal of asset. With the advent of the new Union Budget being so focused on bolstering the start-up and business sector with changes like the abolition of Angel Tax, a closer look is warranted at how payment mechanisms for such businesses are taxed.  A capital asset is any kind of property held by a person, whether tangible or intangible. Whenever a capital asset is sold, the profits or losses on the amount realised is subject to capital gains. When dealing with transactions that involve a large amount of capital like Share Purchase Agreements (‘SPAs’) where shares of a company are purchased, the tax liability of the taxpayer needs to be carefully calculated. Section 48 of the Income Tax Act (‘IT Act’) describes how the capital gains tax is supposed to be computed. It, however, proves inadequate in computing the tax liability arising from transactions that utilise methods of deferred payment like escrow. The mechanism does not account for the nuances included in transactions with deferred considerations like adjusting for the change in market value at the time. When the consideration is received or when the deferred consideration is not received in the future, calculating the adjustments in the actual value of the consideration received after inflation proves complicated.  One of the main points of contention being when the liability of paying capital gains arises on the taxpayer, in the year of accrual of the income or in the year of transfer of the income. For example, if A wants to sell his stake in XYZ Ltd. to B for 5,00,000 where 3,00,000 would be paid up front while the remaining 2,00,000 would only be paid after A meets certain obligations. In such a case, the capital gains tax would be levied on the 2,00,000 only when the amount is actually accrued to A whereas in the latter view, the entire sale of 5,00,000 would be chargeable to tax. While the judicial stance as to how deferred payment mediums are to be taxed is riddled with many seemingly contradictory judgments, a closer look at the logic behind the court’s reasoning shows the real income theory being used as a basis. This article aims to analyse its shortfalls and give suggestions to ensure efficiency for computing tax liability using real income. Firstly, it analyses cases that approved of taxing in the year of accrual. Then moving on to judgements that hold that the same should be taxed in the year of sale and further providing solutions to resolve such ambiguity.  CASE ANALYSIS Real Income Theory & Legal Right to Income  The main reasoning adopted by the courts for taxing deferred income in the year of accrual is underlined in the case of Dinesh Varzani vs. DCIT. (‘Varzani Case’). The Bombay High Court, (‘HC’) relying upon the judgement of the Supreme Court (‘SC’) in CIT Vs. Shoorji Vallabhdas and Co. says that income tax can only be levied upon the real income earned by an assessee. In a case when income does not accrue towards the assessee, no tax can be levied even though in some cases. In the case of Ajay Guliya v. ACIT (‘Ajay Guliya Case’), the Delhi HC stated that an amount can accrue or arise towards the assessee if they acquire a legal right to receive the amount; mere raising of a claim does not create a legally enforceable right to receive the same. After taking a closer look at lawsuits concerning tax liability in escrow accounts, a common essential can be gleaned, that a right towards the amount parked in escrow should never have arisen on part of the taxpayer and the income must never have been accrued in the first place. The Ajay Guliya Case underlines the right to income doctrine while the Varzani case delineates the Right to Income theory that is often used by the courts to resolve such issues. The court relied upon the case of CIT vs Bharat Petroleum Corporation Ltd., owing to an oversight by the assessee company where they failed to adhere to the accounting principles set by the government for a price stabilizations scheme, the assessee ended up with an excess claim of about INR 44,47,482 that was to be settled via a dedicated scheme account. However, the Calcutta HC held that since neither the government accepted the claim for the aforementioned amount and neither any settlement via arbitration occurred, the inclusion of the amount would be unlawful. In Modi Rubber vs ACIT, (‘Modi Rubber Case’)  the Income Tax Appellate Tribunal, Delhi (‘ITAT’) holds that because the deferred amount decided upon in their SPA was directly transferred to the escrow amount without the taxpayer ever having the legal right to claim it and the possibility of them recovering the entire amount deposited in escrow being too remote due to the terms of the SPA, taxing the entire sale consideration including the deferred payment would amount to taxing a notional income instead of the real income of the assessee. The court held that owing to special subsequent facts that led to the diminishment of the assessee’s claim towards the amount parked in escrow causing a decrease in the real income of the assessee, the same would not be taxable in the year of sale.  Contrasting Judgements – Furthering Judicial Uncertainty? The same ratio has been followed in Caborandum Universal Ltd v. ACIT, (‘Caborandum Case’) where the Madras HC states that because the SPA which was entered into by the taxpayer agreed upon the full and final sale consideration and the entire amount was paid to the taxpayer without any deductions, it will be offered to tax. The right of the taxpayer on the money was never disputed.

[By Aayush Ambasht & Param Kailash] The authors are students of Symbiosis Law School, Pune.   Introduction On March 7, 2024, corporate entities stood to witness an extensive development in the Indo-Mauritius Tax Treaty, with an amendment to its preamble and the introduction of the Principal Purpose Test (PPT), implying the requirement for tax authorities to look beyond ‘Tax Residency Certificates’ produced before them by investors from Mauritius. In essence, the treaty aims to touch two primary objectives: the introduction of the Principal Purpose Test and alignment of the Indo-Mauritius Tax Treaty with the Base Erosion and Profit Shifting (BEPS) rights package put forth by the Organisation for Economic Co-operation and Development.   This piece seeks to provide deductions and key takeaways from the introduction of the PPT, potential implications to the money markets associated, as well as unaddressed concerns regarding the nature of investment discipline of the Foreign Portfolio Investor (FPI) landscape in corporate India.   Brief Background On May 10, 2016, the amendment to the Indo-Mauritius DTAA brought about a degree of fine-tuning of the source country taxation, which paves a way for the inclusion of the Limitations of Benefits clause. This was followed by a 2017 press release allowing for the grandfathering of the agreement as well as ensuring standards applicable for future investors. Unlike the 2024 amendment, a 2017 press release by Mauritius clarified concerns regarding the inculcation and implementation of the BEPS minimum standards, by holding the matter to be an item of bilateral discussion between countries. However, deviating from the given stance, the Indo-Mauritius DTAA by way of amendment on March 7, 2024 (which got available to the public on April 11, 2024) chose to align the treaty in lines with OECD proposals concerning the BEPS, with specific emphasis on the introduction of the Principal Purpose Test (PPT).   Key Takeaways from the Amendment Article 1 – Revision of the Indo-Mauritius DTAA  The binding nature of the Preamble of the Indo-Mauritius treaty stands revised following the amendment by omitting the phrase “for the purpose of mutual trade and investment” and replacing it by “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.”  Through this development, an earnest attempt to delineate tax evasion vis-à-vis avoidance by way of treaty-shopping arrangements and indirect benefits of residents based out of foreign jurisdictions has been made.   Article 27B – Alignment with the Principle Purpose Test  Recognizing the pulse of “entitlement to benefits” in line with the “Principle Purpose Test” provided under Article 7 of the MLI for Prevention of Treaty Abuse, benefits accruing out of an item of income with the principle purpose of the transaction or arrangement which may have resulted in such a benefit; shall not be granted unless it is in accordance with the objects or purpose of the Indo-Mauritius Convention.   As an objective driven move, bridging the opacity between both monetary and non-monetary benefits basis the PPT has been sought. This shall minimize possible defaults and unregulated returns beyond the scope of the prescribed business purpose/commercial structure.  Taxation of Capital Gains   As far as capital gains for Indian investments parked through the Mauritius route subject to the 2016 amendment are concerned, capital gains earned by a tax resident of Mauritius on sale of shares of an Indian company were not taxable in India. This exemption had been withdrawn for benefits arising from sale of shares of an Indian company acquired by a Mauritian resident after March 31, 2017. Therefore, investments made prior to April 1, 2017 were grandfathered and sale of such grandfathered shares continued to benefit from the capital gains tax exemption under the tax treaty regardless of when such shares would be sold.   Keeping in mind the amendment at hand, moving the needle on fiscal evasion of taxes on capital gains and income before or after the effective date of this amendment would be privy to the PPT. This would ensure an imposition of a requisite litmus test given the complexities of grandfathering of shares and computation of capital gains on such equity variables.  Analysis and Industry Implications for Indo-Mauritius Money Markets A shift from the golden age of the Indo-Mauritius tax treaty where capital gains tax was effectively never paid merely by channelling money through Mauritius, demanded intervention from the government. The significance of the tax treaty and the pertinent role Mauritius has played in the Foreign Portfolio Investor (FPI) landscape in India stands under question through the introduction of the Principal Purpose Test. With a cursory construction of the PPT, the tax treaty is pivoted towards falling in line with Action 6 of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS), with the framework calling for the establishment of a minimum standard to prevent treaty shopping, thereby furnishing a commitment on behalf of both India and Mauritius Governments to eliminate opportunities for double taxation or tax evasion. While the test mentions about “non-taxation” and “reduced taxation,” more clarity on this conjoint adage must align with mutual benefits without deviating from the prescribed investment route between the two countries.  Further, the question of the grandfathering effect of the treaty also comes into the equation, considering the treaty shall be effective from the date of its entry into force, with no regard concerning the dates during which the taxes were levied or the taxable years the said taxes are concerned with. The ambiguous nature of the protocol calls for challenges arising from investments made prior to the 2017 amendment, keeping in mind the retroactive applicability of the PPT. Pursuant to this challenge, the grunt of regulatory blanks for transactional structures involving the direct or indirect sale of shares, movable assets, immovable assets and family trust funds; challenges shall be faced by investors and the tax authorities of the respective countries arising from its application. To summarize, the retroactive nature of the PPT calls for challenges arising, not only concerning potential fresh investments from Mauritius, but also existing historical structures, sheltered by tax benefits under the grandfathering treaty, thereby leading

[By Shaurya Talwar] The author is a student of Gujarat National Law University, Gandhinagar.   Introduction  The Finance Act of 2023 introduced a juggernaut for business entities dealing with Micro and Small Enterprises by insertion of clause (h) in the Section 43B of the Income Tax Act of 19611 which has now come in force from the Financial Year 2024-25. To understand the repercussions of the same let us go through the relevant provisions.  The Section 43(b), IT Act, 1961 provides for such deductions which are only allowed if there is an actual payment before the filing date, with certain exemptions. Section 43(B)(h), Income Tax Act, 1961 provides that if the assessee has any payment due to any Micro or a small enterprise beyond the time period mentioned under S.15, MSMED Act,2 it shall only be allowed to be deducted in the year in which the actual payment is made. To simplify, any deductions on account of any purchase will only be allowed to be deducted in the year in which it is actually paid and not accrued.   If the tax is not paid within the time limit mentioned under the Section 15 of the MSMED Act, 2006 such purchase is to be treated as your business income under Section 28, IT Act, 1963 and the assessee will have to incur higher tax liability on account of such additional income.   Time period under the MSME Act  The MSMED Act, 2006 defines Micro and small enterprises on the basis of turnover and investments in plants & machinery. It is categorised as follows:  a. Micro enterprises  Turnover: Does not exceed Rs.5 Crores.  Investment in Plants & Machinery: Does not exceed Rs.1 Crore  b. Small Enterprises  Turnover: Does not exceed Rs.50 Crores  Investment in Plants & Machinery: Does not exceed Rs. 10 Crores.  The Section 15 of the MSMED Act, 2006 provides for the time period under which the payment is to be made to Micro and Small Enterprises. There are two categories for the same, which are as follows:  In case of a written agreement: The payment is to be made within the credit period as agreed under a written agreement, however such period cannot exceed 45 days. In case of no written agreement: The payment is to be made within a period of 15 days.  Intention of the Legislature  The clause was inserted as a socio-economic measure to make sure there is sufficient liquidity with the Micro and small enterprises who often faced stretched credit cycles ranging from 67 days to 195 days which ultimately stretched their liquidity and consequently affecting their solvency. The clause was inserted to promote timely payments to such enterprises and to increase efficiency of the credit cycles as delayed payments often have a domino effect across all incidental sectors and industries, therefore the Government takes it very seriously. Prior to the Amendment itself, under the Section 16, MSMED Act,4 upon non-payment of the amount to the Micro and small enterprises within the stipulated time period attracted a compound interest at three times the bank rate notified by RBI.   The Standing Committee on Finance (2021-22) in its 46th Report titled “Strengthening credit flows to MSME Sector” highlighted the issues faced by micro and small enterprises in receiving timely payments from its buyers. Many stakeholders highlighted that despite the Section 15 statutory period many buyers often imposed a business condition of payment not before 60 or more days and micro and small enterprises often had to agree to such credit cycles due to business compulsion. In order to guarantee that all businesses, regardless of size, can function with comparable financial flexibility and promote a more equitable and balanced economic environment, it is imperative that these legislative frameworks be reevaluated.  Further the interest payments on such delayed payments was also not received by MSMEs. Therefore, MSMEs requested for a more strict control mechanism to ensure timely payment.   Delayed payments lead to working capital crunch which forces the MSMEs to avail loan and credit lines from banks, incurring interest payments which ultimately also lead to increase in prices of goods and services which then further reduces liquidity in the market. This essentially is a vicious cycle. In view of such requests of MSMEs, the clause was inserted to ensure timely payments to MSMEs via the Finance Act, 2023.   (Un)Intended Consequences   a. Competitive Advantage of Medium Enterprises vis-a-vis Micro and Small Enterprises Increased size and resources, medium-sized businesses can now provide more flexible payment options. On the other hand, these rules frequently place restrictions on micro and small businesses, making it impossible for them to offer more lenient terms for payments even though they are capable of doing so. This might make such buyers prefer medium enterprises which can offer a more liberal payment tenure in tune with the practical market credit cycles.   The Government has to realise the payment tenure just does not depend on the willingness of the buyer but on the market conditions and receipt of payment from further traders. Buyer of the first instance often have to first realise payment from further buyers to make the primary payment, however such payments again depend on market dynamics such as consumption and demand of such product, logistics-transportation efficiency as the goods might be moved from one part of the country to another via road or rail, seasonal changes and broad market conditions. It is no secret that private consumption has not quite picked up post Covid-19. Such forced regulatory changes will not change the market conditions rather further rattle the market players. In order to guarantee that all businesses, regardless of size, can function with comparable financial flexibility and promote a more equitable and balanced economic environment, it is imperative that these legislative frameworks be reevaluated.  b. Increased difficulties of Exporters  The Indian Exporter community have voiced their concerns with the Section 43B(h), IT Act, 1961. They have sought exemption from the clause as they often faced longer credit cycles compared to domestic consumptions. Indian Exporters receive payments

[By Isha Janwa] The author is a student of O.P. Jindal Global University, Sonipat.   INTRODUCTION: In today’s interconnected world, the ‘digital economy’ has emerged as a powerhouse, the rise of which can be attributed to advancements in information and communication technology (ICT). Multinational Enterprises (MNEs) now conduct cross-border business seamlessly, without the need for physical presence in foreign territories. This paradigm shift allows digital corporations to establish connections with consumers and operate virtually, transcending geographical boundaries via internet.  However, this newfound flexibility in the digital landscape has sparked significant concerns in taxation. Traditional tax frameworks, designed for ‘brick-and-mortar’ economy, struggle to accommodate the borderless nature of the digital economy. The reliance on physical presence as a basis for taxation becomes increasingly inadequate in this dynamic environment.  Recognizing these challenges, the Organisation for Economic Co-operation and Development (OECD) introduced Base Erosion and Profit Shifting (BEPS) Action Plan 1. This initiative characterizes the digital economy as data-driven, reliant on intangibles, and complex in determining value creation jurisdiction due to minimal physical presence requirements.  OECD’s action plan identifies three key taxation challenges in the digital economy: the need for nexus, navigating data usage and value attribution, and characterizing payments for digital goods and services. To address these challenges, OECD proposes a two-pillar approach. Pillar one focuses on broader taxation issues, including profit allocation and nexus, while pillar two targets remaining BEPS concerns such as establishing a global minimum tax rate.  The action plan presents three solutions for digital taxation: establishing a nexus based on Significant Economic Presence (SEP), implementing withholding tax on digital transactions, and introducing an equalization levy. However, it has not recommended any specific measure, therefore, countries can adopt either of these measures.  One such measure, Significant Economic Presence, has been adopted by countries like India. This paper examines the importance of nexus in taxation and assesses the effectiveness of implementing Significant Economic Presence to address nexus challenges, with a focus on India’s tax framework.  NEXUS REQUIREMENT FOR DIGITAL TAXATION AND SPECIAL ECONOMIC PRESENCE:  In the intricate landscape of taxation, the principle of nexus plays a pivotal role. Essentially, nexus refers to the connection between an entity’s income and the jurisdiction seeking to tax it. However, in the realm of ‘digital economy’, this connection becomes notably elusive.  Digital companies, operating primarily in the virtual realm, often lack physical presence in the countries where their services are consumed. This absence of a tangible footprint makes it challenging for tax authorities to establish a direct link between the company’s income and the country, unless a permanent establishment exists.  The absence of a permanent establishment often leads to the taxation of digital companies’ profits in the jurisdiction of their incorporation. This loophole enables digital entities to strategically establish themselves in low-tax jurisdictions while profiting from a global customer base online.  Since the entity would be taxed in the place where it is incorporated, the countries try to have lower tax rates so that the profits are shifted but this competition puts the developing countries at a disadvantage because the corporate tax is one of the main sources of income for such countries. Therefore, one of the key objectives of BEPS project is to prevent ‘shifting of profits’ and ensure that companies pay taxes where their economic activities generate profits, irrespective of their physical presence.  However, the absence of a clear nexus between digital companies and the countries where they operate presents a substantial hurdle. It can be avoided by establishing a taxable presence in the jurisdictions where the entities are performing economic activities even without being physically present. The concept of Significant Economic Presence was brought forth to address this issue. It means that non-resident entities can be taxed in a jurisdiction if they engage in significant economic activities there, even without a permanent establishment. This ensures taxation of substantial economic value derived from the jurisdiction, regardless of physical presence. It is based on three factors. Firstly, the generation of revenue. Secondly, digital factors like IP. Thirdly, user-based factors.  India adopted this measure of Significant Economic Presence (SEP) in 2018 but the applicability got deferred to 2021-22. India introduced the concept of Significant Economic Presence (SEP) in 2018, but its implementation was delayed until 2021-22. According to Section 9 of the Income Tax Act, 1961, any income earned by non-residents from a business connection in India is deemed to have accrued or arisen in India, making it taxable in the country. Explanation 2 to section 9(1)(i) defines “business connection” and now includes a new way to tax foreign companies’ profits known as “significant economic presence.” This means that if a non-resident has a significant economic presence in India, it will be considered as having a business connection in India, leading to the income being taxed in India, regardless of having a physical presence or providing services in India, or where the agreement for the transactions is made. This occurs if either of two specific conditions are met. One is revenue-based SEP, which considers taxation based on generated income, while the other is user-based SEP, which considers taxable presence on the basis of a substantial user base or customer activity within the jurisdiction. The former addresses revenue, while the latter addresses user activity.. Central Board of Direct Tax has issued notification defining thresholds for establishing SEP. The threshold for Revenue is 20 million Indian Rupees. The threshold for users is 300,000 users.   In the traditional framework of taxation laws, the ‘source taxation’ was not established sufficiently for digital economy. However, the concept of Significant Economic Presence has enabled ‘source countries’ to tax the income which is generated from their jurisdictions.   EFFECTIVENESS OF SIGNIFICANT ECONOMIC PRESENCE MEASURE:  The provision of SEP seeks to bring non-residents within the ambit of domestic laws of taxation in India. Since this measure is adopted only in domestic law of India, it can’t override the tax treaty provisions of ‘Double Tax Avoidance Agreement’ (hereinafter ‘DTAA’)  which are primarily based on the concept of permanent establishment. Without revisions to these