Taxation Law

[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

[By Chirag Motwani] The author is a student of Hidayatullah National Law University, Raipur.   Introduction:  To enhance the corporate governance regime in India, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted. The primary purpose of the act was to look upon the financially distressing entities and their revival as a foremost objective. IBC is considered an evolving piece of legislation owing to the numerous development that occurred since its enactment. One of the peculiar features of IBC is its relation with other legislations. One such relation is the relation of IBC with the Income Tax Act.    Since the enactment of the Insolvency and Bankruptcy Code (IBC), the conundrum surrounding the validity of reassessment notices under the Income Tax Act for a period preceding the approval of a resolution plan under the IBC reflects the intricate interplay between two distinct legal frameworks. The IBC aims to deal with the financially distressed entities in a way to revive them as the foremost objective.The IBC, designed to address corporate insolvency, aims to provide a streamlined mechanism for the revival and resolution of financially distressed entities. However, the Income Tax Act, which governs the taxation aspects, poses challenges when it comes to reconciling the timelines of insolvency proceedings and the tax assessment cycle. The question arises as to whether reassessment notices issued by tax authorities for a period predating the approval of the resolution plan are valid, considering that the financial landscape of the entity undergoes substantial changes during the insolvency process. The issue needs clarity for effective legal functioning as well as harmonizing both the legal frameworks. This piece aims to highlight the judicial trends in this regard and aims to provide a suitable position of law concerning the dilemma underlined above.  Judicial Trends:  The question concerning the validity of such notices for a period prior to the approval of resolution plan has been dealt in, Murli Industries Limited vs. Assistant Commissioner of Income Tax & ors. The Bombay High Court herein took a view that, the revenue cannot issue notices against the corporate debtor for unpaid taxes after the adjudicating authority has approved the resolution plan. In the case, after the approval of the resolution plan took place in 2019 by NCLT and was upheld by NCLAT in 2020. The Revenue issued Reassessment Notices to the company for the assessment year 2014-15. Bombay HC considered the notices issued by the revenue invalid as the period pertaining to the notice was covered under the resolution plan. Similarly, in The Sirpur Paper Mills Limited and Ors. Vs. Union of India and Ors. the Telangana High Court took a view of setting aside the notices issued by the Income Tax Department for a period dated prior to the resolution plan. The court in the judgment in paragraph 70 mentioned, “From the tone and tenor of the impugned notices what is evident is that respondents are seeking to pass assessment order under Section 143(3) of the Act since the case of petitioner No. 1 was selected for limited scrutiny under CASS. However, the period of the assessment order would be a period covered by the resolution plan.” Again in, Rishi Ganga Power Corporation Ltd. Vs. Assistant Commissioner of Income Tax the Delhi High Court recently took a view that the notices issued by the Income Tax Department under Section 142(1) as invalid as the period for which the notices were issued were predating the period of resolution plan that was approved by the adjudicating authority. However a shift in the position of precedential values was observed in the approach of Madras High Court in, Dishnet Wireless Ltd. v. Assistant Commissioner of Income Tax wherein, the income-tax authorities had initiated reassessment proceedings for AY 2011-12 and AY 2012-13, post admission of the CIRP application. The High Court passed interim orders in the matter, allowing the income-tax authorities to proceed with the reassessment.   This came as an anomaly to the prevailing practice of invalidating the notices for a period prior to the approval of the resolution plan. The rationale behind the allowance of reassessment notices was that the IBC although having an overriding effect cannot impinge upon the rights of any other law being in force at the time and thus IBC cannot dilute the rights of the Income Tax authorities to reassess the assesse for any unpaid tax amount. This judgment is particularly conflicting with the generally accepted position of law and also dampens the spirit of IBC.   Analysis:     It is important to understand the objectives of the IBC in order to analyze the anomaly in Dishnet. The primary objective of the IBC is to revitalize the financially distressed entities.One of the objectives of the code is to revive the corporate debtor. To ensure this it becomes necessary that after the approval of the resolution plan the corporate debtor is not faced by a situation wherein a payment has to be done to clear dues predating the resolution plan. The Supreme Court in, the Essar Steel Case emphasized upon the surprise claims that the corporate debtor should not face after the approval of the resolution plan. The court provided, “ A successful resolution applicant cannot suddenly be faced with “undecided claims” after the resolution plan submitted by him has been accepted as this would amount to hydra head popping up which would throw into uncertainty amounts payable by the prospective resolution applicant who would successfully take over the business of the corporate debtor.”  Furthermore, the over-riding effect of IBC helps in this regard. The over-riding effect has been upheld and provides for the supremacy of the code in case of conflict with other prevailing laws. The Madras High Court did not consider the line of reasoning as provided above and instead passed orders hampering the spirit of IBC. Furthermore the Apex Court in the Ghanshyam Case inter-alia dealt with the “mischief” conducted by authorities also comprising the tax authorities that continued with litigation even after the approval of the resolution plan and provided

[By Vaisiya Ramya B.] The author is a student of Tamil Nadu National Law University (TNNLU). Introduction: In the pre-GST regime, the government to promote the investment and manufacturing sector rolled out various area-based excise and Value Added Tax (VAT) exemption schemes through the power conferred under section 5A (1) of the Central Excise Act, 1944, and the state-specific acts. However, with the implementation of GST, the Central Government withdrew these area-based exemptions, causing concern for taxpayers who had heavily invested in those regions based on the government’s promises. This resulted in an outcry from the trade sector, advocating for the continuation of these exemptions under the GST regime. Consequently, a budgetary scheme was introduced by the government but its effectiveness seemed cumbersome,  amidst existing unresolved judicial trends on the applicability of the equitable doctrines of promissory estoppel and legitimate expectation in cases of withdrawal of tax exemption benefits, which ensures consistency in the public authority decision-making, and fairness in tax administration. Thus, this article examines the rules of interpretation of tax exemption provisions and the judicial trend concerning the applicability of the equitable doctrines to the withdrawal of tax exemption benefits pre- and post-GST regimes. Rules of Interpretation and Construction of Tax Exemptions: Tax statutes are generally interpreted strictly based on their literal and direct grammatical meaning, without considering their consequences. In such cases, equity and presumptions cannot be relied upon, and the legislative intent cannot be read into the law. However, it is important to distinguish between the interpretation of a charging provision and an exemption clause or notification. The issue of ambiguity in the interpretation of tax exemption clauses or notifications, which can lead to two possible outcomes, has sparked a debate as to whether a strict or liberal interpretation should be adopted in such cases. This matter has been the subject of contention in several cases, leading to the establishment of new interpretative standards. In 1997, the Supreme court in  Sun Export Corporation v. Collector of Customs[i] dealt with the question of interpreting the term “animal feed” to include a blend of vitamin AD-3 animal feed supplements for the purpose of claiming a tax exemption benefit. The Court here held that in matters of taxation, when there are two possible interpretations, the one favourable to the assessee should be preferred, reflecting a leaning towards the liberal interpretation. In 2012 asimilar, stance was adopted by the court in the case of Commr. of Customs (Import) v. Konkan Synthetic Fibres. However, in contrast, in 2018 the constitutional bench of the Supreme Court in the Commr. of Customs (Import) v. Dilip Kumar  overturned the ratio established in the Sun Export case and other judgments that adopted a similar stand. And held that when there is ambiguity in an exemption notification, it is subject to strict interpretation and it must be interpreted in favour of the revenue rather than the assesee. Also in 2022,  the court in the State of Gujarat v. Arcelor Mittal Nippon Steel (India) Ltd, determined that the exemption notifications or clauses should be strictly interpreted, only resorting to purposive interpretation in cases where a statutory provision is unclear or leads to irrational outcomes. Following that interestingly in 2021, the apex court revisited the issue of interpretation of tax exemption in the case of  Govt. of Kerala v. Mother Superior Adoration Convent but this time it agreed with earlier rulings on a strict interpretation of the tax statute and introduced a new line of precedent regarding beneficial exemption, establishing that even in tax exemptions, a liberal interpretation may be sought to provide an incentive for “fostering economic growth or other beneficial purposes.” Accordingly, it can be comprehended that the general rule states that the ambiguous provisions imposing liability should be strictly interpreted in favour of the assessee, while exemption clauses should be construed in favour of the revenue. However, this rule is not rigid and has undergone changes over time, particularly in cases involving economic growth or beneficial purposes, where a more liberal interpretation of exemption provisions has been adopted. This is done for the purpose of advancing the objective of the exemption clause and promote the ease of doing business. Incentive provisions deserve such treatment as the purpose of encouraging industrial activity will otherwise get frustrated and also would affect the domestic and foreign investment on local businesses. Judicial Trend in applicability of Equitable doctrines in Withdrawal of Tax exemptions: Pre- and Post-GST Regime: Position Pre-GST Regime: In MRF Ltd. Kottayam v. Assistant Commissioner Sales Tax & Ors. the court while examining the question of whether processing raw rubber with chemicals qualifies as “manufacture” to claim tax exemption citing Section 38A(c) of the Central Excise Act, 1944 noted that tax exemption notifications apply prospectively unless there are overriding public interests, thereby the state is not permitted to make retrospective changes that impair rights that have already accrued. Thus, ruling in favour of the assessee concluded that the tax exemption notification is not revocable. Similarly, in Bannari Amman Sugars Ltd. vs. Commercial Tax Officer & Ors, the court observed that if a decision maker denies a person’s legitimate expectation by demonstrating some superseding public interest, then the rejection of that expectation is justified. Further in State of Bihar v. Kalyanpur Cement Ltd. and Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P., the court reaffirmed the principle that indefinite and unexplained justifications and a simple assertion of change of policy would not be enough to absolve the Government of its responsibility. However, in contrast, in Shrijee Sales Corp. v. Union of India,  the court observed that the government is competent to revoke a promise even if there is no evident public interest involved, provided no one is placed in an adverse situation that cannot be resolved. Hence, it can be inferred from the majority of the judicial decisions that the establishment of overriding public interest forms the pre-requisite for withdrawal of tax-exemption benefits prior to be appointed date. This thereby introduces an exception to the established rule of promissory estoppel and doctrine of legitimate expectation.

[By Jaipreet Singh Alag] The author is a student of Rajiv Gandhi National University of Law, Punjab.   Introduction With the advent of the Delhi High Court’s judgement in the case of Bhavik S. Thakkar v. Union of India, a debate has started between the power of the customs authority to issue detention certificates and the right of the custodians to claim demurrage charges from the importers of goods. In the said case, there was a mis-declaration of goods on the part of the petitioner leading to their confiscation by the Directorate of Revenue Intelligence (DRI). Once the case was settled a detention certificate was issued by the Customs Authority to the Container Corporation of India (hereinafter, referred to as ‘CONCOR’) i.e., the custodian of imported goods. However, the same was not heeded by the CONCOR, leading to a dispute between it and the Petitioner. Detention Certificates are issued by the customs authority to waive demurrage charges which are levied by the custodian of imported goods on the importers, primarily in cases of illegal detention of goods by the customs authority. They derive their legal standing from Regulation 6(1)(l) of the Handling of Cargo in Customs Areas Regulations (HCCAR, 2009). The aforementioned judgement has placed primary reliance on Section 63 of the Customs Act, 1962 while not giving much consideration to the detention certificate issued under HCCAR, 2009. However, the Finance Act, 2016 has omitted Section 63 from the Customs Act which has enhanced the status of the HCCAR. The article analyses the conflict that has emerged between the HCCAR and the relevant statutes in the area of customs because of the omission of Section 63 from the Customs Act. Right to Demurrage of Custodians Demurrage is a charge that is levied by a custodian of imported goods under Section 45 of the Customs Act in return for the services provided by it, such as warehousing. In certain cases, the imported products are detained by the customs authority for investigation which can be a lengthy process. In such a case the investigation takes place while the services of the custodians are under continuous use. Upon the conclusion of the investigation, the custodians demand the charges (referred to as demurrage) for the usage of their services from the importers. In cases of illegal detention of goods by the customs authority, the chances of conflict between the custodians and the importers increase exponentially. In such cases, the judiciary has usually taken a stand in the interest of the custodians. In the case of International Airports Authority of India v. Grand Slam International, the Supreme Court upheld the Right to Demurrage of the custodian even when the goods were illegally detained. However, the judiciary’s stance is not entirely one-sided. For instance, in the case of M/s Shipping Corporation of India v. CL Jain Woolen Mills, the Supreme Court transferred the liability of paying the demurrage charges to the customs authority instead of the importer of goods. Nevertheless, in the said case, the decision stood in favour of the custodians. Therefore, it can be suitably said that judicial precedents continue to recognise the right to demurrage of custodians. Impact of the Omission of Section 63 from the Customs Act The conflict between detention certificates and the right to demurrage fees of custodians appeared to be settled because of the established precedents. However, the omission of Section 63 from the Customs Act has led to this conflict coming to the fore again. It is pertinent to note that Regulation 6(1)(l) of the HCCAR, 2009 begins with a ‘subject to’ clause which makes the regulation prone to the provisions of other statutes in the country. In this regard, the detention certificates did not possess much power since Section 63 of the Customs Act upheld the right to demurrage of the custodians countering the regulation. The same was affirmed in the case of Bhavik S. Thakkar v. Union of India wherein, the Delhi High Court gave primary consideration to the aforementioned provision of the Customs Act while upholding the decision of the custodian i.e., CONCOR to not release the goods until the demurrage charges for the usage of its warehousing are paid. The intention behind the omission of Section 63 of the Customs Act The omission of Section 63 from the Customs Act has been consistently used as a means to justify the violation of the right to demurrage of custodians. However, while dealing with the instant omission it is important to consider the intention behind the omission of the aforementioned provision. Thus, reference must be made to the explanatory notes of the Finance Bill, 2016. The explanatory note to clause 126 of the Finance Bill explicitly mentions the intention behind the omission of Section 63 to be “privatization of services, and free market determination of rates, including those by facilities in the public sector.” The instant explanation to clause 126 of the Bill cannot be interpreted in a manner that curtails the right to demurrage of the custodians since privatisation is the primary aim of the instant omission. Therefore, any adverse effect on the demurrage rights of the custodians would be contrary to the omission of Section 63. Section 170 of the Indian Contract Act and its interplay with the issue of Demurrage Rights The Finance Act, 2016 has provided for the omission of Section 63 from the Customs Act, it has become important that alternative statutes are used to protect the demurrage rights of custodians. In most cases, the relationship between a custodian and an importer is foundationally based on a contract of bailment. In such contracts of bailment, the importer is considered the bailor while the custodian is the bailee of the goods imported. This view has been upheld by the Supreme Court in the case of M/s Shipping Corporation of India v. C.L. Jain Woolen Mills wherein, it was held that such a relationship requires the application of Section 170 of the Indian Contract Act, 1872. The said provision of the Contract

[By Trilok Choudhary & Arya Tiwari] The authors are students of Gujarat National Law University.   INTRODUCTION Digitization has transformed the business landscape, blurring the boundaries between physical and virtual realms. As businesses navigate this digital frontier, so must tax policies evolve to ensure a fair and equitable taxation framework that captures value in an increasingly intangible economy. TAXATION UNDER OECD MODEL CONVENTION The challenge of taxation initially arose from how to tax foreign corporations. While India could tax domestic entities, complexities emerged with foreign companies operating internationally. The core issue was the risk of double taxation. Each nation holds the right to tax its residents, but this posed questions about where foreign enterprises’ profits should be taxed. This led to a conflict between the company’s incorporation state (resident state) and the state where profits were generated (source state). The OECD Model Convention’s Article 7 introduced the “permanent establishment” concept, a fixed business location in the source country. Foreign companies were primarily taxed by their resident state, but if they had a permanent establishment in the source state, that state could also tax them. Article 7(2) clarified permissible taxation, treating permanent establishments as separate entities. For example, let’s take a hypothetical situation involving a company, say Rico, and its establishment in different states were seen as distinct entities for tax purposes. Transactions between them involved theoretical compensations, like managerial services or licensing fees, determined through a process called benchmarking. The source state could then tax Rico based on these hypothetical payments. Despite attempts, the issue of double taxation persisted, as both source and resident states had tax authority. Article 23 resolved this with the Exemption Method (taxing remaining income after source state tax) and the Credit Method (taxing entire income but crediting back the source state tax). Article 10 extended source state authority to tax passive incomes, imposing conditions on dividends. The foreign company must hold 25%+ shares in the permanent establishment for 365+ days and qualify as the “Beneficial owner” of dividends. This ensures funds are genuinely for its use, and merely as a conduit. Source states can tax dividends (up to 5%) and interest (up to 10%). The “Beneficial owner” concept prevents non-treaty states from exploiting reduced tax rates for entities in treaty states. How exactly do you tax digital entities that have only a digital presence within the market and no permanent establishment (The Digital Challenge)?  This is perhaps the biggest challenge in the arena of international taxation in recent time and in this regard on July 11, 2023, 138 members of the OECD/G20 Inclusive Framework on BEPS agreed upon an outcome statement to address taxation challenges stemming from the digital transformation of global economies. This need was heightened by Multinational Enterprises (MNEs) exploiting tax discrepancies to shift earnings to low or no-tax areas, weakening the tax base of many nations. This exploitation, coupled with the ability of businesses to operate in areas without a tangible presence, challenged traditional tax norms based on “permanent establishments.” Consequently, the framework aims to promote fairness, tackle intricate tax avoidance tactics, establish a standardized global tax landscape, avoid double taxation, and amplify transparency. The solution comprises two main pillars. Pillar 1 focuses on Profit Allocation and Nexus, moving beyond the older notion limited to Permanent Establishment. It introduces taxation rights for nations with significant user/consumer bases, even if a business doesn’t have a tangible presence there. For MNEs surpassing a turnover of USD 20 Billion and a profitability above 10%, taxes are based on revenues from that specific jurisdiction. However, this might lead to additional tax levies. To counter this, the GloBE regulations mandate that MNEs contribute at least 15% tax on earnings from every jurisdiction.  These rules complement current corporate tax norms; if taxes on revenue in a jurisdiction meet the minimum tax requirement, no extra tax is levied. Furthermore, Pillar 2‘s 15% minimum tax levy addresses under-taxation by tax havens. For instance, if State S taxes a company at only 9%, the home state can impose an additional top up tax of 6%, guaranteeing the minimum tax threshold, addressing concerns related to patent boxes, thin-capitalization, and transfer pricing. INDIAN EQUILISATION LEVY India initially chose not to directly adopt the OECD BEPS recommendations. Instead, in 2016, it implemented its unique tax measure, known as the Equalization Levy, set at a 6% rate. This levy applied to specific services, primarily targeting online advertising services received by Indian resident businesses or non-residents with a permanent establishment in India, from non-resident service providers. This was referred to as Equalization Levy 1.0. In 2020, India further expanded the Equalization Levy’s scope through an amendment, introducing a new 2% levy on e-commerce supplies or services. This updated version is often referred to as Equalization Levy 2.0, it encompasses all e-commerce operators, regardless of their Indian residency status. An e-commerce operator, in this context, refers to a non-resident entity that owns, manages, or operates a digital platform facilitating online sales of goods or service provision. Under this framework, such operators are subject to a 2% charge on the total consideration received or expected. However, this levy does not apply to entities possessing a permanent establishment within India, provided the e-commerce activity is directly associated with that establishment. The following scenarios such as digital entities already subject to the existing 6% equalization levy, transactions with an annual consideration value under INR 2 crores are likewise excluded from this levy. However, the Equalization Levy was not without its shortcomings. The broadly phrased provisions in the levy introduce both interpretational and practical challenges. For instance, the levy stipulates that individuals providing services utilizing an Indian IP address can be subject to taxation. However, this raises a quandary when dealing with non-Indian residents using Indian IPs for transactions with service providers outside India. This ambiguity sparks concerns about the levy’s extrajudicial reach. Moreover, it’s unclear if the levy targets the total sales of goods or just the commission charges by e-commerce platforms. This distinction is significant, particularly for entities like