Inching towards Tax Certainty:
Neoteric Domestic Dispute
Mechanism for Cross-Border
Taxation

Research Committee

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
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Basic draft of this publication was prepared by CA. K Sudarshan

Disclaimer:
The views and opinions expressed in this document are those of the author
and based on his experience and not necessarily those of the Institute or
any other regulatory body. Examples of analysis performed, methodologies
and approaches described within document are only examples which have
been truncated with a lot of specifics omitted for brevity of these articles.
They should and must not be utilized ‘as-is’ in the real-world without having
sufficient guidance or experience or otherwise consulting a professional.

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Foreword

Certainty in tax is the quintessential part for a sound taxation system. However,
in a globalised world, disputes emerging from trade, investments and tax are
inevitable which sometimes creates uncertainty. This Research work focuses
on two major factors leading to uncertainty in taxation system i.e., dispute
resolution and international taxation. Generally, tax uncertainty in disputes can
be addressed through an effective domestic dispute mechanism and through
an international tax treaty resolution mechanism.

The report focuses mainly on the domestic dispute mechanism rather than the
international tax treaty resolution mechanism as it involves the cooperation of
other countries and international organizations following the principles of
Public International Law. The scope of report involves assessment of the
existing dispute mechanism under the Indian domestic law and to give
recommendations in order to bolster certainty in tax.

I am very pleased that the Research Committee of the Institute under the ‘ICAI
Research Project Scheme 2020’ undertook the Research Project on the topic
of “Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism
for Cross-Border Taxation”.

I would like to take this opportunity to express my thanks to CA. Anuj Goyal,
Chairman, Research Committee and CA. Kemisha Soni, Vice-Chairperson,
Research Committee, who took the initiative to introduce ‘ICAI Research
Project Scheme 2020’ to encourage research-based activities. I would also like
to take this opportunity to express my gratitude to members of the Research
Committee who have made invaluable contribution through their expert
guidance in the finalisation of the Research Report.

I am confident that this Research Report will be extremely useful for the
members and other stakeholders as well.

New Delhi CA. Atul Kumar Gupta
February 2, 2021 President, ICAI
Preface

The Research Report on “Inching towards Tax Certainty: Neoteric
Domestic Dispute Mechanism for Cross-Border Taxation” revealed that
the prevailing dispute mechanism in India on cross border taxation matters has
its flaws and has certainly not fostered tax certainty. Significant disputes have
been rising exponentially year on year due to rapid growth of Multi National
Entities (MNE). Further, the main causes of tax disputes are “inconsistent
application or interpretations, unclear tax policies and rules, resource
constraint, complex administration procedures, insufficient understanding of
international tax law, enforcement not in accordance with tax treaties,
unintended consequence of domestic practice, inadequate transparency etc.”

Considering the significance that tax certainty brings, the existing state of affair
is not sustainable and does not augur well for all the stake holders concerned.
Therefore, a change in the existing approach or introducing new alternative
mechanisms may be considered for a better future. The research work also
throws light on the architecture of the dispute mechanism framework
consisting three layers of structure (Dispute Prevention, Containment and
Resolution Mechanism) to fuel the said purpose.

I am thankful to CA. Atul Kumar Gupta, President, ICAI and CA. Nihar
N. Jambusaria, Vice President, ICAI who inspired me and Research
Committee to introduce ‘ICAI Research Project Scheme’ and undertake
research projects on contemporary and relevant topics.

I would also like to extend my thanks to CA. Kemisha Soni, Vice-Chairperson,
Research Committee and all the members of the Research Committee.

Further, I would like to take this opportunity to congratulate CA. K Sudarshan
for writing Research Report on the topic of “Inching towards Tax Certainty:
Neoteric Domestic Dispute Mechanism for Cross-Border Taxation” and to
express my thanks to Mr. S.P. Singh, Expert for providing his valuable
comments and suggestions for improvement of technical and presentation
aspect of the Research Report. I also acknowledge the assistance and co-
operation rendered by Dr. Amit Kumar Agrawal, Secretary, Research
Committee and CA Rahul Paul, Project Associate who gave their valuable
inputs during preparation of this Research Report.
I believe and trust that this Research Report will be immensely useful to the
members and to others interested.

New Delhi CA. Anuj Goyal
February 2, 2021 Chairman, Research Committee

vi
Contents

Part I - Setting the Tone for Certainty
1. Introduction ..................................................................................... 3
2. Dispute Mechanism – Key ingredient for tax certainty....................... 7
3. Cross-Border Tax Disputes: Factors .............................................. 11
Part II - Existing Domestic Dispute Mechanism and its Effectiveness
4. Domestic Dispute Mechanism - Current State of Play ..................... 17
5. Measuring India's Tax Certainty through Domestic Dispute

Mechanism.................................................................................... 20
6. Survey Observation on the Effectiveness of the Existing Domestic

Dispute Mechanism for Cross-Border Taxation............................... 22
7. Survey Results and Diagnosis ....................................................... 29
Part III - Tax Certainty in an Uncertain Future
8. Domestic Dispute Mechanism – Architecture and Philosophy ......... 33
9. Tax Administration – The Chief Architect for Tax Certainty ............. 37
10. Layer I -Dispute Prevention Mechanism ......................................... 39
11. Layer II - Dispute Containment ...................................................... 53
12. Layer III- Dispute Resolution Mechanism – As a last resort ............ 64
Part IV - Concluding Summary – Better over Perfect
13. Effective Dispute Mechanism for a Better Future ............................ 69
Appendix
14. Appendix – I .................................................................................. 71
15. Appendix -II................................................................................... 76
AAR Abbreviations
APA
BAR Authority for Advance Ruling
BEPS Advance Pricing Agreement
BIT Board for Advance Ruling
CBDT Base Erosion and Profit Shifting
CIT-A Bilateral Investment Treaty
DCM Central Board of Direct Taxes
DPM Commissioner of Income Tax (Appeals)
DRM Dispute Containment Mechanism
DRP Dispute Prevention Mechanism
G-20 Dispute Resolution Mechanism
GAAR Dispute Resolution Panel
IBFD Group of 20 Countries
ICAI General Anti-Avoidance Rules
IMF International Bureau of Fiscal Documentation
ITAT The Institute of Chartered Accountants of India
LTU International Monetary Fund
MAP Income Tax Appellate Tribunal
MLI Large Tax-Payer Unit
Mutual Agreement Procedure
MNE Multilateral Convention to Implement Tax Treaty Related
OECD Measures to Prevent BEPS
PE Multinational Enterprise
Organization for Economic Co-operation and Development
Permanent Establishment
SAAR Specific Anti-Avoidance Rules
SHR Safe Harbour Rules
TADAT Tax Administration Diagnostic Assessment Tool
TPO Transfer Pricing Officer
UN United Nations
USA The United States of America
WTO DSS World Trade Organization Dispute Settlement System

x
Scope of the Report

• Certainty in tax is the cornerstone for a sound tax system. In an era
where uncertainty is the new normal, the search for certainty in taxation
is well and truly on. This report focuses on two significant aspects
leading to tax uncertainty, i.e., dispute resolutions on issues arising
under cross-border taxation. Tax administrations address tax
uncertainty in cross-border tax disputes through an effective domestic
dispute mechanism and an international tax treaty dispute mechanism.
Dispute mechanism refers to process or mechanics by which parties
address their disputes.

• In-scope: The report focuses only on the domestic dispute mechanism
as they are unilateral and unlike the international tax treaty resolution
mechanism. It involves cooperating with other countries and
international organizations following Public International Law principles.
The report's scope is to assess the existing dispute mechanism under
the Indian domestic law and give recommendations to bolster certainty
in tax. However, a particular portion of the report briefly suggests areas
where international tax treaty dispute resolution can take a cue from
non-tax areas for resolving disputes.

• Exclusion: This report's scope excludes tax-treaty dispute mechanism
for resolving cross-border tax disputes.

• In-scope contents: The report has four parts with relevant sub-
chapters under them.

o Part I of this report sets the tone on tax certainty and how a proper
dispute mechanism can bolster tax certainty.

o Part II of this report broadly identifies the effectiveness of the
existing domestic dispute mechanism currently in vogue through
an online-survey of cross-border tax experts from the industry
and practice based on their experience. The survey will act as a
qualitative research tool to determine the effectiveness of the
existing domestic dispute mechanism.
o Part III of the report suggests an effective dispute mechanism
framework for future consideration by the Government of India
based on the survey findings in Part II of this report. These
suggestions will bolster the tax certainty quotient.

o Part IV of the report provides the concluding remarks to sign off
for a better future.

xii
Part I
Setting the Tone for Certainty
Introduction

"The longing for certainty... is in every human mind. But certainty is
generally illusion."

Justice Oliver Wendell Holmes

1.1. The quote by Justice Holmes mentioned above, emphasizes the need
for certainty in general and how it remains an illusion. Uncertainty has been
an integral feature in one's existence. The enigmatic future with what is in store
tomorrow accentuates the element of uncertainty. On a philosophical note, the
man's quest to determine certainty has been part of this game called life. This
quest is exacerbated in recent times due to the pandemic, Covid-19 wherein
uncertainty has taken a quantum leap.

1.2. In this elusive quest to determine certainty on various facets, the area
of taxation is no exception. Discussion on taxes and certainty cannot go
forward, without quoting the cliched but famous lines by Benjamin Franklin,
the USA's founding father "…nothing is certain, except for Death and Taxes".1

1.3. Tax is certain and inevitable. As Lord Bramwell puts it succinctly "Like
mothers, taxes are often misunderstood, but seldom forgotten". Therefore,
there is an element of certainty when it comes to levying taxes by a State, but
the certainty buck stops there. The functional features of taxation have led to
various complexities, eventually paving tax uncertainty. Many empirical
studies have time and again established the presence of tax uncertainty.2 Tax
uncertainty is a cause of concern for both the taxpayer and the tax
administration. The craving for tax certainty originates from the age-old 'Rule
of Law' principle. The rule of law has various definitions attributed to it, Lord
Bingham3 in his seminal book on Rule of Law identified various features
associated with the rule of law, with one of them being.

1 https://www.adamsmith.org/blog/death-and-taxes
2 Hassett, K. and G. Metcalf (1999), “Investment with uncertain tax policy: does

random tax policy discourage investment?” Economic Journal, Vol. 109, pp. 372-
393; Hanlon, M., E.L. Maydew, and D. Saavedra (2016), “The taxman cometh: does
tax uncertainty affect corporate cash holdings,” Social Science Research Network.
http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2292020; etc.
3 T. Bingham, The Rule of Law (Penguin Press 2010).
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

"The law must be accessible and so far, as possible, be intelligible, clear and
predictable; Questions of legal right and liability should ordinarily be resolved
by application of the law and not by the exercise of discretion".

One of the universal principles identified by the World Justice Project in its
definition on Rule of Law is Just Laws, i.e. "the laws are clear, publicized and
stable"4. Therefore, certainty and simplicity are hallmarks on the rule of law.

Tax Certainty – Core Principle of Tax Law

1.4. As legal certainty is one of the fundamental pillars of law5, tax certainty
is a fundamental principle of (international) tax law. Certainty is one of the main
ingredients for a good tax policy. As a matter of fact, on tax laws, certainty and
simplicity are imperative considering that taxation is a significant feature for a
state to use its coercive power to collect taxes from its citizen6. Taxation,
therefore, impinges on the citizen's liberty. Hence, to ensure that the State
does not unreasonably impose and collect taxes from its citizen, the rule of law
must prevail to constrain the State from exercising its unfettered coercive
powers. Therefore, tax certainty plays a significant factor as the taxpayer
wants to know precisely how much tax he owes to his country. Similarly, the
design of the rule of law principles must ensure that tax shenanigans do not
evade in paying their share of taxes by using loopholes or vagueness in the
tax law.

1.5. Apart from various benefits tax certainty brings to the table, one core
aspect is that it promotes faith in the system, which is an absolute need of the
hour in the Indian context.

Defining Tax Certainty

1.6. Tax laws have often faced taxpayers' wrath for being complicated,
leading to uncertainty. The USA ex-Senator, Max Baucus, quoted that "Tax
complexity itself is a kind of tax". Therefore, simplicity, stability, predictability
and clarity are vital for tax law. As per the IBFD Glossary7 , the indicia for tax

4 https://worldjusticeproject.org/sites/default/files/documents/WJP-ROLI-2020-
Online_0.pdf

5 Leawood, Heather (2000). "Gustav Radbruch: An Extraordinary Legal Philosopher".
Washington University Journal of Law & Policy. 2: 489

6 Vijay Kelkar and Ajay Shah (Nov. 2019). In Service of the Republic: The Art and
Science of Economic Policy. Penguin Allen Lane

7 Fundamentals of Taxation: An Introduction to Tax Policy, Tax Law and Tax
Administration (2019), Pistone, Roeleveld & Others edition, IBFD Publication,

4
Introduction

certainty is that "the taxpayer should know exactly what is being taxed, how
much he has to pay and how and when he has to pay it, meaning that the law
should be clear and unambiguous and the tax authorities' interpretation of it
should be readily available".

1.7. Tax certainty can be determined in the cross-border investment
framework as the capacity to determine the tax costs associated with an
investment in a country during its lifecycle8. The Indian Supreme Court in the
famous Vodafone judgement emphasized on the need for tax certainty as
certainty is integral to the rule of law. Certainty and stability form the necessary
foundation of any fiscal system. Tax policy certainty is crucial for taxpayers
(including foreign investors) to make rational economic choices most
efficiently… Investors should know where they stand."9

Global Agenda on the Need for Tax Certainty

1.8. The global financial crisis in 2009, saw the downfall of the global
economy, which eventually saw the rise of G20 as a significant economic
policy player. The emergence of G20 as a policy player has been significant,
especially on the global economic front.10 With many initiatives helmed by the
G20 on the cross-border taxation front, one significant issue in this regard
pertains to the heightened concern about the uncertainty in tax matters and its
impact on cross-border trade and investment.11 Other empirical studies have
revealed that tax uncertainty is a cause of concern for investors. 12
Understanding the significance of tax certainty in the international taxation
domain, the G20 leaders mandated the OECD and the IMF in identifying areas
to strengthen tax certainty.13

Netherlands.
8 THE ROLE OF TAX CERTAINTY IN PROMOTING SUSTAINABLE AND

INCLUSIVE GROWTH By Prof. Dr. Jeffrey Owens
9 Vodafone International Holdings B.V. v. Union of India & Anr., Civil Appeal No. 733

of 2012, arising out of S.L.P. (C) No. 26529 of 2010, Supreme Court of India
10 Allison Christians, Taxation in a Time of Crisis: Policy Leadership from the OECD

to the G20, 5 Nw. J. L. & Soc. Pol'y. 19 (2010).
11 Devereux, M. (2016), “Measuring corporate tax uncertainty across countries:

evidence from a cross-section survey,” Mimeo, Oxford University Center for
Business Taxation.
12 Gulen, H. and M. Ion (2016), “Policy uncertainty and corporate investment,” Review
of Financial Studies, Vol. 29, pp. 523-564.
13 G20 2016 Summit, Hangzhou, China

5
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

Economic Uncertainty leading to Tax Uncertainty

1.9. In this present globalized, neo-liberal world that seeks free trade
movement of goods and services, tax certainty is a major component to
achieve its objective. Considering the uncertain economic world and conflicts
between all stakeholders, more so exacerbated by the global pandemic, Covid-
19 has led to fiscal uncertainty. With the increasing need to raise revenues
and achieve the UN Sustainable Developmental Goals14, countries are in dire
need of revenues and are keen on promoting trade & investments. On the
cross-border investment front, legal certainty is a foundational factor in
attracting investment and relies, in no small degree, on strengthening the
consistency of the international tax system.

India and Tax Certainty

1.10. India was ranked #1 on a global survey conducted in 2016, measuring
corporate tax uncertainty across countries. 15 The table in figure 1 is an extract
from the survey where the respondents representing MNEs have indicated
India as the most uncertain jurisdiction in the corporate tax regime.

Figure 1 – Extract from the survey 16
1.11. The global survey findings reflect the dismal State of tax certainty in
India and the dire need to improve the tax certainty aspect.

14UN Sustainable Developmental Goals, THE 17 GOALS | Sustainable Development
(un.org)

15 Michael Devereux, Measuring corporation tax uncertainty across countries:
Evidence from a cross-country survey

16 ibid

6
Chapter 2

Dispute Mechanism – Key
ingredient for tax certainty

"No matter how thin you slice it, there will always be two sides." -Baruch
Spinoza17

2.1. Dispute mechanism refers to process or mechanics by which the parties
address their disputes. Dispute mechanism includes dispute resolution,
dispute preventions etc. In the context of tax-disputes, the OECD-IMF report
on tax certainty calls for clear, simple rules and regulations that minimize
disputes.18 The report also highlighted that tax uncertainty creates a risk of
discouraging investment. Inter-alia, the major factors leading to tax uncertainty
identified in the report based on a survey conducted by the OECD are19

• Tax Policy Design

• Tax Administrability

• Dispute Resolution

• Specific International Tax Issues

Of the various factors that mushrooms tax uncertainty, the OECD-IMF report
identifies ineffective dispute resolution mechanism as an essential driver of tax
uncertainty. Further, the report also indicates that specific international tax
issues as a significant factor leading to tax uncertainty. This paper's scope
referred to earlier tries to address these two factors to ensure an adequate
dispute mechanism to solve cross border tax disputes.

Tax disputes leading to uncertainty

2.2. It is no wonder that tax regulations' uncertainty is a breeding ground for
disputes and legal conflicts. Legal disputes are inevitable, as the laws get
interpreted through words, words are capable of multiple meanings depending

17Renowned Dutch Philosopher.
18 Report on Tax Certainty – IMF & OECD (2017)
19 Ibid pg.31
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

on the context.20 As the famous legal philosopher HA Hart puts it "words have
a penumbra of uncertainty". Tax laws are no exception to it, especially
considering its dynamic nature. More so in cross-border transactions
considering the international tax system's nature, two different tax systems
interact with a treaty.
2.3. On the survey undertaken as part of this report which is explained in the
next part, 60% of the respondents indicated that dispute prevention and
resolution are vital ingredients for tax certainty. Buttressing the fact that an
effective dispute mechanism plays a significant role in bolstering tax certainty,
an ineffective dispute mechanism will only exacerbate the uncertainty.

Tax disputes stifle India's economic growth

2.4. The Income-tax department is the largest litigant in the economic
liigation landscape, with almost 85% of the total number of appeals are filed
by the tax department. 21 The figure in Table 1 is an extract from India's
economic survey, reflecting the appeals' success rate, which is abysmally low,
at losing 65% of its cases. The mounting tax disputes due to protracted
litigations have severe ramifications identified in Table 2 for the Indian
economy. Therefore, an effective domestic dispute regime augurs well for the
Indian economy to bolster tax certainty and a much-needed shot in the arm for
attracting foreign investments.

20 Pagone, Gaetano. 2009. Tax Uncertainty. Melbourne University Law Review 33:
886–907

21 Chapter 9, Ease of Doing Business’ Next Frontier: Timely Justice, India’s Economic
Survey 2017-18 pg 131-144

8
Dispute Mechanism – Key ingredient for tax certainty

Table 1 - Tax Administration’s success rate of tax disputes in India

Source: Extracted from The Economic Survey Report, 2017-1822
Table 2: Tax Disputes Stabbing the Economy

• High legal costs to the exchequer
• High litigation costs to the taxpayer
• Reduction of investments
• Dent in ease of doing business.
• Promoting legal uncertainty
• Stalling of public infrastructure projects
• Significant burden of judiciary especially the High Courts and the

Apex Court.
• Negative public perception as a litigant community

Measuring Tax Certainty through Disputes

2.5. Having discussed the need for tax certainty and how the existing dispute
mechanism has contributed to tax uncertainty, we move next to measure
certainty. As the modern-day management influencer, Peter Drucker quoted-
"If you can't measure it, you can't improve it", therefore, to improve certainty
we need to measure it.
2.6. In the search for tax certainty, it is imperative to understand that it is
impossible to attain absolute tax certainty due to the tax law's vagaries. An
element of uncertainty around is inevitable.23 Absolute certainty in tax law will
remain utopian.

22 Ibid
23 Gribnau, Hans. 2013. Legal Certainty: A Matter of Principle. In Retroactivity of Tax

Legislation. Tilburg Law School Research Paper No. 12/2014.

9
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

2.7. Nevertheless, as FA Hayek points out 'complete certainty of the law is
an ideal which we must try to approach but which we can never perfectly
attain'.24 Therefore, tax administration should make consistent efforts to
achieve tax certainty to ensure economic efficiency and equality in the tax
policy. Relative certainty is much desirable than absolute certainty. 25The
degree of certainty can be measured by yardstick which FA Hayek offers: 'the
disputes which do not lead to litigation because the outcome is practically
certain as soon as the legal position is examined'. 26Vanessa Mak also defines
this concept as "the predictability of outcomes in legal disputes." 27
2.8. Hence, an efficient dispute mechanism will offer a more considerable
degree of tax certainty for all stakeholders concerned with this paper's theme.
Therefore, this core part of the paper explores mechanisms that the Indian tax
administration can consider invoking to handle cross-border taxation disputes
to achieve a certain degree of tax certainty in an uncertain future.

24 F.A. Hayek, The Constitution of Liberty (Chicago: The University of Chicago Press,
1960), at pp. 208-210

25 Alexander V Demin, Certainty and Uncertainty in Tax Law: Do Opposites Attract?,
MDPI, 2020

26 ibid supra note 16, at p. 208.
27 Mak, Vanessa. 2013. Standards in European Private Law: A Model for European

Private Law Pluralism. Tilburg Private LawWorking Paper Series, No. 015/2013.
July 29. Available online: http://ssrn.com/abstract=2302562

10
Chapter 3

Cross-Border Tax Disputes:
Factors

3.1. In a globalized world, disputes emerging from trade, investments and
tax are inevitable. Further, MNE's rapid growth signifies the importance of
globalization and the free market. Still, it also brings along, significant disputes
and the disputes have been rising exponentially year on year. Dispute
mechanism is placed at both the domestic level as well as at the international
level through bilateral or multilateral treaties.

3.2. In the view of Thomas, Lai and Kyte,28 the leading causes of tax disputes
are "inconsistent application or interpretations, unclear tax policies and rules,
resource constraint, complex administration procedures, insufficient
understanding of international tax law, enforcement not following tax treaties,
an unintended consequence of domestic practice, inadequate transparency,
and other, including non-tax factors."

3.3. Apart from the complexities mentioned, various other factors lead to tax
disputes, one of which is legal language due to lousy drafting of laws. Unclear
tax law with vague terminologies leads to more disputes.29 As Christe puts it
her seminal paper30 "[T]he slightest trace of vagueness will be exploited. Once
vagueness has been found, one is free to choose the interpretation of which
one approves". Further, with tax laws being complicated, even if the intentions
are right and the law is followed in spirit, there is still a possibility of violation
leading to disputes. 31 Further, the tax law apart from being substantive is also

28Rob Thomas, Becky Lai and Justin Kyte, “Discussion Paper on Improving Dispute
Settlement among ‘Belt and Road’ Jurisdictions” in BRITACOM Special Edition,
Building a Growth-Friendly Tax Environment in Collaboration with International
Taxation in China (April 2019)

29 Edmiston, Kelly, Shannon Mudd, and Neven Valev. 2005. Tax Structures and FDI.
The Deterrent Effects of Complexity and Uncertainty.

30 Christie, George. 1964. Vagueness and Legal Language. Minnesota Law Review
48: 885–911.

31 Lawsky, Sarah. 2009. Probably? Understanding Tax Law’s Uncertainty. University
of Pennsylvania Law Review 157: 1017–74.
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

procedural, the procedural aspects which complement the substantive aspect
of the law, many times leads to tax disputes owing to onerous compliance
norms.

3.4. Regarding taxation, cross-border tax disputes are prevalent for various
reasons. Some of the factors due to which cross-border direct taxation
disputes arise are as follows:

Disputes on account of Disputes on account of tax treaty
domestic law

• Unilateral measures. • Tax Treaty Entitlement

• Divergent interpretation of tax • BEPS Issues

treaties. • Issues on account of the interplay

• Unilateral Transfer Pricing between MLI and the bilateral tax
adjustments. treaty.

• They are withholding tax issues. • Double non-taxation through

• Treaty overrides through treaty avoidance mechanism such
Domestic law. as treaty shopping.

• Wrong Qualification and • Discrimination

Characterization of incomes due • Economic double taxation issues.

to different interpretations of • Lack of interpretative notes from

provisions in a tax treaty. competent authorities on treaty

• The heterogenous signing of interpretation.

bilateral tax treaties with • Very generally worded treaties
different countries' features leading to varied interpretations.
leads to disputes.
• Lack of agreements reached by
• The interpretation conflict countries (i.e. Protocols to a tax
between tax treaties and treaty) to clarify tax treaties or lack
domestic tax laws. authoritative interpretations to tax

• Foreign tax credit denial treaties.

• Tax avoidance claims due to

GAAR and SAAR.

• Tax administration issues such
as qualified resource,

adversarial administration and

setting high revenue target

collections leading to disputes.

12
Cross-Border Tax Disputes: Factors

• Procedural infirmities are arising
out of domestic law requirement.

• Lack of inconsistency in
domestic law judicial precedents
on cross-border taxation issues.

3.5. To understand the nature of tax issues common in cross-border
taxation, the tax certainty survey undertaken on cross border tax disputes
(discussed detailed in Part II, Chapter 5) will be a useful indicator.
Unsurprisingly, 83% of the respondents identified transfer pricing dispute as
the most common cross-border tax disputes followed by PE issues and treaty
entitlement. The OECD MAP statistics also corroborate that transfer pricing
dispute garners the largest share on cross-border tax disputes. 32 Figure 2
provides a snapshot of the common cross-border tax issues.

Figure 2- Snapshot of the common cross-border tax issues
3.6. Given the increasing number of cross-border tax disputes, the
introduction of tax avoidance tools such as the MLI and the digital economy
taxation conundrum will further exacerbate cross-border tax disputes with tax
uncertainty looming large. Therefore, it is essential to have an effective dispute
mechanism for handling cross-border taxation matters both at the domestic
level (in-scope of this report) and the international level.

32 OECD MAP Statistics, 2019 available https://www.oecd.org/tax/dispute/mutual-
agreement-procedure-statistics.htm

13
Part II
Existing Domestic Dispute
Mechanism & its Effectiveness
Chapter 4

Domestic Dispute Mechanism -
Current State of Play

4.1. Dispute mechanisms refer to process or mechanics by which parties
address their dispute for cross-border taxation issues at the domestic and
international levels. Prevention and resolution of disputes at the international
tax law level are available in the form of MAP present in the respective bilateral
tax treaties. The domestic dispute mechanism is available under the Indian
Income-tax Act, 1961 specifying recourse mechanism to prevent and resolve
tax disputes.

4.2. The existing dispute prevention and dispute resolution mechanism tools
that are in vogue is depicted diagrammatically as in figure 3
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

AAR

Dispute APA and Safe
Preventi Harbour

Tax Lower / Nil WHT
Complia Certificate

Filing of Return
Return Processi

Tax
Audits/Assess

Dispute CIT (A) / ITAT HC / SC
Resoluti DRP
Figure 3

4.3. As part of the survey undertaken in this report, around 86% of the
respondents appearing in Table 5, indicated that they have resorted to dispute
resolutions under the domestic legislation over tax treaty dispute resolution
(MAP). Thereby signifies the importance of having an effective domestic
dispute mechanism to curtail cross-border tax disputes.

18
Domestic Dispute Mechanism - Current State of Play

Table 5

19
Chapter 5

Measuring India's Tax Certainty
through Domestic Dispute
Mechanism

5.1. As mentioned earlier, one of the ways to measure tax certainty is
through the predictability of outcomes on tax disputes. Therefore, the
effectiveness of the domestic dispute mechanism will be a perfect yardstick to
measure tax certainty. An online survey undertaken amongst tax practitioners
specializing in international taxation to determine the dispute mechanism's
effectiveness on cross-border taxation matters. The ground-level perspective
of the tax experts who are cross-border tax practitioners may reflect the
effectiveness of the dispute mechanism tools currently in vogue.

Survey and respondents

5.2. Online surveys are an effective tool for qualitative research as they
provide richness and depth on the research topic.33 The present survey was
aimed exclusively at cross-border tax professionals Pan-India, some of whom
are tax experts from the industry and rest are tax advisors who act as external
consultants/counsels. The survey respondents were sent a detailed
questionnaire (Appendix II ) with views sought on

• tax certainty,

• effectiveness of existing dispute prevention and resolution mechanism
on cross-border taxation both at the domestic and international level,

• Future of cross-border tax disputes

5.3. The questionnaire was designed to cover the entire framework of the
dispute mechanism beginning from the commonly faced cross-border tax
disputes to the future of cross-border tax disputes, however with significant
emphasis on effectiveness of the existing domestic dispute mechanism. Total

33 Virginia Braun, Victoria Clarke, Elicia Boulton, Louise Davey & Charlotte McEvoy
(2020) The online survey as a qualitative research tool, International Journal of
Social Research Methodology, DOI: 10.1080/13645579.2020.1805550
Measuring India's Tax Certainty through Domestic Dispute Mechanism

of 52 respondents, who are tax professionals from various regions of the
country, responded to the questionnaire with their views. The professional
background of the respondents was a blend of experts from the advisory as
well as in the litigation practice. Table 3 highlights the background of the
respondents.

Table 3: Background of the Survey Respondents

Number of respondents 52

In-house tax professionals 15

External consultants/advisors/counsel 37

21
Chapter 6

Survey Observation on the
Effectiveness of the Existing
Domestic Dispute Mechanism for

Cross-Border Taxation

6.1 Dispute Prevention Mechanism

The DPM tools' broad features and the tool's effectiveness are provided in a
tabular format to reflect the features of the DPM and compare its effectiveness
as indicated by the survey respondents.

DPM Tools Key Features Effectiveness

Authority for • AAR is a quasi-judicial On the effectiveness of
Advance
Rulings body introduced as a AAR as a DPM tool: (Chart
(AAR)34
dispute avoidance 1 of Appendix I)

mechanism majorly for • Almost 60% of
respondents indicated
the cross-border that AAR is ineffective
due to various schemes'
transaction. An applicant shortcomings.

could seek clarity, i.e., • Only 10% of the
respondents indicated
private ruling on tax that it is effective and
attributing certainty as a
liability on particular significant AAR feature.
cross-border transaction
activity.

• Private Rulings of the
AAR are binding on the
taxpayer (i.e. the

applicant) and the tax

authorities regarding the

transaction for which the

ruling was sought.

• However, the ruling may

34 Chapter XIX-B of the Income tax Act, 1961
Survey Observation on the Effectiveness of the Existing Domestic Dispute…

be challenged before the
High Court and
subsequently before the
Supreme Court at the
instance of either
applicant or the tax
authorities.

Advance • APA, as the name Effectiveness of APA as a
Pricing indicates, is an ahead of
Agreement time agreement between DPM tool: (Chart 2 of
(APA) 35 Appendix I)

a taxpayer and tax • 56% of the respondents
authority for determining indicated that APA is
the transfer price of effective on account of
certain transactions that the following reasons:
may take place in the
future 1. The applications are
disposed of in a time-

• Taxpayers can enter into efficient manner

an APA for a full five compared to other
years in the future and
four years of past period DRM.
(under roll-back).
2. APA team is pragmatic
and knowledgeable

• Taxpayers can obtain compared to field
certainty from a transfer officers.
pricing perspective for a
maximum of nine years 3. Certainty in margins.
(including roll-back).
4. Compliance conditions

• The taxpayer can prefer / critical assumptions
a multilateral/ bilateral or
are spelt out clearly.

unilateral APA. The panel is receptive

Unilateral APA is a of business

domestic mechanism; considerations and not
Bilateral/Multilateral APA
is an international purely revenue-driven.
mechanism as it involves
two or more tax
authorities to interact.

35 Section 92CC & 92CD of the Income Tax Act, 1961

23
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

Safe Harbour • SHR provides for Effectiveness of SHR:
Rules for
transfer circumstances in which a (Chart 3 of Appendix I)
pricing 36
certain category of • 39% of the respondents
taxpayers can follow a indicated that they have
simple set of rules under never opted for SHR.

which the revenue • 35% of the respondents
authorites automatically indicated that SHR is
accept the transfer effective on account of
prices. the following reasons:

• The objective of SHR is 1. Certainty,
to provide compliance 2. Reasonable rates for
relief, administrative
captive business units
simplicity, minimizing tax
of MNE
audit scrutiny and
thereby 3. Ideal for medium-sized
certainty business

avoiding litigation. 4. Less complex

Lower / Nil • In a case where a Effectiveness and
Withholding taxpayer/tax deductor
tax certificates consider that withholding experience in obtaining
tax rate is greater than
37 the actual tax liability, withholding tax certificates:
then such taxpayer could
file an application before (Chart 4 of Appendix I)
the tax authority for a
lower/nil withholding tax • 37% of the respondents
certificate. indicated that this

• Further, the payee could mechanism is
also apply to determine
the income chargeable ineffective as it is
to tax in India.
prejudiced in favour of

the revenue.

• 27% indicated that
obtaining the certificate
is cumbersome and
time-consuming.

• 17% indicated that the
process is seamless and
effective.

36 Section 92CB of the Income Tax Act, 1961
37 Section 195(2) and Section 197(1) of the Income tax Act, 1961

24
Survey Observation on the Effectiveness of the Existing Domestic Dispute…

6.2 Dispute Resolution Mechanism

The table below highlights the broad key features of the dispute resolution
mechanism tool and its effectiveness based on the survey results.

DRM tools Key Features Effectiveness

At the • In India, Onus is on the Effectiveness of handling the
taxpayer to perform disputes at the tax audit level:
assessment self-assessment and (Chart 5 of Appendix I)
file the tax authorities'
stage income tax return. • 92% of respondents indicated
that the dispute resolution at
• The Centralized the tax audit level, i.e., tax
authorities' assessment, is
Processing Center of ineffective and acts as a
breeding ground for tax
Income-tax authorities disputes.

would process the
return filed.

• Based on specific • The two major reasons by the
criteria and random respondents for an ineffective
sample basis, some tax assessment at the
taxpayers would be administration level is
attributed to:
selected for a detailed
tax audit by the tax 1. Unreasonable targets
authorities. (89%)

• Upon examining 2. Insufficient knowledge of
the tax authority at the
documents/returns, administration level
(53%)
the tax authorities

would pass an order

with demand/refund.

First Appeal CIT (A) Preferred mode between CIT(A)
and DRP:
- DRP &• As a traditional litigation
• 61% of the respondents
CIT (A) process, a taxpayer, if he prefer CIT(A) & 39% opted for
DRP. (Chart 6 of Appendix I)
is not in agreement with
Effectiveness of DRP
the order passed by the
• 96% of respondents
Tax Authorities (i.e. mentioned that DRP is
ineffective and failed to
Assessing Officer) could

appeal against the order

before the Commissioner

25
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

of Income-tax (A) achieve its intended objective

• CIT(A) is a quasi- by often taking pro-revenue
judicial body that has
to dispose of the sides without fair
taxpayer's appeal.
adjudication. (Chart 7 of

Appendix I)

DRP Effectiveness of CIT(A)

• Alternatively, Certain • 79% of the respondents
indicated that CIT(A) is
taxpayers (foreign

Companies or ineffective. (Chart 8 of
Appendix I)
taxpayers having
transfer pricing issue)
have an option of

approaching Dispute
Resolution Panel
('DRP'), which is a
collegium of three
Commissioners of
Income-tax.

• The DRP is to dispose
of disputes arising
from tax audit in a

time-bound manner,
thereby acting as an
alternative dispute
resolution mechanism
to other options such
as CIT (A).

ITAT • ITAT is the second Effectiveness of the ITAT in

appellate authority and resolving cross border taxation

a quasi-judicial issues: (Chart 9 of Appendix I)

institution set up by the • 67% of the respondents
Central Government indicated that ITAT

under the Ministry of effectively resolves tax
Law and Justice's disputes.
auspices.
• ITAT's effectiveness
• Any of the aggrieved
specifically on TP issues as

party will file the the final fact-finding body:

26
Survey Observation on the Effectiveness of the Existing Domestic Dispute…

appeal before ITAT. (Chart 10 of Appendix I)

There are monetary 1. 52% of the respondents
thresholds based on indicated that the ball is
the tax effect for filing shifted back to the TPO for

an appeal at the ITAT adjudication.
by the revenue 2.
authorities. 35% of the respondents
• ITAT is the final fact- indicated that the ITAT
effectively resolves TP

finding authority. disputes.

iv) Judicial • Tax-payer or the Effectiveness of the judicial
Level- High
Courts and Income-tax authorities forum in resolving cross-border
the
Supreme if aggrieved by order of tax disputes: (Chart 11 of
Court
the ITAT and can file Appendix I)

an appeal on a • 77% of the respondents
substantial question of indicated that the judicial
law before the High forums are effective in
Court. resolving cross-border tax

• Supreme Court is the disputes.

final dispute resolution • Consistency in the

forum. Tax-payer / Tax interpretation of the law for

authorities aggrieved fostering certainty on issues

by the High Court in cross border tax disputes:

order could file an (Chart 12 of Appendix I)

appeal before the 1. 60% of the respondents
Supreme Court.
indicated that the judicial

• There is a monetary forums are consistent in

threshold on tax effect their approach and follow the

to be crossed to rule of law principle.

appeal before the High

Court and Supreme

Court by the revenue

authorities.

6.3 Tax Certainty under Existing Dispute Mechanism

• The survey respondents were to rate on the scale of 1-5 with Five (5)
being 'extremely certain' to 1 being "no certainty" on how the existing

27
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

dispute prevention and resolution mechanism for cross border taxation
have fostered tax certainty.

The responses indicate the level between 2-3 to indicate that the existing
dispute prevention and resolution mechanism does not offer even a moderate
tax certainty level.

28
Chapter 7

Survey Results and Diagnosis

"Study the past if you want to define the future."
Confucious

The following aspects emerge concerning the domestic dispute mechanism's
effectiveness for cross-border taxation on diagnosing the survey.

7.1 Dispute Prevention Mechanism – Findings

7.1.1. AAR is ineffective as a DPM and needs further strengthening to make it
effective. The reasons for ineffectiveness and failure to achieve its objective
in preventing disputes are due to:

▪ Time-consuming and inordinate delay in providing the ruling.

▪ Administrative infirmities – non-functioning owing to lack of resources.

▪ The ruling is not final and is appealed in the High Court and Supreme
Court leading to protracted litigation.

▪ Lack of interpretative consistency in the rulings.

▪ Lack of competent judges to handle international taxation issues.

7.1.2. APA is the most effective DPM tools amongst the domestic dispute
mechanism, as unilateral APAs are part of the domestic mechanism. With
more than 300 APA signed, tax certainty quotient is undoubtedly high and
augurs well for all the stakeholders concerned.

7.1.3. Low/Nil withholding tax certificate tool is ineffective as a dispute
prevention mechanism to determine the transaction's taxability. With time-
consuming and cumbersome process coupled with the unfair determination of
taxability by the revenue, authorities have made this forum ineffective
according to the majority of the respondents.
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

Table 4: Survey findings - DPM Effectiveness and Certainty

Tools DPM - Effectiveness Tax Certainty
No
AAR Not Effective Yes
Moderate
APA Effective No

SHR Neutral

Withholding tax certificates- Not Effective
Low/Nil

7.2 Dispute Resolution Mechanism – Findings

7.2.1 Tax Assessment and audits by the tax administration are a significant
cause of tax disputes, consequently paving the way for protracted tax disputes.
Around 92% of the survey respondents indicated that dispute resolution is
ineffective at the tax audit level and is the cause for rising tax disputes.
Thereby demonstrates that the tax officers at the assessment stage are not
effective in concluding the assessments for cross-border transactions. The tax
assessment's ineffectiveness is due to the reasons showcased in figure 4. As
can be observed, the biggest reasons attributed to ineffective tax assessment
is due to

• unreasonable targets on tax authorities by the administration,

• Limited knowledge of the tax authorities absent sufficient training on
cross-border transaction issues,

• Limited availability of time to complete the audits and

• Non-adherence to the rule of law.

Reasons for ineffectiveness at the tax
assessment stage

Inability for tax authorities to avoid…

Hesitation on the part of officers

Corruption & Bureaucracy

Knowledge of the tax authority

0 10 20 30 40 50

Reasons for ineffectiveness at the tax assessment stage

Figure 4 – Reasons for ineffectiveness at the tax assessment stage

30
Survey Results and Diagnosis

7.2.2 DRP and CIT(A), the first appeal forums, are ineffective for resolving
cross-border taxation disputes. Regarding the DRP, set up as an alternate
dispute resolution mechanism for speedy disposal, almost the entire
population of respondents (96%) indicated it as ineffective. The 4% of the
survey population, which considers DRP has achieved its intended objective,
perceives that DRP is better placed to appreciate the technical matters
compared to CIT(A). Further, the respondents perceive that a certain degree
of reasonableness and targets are also not the driving force for determining
the outcome, thereby bringing neutrality. However, as can be observed, most
of the respondents opine that DRP has not achieved its intended objective
because DRP panel is biased against the taxpayer and works in favour of
revenue and lacks independence.

7.2.3 ITAT is the final fact-finding body has been useful as a dispute resolution
mechanism, according to the majority of the respondents. However, half the
respondents (52%) opine that when it comes to transfer pricing disputes, the
ITAT is passing the buck back to the TPO to redetermine the issues rather
than prefer the ITAT to resolve the dispute attain finality instead of beginning
the second innings.

7.2.4 Judicial forums such as the High Court and the Supreme Court have
effectively resolved the disputes. However, the survey highlights that the High
Court and Supreme Court are not consistent in approaching the tax issues,
thereby leading to tax uncertainty by creating umpteen number of diversified
precedents.

Table 4: Survey findings - DRM Effectiveness and Certainty

Tools DRM - Effectiveness Tax Certainty
Assessment Stage Not Effective
DRP/CIT(A) Not Effective No
ITAT Effective
Judicial Forums- High Effective No
Courts and the Supreme
Court Moderate

No (due to lack of

consistency and

deviation from binding

precedents)

31
Part III
Certainty in an Uncertain Future
Chapter 8

Domestic Dispute Mechanism –
Architecture and Philosophy

8.1. As already discussed above in Part I, one of the primary reasons for
India's low tax revenue productivity is due to a significant amount of tax
revenue held in disputes. These large tax disputes have dented the faith in the
tax system, thereby fostering a hostile tax regime. Hence, if the tax
administration can resolve tax disputes with an effective framework or if
stakeholders can avoid disputes at the first instance, it will foster certainty,
predictability and stability in the tax system from a taxpayer perspective. From
a tax administration perspective, reducing tax disputes will pave the way for
effective tax collection leading to a tax-gap ratio reduction. The certainty in the
system will also broaden the tax base.

8.2. On the future of cross-border tax disputes, with the advent of a plethora
of anti-avoidance rules both general and specific, the advent of MLI, Digital
economy taxation, unilateral taxation measures, dynamic tax policies, dynamic
business mechanics, the cross-border tax -disputes are bound to increase
further. On the survey that we had undertaken for this report (in Part II) to
understand the level of cross-border tax disputes in the future, 100% of the
respondents indicated that there would be an increase in cross-border tax
disputes. These results amplify further the need for an effective dispute
mechanism is imperative.
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

The architecture of the dispute mechanism framework consists of the three -
layer structure of

i) Dispute Prevention Mechanism Early Tax
ii) Dispute Containment Mechanism and Certainty
iii) Dispute Resolution Mechanism.

Dispute Prevention

Dispute Tax
Containment Certainty

Dispute Resolution

Figure 5: Tax Certainty -Horizontal Layer

8.3. The three-layered structured can be looked into as horizontal layers as
depicted in figure 5 with each dispute mechanism independently paving the
way for tax certainty. Alternatively, the three-layer structure may be depicted
as a step-down process, as in figure 6. The three-layered design ensures that
in the first layer on dispute prevention, tax disputes are prevented or avoided
from occurring. The second layer on dispute containment, disputes are
handled by the tax administration and resolved at an early stage to ensure it
is not aggravated into a protracted litigation battle. The third and final layer on
dispute resolution is to ensure tax disputes are resolved by the dedicated tax
tribunal or judicial courts. The first two layers will mostly be in the purview of
tax administration. They must ensure that majority of the disputes will be
resolved within these two layers for an effective domestic dispute mechanism.

34
Domestic Dispute Mechanism – Architecture and Philosophy

Dispute
Prevention

Dispute
Containment

Dispute
Resolution

Figure 6 Tax Certainty – Vertical Layer

Early Tax Certainty

8.4. The domestic dispute mechanism's design ensures that significant
focus must be on the first two layers, i.e., the dispute prevention & the dispute
containment to ensure early tax certainty. Early tax certainty is imperative
because any state's tax policy objective is to collect maximum revenues with
minimum costs incurred on collection & compliance. Tax disputes have a two-
pronged effect. On the one hand, it increases the cost collection in litigation
costs. On the other hand, it creates economic distortions as tax disputes foster
uncertainty and adversity in the system. Therefore, the earlier, the disputes
can be resolved better for the State. The significance of dispute prevention
and dispute containment in legal disputes is well summed up the United
Kingdom's Civil Justice Council report in the context of civil disputes:38
"Paradoxically, at a time when saving costs is a government priority, we
propose that the courts extend their scope— beyond dispute resolution
to include both dispute containment and dispute avoidance. Our
assumption is that better containment and avoidance of disputes will
greatly reduce the number of disputes that need to be resolved by judges
. . . This could be the legal world's 'fluoride moment'—
just as putting fluoride in the water in the 1950s radically reduced the
need for dental work on tooth decay, then, similarly in law, appropriate

38 ONLINE DISPUTE RESOLUTION FOR LOW VALUE CIVIL CLAIMS , Civil Justice
Council, 2015, United Kingdom available at Online Dispute Resolution (judiciary.uk)

35
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

investment in containment and avoidance should greatly reduce the
number of cases coming before our courts".

8.5. Therefore, the tax administration's emphasis on tax dispute prevention
and containment will go a long way in bolstering tax certainty. The design
summary is as follows –

Layer Mechanism Objective Key Factor
I Dispute Early Tax
Prevention Preventing or avoiding disputes Certainty by
II Dispute in the first instance. Tax
Containment Administration
Extinguish disputes at the tax
Tax Certainty
administration level to ensure by Judicial
and Quasi-
the dispute doesn't spread Judicial
forums
further—de-escalation of

disputes.

III Dispute Resolution in this layer through
Resolution the judicial Court should act as a
last resort to resolve complex
tax disputes to ensure
consistency and law rule.

36
Chapter 9

Tax Administration – The Chief
Architect for Tax Certainty

9.1. Before we get into the dispute mechanism options, the chief architect
for an effective dispute mechanism is the tax administration. As much as tax
laws cover the substantive aspect of what, who, and how much to levy, the tax
law's procedural aspect governs the taxes' collection. The power to collect the
taxes and enforce levy is on tax administration. 39

Tax Administration is Tax Policy

9.2. The tax administration is tax policy and more so for developing
economies.40 The main objective of tax policy is to ensure taxes get collected
with a minimal cost in terms of compliance and economic distortions.
Therefore, a tax system's administrability is the cornerstone and core feature
for a sound tax system. 41 A tax system can achieve its objectives, only when
effectively and efficiently administered, thereby act as a protagonist for
fostering tax certainty. 42

9.3. Handling disputes is one of the tax administration's primary functions,
as shown in figure 7. Access to timely and cost-effective dispute process is
one factor in a rule of law system. The Tax Administration Diagnostic
Assessment Tool,43 an assessment tool for evaluating tax administration has

39 Fundamentals of Taxation: An Introduction to Tax Policy, Tax Law and Tax
Administration (2019), Pistone, Roeleveld & Others edition, IBFD Publication,
Netherlands

40 Milka Casanegra de Jantscher. 1990. Value added taxation in developing Countries,
World Bank Administering a VAT, M. Gills, C. S, Shoup and G. P. Sikat (eds)

41 Fundamentals of Taxation: An Introduction to Tax Policy, Tax Law and Tax
Administration (2019), Pistone, Roeleveld & Others edition, IBFD Publication,
Netherlands

42 M Govinda Rao and Sudhanshu Kumar, Envisioning Tax Policy
for Accelerated Development in India, NIPFP, New Delhi (2017)
43 TADAT is a tool that has been developed by international development partners,

with technical input from a wide range of experts, to help make tax administrations
around the world more efficient and fair. It provides an independent, standardized,
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

identified, 'adequacy in resolving tax disputes' as one of the performance
outcome areas. 44 The desired outcome for TADAT is a fair, independent, time-
bound dispute process which is accessible and useful in resolving tax
disputes.45 Therefore, dispute management is a building block for efficient and
effective tax administration. India's tax administration adequacy in resolving
tax disputes is not available as part of the TADAT assessment. Nevertheless,
tax certainty is possible if the disputes are handled effectively and, in a time,
bound manner.

Figure 7: Functions of Tax Administration- Handling Disputes.
Source: OECD Tax Administration 2017: Comparative Information on OECD
And Other Advanced And Emerging Economies.

evidence-based, quality-assured, all-round assessment of the performance of a tax
administration system. Available at TADAT
44 OECD (2016), Tax Administrations and Capacity Building: A Collective Challenge,
OECD Publishing, Paris.
http://dx.doi.org/10.1787/9789264256637-en
45 TADAT Field Guide, 2019 Edition

38
Chapter 10

Layer I -Dispute Prevention
Mechanism

10.1 The adage "Prevention is better than cure" holds good not only for
diseases but also for disputes. Disputes are akin to disease and cause
significant distress to all the stakeholders concerned. The distress is in tax
disputes creating socio-economic distortions for the State. One need not
emphasize the significance of vaccination, especially in the current pandemic
world. The pandemic has left an indelible mark by taking many lives and
causing economic disruptions. Therefore, drawing an analogy from the
medical field, adequate dispute prevention mechanisms act as a legal
vaccination for the disease that the stakeholders are fighting in tax disputes.

A shot in the arm

10.2 Dispute prevention or dispute avoidance tools are a shot in the arm to
foster tax certainty and stability in the modern-day world. Global trade is so
intertwined and inter-connected with 60% of world trade taking place within
multinational enterprises.46 The advent and surge in MNE activities have been
a major boost to commerce. Still, it also brought a migraine to the tax world in
the form of transfer pricing disputes, which is one of the significant cross -
border tax disputes that the tax-world is grappling with for quite some time.
Therefore, there is a definite need for an effective dispute prevention
mechanism for a seamless global trade.

46 Available on http://oecdinsights.org/2012/03/26/price-fixing/ (last accessed on 12
February 2019).
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

DPM Tools

10.3 Authority for Advance Ruling 2.0 – Private Rulings

Constitution of BAR – Curing the symptom and not the disease

• At the time of this report going for publication, the Indian
Government in the Union Budget 2021, vide Finance Bill 2021, has
proposed to abolish the existing AAR scheme under the Indian
Income-tax Act.47 The failure of the AAR has been duly noted by the
Government in its memorandum to the finance bill. The AAR is
replaced by the new Board for Advance Ruling (BAR). The BAR unlike
the AAR will not have any retired judges of SC/HC and instead will
consist of two tax officers not below the rank of chief commissioner.
The rulings of the BAR is neither binding on the tax-payer applicant
or the department. The effective date of BAR is yet to be notified.

• Even though the Government has replaced the ineffective AAR, the
efficiency of the new constitution of the BAR will be under scrutiny
especially that the BAR is comprised of revenue officers. The fear of
BAR turning into a DRP is not far-fetched. One needs to take
cognizance that the AAR was ineffective due to its administrative
shortcomings such as appointment of judges etc, but from a justice
perspective has a reputation of being bipartisan, neutral, and fair
while delivering justice in its rulings as the AAR was headed by a
retired judge of the Supreme Court.

• Notwithstanding the proposed new BAR, the Government may still
consider the recommendations provided below and can revisit its
stance for an effective AAR 2.0 which will serve as an effective tool
for cross-border tax dispute prevention mechanism. The AAR 2.0
needs little tinkering and does not warrant a demolition as the
foundations are strong.

10.3.1. AAR has been one of the foremost dispute prevention mechanism
tools deployed in many countries including India for cross-border taxation
matters. The advanced ruling mechanism's core objective was to provide tax
certainty to foreign investors in India and prevent tax disputes. The AAR's

47 Finance Bill 2021, new section 245OB to be introduced in the Income Tax Act

40
Layer I -Dispute Prevention Mechanism

private ruling procedure determines the taxability on particular transactions
undertaken or proposed to be undertaken by a taxpayer.

Withering on the vine

10.3.2. Being an independent quasi-judicial body, the AAR's foundations laid
in 1994 when introduced as a dispute prevention scheme were strong and
solid. The procedure met the taxpayers' expectations, paving way for tax
certainty and reducing disputes. However, the initial good work withered away
slowly and was on hibernation mode at one point in time. A promised start that
did not last long.

10.3.3. The Government of India made efforts to revamp the AAR function by
waking it up from its slumber by increasing the benches, however the system
is not fully active yet due to infrastructural and administration infirmities. As
the foundations are well laid, AAR 2.0 has a new avatar can emerge if few
leakages are plugged for the betterment of all stakeholders including tax
administration as it will prevent disputes apart from bringing in certainty. The
shortcomings led to taxpayers looking at other mechanism to resolve disputes,
which was evident from the fact that the AAR received only a record low of
twenty-eight applications during the FY 2018-19.48 Therefore, the Government
must focus on additional strengthening measures to ensure AAR does not
wither on the vine.

10.3.4. Strengthening of AAR mechanism in India – AAR 2.0

S.no Measures Recommendation
A Timelines
• Strict adherence to the timeline
specified under the statute to deliver
the ruling within six months from the
receipt of the application by the AAR.
49 The timeline within which the ruling
must be pronounced was an eye-
catching feature and strengthened the
tax certainty factor. Since advance
rulings are also sought for transactions
that are ex-ante events, the rulings will

48 Annual Report 2018-19, Ministry of Finance, India, available at Annual Reports |
Department of Economic Affairs | MoF | GoI (dea.gov.in)

49 The time limit is only recommendatory in nature.

41
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

provide much-needed certainty in
preventing tax disputes.

B Capacity building – for • Currently, the time limit specified for

consistency providing a ruling by the AAR is being

delayed due to resources and judges'

inability to adjudicate the ruling. Even
though efforts are made by the
Government of India to revamp the
AAR function by increasing the
benches, the timely appointment of the

adjudicating members will help in
providing ruling within the
recommended statutory time limit.

• Apart from the personnel resource,
other capacity-building programmes
like regular training programmes for

members in the AAR by cross-border
tax experts from other jurisdictions,
support staff by young cross-border

tax professionals as researchers, etc.
will give teeth for its functioning. The
objective of the AAR must ensure there
is consistency in its rulings despite the
fact that the precedents have only

persuasive value. Nevertheless, a rigid
or mechanistic application has to be
avoided.

C Institutionalization • The advantage of institutionalization is
transparency, predictability and
independence. Even though the
existing framework has been

institutionalized, there is scope for
strengthening it further. The ITAT,
which is also a quasi-judicial body, is a
benchmark for AAR to emulate.
Further retired ITAT members can also
be appointed as judges for the AAR to
address the shortfall.

42
Layer I -Dispute Prevention Mechanism

• With a proper functioning secretariat
with case rosters, adequate members
permanently appointed, regular
publication of all the rulings, frequent
interaction with the taxpayer
community to hear grievances etc. are

hallmarks of institutionalization.

D Use of Technology • Technology has been a silver lining
amidst the pandemic cloud. With
'online courts', 'virtual hearings'

becoming a new normal and common
phenomenon, the AAR can embrace
virtual hearings on a regular basis.
Apart from the speedy delivery of the
rulings, litigation cost to the
Government can be reduced. With
benches functioning only in limited
jurisdiction currently, online AAR court

can be a panacea for clearing the
backlog of cases in a time-bound
manner especially for taxpayers

present in other jurisdictions who can
avoid travel for safety reasons and
also avoid adjournments. Further,
these hearings will boost 'information
transparency' (subject to privacy
guidelines). The hearings transcripts
can also be made available, enabling a
more transparent system and can be

utilized for the next stages of the
dispute.

E Infrastructural • On the physical hearing front, the AAR
collaborations can conduct short camps similar to the

ITAT in other cities where benches are
not established. The ICAI had recently
offered its campus to the ITAT for

43
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

conducting camps.50 The ICAI, through
its offices in various locations of the
country, can offer similar such facilities
to the AAR as well for hearings and
expedite the rulings. Legal universities
equipped with courtroom facilities for
moot sessions can also be an option.
These collaborative approaches will
arrest the infrastructural shortcomings,
save costs to the Government, and
incidental benefits for aspiring tax
professionals to learn from witnessing
the hearings on real-time at their
campuses.

10.4. Diagnostic Tools to Prevent Disputes - Public Rulings, Public
Advice, Legal Companion Note etc.

10.4.1. Tax diagnostic tools in the form of Public Rulings, guidance notes,
and public advice will be an effective mechanism to prevent disputes and
provide clarity to the taxpayers. These are invaluable resources that a taxpayer
will seek to ascertain the tax position. Currently, the CBDT guides specific tax
issues in circulars, frequently asked questions (FAQs), guidance note etc. This
CBDT advice and guidelines are a much-needed tool for dispute preventions
as they provide the tax administration's perspective on how the law is applied.

10.4.2. For example, the recent guidance issued on MAP 51 is a convenient
and helpful tool for the taxpayers as these guidance notes are desirable since
it provides certainty and clarity to taxpayers. However, these guidance notes
are far and few between when it comes to cross-border taxation matters.

10.4.3. Therefore, the following aspects are worth considering by the CBDT
as part of the taxpayer service, a win-win proposition for both the significant
stakeholders concerned. It will prevent disputes and bolster certainty. Further,
even if the disputes advance, the guidance tools may act as interpretative tools
for the judiciary in resolving the tax disputes.

50 http://icaitv.com/news/1105/icai-offers-its-infrastructure-itat
51 F.No. 500/09/2016-APA-I dated 7th August 2020. Available at MAP-GUIDANCE-7th-

August-2020.pdf (incometaxindia.gov.in)

44
Layer I -Dispute Prevention Mechanism

S.no Tool Objective

A Co-operative • Co-operative compliance entails resolving

Compliance disputes through a collaborative approach

Scheme - between the taxpayers and the tax

Lessons from administrations. The cooperation will improve

the failure of the tax compliance mechanisms, and

Large Taxpayer dependency on tax audits will reduce. For the

Unit taxpayers, early tax certainty is possible.

• As per the OECD-IMF52 "Co-operative
compliance programs are compliance risk
management strategies used by revenue
bodies that focus on effectively influencing
and improving taxpayer compliance
behaviour. Designed to establish voluntarily a
relationship based on cooperation and trust
between taxpayers and revenue bodies".
These resolutions at the tax administration
level provide for containment of disputes
bolstering early tax certainty. Co-operative
compliance mechanism, the essence is on
the relationship between the taxpayers and
the tax administration, is mutual trust and
cooperation. Many countries across the globe
have already introduced this mechanism.

• Co-operative compliance schemes are
designed primarily for large corporates being
the major contributors to the revenue kitty.
India in 2005 introduced and established

Large Taxpayer Units (LTU). The LTU, set up
as a single-window clearance point for direct
and indirect taxes at the central level. The
objective of LTU was to strengthen the
relationship of the tax administration with the
taxpayers, where the tax administration

52 Tax Certainty, IMF/OECD Report for the G20 Finance Ministers, 2017

45
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

nominated a client executive to liaise with
large taxpayers for seamless functioning. The
taxpayers could be part of the LTU without
any compulsion.
• Unfortunately, the LTU failed to achieve its
desired objectives viz., preventing disputes,
increased tax revenues, strengthening the
taxpayer's relationship, etc. The scheme's
failure was also buttressed with low
patronage amongst the large taxpayers to opt
for the LTU fearing harassment on tax
collection. The failure could be due to
increasing tax revenue targets, wherein the
large taxpayers could prove to be cash cows
to milk revenues resulting in more disputes.
• With faceless assessment and the advent of
technology, India's scene is perfect for
reintroducing co-operative compliance
mechanisms for large taxpayers who are
generally MNE, especially on cross border
taxation matters. With international taxation
jurisdiction outside the scope of faceless
assessments, an effective compliance model
will produce intended objectives of preventing
disputes and providing early tax certainty.
• An effective co-operative compliance model
will provide the following results:
a) Tax Certainty – Early tax certainty helps, as
the taxpayer will determine tax positions for
complex issues and avoid substantial tax
demands. Assurance from tax authorities will
mitigate tax risks. Further, tax audits will be
precise and straightforward without any
harassment. The system works on a
reciprocal arrangement wherein the tax
administration commits making tax
compliance more straightforward and more
secure. On the other hand, taxpayers must

46
Layer I -Dispute Prevention Mechanism

act in good faith, minimizing exposure to
penalties and interest. This process means
that, rather than looking retrospectively at
past returns and transactions, both taxpayer
and tax administration focus on the present
and the future.53 These features augur well
for the overall investment framework for the
country as well.
b) Transparency – Increase transparency
between the taxpayer and the administration
with proper disclosures leading to reporting
uncertain tax positions, which will help
determine certainty from the tax
administration.
c) Improved Compliance – An improved tax
compliance from the taxpayer certainly
fosters tax certainty. The tax-payers
compliance behaviour will effectively manage
compliance risks in exchange for
transparency. Compliance costs will reduce
for both the stakeholders, which is an
essential feature of a sound tax system. In
the USA, Tax-payers estimate they save 48%
by using this process instead of the traditional
audit.54
d) Better tax policies and system – Co-
operative compliance scheme will help
provide real-time feedback by the taxpayers
to the tax administration on account of a
better trust-based relationship between the

53 The 2020 Annual Plan of the Dutch tax authorities states that the current HTM
agreements concluded by the Dutch tax authorities with the hundred largest and
most complex companies will be terminated. An individual tax monitoring plan will
replace these HTM agreements. The medium-sized companies according to Dutch
accounting law can conclude an HTM agreement under stricter requirements and
for a limited duration of three years.

54 https://www.irs.gov/businesses/fact-sheet-pre-filing-agreement-pfa-program

47
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

two stakeholders due to frequent interactions.

These inputs will help improve and design a

better tax system that is taxpayer-friendly.

• No more chalk and cheese: Since India has

prior experience with the LTU and based on

the negative lessons learnt, Indian tax

authorities may consider reintroducing a

refined version of co-operative compliance

scheme. The scheme shall have an adequate

taxpayer feedback system and quality

assurance check to help prevent disputes,

early tax certainty and increased tax

collection. Further, when the Government is

keen on transitioning from the adversarial

regime to a taxpayer-friendly regime, such

compliance schemes will bolster a healthy

trust-based relationship between the two

stakeholders.

• The survey observation in Part II indicated

that 90% of the respondents believed that the

tax assessment is a breeding ground for

disputes. Co-operative compliance scheme

will be a preventive tool for non-breeding of

the disputes.

B Public Rulings • As private rulings through a quasi-judicial

& Advice body in the form of AAR are available to

taxpayers on specific transactions. The public

rulings are where the tax administration'

interpretationed on common cross border

taxation issues are much desirable

introduced by the CBDT.

• Public rulings are common in some countries

such as Australia, Greece, Kenya etc. For

example, the Australian Tax Office recently

issued a public ruling on applying arm's

length debt test in its thin capitalization

48
Layer I -Dispute Prevention Mechanism

rules.55 These rulings assist as interpretative
guidance for taxpayers, thereby fostering tax
certainty. Foreign taxpayers often refer to
these rulings by the ATO to understand tax
administration perspective.
• Singapore's e-tax guide56 is another
prominent example of guiding various cross
border tax issues that regularly understand
the taxpayers' obligations. Even legacy
issues are updated frequently to keep it up to
speed with the modern-day business
dynamics.
• Even though circulars, instructions are
provided by the CBDT, albeit on a sporadic
basis. Hence a guidance note in the form of
guides can be also be provided for practical
compliances more so for cross-border
taxation matters. For example, FAQ or a
guidance note on availing foreign tax credit
based on the concerned rule 57 will be a
handy tool for taxpayers to understand the
practical issues that emerge. These will
undoubtedly prevent disputes and also foster
certainty.
• Ideally, the public rulings or advice must be
binding on the administration as it will add
sanctity to these notes apart from fostering
certainty and protection to the taxpayer.
Nevertheless, a non-binding ruling or advice
is also desirable as it will provide a guidance
tool to understand the tax administration's
interpretation of cross border taxation
issues.

55 TR 2020/4 | Legal database (ato.gov.au)
56 IRAS | e-Tax Guides
57 Rule 128 – Foreign Tax Credit, Income Tax Rules, 1962

49
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

C Frequent • The CBDT may consider pro-active

Stakeholder diagnostic measures by providing public

Consultations consultation notes before introducing new

cross-border tax provisions. For example, the

draft CBDT report for public consultation on

an amendment to rules on attribution of
profits to PE is a welcome step. It enabled the

stakeholders to digest, discuss and provide
their views on the proposed rules.

• Report similar to the draft rules on attribution
of profit to PE must not be a sporadic
phenomenon rather than a regular

phenomenon. These best administrative
practices will bridge the trust deficit gap

between the taxpayer and the administration.

D Legal • Subset to public rulings, the legal companion
Companion memorandum can be provided as an

Memorandum extension to explanatory memorandum while
introducing new substantive taxation
for provisions. These notes can act as guidance
and interpretative versions from the tax
amendments in administration, outlining the application of the
newly amended provisions.
the tax

legislation

• The explanatory memorandum that tags with
the finance bill helps to determine the
intention or rational. Still, it remains abstract

and insufficient to understand the proposed

amendment's technical nuances,

interpretation, and relevant practical aspects.

• Therefore, the legal companion
memorandum can clarify the interpretation of
legal provisions to be introduced, especially
for cross-border tax provisions having
significant impact and complexity. Since
these notes will accompany the Union Budget
documents, this provides an opportunity for

the taxpayers to provide their suggestions
and feedback for rectifying any apparent

anomalies in the Finance Act.

50
Layer I -Dispute Prevention Mechanism

• These notes and the explanatory
memorandum will foster tax certainty and
prevent disputes on new provisions that the
income tax law introduces.

• To give a practical illustration of the
significance of legal companion
memorandum, the Finance Act 2020 had
expanded the scope of Equalization Levy,
resulting in a significant amount of confusion
and questions. 58 The EL 2.0 resulted in more
questions than answers leading to tax
uncertainty.

• A legal companion memorandum by the tax
administration on the amendment's scope
and the related key features of the provisions
to comply would have provided a large
amount of clarity for taxpayers & signalled a
rational policy statement justifying the need
for a unilateral taxation measure at the global
level.

• The legal companion memorandum can also
be introduced in the form of Joint
interpretative note for tax treaties that India
signs in order to understand the positions
taken by the countries while negotiating or
revising a tax treaty. Even if bilateral joint
note is not possible, at least the Government
can consider a technical explanation note
which is already a set precedent in many
countries. The technical explanation
memorandum need not be binding, but it will
endeavour to act as a guidance note.

E Technical • The CBDT may consider setting up a

Advisory Panel technical advisory panel in its Foreign Tax

and Tax Research Division which a senior tax

officer can chair. The panel may consist of a

58 Colloquially referred as EL 2.0, Section 165A of the Finance Act 2020

51
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

diversified team by empanelling tax
academicians, industry representatives, tax
experts from other countries, indirect tax
officers and experts from other
interdisciplinary areas such as economists.
The technical panel can provide its views on
CBDT circulars, guidelines before they are
released.
• The panel will act only in an advisory role
following a strict code of conduct norms for
external experts to adhere to in the panel,
including minimum time for the panel's cause.
• The panel may consist of experts from across
the country, and meetings can be held
virtually for transparency reasons, saving
operational costs.
• The panel views will provide an inclusive and
multiple perspectives and interpretations,
which will help the CBDT adopt the correct
position and avoid disputes.

52
Chapter 11

Layer II - Dispute Containment

11.1 As the name suggests, containment of dispute contains the disputes
from aggravating further. In the words of Professor Susskind – "Dispute
containment concentrates on preventing disagreements that have arisen from
escalating excessively". 59In the context of cross-border tax disputes, this
ensures that the tax administration resolve disputes at their level.
Consequently, only complex disputes that require judicial or quasi-judicial
intervention may proceed to the next layer, i.e. the dispute resolution layer.

Nip it in the bud

11.2 India's economic survey mentioned in their report that "There is
substantial avoidable litigation in the tax arena which government action could
reduce"60. The survey also revealed that more than seven lakh crores are stuck
in tax disputes; therefore, an early-stage resolution of tax disputes is the need
of the hour. Time taken to resolve the disputes is significantly high due to many
cases lying unresolved before the courts waiting for its turn. Time is of the
essence and more so for economic subjects as it has significant ramification
for the State's developmental goals. Disputes don't age like wine; it turns into
an economic mess.
11.3 Therefore, the dispute containment mechanism is pivotal for an effective
domestic dispute mechanism to resolve cross-border taxation matters. Hence,
tax administration must ensure that disputes be resolved by nipping them in
the bud to betterment all the stakeholders concerned and ensure that only
complex tax issues go to the dispute resolution layer. For example, the co-
operative compliance scheme recommended in the previous chapter under
dispute prevention will also work as an effective dispute containment tool.

59 Richard Susskind, Online Courts and Future of Justice (2019), OUP London.
60 India’s Economic Survey , 2017-18 Available at

http://mofapp.nic.in:8080/economicsurvey/
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

Effective domestic dispute containment tools for early tax
certainty

11.4 Dispute Resolution Panel – Failure to provide substantive justice

11.4.1The DRP was set up by the Government of India in 2009, as an
alternative dispute resolution mechanism within the Income-tax Department to
resolve disputes arising out of transfer pricing matters and disputes on tax
adjustments made for non-residents by the revenue authorities. 61 The DRP
objective was to dispose of disputes arising from tax audit in a time-bound
manner and endeavour to act as an alternative dispute resolution mechanism
to other options such as CIT ( Appeals). In essence, DRP was like a surrogate
Mediation mechanism with tax administrators acting up like mediators to
resolve disputes arising from tax audits.

DRP – Game that is not worth the candle

11.4.2However, after a decade of its existence, the DRP mechanism has not
been an effective alternative dispute resolution mechanism. A whopping 96%
of the survey respondents in Part II have mentioned that the DRP failed to
achieve its objective as a dispute resolution tool. The DRP orders were highly
prejudiced in favour of the revenue, thereby eventually escalating the tax
disputes to the next level due to tax-payers aggrievement that the DRP failed
to deliver substantive justice.

11.4.3 Fairness is a critical component of substantive justice, with disputes
resolving substantially in favour of the revenue, the element of fairness
appears to be missing. With this flawed process, the DRP has lost its sheen
as an effective dispute resolution tool. The DRP has been spinning its wheel
for a decade and needs serious introspection.

11.4.4 Despite the DRP's failure to resolve disputes and provide substantive
justice to taxpayer's disputes, the taxpayers still prefer the taxpayers as a via-
media to escalate the disputes at the ITAT in a speedy time-bound manner as
the CIT (appeals) process consumes more time. The DRP acts as a speedy
route to the ITAT. The ploy by taxpayers to resort to DRP only as a via-media
to ITAT for speedy disposal defeats the ultimate purpose of setting up DRP.
The objective is for a timely justice and not timely injustice. Further, an unfair
advantage on the time factor for DRP vis-à-vis CIT (A) is also against tax law
principles.

61 Section 144C of the Income Tax Act, 1961.

54
Layer II - Dispute Containment

11.4.5 Suggestions for an effective DRP mechanism –

Options Recommendation Objective

A DRP replaced by the • The main criticism of DRP is that

GAAR Approving Panel – it is pro-revenue. Invariably

Substantive justice disputes are resolved in favour

of the tax-administration,

leaving taxpayers frustrated for

not being a neutral body.

• The existing panel in the DRP
consisting of tax administrators
may be replaced by or a similar
to the GAAR approving panel.
Currently, the GAAR approving
panel consists of three members
including the chairperson who is
or has been a judge of a High
Court, and One member shall be
a member of Indian Revenue
Service not below the rank of
Chief Commissioner of Income
Tax, and One member shall be
an academic or scholar having
special knowledge of matters,
such as direct taxes, business
accounts and international trade
practices)

• Being a diversified panel with
broad expertise and a neutral
approach will be ideal for the
DRP to be an effective dispute
containment mechanism. These
will also reduce the number of
cases escalating to the ITAT,
which already is loaded with
many cases.

55
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

B The merger of DRP with • With the survey results in Part II

CIT (Appeals) indicating the ineffectiveness of

DRP and dwindling interest from

taxpayers in adopting DRP, it is

futile to continue with this

alternative dispute mechanism.

The dwindling interest is evident

from our survey, where 61% of

the respondents mentioned that

they opt for CIT(appeals) as a

forum over the DRP to resolve

their disputes.

• The better sense will prevail if
the Government abolishes DRP,
thereby allowing the taxpayer to
resort to the traditional appeal
mechanism under the domestic
law with the CIT(Appeals). The
CIT(A) may be an effective
alternative dispute resolution
tool with the introduction of
faceless appeals. The
Government can also reduce
the timelines in line with the
DRP timelines to make it more
time-bound for speedy disposal.

11.5 Tax Ombudsman 2.0 - Effective Mediation Procedure

11.5.1In general, Ombudsman enquires into grievances or complaints
regarding the functioning of a public authority.62 Tax Ombudsman is an
alternative dispute resolution mechanism where the Ombudsman plays the
role akin to a mediator in solving disputes between taxpayer and the tax
administration at an early stage. They act as a watchdog to ensure tax laws
are implemented appropriately and act on taxpayer grievances. The tax

62 Income Tax Department, Taxpayer Information Series -40, available at ombudsman-
publication.pdf (incometaxindia.gov.in)

56
Layer II - Dispute Containment

ombudsman scheme's primary advantage is that the low unit costs for the
Government and cases could be solved quickly, leading to early tax certainty.
Tax Ombudsman mechanism is present in various countries, such as
Australia, Denmark, Mexico63, Finland, Ireland, Pakistan etc., proving to be an
effective mediation settlement process for disputes between taxpayer and
administration.

Tax Ombudsman - Indian Experience

11.5.2 India is no stranger to tax ombudsman scheme as it had its tax
ombudsman scheme including a detailed guideline on the functioning of tax
ombudsman.64 However, the ombudsman scheme got abolished due to failure
to 'achieve its objectives'.65 Another reason for removing the ombudsman
scheme was the availability of alternative grievance redressal mechanism viz.
the Centralized Public Grievance Redress and Monitoring System (CP
Grams). Also, there was general apprehension amongst the taxpayer fraternity
for approaching the Ombudsman, which may antagonize the regular assessing
officer and impact its audit.

Tax Ombudsman 2.0 – As an effective mediation forum for
cross-border taxation

11.5.3 Considering the importance of global trade and foreign investment, a
refreshed and revamped tax ombudsman scheme can be introduced
specifically for cross-border taxation matters. The grievances can be
concerned with the following:

o Unfair tax claims

o Disputes under lower or nil withholding tax certificate under Section 195
of Income Tax Act, 1961.

o Assistance in approaching advance ruling

63 Mexico’s PRODECON is a well-established precedent for taxpayer rights and
grievances. PRODECON has been successful in mediating disputes between
taxpayer and the administration, thereby resolving disputes at an early stage.

64 The Income Tax Ombudsmen Guidelines 2010, available at ANNEXURE-I
(incometaxindia.gov.in)

65 Cabinet approves Abolition of Institution of Income-Tax Ombudsman and Indirect

Tax Ombudsman, PIB release, available at

https://pib.gov.in/Pressreleaseshare.aspx?PRID=1562982

57
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o Withholding tax dispute

o MAP grievances

o Wrong application of tax treaty principles by the Assessing Officer

o Transfer pricing disputes

o Foreign tax credit related disputes

o Determination of dual residency

o Refunds, Demand collection, facilitating appeals and other procedural
infirmities faced by the taxpayer

o Exchange of information related

o Any unlawful action by the tax authorities

Tax Ombudsman also as an advocate for taxpayer rights

11.5.4 Tax Ombudsman could be an independent body from India's tax
administration. She could act as a medium for promulgating taxpayers' rights
to counterbalance the tax administration's power. Hence tax ombudsman can
also be labelled as a taxpayer's advocate. With the Indian Government
legislating taxpayer rights through tax charter, the Government can appoint an
independent taxpayer advocate to ensure the taxpayer's legal rights are duly
given effect. Apart from the grievances, the taxpayer advocate can also
undertake the following activities:

o Policy Advisor: Investigate and identify the systematic problems of the
taxpayers and to propose to the Tax Authority suggestions for their
better solution; propose to the Tax Authority the proper amendments to
its internal strategies; Bridge the gap between taxpayers and tax
administrators. Hold meetings with tax officials and taxpayers'
organizations to discuss and propose different solutions to their main
problems.

o Taxpayer Rights Advisory Panel: An advisory panel may be constituted
consisting of the taxpayer advocate, revenue officers, legal scholars,
tax academicians, tax practitioners, economists, civil-society groups,
retired judges, public volunteers etc. to identify cross-border tax issues
that need clarification and more importantly have severe economic
effect for the State. With increasing tax evasion and tax avoidance,
these inclusive advisory panels can be consulted frequently to ensure

58
Layer II - Dispute Containment

that the tax system's leakages are plugged. These initiatives may deter
tax shenanigans from dodging taxes as the taxpayer rights advisory
panel as a representative of tax-payers advocates in promoting tax
fairness and ethics to taxpayers.

11.6 Tax Treaty Dispute Containment Mechanism- Mutual Agreement
Procedure

11.6.1Strengthening the existing mechanism

• Tax treaty dispute mechanism is not in this report's scope, as the report
focuses on improvement on domestic legislation for an effective dispute
mechanism on cross border taxation. However considering the
significance of MAP as a dispute containment mechanism available
under the tax treaties, some recommendations to strengthen the
existing MAP framework is discussed below.

India's MAP framework

• India's MAP inventory is the fourth largest among the countries with a
MAP framework in their tax treaties. The huge number of cases
indicates India's aggressive position on cross-border tax issues. Apart
from the domestic dispute mechanism available for the aggrieved
taxpayer to resolve tax treaty issues, the MAP is the only recourse for
resolving disputes bilaterally from an international tax treaty
perspective. Hence, an effective MAP is essential in containing disputes
elevating to the domestic judiciary. India's MAP framework suffered from
infirmities in the past66 and thereby was inefficient leading to clogging of
cross-border tax disputes to be resolved at the domestic level. The
inflexion point in India's MAP framework and many other countries has
been the G-20 OECD BEPS project and, more specifically, the minimum
standard implementation, Action 1467.

• As a stock-taking measure, the OECD peer review report on MAP
effectiveness in India reflected its concern on the average timelines to

66 Sriram Govind and Shreya Rao, Designing an Inclusive and Equitable Framework
for Tax Treaty Dispute Resolution: An Indian Perspective, Intertax, Volume 46,
Issue 4 , 2018.

67 OECD (2015), Making Dispute Resolution Mechanisms More Effective, Action 14 -
2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD
Publishing, Paris, https://doi.org/10.1787/9789264241633-en

59
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

resolve MAP disputes which were extremely high regarding
miscellaneous cases68 taking close to 68 months. 69 The report
highlighted that India's competent authority is short of resources and
need to strengthen its resource to ensure a quick turnaround in
resolving MAP disputes.

• Pursuant to implementing the BEPS measures from 2016, India's MAP
framework has become very efficient and acts as an effective dispute
containment procedure. The MAP guidance released by the CBDT is a
very handy tool and much-needed guidance for taxpayers on resorting
to MAP to resolve disputes. The recent OECD award to India for
effective MAP cooperation with its counterpart in Japan for resolving
transfer pricing disputes stands testimony to India's MAP effectiveness
presently. 70

Improving MAP efficiency

• The Government may consider some of the following aspects for
improving MAP efficiency.

o Capacity building - The upcoming handbook by the United
Nations Tax Committee on Dispute Avoidance and Resolution will
be a useful tool for discussion on changes to be made in the MAP
framework and capacity building exercise in providing training to
tax administrators on implementing best practices. 71Training
programmes at regular intervals will help address the practical
issues immediately and enable the administrators to resolve MAP
disputes quickly.

o Non-binding Arbitration or Mediation - Further as a
supplement to the MAP, alternative dispute resolution
mechanisms such as arbitration and mediations may be
considered.

68 Other than Transfer Pricing cases
69 OECD (2019), Making Dispute Resolution More Effective – MAP Peer Review

Report, India (Stage 1): Inclusive Framework on BEPS: Action 14, OECD/G20 Base
Erosion and Profit Shifting Project, OECD Publishing, Paris,
https://doi.org/10.1787/c66636e8-en.
70 MAP 2019 Awards, OECD, Mutual Agreement Procedure 2019 Awards - OECD
71 Subcommittee on Dispute Avoidance and Resolution | Financing for Sustainable
Development Office (un.org)

60
Layer II - Dispute Containment

o Joint Multilateral framework agreement – An agreement could
be entered between the competent authorities for handling MAP.
Framework agreement may address procedural or administerial
issues relating to the MAP. Further specific substantive treaty
issues can also be addressed, considering it is possible to
determine the common issues that may arise within the regular
country partners in the MAP. These processes will enable us to
arrive at a quicker resolution on the specific substantive treaty
issues. Furthermore, this multilateral framework can also help
implement an effective Multilateral Co-operative Compliance
scheme, for seamless exchange of information sharing and quick
resolution of tax treaty-related issues. This may also act as a
catalyst in the longer term for effective joint audits of multinational
enterprises with the MAP partner countries.

• Inspiration from non-tax treaties for tax treaty dispute management
o WTO Dispute Settlement System – The DSS governs the trade
disputes in the WTO, and the framework has received a positive
response from the stakeholders in handling disputes which are
often textured with political overtones. The framework of the DSS
is as follows72:

72 Aarshi Tikrey, The WTO Dispute Settlement System: An Analysis of India’s Experience
and Current Reform Proposals, 2019, ORF Occasional Paper #209

61
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

o The WTO DSS's effectiveness is due to an efficient appellate
review body that reviews panel decisions based on an appeal.
Therefore, taking a cue from the WTO, a similar dispute
settlement body may be introduced for MAP arising out of tax
treaty disputes. An appellate body can be constituted, which will
hear matters on MAP issues that are not resolved within the
timelines to ensure MAP effectiveness. With significant global tax
disputes, the UN tax committee can endeavour to be a primary
dispute resolution body to ensure speedy, unbiased and fair
dispute resolutions on international tax matters. Under the UN's
auspices, a Global Tax Dispute Settlement Centre may be set up
as a self-standing international tax dispute resolution body, more
so as mandatory dispute settlement.73

73 Jeffrey Owens, Arno E. Gildemeister, and Laura Turcan, Proposal for a New
Institutional Framework for Mandatory Dispute Resolution, Tax Notes Int’l, June 6,
2016, p. 1001.

62
Layer II - Dispute Containment

o Bilateral Investment Treaties 74– India recently entered into a
bilateral investment treaty with Brazil. 75 One of the vital
provisions in BIT is the Investor-State Dispute Settlement (ISDS)
mechanism. Under ISDS, a foreign investor in a host country can
resolve its dispute against the host state for violating/breaching
the BITs. It is interesting to note that the India – Brazil BIT
contemplates only state-state dispute settlement mechanism
similar to the MAP framework in the tax treaty, where only
competent authorities of both the states resolve disputes arising
from the tax treaty. The India-Brazil BIT proposes a certain
mechanism for preventing and resolving disputes, such as the
following:

o Joint committee – 76As part of dispute prevention mechanism, a
joint committee will be set up consisting of government
representatives from both the countries. The joint committee shall
be responsible for the BIT's effective functioning and discuss to
resolve disputes arising out of the BITs. Under the tax treaty, the
MAP procedure can also consider similar mechanisms to resolve
tax treaty disputes.

o National Focal Point or Ombudsman as Dispute Prevention
Procedure-77 The BIT mandates setting up an ombudsman from
both the countries to prevent disputes arising from the BIT.
Similar such mechanism can be made under the tax treaties for
taxpayers to approach Ombudsman for resolving tax treaty
disputes before invoking the MAP as a dispute prevention
procedure.

74 Bilateral Investment Treaties (BITs) are agreements between two Countries
(States) for the reciprocal promotion and protection of investments in each other's
territories by individuals and companies situated in either state. In simple terms,
BITs is a primary legal mechanism for protecting foreign direct investment (FDI)
around the World. There are more than 3000 BITs entered between States and
many between developed and developing countries

75 Investment Cooperation and Facilitation Treaty with Brazil - English_0.pdf
(dea.gov.in)

76 Article 13 of the India-Brazil BIT, available at Investment Cooperation and
Facilitation Treaty with Brazil - English_0.pdf (dea.gov.in)

77 Article 14, ibid

63
Chapter 12

Layer III- Dispute Resolution
Mechanism – As a last resort

12.1 Under the DRM layer, only those tax disputes that are complex or issues
that require the Court's intervention on answering a question of law must reach
this layer. Unfortunately, all the tax disputes currently reach this layer, leading
to overburdening the judicial forums and the quasi-judicial forum like the ITAT.
Ideally, this indicates that a majority or substantial amount of tax disputes must
be settled before reaching the ITAT or the judicial forums viz. the courts.

12.2 The survey undertaken as part of this report on the effectiveness of the
domestic dispute mechanism for cross-border taxation matters indicated that
the judicial forums and quasi-judicial forums have been effective. Therefore,
the judicial and quasi-judicial forum like the ITAT has been instrumental in
resolving tax disputes. Further, the role of ITAT in international tax
jurisprudence has been phenomenal, especially with some path-breaking
landmark judgements.

12.3 The time limit in disposing cases at the ITAT and the judicial courts is
on the decline, especially in the courts where dedicated tax benches have
been allotted for disposing of tax matters. The ITAT has also set up a dedicated
international tax bench handling international tax and transfer pricing disputes.

12.4 However, areas where the existing dispute resolution mechanism at the
ITAT level can be strengthened, are as follows:

• Consistency in the judgements- The ITAT can have a roster of
members for fixed period handling only international taxation and
transfer pricing matters. Even if the member is transferred to another
jurisdiction, he may be allotted the international tax bench. These
ensure consistency in the judgments being rendered on International
tax and TP matters.

• Not to remand TP matters- The ITAT as a final fact-finding authority
can endeavour to resolve the TP disputes as much as possible and
remand only those matters which require the AO's re-intervention. This
Layer III- Dispute Resolution Mechanism – As a last resort

will avoid the second and multiple innings of tax disputes, which often
comes back to ITAT. These will provide certainty and reduce the
protracted litigation cycle.
• Online Judging – Thanks to Covid-19 pandemic, online court/ virtual
hearings are a new normal. The ITAT can effectively use the technology
to hear matters for speedy disposal. Further e-courtroom facilities can
be set up, to have a dedicated platform for virtual hearings, which will
include all the documents on the case available in the platform for
viewing and discussion. Australia's 'e-CourtRoom' is a model to emulate
in this regard.
• Asynchronous Hearing- Asynchronous hearing can be promoted
wherein; there is no need for live hearings and the parties' physical
presence as in conventional hearing. Asynchronous hearing can be
rendered for straightforward issues through e-mail communication or a
dedicated platform. The advantage of asynchronous hearing is there is
no specified time for the hearing, and the arguments can happen over
e-mail at any point in time. It is useful, especially in the modern epoch
as the parties' presence is not needed and is location agnostic.
12.5 Regarding the judicial courts, the High Courts and the Apex Court, the
only recommendation will be to follow the rule of law and other common law
doctrines such as binding precedents. In the survey, most of the respondents
indicate that the judicial courts are not consistent in their approach, leading to
tax uncertainty. This report does not comment about the functioning of India's
court system as that is outside the scope. The report's objective is to ensure
that tax disputes are either avoided or prevented early. Only very complex tax
disputes or disputes where the rule of law is compromised must reach the
judicial courts. These will help the courts focus on non-tax disputes, which
have plagued our judiciary's effective functioning. With very few cases, going
to the judiciary will help increase tax collections and reduce needless litigation
costs for the stakeholders concerned.

65
Part IV
Concluding Summary:

Better over Perfect
Chapter 13

Effective Dispute Mechanism for
a Better Future

"The best is the enemy of the good".
-Voltaire

13.1 This report in paragraph 1.1. began with a survey where the
respondents ranked India as #1 amongst countries on tax uncertainty. The
same survey also indicated how uncertainty had a serious impact on business
decisions impacting them frequently. Unsurprisingly, India ranks the top in this
table, as shown in figure 8. The change in decisions on account of tax
uncertainty frequently is against the major principles of tax law, i.e., stability,
consistency and simplicity.

Figure 8 – Extract from the survey 78
13.2 Analysis and results from Part II of this paper revealed that India's
prevailing dispute mechanism on cross border taxation matters has its flaws
and has certainly not fostered tax certainty. Considering the significance of tax

78 ibid
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

certainty, the existing State of the affair is not sustainable and does not augur
well for all the stakeholders concerned. Therefore, the Government may
consider for a change in the existing approach or introduce new alternative
mechanisms for a better future. However, changing systems or processes are
always met with resistance. Resistance to change is agnostic to any field or
domain. The famous French philosopher Voltaire quoted that "the best is the
enemy of the good" indicating that its critics often shun changes by
benchmarking with idealistic solution, thereby maintaining the status quo.

Change is inevitable; the struggle is optional.

13.3 In his recent book, Professor Richard Susskind, a legal futurist who is
an ardent advocate of legal technology in dispute resolution, 79 advocates the
need for the legal community to embrace technology. His plea comes because
the existing court system is ineffective and not sustainable for dispute
resolution leading to failure in delivering justice. To promulgate the change in
the system and to shun the critics who are resisting change, Professor
Susskind tweaks Voltaire's quote as "the best is the enemy of the better"
whereby indicates that benchmarking new solution with a perfect idealistic
solution will take us nowhere and instead solution which will make the existing
system better has to be the path.

Taming the Schrödinger’s Cat – Inching towards Tax
Certainty

13.4 The Indian Government in the recent past has been taking measures to
foster tax certainty which is also evident from the recent Finance Bill 2021. As
the efforts of the Government marches towards tax certainty the suggestions
mentioned in the report may assist in accelerating its pace to reach the desired
destination. The suggestions here may not necessarily be perfect; however, if
the proposed suggestions in part III reflects a better framework for solving
disputes and leading towards tax certainty, they may deserve some attention.
After all, what is coming is better than what is gone. 80

79 Richard Susskind, Online Courts and Future of Justice (2019), OUP London.
80 Arabic Proverb.

70
Appendix – I

Chart 1 – Effectiveness of AAR

Chart 2 - Effectiveness of APA
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

Chart 3 - Effectiveness of SHA
Chart 4 - Effectiveness of Withholding Tax Certificates

Chart 5 - Effectiveness of Tax Assessments

72
Appendix – I

Chart 6 – Preferred Mode of First Appeal
Chart 7 – Effectiveness of DRP
73
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

Chart 8 - Effectiveness of CIT(A)

Chart 9 - Effectiveness of ITAT

Chart 10 – ITAT in TP Disputes

74
Appendix – I

Chart 11 - Effectiveness of HC/SC

Chart 12 - Consistency in interpretation of law

75
Appendix II
Appendix – II

77
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

78
Appendix – II

79
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

80
Appendix – II

81
Inching towards Tax Certainty: Neoteric Domestic Dispute Mechanism for …

82
Appendix – II

83