Anshumaan Sahni, Lead Counsel, ASLaw

30 Jul 2021

Can Policy Interventions Solve Tax Disputes?

In Cape Brandy Syndicate v. IRC[1] (1921) KB 64 @ 71, Rowlat J. had said: “In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look at the language used.” 

These are very famous lines said exactly 100 years ago and not much has changed since then when it comes to how taxes are treated by countries. When the language of a tax imposing provision is clear and unambiguous, there is no issue with the above interpretation. However, when the language leaves much to be desired or leaves discretion in the hands of the taxman, there are issues. 

There is a clear understanding among nations that man must be taxed for activities that he does, and over the years there has been a rush to tax as many activities as possible. For instance, India’s GST has code no. 99973 for funeral, cremation and undertaking services. 

Certainly, taxing of almost all aspects of human activity is a very taxing issue. The taxman on one side looks at all human activity from the lens of ‘money making’; the citizen looks at it from the lens of it being not taxable or for personal enjoyment. This approach makes for an interesting battle of the opposites in tax litigation and disputes. 

It was probably in this context that Rowlat J. had said that there is no equity about tax, translating practically to, either there is a tax or there isn’t a tax. But there cannot be an ‘in-between’, where it’s said that tax may be due; or tax may be paid; or tax may remain unpaid; or taxman may or may not recover tax, interest, fine or penalty. The only thing sure in tax litigation is the finality given to the action of the taxpayer or the taxman. 

The Economic Survey of 2017-18 states that as of March 2017, 137,176 direct tax cases are pending and ₹ 4.96 lakh crores is locked up in the litigation system; usable neither by the taxpayer nor by the country. In fact, the survey also showed that mere 0.2% of those cases carried 56% of the ₹4.96 lakh crore, i.e., just 274 cases held ₹2.78 lakh crore of taxpayer’s money that could instead be used to develop this country further. What the economic survey does not tell us is as to under which sections the taxes that are held up are due. One moot question that can be posed is if these 274 income-tax cases that hold up ₹2.78 lakh crore be solved through policy intervention or only through judicial pronouncement? 

Does the Indian law support sufficient alternate means to solve tax disputes? For plain domestic tax disputes, there may not be much freedom available in terms of alternate resolution, except The Authority of Advance Rulings (AAR)[2]. However, in case of disputes that involve cross border entities and transactions, rapidly evolving digital footprints of businesses, etc. there are provisions of Mutual Agreement Procedures (MAP) under tax treaties and Safe Harbour Rules, under Transfer Pricing provisions, which have also been recognized by Courts in India. However, Arbitration is not one of those such areas used to solve tax disputes, the underlying ideology being that taxation is a sovereign function and not a contractual or commercial dispute calling for interpretation. 

However, there have been attempts to bring tax disputes under Investment Arbitration, with Tribunals interpreting domestic tax law of a country through the lens of Fair and Equitable Treatment, National Treatment, Most Favoured Nation (MFN), Protection from Expropriation, etc. 

This is evident in the two major tax disputes that have bogged the Indian tax department and courts down i.e. the Vodafone[3] and Cairn Energy[4]cases. In both these cases, the Indian tax department taxed the two entities basis a change in law mid-year; and finding that the two entities were structuring their deals in order to avoid paying tax, taxed them as per law and recovered taxes due. These disputes took a turn for the worse, when the two companies approached the Investment Arbitration Courts under the Bilateral Investment Treaties signed by India with another nation, which guaranteed protecting of investment made by that country’s corporation in India. Vodafone and Cairn alleged in their arbitration claims that the change in tax law mid-year and holding the entity guilty of tax evasion/avoidance was illegal. Further, the two companies also alleged that taking over of assets amounted to illegally appropriating their investment in India and thus they deserved to be compensated for the same. The Government, on the other hand maintained that income received from indirect transfer of investment was taxed as per law and that the investment of the entities was not taxed nor appropriated. The Awards, however, came in the favour of the entities, ignoring that taxation is a sovereign function and that India never consented to subject tax to such a dispute resolution mechanism. The entities, in a bid to enforce those Awards then filed petitions seeking to take over Government of India assets abroad, and the Government of India is now taking affirmative legal measures to protect its assets abroad. What is also interesting to note is that the Government of India issued a statement saying that talks are on between the representatives of Cairn to settle this matter outside the ambit of court/ arbitral award. This does indicate that dialogue may help in avoiding recourse to further legal measures. 

Let us consider the possibilities that are involved herein. The Government of India is attempting to solve the dispute where an International Arbitration Award was made against it for allegedly appropriating the investment of these companies by allegedly and illegally subjecting them to tax. The Government of India’s stand has always been that ‘tax and the incidence or liability thereof’ was never consented to be arbitrated under the Investment Agreements as it is a sovereign function and not a contract or commercial issue. This is a fair submission. But the important question still remains, can it be solved amicably? 

Already action has been filed by Carin plc in a New York court attempting to take over assets of Air India, as an extension of Government of India. There have also been reports of a Parisian Court allowing Cairn plc to take over properties of Government of India in Paris.[5] 

Relevant to note for the case filed by Carin plc in New York is The Foreign Sovereign Immunities Act (USFSIA) and Title 28 U.S.C. § 1603(b)[6] which defines the term, ‘agency or instrumentality of a foreign state’ includes any entity that (i) is a separate legal person, corporate or otherwise; and (ii) either is an organ of a foreign state or political subdivision thereof, or a majority of its ownership interest is owned by a foreign state or political subdivision thereof; and (iii) is neither a citizen of a state of the United States nor created under the laws of a third country. As per American jurisprudence, 50% ownership will qualify the entity as an agency of a foreign state. Thus, whether the argument above would be able to steer Air India clear of this ‘agency or instrumentality of a foreign state’ and give it sovereign immunity is yet to be tested. 

In the midst of all these arguments, the best possible solution is for the Government of India to amicably settle this dispute. First of all, the tax department represented through the CBDT may not have the power to take such a call as the Income-tax Act, 1961 does not give powers to the CBDT to relax tax or to not collect tax. Section 295 is the only section giving Power to the Board to make Rules in furtherance of the Income-tax Act, 1961. It does not involve any leeway to CBDT to relax or exempt a tax. If anything, this could be done at the Ministerial or Cabinet level, in order to preserve the principle of comity of nations and having due regard for international law as per the Constitution of India as a one-time relaxation or settlement, albeit on negotiated terms. 

There are other issues of tax disputes where the CBDT has the power to lay down Policy to clarify Income-tax Act, 1961 provisions in case there is ambiguity or in case the interpretation is leading to an onerous liability being imposed on the taxpayer. For example, a group of petitions pending since 2012 in the Supreme Court of India, where the challenge to assessment proceedings involves an issue related to whether income received from sale of seeds is agricultural income or business income. Income Tax Act exempts agricultural income from the ambit of tax. However, whether the activity i.e. sale of seeds is an agricultural activity or business activity can squarely be clarified by the CBDT rather than in adjudication before the Hon’ble Supreme Court. It would be mindful to remember that the assessment order passed by the Assessing Officer would first have been challenged before the Commissioner (Appeals), then the ITAT, then the High Court and then before the Supreme Court (if you generously give one year to each preceding authority to decide the issues, the genesis of this dispute could well be around 2007-08). 

The challenge before the Supreme Court is made by companies that are declaring income from sale of seeds as an agricultural income exempt from tax and then transferring the same to their parent companies outside India as royalty for giving them the know-how on the production and manufacture of seeds, which were all ultimately sold in India. Clearly this is a business activity and not an agricultural activity. Test of accrual of income in India under Section 9 of the Income-tax Act, 1961 would apply and this money can be taxed in the hands of the Indian company as a business income before being repatriated off the country. The same activity when carried out by an Indian entity, would also technically meet the same fate, and could be taxed as business income, or can, using intelligential differentia, be exempt from tax or subject to partial income offered to tax, by invoking India’s Food Security Act, 2013 which seeks to provide subsidized food grain to 2/3rd’s of the country’s population. CBDT has the power to declare this through a clarificatory notification/ circular/ instruction to its field officers to tax the activity as such. In fact, the challenge before the SC can be closed without adjudication as soon as such a clarification is issued by the CBDT. 

The need for Policy intervention further stands increased by virtue of the Government of India imposing the Equalization Levy. This was borne out of the supremely fast advent of technology and businesses moving to a digital style of functioning, borders losing their significance and monies directly and digitally being paid outside borders at the click of a button. Most of these tech behemoths, which have become huge online marketplaces, for the purpose of belonging are in the developed western countries, whereas for tax purposes are located within tax havens, where there is negligible corporate tax. Taking advantage of such low taxes, all income is taxed in the tax haven countries and massive profits distributed to the billionaire owners. There was an emergent need to bring such corporations that have access to big data on Indian citizens to tax. Thus, Equalization Levy was born, which emerged first out of policy discussions on data, privacy, shrinking of physical market, competition laws violations and then tax. In fact, it is an open position that Google, when sued in an Indian court in the context of data, privacy and search content has consistently taken the stance that their Indian company is only an advertising arm of the parent company which is outside India and not subject to Indian Court’s jurisdiction and that Google Inc. does not control aspects of search data, when in fact, its algorithm has been found to favour its own services[7]. 

Another highly litigated example that comes to light is found in the imposition of Anti-Dumping Duty under the aegis of the WTO texts. India is a signatory to the WTO Convention and in that regard has introduced Anti-Dumping Duty[8] rules in 1995 to regulate the entire process of investigation, imposition, and collection of duties on dumped articles. In a case that I handled before the Hon'ble High Court of Delhi, an issue arose where Anti-Dumping Duty had been imposed on a product for 5 years, extended by 1 year and then before the end of that 1 year extended period, the duty was specifically discontinued. The administrative process for that is, first, the Designated Authority shall issue findings of an investigation in accordance with WTO texts, to come to a conclusion that there is still dumping and injury to domestic industry or that incidence of dumping and injury are over. After that, the Government of India would issue a Notification continuing or removing duty. However, the Notifications are always prospective, implying removal of duty from date of Notification. However, the WTO texts clearly say that “duty must be removed when injury is over”. In the case I dealt with, the findings of the Designated Authority clearly held injury during the period of investigation was over and issued the findings on 23.04.2018 and the Government issued Notification on 01.06.2018 removing Duty. In the time between the findings were issued and Notification was issued by the Government of India, my client imported the subject goods, which were stopped by the Customs Authority and Anti-Dumping Duty was imposed on them. We approached the Delhi High Court with the submission that since WTO texts hold that duty must be removed when injury is over, and the Notification issued by the Government of India is prospective and does not take into account removal of duty from date of ending of injury, WTO law is being violated and hence international law violations are occurring in the implementation of this law. 

The High Court directed the Customs Authority to pass appropriate orders on the plea, and the Department upheld the process of removal of duty from date of Notification by the Government of India and did not advance any findings on the very pertinent issue raised by us on harmonizing international law with domestic law. This is because the CBEC (as it was then), just like CBDT, did not have the power to allow such an interpretation. However, it was open to the Government, to clarify on such a gap in the interpretation and implementation of international law, as compared to Anti-Dumping Duty Rules, 1995. 

The picture emerging from the above is that Policy intervention may[9] be used to find a way to solve long litigated tax disputes only if the two sides, i.e., the taxman and the taxpayer are willing to take a tiny hit in order to close the disputes and move ahead. And for this, it is not the Tax Boards but the Government, which would have to do a fine balancing act in order to preserve revenue collection vis-à-vis tax avoidance! 

Policy intervention in taxes, though, is also a tightrope walk inasmuch as not everyone may be happy with the decisions but given that they conform to the principles of transparency, reasonable nexus, rationality and lack of discrimination, and that they are imposed by authority of law as per Article 265 Constitution of India, they should pass the test of constitutionally expected from government action and should not be interfered in by the Courts.


[1] Cape Brandy Syndicate v. IRC (1921) KB 64, (71). 

[2] The Authority of Advance Rulings (AAR) has been abolished vide Finance Act, 2021 (No. 13 of 2021) and is to be replaced with a Board of Advance Rulings to be notified by the Central Government. The Income-tax Settlement omission was also abolished by the Finance Act, 2021. However, the AAR and SC under the Central Board of Indirect Taxes & Customs (CBIC) continue to be functional.  

[3] Domestic litigation before the SC in Vodafone International Holdings B.V. v Union of India (UOI) and Ors. (2012) 1 S.C.R. 573; subsequent to this the matter was subjected to international arbitration, the resultant award of which has been challenged in Paris, France in 2020.  

[4] Initial verdict in Cairn Energy PLC and Cairn UK Holdings Limited (CUHL) v. Government of India, (2016), PCA Case No. 2016-07. Subsequent arbitration took place, with the resultant award being challenged in New York, U.S.A. 

[5] The Minister of State, Sh. Pankaj Chaudhary has in a written reply in Rajya Sabha on 27.07.2021 confirmed that such an Order has been passed by French Court, Tribunal Judiciare de Paris freezing 20 odd Government properties in Paris worth ₹177 Crores on an application made by Cairn Energy plc

[6] The Foreign Sovereign Immunities Act (1976) Title 28; §1330, §1391(f), §1441(d), §1602–11 U.S.C.

[7] Competition Commission of India Case No. 07 and 32 of 2012 dated 08.02.2018: Limited vs. Google LLC & Ors., CUTS vs. Google LLC & Ors.;  European Union has in June 2017 fined Google €2.42 billion for abusing its market dominance as a search engine by giving an illegal advantage to its own comparison shopping service, and in March 2019 for allegedly stifling competition in online advertising;  The US Department of Justice has filed an Anti-Trust Suit against Google Inc. under Section 2 of the Sherman Act, alleging Google has unlawfully maintained monopolies in markets for “general search services, search advertising, and general search text advertising.” 

[8] Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995. (Notification No. 2/95-Cus. (N.T.)) (w.e.f. 1st January, 1995). 

[9] May not to be read as Shall.

Cite this Article - Sahni Anshumaan, 'Can Policy Interventions Solve Tax Disputes?' (Tax Terminal Blog, 30 July 2021) <>

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