TIOL - COB( WEB) - 942
OCTOBER 17, 2024

By Shailendra Kumar, Founder Editor

ONE of the universally common traits of a human being is to resist change, and if the brutal force of change is thrust upon, people barring a few exceptions, tend to dislike it! They hardly see an opportunity in a crisis, riding a noisy wind! True, as the Arabian proverb goes: Entering a hammam is not the same as leaving it! And it was palpably seen even in the case of international taxation after the global economic meltdown in 2008. The institution of state in almost all large economies was reduced to a bundle of skittish nerves as they needed revenue to revive their economies and bankroll their welfare schemes. Scalded and flummoxed G20 countries hurriedly mandated their favourite forum OECD with the task, which is globally known as BEPS (Base Erosion & Profit Shifting) Project, in 2013. Crumb! End of belle époque of 100-year-old international tax framework!  End of an era as all basic illusions of tax avoidance and tax evasion got exhausted! Since then, the hitherto stable plate of international taxation is undergoing a tectonic shift in many respects. The PE-driven rules are utterly dishevelled and a makeover of sort is in the making! Another parallel wind of change comes from a gaggle of judicial decisions from a slew of developed and developing tax jurisdictions. Both the forces are shaping and reshaping the elements of international taxation winds! Keeping in mind all these contemporary developments, the TIOL Knowledge Foundation opted for a technical session at its Tax Congress 2024 - "Globalisation of Tax Laws & Jurisprudence - An Indian Perspective".

Rolling the ball in the alley of the Chairperson of the Tax Tribunal of Uganda, Ms Crystal Kabajwara, the moderator of the session, Mr Pramod Kumar, former Vice President of ITAT, pointedly asked: Do you see convergence in international tax jurisprudence? And do you also take lessons from judicial decisions from other parts of the world? In her observation, she was quite stoutly emphatic - "The expression judicial convergence is a misnomer". She further explained that transfer pricing and international taxation issues tend to be facts-intensive. For convergence to happen, there has to be a web of fact patterns, added she while underscoring that a country like hers, is more inclined to look to countries like India rather than the West, for a precedence. She further added that if one looks at Western tax jurisdictions, one may not find judicial decisions relating to withholding tax, reverse charge and VAT, which are more pertinent for the issues arising in her country. Also, she said that the decisions coming from the Western jurisdictions are, hmm, very complex a la the Coca Cola decision of the US. Her final view was that she sees no chance of convergence of judicial jurisprudence as interests of the West are different from the developing economies and because the cases, like on the TP, are fact-centric. Mr Pramod Kumar's observations about every fact-centric decision having a significant legal principle as a takeaway did not buy her conviction either!

Before turning towards the celebrated tax lawyer, Mr Mukesh Butani, Managing Partner of BMR Legal, Mr Pramod Kumar observed that there is an emerging trend in India to give significant weightage to foreign decisions, even in the Indian courts. Although he admitted that there have to be different standards for fact-based cases and cases decided on principles but it is also a fact that foreign decisions are accorded due respect by the Indian courts. Reacting to his observations, Mr Butani commented that India has very sumptuous jurisprudence on which the world relies upon. However, if foreign decisions are not in direct conflict with the Indian laws, they do carry the heft of persuasive value. However, each case depends on its own facts which alone guide the direction of the judicial decision. He further added that if a foreign decision is coming from the apex court of a Commonwealth country, it commands greater attention. Given that some of these Commonwealth countries still have Privy Council system, their decisions are paid sincere heed by the Indian courts.

When the same question was parried towards Mr Sriram Ranganathan, Global Tax Head of Wipro Group, he said that he would opt to partially agree with Ms Crystal and Mr Butani. He admitted that he does look for judicial decisions of other jurisdictions for a tax view. However, his experience of dealing with tax jurisdictions outside India is that his issues are largely facts-driven and not necessarily principle-based. Referring to TP adjustments, he said that on the same issue, different views are taken by the Indian tax authorities and the foreign tax jurisdictions - diametrically opposite, which gratifies their revenue interests! However, in disputes embroiling tax treaties, jurisprudence does help them and they tend to look for decisions from Commonwealth countries. Reacting to his observations, Mr Pramod Kumar quipped that in the evolution of jurisprudence, smaller jurisdictions play a much bigger role than the decisions coming from the US. And he volleyed the same question towards Ms Richa Sawhney, Partner of Walker & Chandiok LLP. On her part, she recalled that she used to rely more on foreign decisions in the past but now, very rich Indian jurisprudence is available to her. While filtering decisions, she said that she first checks whether the provisions of a foreign legislation match with the Indian laws or not. In a nutshell, she acknowledged that the propensity to rely upon OECD commentary or model convention has diminished over the years. She prefers to hinge her arguments more on Indian decisions which are aplenty.

Turning towards Mr Butani, the moderator Mr Pramod Kumar asked him how does he see the evolution of buzzy developments like BEPS, PPT, MLI and new tax conventions? Mr Butani said that holy tax! all tax jurisdictions have now got anti-abuse provisions in place. Treaty-related GAAR or Principal Purpose Test (PPT) are commonly available in all tax treaties. However, what is of greater import is the latest trend of invocation of information exchange clause. Leave aside the Revenue, even taxpayers have begun pressing for exchange of information to deal with the elements of information detrimental to their interests. He further added that the convergence of policy is one part but global soft laws are increasingly being incorporated in the domestic laws and this happens to be the eye of multilateralism-driven storm in the recent times! Concluding his observations Mr Pramod Kumar made it clear that the inputs gathered through the exchange of information cannot be used in judicial proceedings and confidentiality is of vital nature - they can only be used for the specific purposes for which these are obtained.

Swirling towards BEPS Project, he asked Ms Richa - how do you advise your clients on Pillar 2 battle-readiness? She commented that this development involves many intricacies particularly with respect to the compilation of information. Though the final version is yet to come out but what she is looking forward to is the sufficient time for the taxpayers to lace up. Though India is yet to finalise but there are countries which have incorporated new provisions and they are better prepared. She said that she has been evaluating the 15% global minimum tax in the case of GIFT City and other cases which may be subjected to jurisdiction-blending. On the same issue, Mr Sriram said that smaller countries have made it operational. He further added that the tax rate may not be high but tax compliance cart-load is going to leapfrog. Secondly, in case of disputes, several jurisdictions may get embroiled to protect their own slice of revenue. Ms Crystal said that the Pillar 2 rules are very complex but Uganda is not a signatory to the inclusive framework. She further added that nonetheless, her government is examining them before Uganda applies them. But what may pose stiff challenges are exemptions under domestic legislation; digital service tax and other tax spigots offered by the government.

On the issue of dispute resolution, Mr Butani took a dive into the four-layered apparatus. The raison d'être of the first layer is lost out as it has merged with the tax administration. So, he wished, the first and second layers should be undergirded and fortified. Very few cases should crawl up to the High Court level! He further said that TP cases are resulting in double taxation in many cases. He expects more proactive and solemn approach from the government to resolve disputes. At present, every decision is being appealed. With the conventional reference system being quarantined, every case now knocks at the door of a High Court. He also suggested that even ITAT should set up more Special Benches to improve the quality of orders! As the CBDT braces up to stitch a new direct tax code, Mr Butani is of the view that the Board should go back to the ARA and explore more options for alternative dispute resolution tool-kits. Ms Richa backed all suggestions and added that the CBDT should issue more clarificatory statements on issues like MFN clauses in different tax treaties. Mr Sriram said that although the tax administration has improved by a few notches but more endeavours are required to reduce the time span for APA, and APA-renewal also needs to be fast-tracked. In case of safe harbour rules, Mr Sriram wished that either the threshold should be removed or the margins should be amended. All the speakers were almost unanimous in tossing out the DRP system as an abject failure.

While concluding the session, Mr Pramod Kumar said that many professionals see the in-house mechanism of first appeal as a mere ritualistic formality, and it is of utmost importance that the institutional mechanism at the first appellate level is strengthened. He ended with recalling the amazing transformation witnessed in the functioning of the income tax department, albeit there are many issues which need to be addressed. His concluding remark was: the biggest tax incentive any government can offer to a business entity is the tax certainty and that should be even India's solemn goal! Amen!