Tax Litigation

What is Tax Litigation?

Tax Litigation under the Indian judicial system is time consuming. The adjudicating and quasi-judicial appellate authorities act as a fact finding body under the Income Tax Act, 1961 and the constitutional authority .i.e. High Courts and Supreme Court of India.

Currently tax litigation in India takes more than two decades to reach its decisiveness. As per recent report of CAG (Comptroller and Auditor General of India) there are Rs.2.2 lakh crore cases are locked up in appeal out of which in most of the cases the government is the appellant. As the tax authorities are getting more aggressive the number of cases appealing in the court are increasing.

Also most of the tax litigation cases pending at various forums are of multinationals

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Tax Litigation often arises in the following areas

  • Individual and Partnership Matters

    Tax disputes involving personal and partnership tax assessments, deductions, and compliance. These often include challenges on capital gains, income tax, and deductions.

  • Charitable and Nonprofit Institutions

    Tax litigation concerns around charitable and nonprofit institutions include qualifying for tax exemptions, compliance issues, and disputes over donations or use of funds.

  • Cross-Border Transactions

    Issues arise from permanent establishment rules, profit attribution, and tax residency. Cross-border transactions often lead to disputes on double taxation and transfer pricing.

  • Transfer Pricing – Marketing Intangibles

    Disputes over the valuation and allocation of marketing intangibles in intercompany transactions, often involving methods to determine arm's length pricing and comparability.

  • Transfer Pricing – Management Expenses

    Cross-border management fees charged between related entities raise transfer pricing challenges, requiring justification of expenses and adherence to arm's length principles.

  • Transfer Pricing – Captive Services Compensation

    Determining appropriate compensation for captive service providers involves complex transfer pricing issues, requiring proof of service value and adherence to international pricing standards.

  • Corporate Restructuring

    Tax disputes arise during mergers, acquisitions, and demergers over capital gains, tax liabilities, and structuring of transactions to achieve tax efficiencies while staying compliant.

  • Royalty Income Taxation

    Disputes on taxing royalty income involve interpreting tax treaties, determining source of income, and applying proper withholding tax rates on cross-border royalty payments.

  • Transfer Pricing – Royalty Payments

    Valuing royalty payments for intellectual property transfers between related entities creates disputes, often revolving around determining arm’s length price and appropriate transfer pricing method.

  • Customs Act, 1962 – Valuation

    Disputes under the Customs Act, 1962 often involve the correct valuation of imported goods, affecting duty calculations and compliance with customs valuation rules.

Categories of Tax Litigation

  • Income Tax Disputes

    Focuses on disputes over income tax assessments, deductions, exemptions, and penalties. Often involves individuals, businesses, and multinational corporations.

  • Indirect Tax Disputes

    Involves litigation over indirect taxes like GST, VAT, excise duty, and customs. Disputes often arise from classification, valuation, and input tax credit.

  • International Tax Disputes

    AConcerns cross-border transactions, transfer pricing, double taxation, and tax treaty interpretation. Issues include permanent establishments and profit attribution in global operations.

  • Wealth and Capital Gains Tax Disputes

    Covers disputes over wealth tax and capital gains tax assessments, often related to real estate transactions, shares, and securities transfers.

  • Tax Penalty and Prosecution

    Litigation surrounding penalties for non-compliance, tax evasion, underreporting of income, and fraudulent practices, potentially leading to prosecution under tax laws.

Corporate Tax Litigation Update

  • Transfer Pricing Adjustments

    Recent updates focus on stricter scrutiny of intercompany transactions and transfer pricing adjustments, especially concerning intangibles and intra-group services.

  • Taxation of Digital Transactions

    Ongoing litigation related to digital services taxation, focusing on determining taxable presence and profit attribution for multinational tech companies operating digitally.

  • M&A Tax Implications

    Litigation arises in corporate restructuring, particularly over tax implications of mergers, acquisitions, and demergers, including cross-border restructuring.

  • BEPS and Global Taxation

    Updates on Base Erosion and Profit Shifting (BEPS) litigation focus on profit shifting by multinational companies and implementation of global minimum tax standards.

  • Cross-Border Tax Compliance

    Increasing litigation over cross-border compliance, especially regarding international tax treaties, withholding tax, and foreign tax credit claims.