Typically, controversies begin wherever discrepancies or disagreements arise between taxpayers and tax authorities on a taxpayer’s adopted position in (i) taxability of income (ii) allowability of deductions and (iii) withholding of taxes. Such disputes stem as a consequence of the multiple plausible interpretations given the vastness of the tax laws.

Disputes arise in general whenever (i) a discrepancy is flagged on computerised scrutiny of the returns filed or (ii) a taxpayer’s case is picked for scrutiny via a process of assessment or re-assessment.

Tax authorities institute assessment or re-assessment procedures with an object to unearth potential tax leakages arising from non-disclosure of incomes, erroneous claim of deductions or tax credits or erroneous application of withholding provisions. Such assessment or re-assessment proceedings can be initiated irrespective of whether a taxpayer has carried out their self-assessment by filing appropriate returns.

In India, the tax controversies are greater with respect to corporate tax issues and these are largely centred on the following:

• transfer pricing issues and application of tax treaties;
• eligibility of tax exemptions and deductions;
• taxation of foreign income in India;
• tax issues that arise in a business reorganisation;
• application of withholding tax provisions especially in an international context; and
• procedural and reporting violations which include non-filing of requisite forms under law or non-reporting of certain transactions or information as required under law.

Understanding the legal framework and existing jurisprudence becomes crucial for taxpayers in structuring transactions and consequently framing their self-assessment for tax purposes.

Apart from corporate tax issues, significant controversies also arise in individual taxation, specifically with respect to high net worth individuals who often face investigations with an object to unearth unreported incomes or aggressive tax planning strategies that may not meet the test of commercial substance.

Adhering to tax laws and regulations by correctly reporting income, expenses and other mandatory information while filing an income tax return can be the first step towards mitigating tax controversy. Further, maintenance of adequate documents to explain source of income and expenses claimed can also be a mitigating factor when a taxpayer’s case is picked up for scrutiny by the tax authorities. Additionally, in cases where the law is not settled, opting to receive advance rulings from the Authorities of Advance Rulings can help clarify potential issues as such decisions are binding on the income tax authorities. In other circumstances, where an advance ruling cannot be obtained, it may be prudent to obtain informed legal advice before entering into a transaction and carry out an informed decision after being aware of potential tax risks. In addition, where tax controversies have resulted in additional demands, taxpayers may also prudently benefit (after analysis) from dispute settlement schemes such as Vivad Se Vishwas, which are brought in as a specific measure to reduce litigation.

India has been an active participant in the BEPS project by the OECD, and many of the recommendations have been integrated into the country’s tax framework. Key measures such as transfer pricing documentation, country-by-country reporting, and anti-abuse rules have been adopted through amendments to the income tax laws, notably under Section 92 of the Income Tax Act, 1961 and the introduction of Multilateral Instruments (MLI). Although these changes are aimed at curbing tax avoidance by multinational corporations using profit shifting strategies, it has also led to increased complexity with respect to transfer pricing assessments, and interpretation of anti-avoidance provisions. With respect to taxpayers who enter into international transactions in India with an associated enterprise, various checks and balances are created in the tax laws to ensure that the transaction is undertaken at arm’s length. Further, additional compliance such as maintenance of proper documentation and filing of audit reports are made mandatory, and penalties in cases of such non-compliances are also envisaged under the tax laws.

In cases where a taxpayer is aggrieved by the tax assessment, then the appeal mechanism under the income tax laws can be preferred. Generally, in cases involving a disputed tax amount and where an appeal is preferred, a stay on recovery of the demand must be filed to ensure that during the pendency of the appeal no recovery is made. Such stay application are generally examined for the following grounds (i) existence of a prima facie substantial case on merits (ii) financial hardship (iii) balance of convenience. In practice, a certain percentage of the tax demand is generally ordered to be paid for granting a stay. Taxpayers aggrieved by such orders can file a review petition before a higher authority or can agitate the matter in a Writ Court, provided substantial justification exists for the same.

Although the process leading to a tax audit is not a public information, the trends and patterns that have triggered tax audits in the past are as below.

• Cases of high net worth individuals and large corporations that frequently or are more likely to engage in complex transactions or sophisticated tax planning strategies are more likely to be picked for scrutiny.
• Individuals and businesses falling under certain risk categories, such as irregular income declarations or offshore holdings, are also more likely to be audited.
• The Tax Department uses a risk-based selection process, wherein certain sectors or activities that have historically exhibited patterns of non-compliance are specifically sought to be scrutinised.
• Tax audits are also conducted when discrepancies or inconsistencies are noticed in a taxpayer’s returns vis-à-vis (i) information available with the tax authorities from multiple sources including other government departments, (ii) information discerned by use of data analytics or (iii) information disclosed by the taxpayer before other regulators or government agencies.

Besides the above, selection of cases for scrutiny can also happen by random selection using a computerised algorithm.

The tax laws specify timelines for initiating and concluding tax scrutiny.

Original Assessment Timeline

The timeline to carry out a computerised processing of an income tax return is nine months from the end of relevant financial year. An income tax return can be subject to scrutiny not later than three months from the end of the financial year in which the income tax return was filed. Further, once a return is subject to scrutiny, the audit of such return must be completed within 12 months from the end of the assessment year in which the income was assessable (for assessment year 2022–2023 onwards). However, if reference is made to the Transfer Pricing Officer, the period available for assessment shall be extended by 12 months.

Re-Assessment Timeline

If any income of an assessee has escaped assessment for any assessment year, then the Assessing Officer (AO) has the power to assess or re-assess such income. The first show cause notice for re-assessment must be issued within three years from the end of the relevant assessment year (escaped income less than INR50 lakhs; where 1 lakh equals 100,000) or within five years (escaped income more than INR50 lakh; where 1 lakh equals 100,000). Not later than three months from issuing the show cause notice, the AO must issue a notice of re-assessment stating that the taxpayer’s case is fit for carrying out a re-assessment. The time limit to conclude the re-assessment is within 12 months from the end of the financial year of issuing the re-assessment notice.

Normal Tax Audit

Income tax assessments in India are conducted in a faceless manner, which completely eliminates the physical interface between the taxpayer and the AO, and instead involves the electronic interface right from the selection of cases for the purposes of scrutiny. The assessments are conducted exclusively in an e-portal maintained by the income tax department. An overview of the procedure of tax audits is as follows:

• automatic allocation of case to an assessment unit;
• taxpayer shall be served notice of assessment/re-assessment in the e-portal;
• requisition of information from taxpayer through e-portal;
• furnishing of response by taxpayer;
• personal hearing through videoconferencing;
• in some cases, on a reference made by assessment unit the verification unit may inter alia conduct enquiry by carrying out physical visits, conduct cross-verification of books of accounts, examine witnesses or record statements;
• preparation of draft assessment order with income/loss variation proposed; and
• passing of final assessment order.

Search Audit

The provisions of the income tax law empower the income tax authorities to carry out a search and seizure of books of accounts, documents, cash, jewellery, etc, of a taxpayer. The search assessments can be initiated by the income tax authorities, on the basis of information in their possession and if they have reason to believe that a person:

• who was summoned to produce documents/books of documents, has wilfully omitted or failed to produce the said documents/books of accounts; or
• who is in possession of any articles or things, including money bullion or jewellery or any other valuable article and these assets represent either wholly or partly income which has not been or which would not be disclosed by them.

The search is mandatorily authorised by issuing a search warrant. Further, the powers of the income-tax authority to conduct searches include:

• entering and searching any building, place, vessel, etc, of the taxpayer where they have reasons to suspect that such books of account, other documents, money, bullion, jewellery or other valuable articles or things are kept; and
• power to break in, where the keys to doors or locks are not available.

In India, a tax audit typically begins with a formal notice being issued to the registered email address of the taxpayer or uploaded to the income tax portal, followed by a request for specific documentation related to the taxpayer’s financial activities.

Key areas requiring special attention from the Income Tax Department in India include the following.

• Detailed information regarding the income declared by the taxpayer in the returns for the specific period can be called for. This includes income from business, profession, capital gains or other sources, with clear documentation to substantiate any claims made under these heads.
• In a case where there are deductions claimed under specific provisions under the income tax laws then there might be a questionnaire issued calling for details/documents to substantiate such deductions. Inconsistent or excessive claims may raise red flags.
• The Income Tax Department will review the audited financial statements, including the balance sheet and profit and loss account. The reconciliation between the financial statements and the tax returns will be reviewed with a view to unearth any discrepancies.
• Special attention is given to transfer pricing issues, where transactions between related entities or international transactions are scrutinised for compliance with the arm’s length principle.

The different types of tax treaties through which information can be exchanged are DTAA, Tax Information Exchange Agreement (TIEA) and Multilateral Convention on Mutual Administrative assistance in Tax Matters (MAAC). The increasing prevalence of rules concerning cross-border exchange of information and mutual assistance between tax authorities has led to increased levels of scrutiny over Indian (and other) taxpayers. However, there is no specific data on whether there is an increase in tax audits due to the prevalence of tax information exchange mechanisms.

To the best of the knowledge of the authors, at the time of writing, there have not been any tax audits conducted with the tax authorities of different states.

Upon receiving notice of a tax audit from the Income Tax Department, it is crucial for businesses and individuals to act swiftly and prepare the documents and information that are called for. It is important to ensure that no document or information is neglected as that might lead to adverse inferences. Providing clear, accurate, well-documented and relevant information is crucial in tax assessments. Wherever necessary, it may be advisable to seek professional advice on how to handle tax assessments and prepare responses. Wherever there exists scope to challenge assessments on grounds of jurisdiction or limitation, it may be crucial to do the same at the threshold itself. Such challenge can be made either by framing necessary objections before relevant authorities or by challenge under a writ petition.

In matters relating to search and seizure, the procedural safeguards to protect a taxpayer’s interest inter alia include the right to ensure that the stated facts have been recorded correctly, the right to verify the identity of the officer in charge, the right to have a copy of any statement that is used against them by the Department, etc. Extending complete co-operation to tax authorities to perform their duties under law is essential in such matters.

When the tax authorities notify an additional tax assessment, it typically signals an intention to pick the case of the taxpayer for scrutiny or revise a taxpayer’s previously assessed tax liability or question. This can arise due to the discovery of unreported income, incorrect deductions/exemptions claimed, or disagreement in withholding of tax.

Please refer to 2.2 Initiation and Duration of a Tax Audit for the timelines with respect to assessment or re-assessment procedures. This constitutes the administrative phase. During the administrative phase, the taxpayer is subject to various questionnaires from the income tax department which will be followed by a final assessment order. Where the taxpayer or the revenue authorities are aggrieved by the assessment order, the same will be appealed against. Therefore, in all cases once the administrative phase has come to an end, it will be taxpayer or revenue authority’s prerogative to initiate the judicial phase. Please refer to 5. Judicial Litigation: Appeals for information on the judicial phase.

Administrative claims can be lodged by a taxpayer during the time (i) of filing return of income (ii) when the return is subject to scrutiny (during original or re-assessment proceedings) and (iii) when the taxpayer lodges a complaint to the Central Board of Direct Taxes.

If, during the original assessment or re-assessment, orders or notices are issued with procedural lapses or errors, taxpayers can file writ petitions directly before the High Courts of India in the taxpayers’ respective jurisdictions. In other circumstances where no action is taken by the tax authorities or the Central Board of Direct Taxes on any claim or request made by the taxpayer, recourse can be via writ petition directing such authorities to do that particular act in a particular manner.

The High Court has the discretion to intervene directly in such cases and issue appropriate orders, including quashing the assessment order or notice. However, filing a writ is generally considered an extraordinary remedy. Before resorting to writs, taxpayers are expected to exhaust administrative appeals or judicial remedies (eg, filing an appeal to the Commissioner (Appeals) or the Income Tax Appellate Tribunal) unless the situation involves grave errors that warrant immediate intervention.

The judicial phase in income tax cases in India begins after conclusion of the administrative phase, providing an opportunity to challenge decisions made by the tax authorities at higher judicial forums.

Once a tax controversy emerges and a final assessment has been made to the prejudice of the taxpayer, such taxpayer can appeal against such an assessment.

The appeal procedure and timelines are set out below.

• First appeal: The first appeal shall lie with the Commissioner (Appeals) within 30 days from the date on which the order to be appealed against is served. (There is unlimited power to condone the delay, provided reasons are satisfactory.)
• Second appeal: The decision of the Commissioner (Appeals) is appealable to the ITAT within two months from the end of month in which the order appealed against is served. (There is unlimited power to condone the delay, provided reasons are satisfactory.)
• Third appeal: The order of ITAT is appealable to the High Court within 120 days from the date of receipt of the order. The appeal stands only when a substantial question of law is involved. Any question of fact can only be dealt with up to the stage of the ITAT, as it is the last fact-finding authority. (There is unlimited power to condone the delay provided reasons are satisfactory.)
• Fourth appeal: An order of High Court can be appealed to the Supreme Court (SC). No timeline is prescribed for filing such appeal except for a pre-condition that such appeal can be preferred only if the High Court declares it to be a fit case for preferring appeal to the SC.

Alternatively, a writ petition can be filed if gross injustice has occurred due to the misuse of power by tax authorities, or if there has been an incorrect or excessive exercise of jurisdiction or violation of principles of natural justice.

The ITAT plays a crucial role in resolving disputes between taxpayers and the Income Tax Department. The procedure before the ITAT follows several stages, from the initial filing of an appeal to the final decision.

• Filing of appeal: The taxpayer or the Income Tax Department can file an appeal to the ITAT within two months from the date of the Commissioner’s (Appeals) order. The appeal is submitted in the prescribed format, accompanied by the necessary documents.
• Admission of appeal: The ITAT examines the appeal and determines whether it meets the necessary requirements. If the appeal is admissible, the case is scheduled for a hearing.
• Hearing: Both the appellant (taxpayer) and the respondent (tax authorities) present their arguments. This includes submission of evidence, legal arguments and any additional documents. The ITAT may allow for multiple hearings if required.
• Order: After hearing both parties, the ITAT makes its decision. It can confirm, modify or reverse the decision of the lower authorities, such as that of the Commissioner (Appeals).
• Rectification and review: If there is an apparent mistake in the ITAT’s order, either party can file an application for rectification.

The ITAT’s decision is binding on both the taxpayer and the tax authorities unless challenged before the High Court.

Typically, in income tax litigation in India, documentary and witness evidence plays a critical role in establishing facts and supporting legal arguments. Documentary evidence (eg, financial statements, receipts, contracts) must be submitted at the earliest stage, during the assessment or appeal process before the Commissioner (Appeals) or the ITAT. These documents help substantiate claims or objections made by the taxpayer or the tax authorities. Any reliance on third-party statements by the tax authorities for completing any assessment should necessarily be cross-examined by the taxpayer.

In both civil and criminal tax litigation proceedings under Indian direct tax laws, the burden of proof generally rests on the party making the claim.

• Civil tax litigation: In civil tax cases, where the taxpayer challenges an assessment, the burden of proof typically rests on the taxpayer. If the taxpayer disputes the tax authorities’ findings, they must provide sufficient evidence to prove that the assessment is incorrect. However, if the tax authorities allege concealment of income or fraudulent activities, they must initially provide evidence to support their claims, and then the burden may shift to the taxpayer to disprove the allegations.
• Criminal tax litigation: In criminal tax cases, such as those involving tax evasion or wilful concealment, the burden of proof is on the tax authorities. The prosecution must prove beyond a reasonable doubt that the Taxpayer intentionally evaded taxes or committed fraudulent acts. If the tax authorities prove their case, the burden may then shift to the accused to provide evidence of a legitimate defence.

During the judicial phase of tax litigation, taxpayers may consider some of the following strategic options to optimise their case. Key factors to keep in mind include the following.

• Timing for producing documents and evidence: Taxpayers must ensure that all relevant documents and evidence are submitted at the earliest opportunity, typically during the filing of the tax appeal or in advance before the scheduled hearing.
• Legal arguments: Preparing strong legal arguments is crucial. This includes pointing of factual discrepancies, interpreting tax laws and citing relevant judicial precedents. It is advisable to have proper legal representation as it is vital to strengthen the case.
• Possibility of settlement: Settlement schemes introduced by the Indian government for income tax disputes such as Vivad Se Vishwas is an option available for taxpayers to finally settle disputes with the tax authorities.
• Payment decision: Where an appeal is preferred against an assessment order where tax is determined to be payable, a taxpayer cannot merely take protection from payment of such tax citing pending appeal unless a stay is specially sought and granted. In certain instances, a pre-deposit of a certain amount may be required to be paid either under law or as directed by a court to enjoy a stay of balance demand during the pendency of the appeal before various forums.
• Expert reports: Issues involving valuations, transfer pricing, or technical matters will require expert opinions or reports that can support the taxpayer’s case. In those cases it is vital to ensure that such reports are obtained from professionals with adequate experience and credibility.

While Indian courts are not bound by decisions from international courts like the European Court of Justice (ECJ) or European Court of Human Rights (ECHR), such rulings do have a persuasive value and are referred to especially when interpreting international agreements or treaties.

The OECD Model Tax Convention and OECD guidelines on transfer pricing are particularly important in shaping Indian direct tax law and practice. The Indian tax authorities often rely on the reports of OECD when addressing issues like transfer pricing, tax avoidance and treaty interpretation.

Four levels of appeal remedies are made available to taxpayers once an assessment order is passed:

• Commissioner (Appeals) or National Faceless Appeal Centre;
• Income Tax Appellate Tribunal;
• High Court; and
• Supreme Court.

These remedies can be availed by a taxpayer only once for the respective year concerned unless the taxpayer’s case is remanded for fresh adjudication by any of the appellate authorities.

A taxpayer aggrieved by an order of assessment can file an appeal before the National Faceless Assessment Centre within the timeline prescribed under the relevant statute. Any further grievance can be adjudicated by way of an appeal before the Tribunal, which shall be the last fact-finding authority, and such order can be challenged before the High Courts provided substantial questions of law exist.

Neither the High Court nor the Supreme Court will entertain cases that involve disputes of fact. Where a matter reaches the Supreme Court, the decision rendered shall be final and binding on both the taxpayers and revenue authorities.

Rectification

Other than the above, the taxpayer has the option to file a rectification application where there is any mistake apparent from the records. The income tax authority is bound to dispose of such application after due verification. An order of rectification is an appealable order.

Revision

Apart from the above, a taxpayer also has an option to seek revision before a higher authority. Where such revision is sought, the order passed under such revision application cannot be further appeal. Writ remedy may be explored provided that it is permitted in law.

Please refer to 4.1 Initiation of Judicial Tax Litigation.

The First Appellate Authority will be the Commissioner (Appeals). A Faceless Appeal Scheme was introduced in 2020 in terms of which an appeal filed by a taxpayer would be allocated to an Officer in a faceless manner. All communication will be between taxpayers and a National Faceless Appeal Centre through e-mail, messages and uploading communications in the income tax portal. The Commissioner (Appeals) under the Faceless Scheme will be allocated randomly through an electronic/computerised system.

The Second Appellate Authority will be the ITAT. For any appeal filed by a taxpayer, the matter will be allocated to a bench of the ITAT. Further, the bench of the ITAT will comprise one judicial member and one accountant member. Where the two members cannot come to a consensus on any particular issue, such issue will be referred to the President of the ITAT for hearing, and the case shall be decided in terms of the majority opinion in the matter. Members of the ITAT are appointed by the Ministry of Law and Justice.

Where an appeal is filed before the High Court, the case of the taxpayer shall be heard by a bench comprising not less than two judges, and the case shall be decided in terms of the majority opinion of the judges. Where a majority opinion could not be arrived at with respect to any particular point of law, then that point of law will be heard by a third judge or more judges and the case will be decided in terms of the majority opinion. 

Where an petition has been filed and admitted and considered as an appeal before the Supreme Court, the appeal shall be heard by a bench of not less than two judges. Where, in the course of the hearing, the bench considers that the matter should be dealt with by a larger bench, the matter shall be referred to the Chief Justice, who shall constitute such a bench for the hearing.

An alternative to the tax dispute resolution methods discussed above is in place for resolving tax matters in India. Such alternative dispute resolution methods are in the form of Authority for Advance Ruling (AAR), Dispute Resolution Panel (DRP), Advance Pricing Agreement (APA) and Mutual Agreement Procedure (MAP). Owing to the huge backlog of cases before the traditional forums of tax litigation, the alternate methods offer a viable alternative to residents and non-residents.

• AAR: A quasi-judicial body primarily set up to determine the income tax/withholding tax liability on transactions in advance, thereby avoiding uncertainty and lengthy litigation for taxpayers.
• DRP: A quasi-judicial body consisting of experts to whom the taxpayer can file objection in relation to any variation that is proposed by the AO to the income or loss stated by the taxpayer. This option is available for variations proposed by a transfer pricing officer or for variations proposed in case of a non-resident. The decision of the DRP is binding on the AO and therefore, the final order passed by the AO must be in conformity with the findings of the DRP.
• APA: The Central Board of Direct Taxes (CBDT) will enter into APAs with any person for a maximum period of five years for determining the arm’s length price or specifying the manner in which the arm’s length price will be determined in international transactions. There are different types of APAs serving different objectives, namely:
1. a unilateral APA is entered into between the taxpayer and CBDT;
2. a bilateral APA is entered into between CBDT and the taxpayer subsequent to an agreement between the tax authorities of India and of another country; and
3. a multilateral APA is an agreement between taxpayer and CBDT subsequent to agreement between the competent authority of India and of other countries. 
• MAP: India has entered into Double Taxation Avoidance Agreements (DTAAs) with several countries. MAP is an ADR mechanism available to taxpayers under the DTAAs. Further, the purpose of invoking a MAP procedure is for resolving disputes that give rise to double taxation or taxation that is not in accordance with DTAAs. In such cases, MAP can alleviate double taxation either fully or partially.

AAR

Advance ruling under the income tax laws in India can be preferred by a resident or a non-resident for the following reasons.

• Resident: Tax liability of a resident applicant, arising out of a transaction or transactions valuing INR100 crore (1 crore equals 10 million) or more which has been undertaken or is proposed to be undertaken by such applicant. Such determination shall include the determination of any question of law or of fact specified in the application. An advance ruling may also be preferred to determine whether an arrangement proposed to be undertaken by them is an impermissible avoidance arrangement under GAAR.
• Non-Resident: For determination of tax liability in respect of any investment in India, complex issues including application of DTAA which may arise due to difference of opinion and also to determine whether transactions undertaken or proposed to be undertaken by a non-resident, is an impermissible avoidance arrangement under GAAR.

A decision by the AAR is required to be pronounced within six months from the date of receipt of an application, thereby providing a speedy redressal option for applicants. It should be noted that any application which inter alia involves a question that is already pending before the ITAT or any court, and any transaction that is designed to prima facie avoid tax, shall not be entertained before the AAR. 

DRP

In cases where a variation is proposed by the AO to the income or loss stated by the taxpayer who is a non-resident or in a case where variation is proposed by a Transfer Pricing Officer (TPO) and such variation is prejudicial to the interests of the taxpayer, the AO must forward a draft order to the Taxpayer. The Taxpayer shall accept such objection or prefer to file an objection with the DRP. Subsequently, the DRP shall issue direction within nine months from the end of the month in which the draft order is forwarded to the taxpayer. Based on the directions issued by the DRP, the AO must complete the assessment within one month of receipt of directions. While issuing directions to the AO, the DRP may make further enquiry or direct the income tax authorities to cause further enquiry. The DRP might reduce, confirm or enhance the variations proposed by the AO and the direction of the DRP will be binding on the AO. If the taxpayer is not satisfied with the final order of the AO then an appeal can be preferred before the ITAT.

APA

Any person entering into an APA with the CBDT can request a pre-consultation with the Director General of Income Tax. Such pre-consultation does not involve any fee. The pre-filing consultation would aid in (i) determining the scope of agreement (ii) identifying transfer pricing issues (iii) determining the suitability of the international transaction for the agreement and (iv) discussing broad terms of the agreement. The pre-filing consultation shall not bind the CBDT, or the taxpayer and shall not construed as making an application for entering into an APA. The next step would be to file a formal application and this shall mark the initiation of the APA process. The understanding from the pre-consultation step may be annexed to the formal application that the taxpayer shall make. It should be noted that the time limit to opt for a pre-filing consultation and thereafter to make a formal application is not prescribed in the income tax laws. On receipt of the application, the APA team will be in constant touch with the taxpayer to conduct meetings, requesting additional information if necessary or to make additional enquiries. A draft of the agreement containing the negotiated terms is sent by the APA team to the central government for approval. Once the approval is received, the agreement will be signed by both the tax authorities and the taxpayer.

MAP

Please refer to 8.1 Mechanisms to Deal With Double Taxation.

India does not have a mediation or arbitration system to settle tax disputes. However, the government introduces a settlement scheme permitting taxpayers to settle disputes by paying the disputed tax along with an additional sum (in certain cases) and securing waiver of interest and penalty. One such scheme was introduced recently in 2024.

A taxpayer who wishes to seek an advance ruling in respect of issues mentioned in 6.2 Settlement of Tax Disputes by Means of ADR, shall make an application in the prescribed form along with the prescribed fee. The pronouncement of an advance ruling shall be binding only (i) on the taxpayer/applicant who sought the advance ruling (ii) in respect of the transaction in relation to which the advance ruling was sought and (iii) in respect of the income tax authorities relevant to the applicant.

Therefore, a decision delivered by an AAR in relation to a taxpayer/applicant cannot be used as a precedent by any other taxpayer. The advance ruling delivered by the AAR will be followed by the AO in making the assessment. If the taxpayer is aggrieved by such an assessment, an appeal may be preferred.

AAR

Please refer to 6.2 Settlement of Tax Disputes by Means of ADR for details with respect to the issues for which an advance ruling can be sought by a taxpayer. On making an application by a taxpayer, the AAR is required to deliver a ruling within six months. If a taxpayer or the department is aggrieved by the ruling of the AAR then the taxpayer/department shall prefer an appeal before the High Court before 60 days (can be extended by 30 days if there is sufficient cause of delay).

DRP

Please refer to 6.2 Settlement of Tax Disputes by Means of ADR for details with respect to issues for which a representation can be made to DRP, the time limit for receiving a final decision in the matter and the possible recourse on receipt of a DRP finding.

APA

Please refer to 6.2 Settlement of Tax Disputes by Means of ADR for details on issues for which an APA can be preferred by a taxpayer. There is no set timeline for finalising the final agreement of APA under the income tax laws in India.

MAP

Please refer to 8.1. Mechanisms to Deal With Double Taxation for details with respect to issues for which MAP procedure can be opted for by taxpayers. In most of the DTAAs entered into by India, the time limit for making an application for MAP is three years from the first notification of the action giving rise to such taxation. There is no set monetary value for where a MAP application can be preferred. Although there is no set timeframe to reach a MAP resolution, India endeavours to reach a resolution within 24 months of a competent authority in India becoming aware of the MAP application made by a non-resident.

The APA was introduced in India with the motive to promote ease of doing business especially for multinational enterprises (MNE) which enter into a number of cross-border transactions with their associated enterprises. Therefore, those MNEs can seek advance ruling wherever required or enter into APAs to garner better certainty with respect to taxation in India.

Where the income tax authorities are of the view that there is a tax infringement, an assessment is initiated. Please refer to 3. Administrative Litigation for the process of initiating and conducting assessment. The following are some offences for which criminal prosecution can be initiated and where the taxpayers will be subject to imprisonment and fine, as applicable:

• failure to comply during search proceedings;
• failure to pay tax to the credit of the central government after withholding tax/collecting tax at source;
• willful attempts to evade tax, penalty or interest;
• willful failure to furnish returns of income;
• furnishing false statements or documents knowing them to be false;
• falsification of books of accounts to evade tax;
• abetment of false returns, accounts, statements or declarations; and
• for offences by companies, the company and the officer responsible for offences committed by the company shall be punishable with imprisonment and a fine.

A criminal litigation under the income tax laws will be initiated with a complaint made by a specified income tax authority on commission of offences discussed above. On the basis of the complaint, a trial will commence in a “Special Court”, based on which a conviction or acquittal of the accused will follow. A civil tax assessment on the other hand will entail a scrutiny process and the AO will pass an order making an addition or confirming the return made by the taxpayer. Civil assessment and criminal litigation can be conducted in parallel for a taxpayer.

A criminal tax case can evolve from an administrative infringement – ie, through scrutiny assessment, or it can arise where there is a specific tax infringement which falls under any of the categories mentioned in 7.1 Interaction of Tax Assessments With Tax Infringements.

Where there is a criminal infringement under the income tax law which is punishable with imprisonment, the taxpayer cannot be pursued without the sanction of the Principal Commissioner or Commissioner or Joint Commissioner (Appeals) or Commissioner (Appeals). Further, for trial of offences that are punishable with imprisonment, the central government in consultation with the Chief Justice of the High Court may set up Special Courts by designating one or more courts of Magistrate of the first class as a Special Courts.

Therefore, Special Courts are set up for deciding a criminal tax case as opposed to a civil tax case.

A scheme is provided under the income tax law which provides for immunity from penalty proceedings in all cases except for misreporting of income, provided the following conditions are fulfilled:

• tax and interest payable as specified in the notice of demand in pursuance of an order of assessment/reassessment has been paid within the specified time;
• no appeal is filed against the order of assessment or reassessment; and
• an application seeking such waiver is made within one month from the end of the month in which the order of assessment/reassessment is received by the assessee.

Once a criminal trial has been initiated, an option available to the taxpayer would be to compound the offence by paying a certain compounding fee to avoid lengthy prosecution proceedings. When such an option is exercised, the taxpayer should pay the outstanding taxes waiving all of the appeal remedies available under the Income tax laws. One distinctive factor in cases of compounding is that a taxpayer can choose to compound an offence even before the authorities identify the offence committed. 

Compounding guidelines categorise offences into three categories to be eligible for compounding. Several instances where compounding is allowed are under:

• failure to pay the tax deducted at source;
• failure to pay the tax collected at source; and
• wilful attempt to evade tax.

A criminal tax case under the income tax laws will be heard by a Special Court as mentioned in 7.4 Stages of Administrative Processes and Criminal Cases. The Special Court on a complaint made by the specified income tax authorities will take cognisance of the offence for which the accused is committed for trial.

Further, if the accused is convicted in the Special Court in respect of the criminal tax complaint, such a person can appeal before higher fora as stipulated in law.

If the AO, at any stage of the assessment or reassessment, having regard to the material and evidence available, considers that it is necessary to invoke GAAR, they may make a reference to the Commissioner of Income Tax. If the Commissioner of Income Tax is of the opinion that GAAR provisions are required to be invoked, a notice will be issued to the taxpayer setting out the reasons and basis of such an opinion and providing an opportunity of being heard to the assessee. If the Commissioner of Income Tax, after hearing from the assessee, is not satisfied by the explanation of the assessee, then they shall make a reference to the Approving Panel. The Approving Panel, on receipt of a reference from the Commissioner of Income Tax, after giving an opportunity of being heard to the assessee, shall issue such directions, in respect of the declaration of the arrangement, such as an impermissible avoidance agreement including specifying the previous year or years to which such declaration of an arrangement as an impermissible avoidance agreement shall apply. All tax and penal consequences of such a declaration will follow under law.

MAP is a special mechanism provided under DTAAs, that applies to cases where an action or a proposed action leads to double taxation of income, which is not in accordance with the DTAA in question. On receipt of an application for MAP made by a taxpayer, the competent authority of the taxpayer’s country will take up the disputed matter with the competent authority of India to discuss the issues and try to arrive at a resolution. It should be noted that MAP procedures are not embedded in the income tax laws in India. However, MAP is an integral part in most of the DTAA. Therefore, these avenues are available only where India has entered into a DTAA with such country and such DTAA provides for a MAP resolution method.

MAP cases involve cross-border double taxation that could either be juridical double taxation (same income taxed twice in the hands of the same entity in two different countries) or economic double taxation (same income taxed in the hands of two separate entities, who are associated enterprises, in two different countries). Some scenarios where MAP can be invoked are in terms of disputes related to whether Permanent Establishment (PEs) exists:

• attribution of profits to PEs;
• transfer pricing adjustments; and
• determination of an income or expense as royalty, fee for technical services or business income.

The alternative to a MAP procedure would be domestic litigation. Since all tax disputes start with an assessment, a taxpayer can opt for the appeal process which starts with filing an appeal before the Commissioner (Appeals), ITAT, the High Court and Supreme Court.

Tax treaties are one of the many ways in which a taxpayer may derive some tax benefit or reduce overall tax liability. As many taxpayers were creating artificial structures (such as diverting income through businesses based in low-tax jurisdictions) to take the advantage of these benefits or of the reduced tax liability, a loss of revenue was experienced by the state. In order to restrict this loss, the GAAR was introduced vide Chapter X-A with effect from 1 April 2017. It should be noted that the introduction of Clause (2A) in Section 90 means that notwithstanding the treaty benefits conferred to a taxpayer, where GAAR is invoked such benefits cannot override GAAR.

Further, where the anti-abuse provisions in treaties – ie, Limitations of Benefits Clause of the DTAA – are prevalent, the Central Board of Direct Taxes in India vide a circular dated 27 January 2017 clarified that GAAR will not be invoked if a case of avoidance is adequately addressed by a Limitation of Benefits in the treaty.

The Principal Purpose Test (PPT) introduced by MLI is one of the key measures of the BEPS project to combat treaty abuse/shopping. It acts as a means to deny treaty benefits if one of the principal purposes of the arrangement or transaction is to obtain the treaty benefit, unless granting the treaty benefit is in accordance with the object and purpose of the tax. Since PPT and GAAR are both anti-abuse provisions with a common objective to deny treaty benefits for certain reasons, in an interplay between GAAR and PPT, PPT is broader for the reason that GAAR is applicable only when the main purpose of the transaction is to obtain a tax benefit.

Further clarification was brought in by the CBDT vide a circular dated 21 January 2025, which stated that PPT will not be applied on income arising from transfer of investments made before 1 April 2017. Similar amendment was brought into the income tax laws for application of GAAR on transactions relating to the said period. 

The transfer pricing laws in India were introduced with an intention to ensure that international transactions entered into with associated enterprises are conducted at ALP so as to prevent profit shifting and erosion of the tax base in India. The tax audit procedure for scrutinising a transfer pricing issue is embedded under the domestic income tax law provisions as follows:

• there is an automated procedure for selecting tax returns for tax audit;
• once an audit is initiated, reference is made by the AO to the Transfer Pricing Officer (TPO) to compute the ALP for the international transactions undertaken by the taxpayer with its associated enterprise;
• the TPO, after taking into account all documents and submissions of the taxpayer will pass an order determining the ALP;
• a copy of the order will be sent to the AO and the taxpayer. On receipt of the TPO’s order, the AO would compute the total income of the taxpayer by applying the arm’s length prices determined by the TPO and pass a draft order within the time limit prescribed for completion of scrutiny assessment;
• a taxpayer who is aggrieved by an order passed by the AO will have the option to file objections before the DRP;
• the DRP would provide directions based on which the AO will pass the final order; and
• a taxpayer who is aggrieved by an order of the AO shall prefer an appeal to the Commissioner (Appeals).

Alternative Routes

A Taxpayer can alternatively choose to opt for ADR through APA or MAPs and thereby avoid normal litigation routes.

Any person can opt to enter into an agreement, an APA, with the Central Board of Direct Taxes for a maximum period of five years to determine the arm’s length price or specifying the manner in which the arm’s length price will be determined in international transactions. As per the Annual Report for 2023–24 released by the Central Board of Direct Taxes, taxpayers have shown an increased preference for opting for unilateral and bilateral APAs in recent times and that more than 75% of the applications of APA are unilateral and the rest are bilateral APAs.

Procedure for Obtaining an APA

Please refer to 6.2 Settlement of Tax Disputes by Means of ADR for the procedure and stages involved in applying for APA.

Cross-border issues arising in areas of withholding of tax, permanent establishment and transfer pricing continue to remain the subject matter of litigation before the courts of India. However, there is no specific published data to identify which of these issues is prone to higher litigation. Non-residents may make use of ADR mechanisms and seek legal advice before entering into transactions and taking tax positions to mitigate unwarranted litigation.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

India did not opt for mandatory binding arbitration, according to Article 18 of the MLI, for the reason that if tax matters are made mandatory arbitrable, then this would directly hamper the government’s sovereign right to levy tax on a non-resident and foreign entities.

Currently, the arbitration procedure that is provided for in the DTAAs entered into between India and other countries is the MAP procedure. Please refer to 8.1 Mechanisms to Deal With Double Taxation. India has not adopted the mandatory binding arbitration as provided in Article 18 of the MLI.

Such practice is not undertaken in India to settle international tax disputes.

India has not shown its enthusiasm for acceding to Mandatory Binding Arbitration as provided in Article 18 of the MLI. Therefore, arbitration in respect of MAP procedures will be available for international transactions with countries with which India has a DTAA, and such DTAA provides for settlement of disputes through MAP. For more information on MAP please refer to 8.1 Mechanisms to Deal With Double Taxation.

As discussed in 8.1 Mechanisms to Deal With Double Taxation, India has actively included MAP as a dispute resolution mechanism in most of the DTAAs entered into with other countries.

Pillar One

The Pillar One goal, which was to abolish any digital services tax, was enthusiastically welcomed by India. Further, as part of aligning the tax reforms of India with those of the global tax framework, the equalisation levy of 2%, which especially had an impact on non-resident e-commerce operators, was withdrawn.

Abolition of equalisation levy

India witnessed the abolition of the equalisation levy of 2% as a result of the Union Budget, 2024 India. The equalisation levy was introduced in 2016 and is applicable on consideration received by a non-resident e-commerce operator from e-commerce supply or services made or facilitated by it (i) to a person resident in India or person using an internet protocol address of India or (ii) to a non-resident in specified circumstances. The Indian government proposes to abolish the 6% equalisation levy or digital tax on online advertisements, a move that will benefit advertisers on digital platforms and that is expected to benefit companies selling online advertising space, particularly major US-based tech giants like Google and Meta.

Pillar Two

Pillar Two consists of a treaty-based, Subject to Tax Rule (STTR) that allows source jurisdictions to impose source taxation on certain payments if subjected to tax below a minimum rate by the jurisdiction where the recipient entity is located. This would help India to curb base erosion and profit-shifting. However, the implementation of Pillar two in India is being closely examined by the government of India.

In India, the orders passed by the AO and the Commissioner (Appeals) are confidential and remain viewable only to the taxpayers concerned.

The judgments delivered by the ITAT, High Courts and Supreme Court are publicly accessible.

The decisions arising out of MAP procedures and the APAs entered into between a taxpayer and the tax authorities remain confidential to safeguard agreements between tax authorities and taxpayers.

The most common legal instrument used in India, by way of arbitration, in settling cross-border disputes would be the MAP procedure. Please refer to 8.1 Mechanisms to Deal With Double Taxation. This is because the domestic direct tax laws in India do not have an express provision for settling disputes through arbitration.

Alternative to arbitration would be to enter into a bilateral APA with the government of India. However, obtaining a bilateral APA would be limited to determination of ALP and the same will be valid for five years. Reference may be made to 6.2 Settlement of Tax Disputes by Means of ADR for the process of obtaining a bilateral APA. 

Taxpayer’s Approach

The common practice in India while dealing with income tax disputes both domestic and international, is to engage accountants or legal professionals having expertise in tax law, to represent their case before the income tax authorities. With respect to arbitration procedures such as MAP applications or APAs, the engagement of legal professionals will become essential both at the initial stages and during the time of dispute resolution. At the initial stages of dispute resolution, such professionals play a vital role in preparing evidence and submissions in support of the applications made. With respect to APAs, legal professionals play a vital role in negotiating favourable terms for the taxpayer and in ensuring that the terms of the agreement which are harmful to the taxpayer are not acceded to. At the High Court or Supreme Court level, the taxpayers have an option to engage Senior Counsel, who are legal professionals, and due to their experience and expertise gained in a particular subject area, are given special recognition in court. 

State’s Approach

The state, on the other hand, will be represented by public prosecutors who are appointed by the state.

At the administrative level, there are no fees that are to be paid to the AO during the process of assessment proceedings. However, at the end of the assessment proceedings where a tax liability of any nature is determined for the taxpayer and the taxpayer does not opt for an appeal, then the total demand as determined by the AO becomes payable along with interest.

Where an appeal is preferred by the taxpayer, the fee for filing such appeal must be paid at the beginning of the proceedings. Without such payment, the appeal cannot be filed before the various forums. In this instance, tax amounts required to be paid as a pre-deposit are not discussed, as these are not construed as “fees”.

• At the Commissioner (Appeals) stage, the fee for filing an appeal is (i) INR250/- for assessed income amounting to INR1 lakh (1 lakh equals 100,000 in all instances) or less, (ii) INR500/- where assessed total income more than INR1 lakh but not more than INR2 lakhs, (iii) INR1,000/- where assessed income is more than INR2 lakhs and (iv) INR250/- where appeals involve any matter other than discussed above.

• At the ITAT stage the fee for filing an appeal (i) INR500/- where the assessed total income is INR1 lakh or less, (ii) INR1500/- where assessed total income is more than INR1 lakh and less than INR2 lakhs, (iii) 1% of the assessed income subject to maximum of INR10,000 where the assessed income is more than INR2 lakhs and (iv) INR500/- where the subject matter of appeal relates to any matter other than discussed above.
• At the High Court stage, the fee for filing an appeal or writ will be as per the Court Fee and Valuation Act of the respective states. The amount of fees will depend upon the statute of the state in which the appeal is being filed. The fees are to be paid by way of purchase of judicial stamp papers of the respective state in which the appeal is to be filed.
• At the Supreme Court stage, the fee for filing will be at the discretion of the court.

Where an additional tax was levied on the taxpayer as a consequence of scrutiny proceedings, and such additional tax was nullified by appellate forums/courts, then the taxpayer will be eligible for the refunds along with simple interest on the refund amount. Such simple interest is calculated from April 1st of the relevant assessment year (if the return is filed within the due date) or from the date of furnishing the income tax return (if the return is filed beyond the due date) until the day when the refund is issued.

The court fees in cases where ADR mechanisms are opted for by the taxpayer are as provided below.

• Advance ruling: (i) INR2 lakhs (1 lakh equals 100,000 in all instances) where the amount of transaction(s), entered into or proposed to be undertaken, in respect of which a ruling is sought, does not exceed INR100 crore (1 crore equals 10 million in all instances), (ii) INR5 lakhs where the amount of transaction(s), entered into or proposed to be undertaken, in respect of which a ruling is sought, exceeds INR100 crore but does not exceed INR300 crore, (iii) INR10 lakhs where the amount of transaction(s) entered into or proposed to be undertaken, in respect of which ruling is sought, exceeds INR300 crore and (iv) INR10,000/- for any other applicant not covered in the above cases.

• APA: (i) INR10 lakhsfor international transactions up to INR100 crores, (ii) INR15 lakhs for international transactions up to INR200 crores and (iii) INR20 lakhs for international transactions exceeding INR200 crores. There is no fee that is prescribed for pre-consultation filing.

• MAP application: There is no filing fee that is prescribed for a MAP application.
• DRP: There is no prescribed fee for a reference made to DRP since the DRP procedure is similar to an assessment/administrative procedure.

The appeals pending before the respective Appellate forum are as folllows:

• Commissioner (Appeals) – 549,042 (as per the Central Action Plan 2023–24);
• Income Tax Appellate Tribunal – 19,238;
• High Courts – 27,950; and
• Supreme Court – 4,379.

(As per The Comptroller and Auditor General Report No 13 of 2024 (tabled on 17 December 2024).

With respect to direct taxes, the number of cases initiated during FY 2023–24 were 144,064, and the number of cases disposed of during the year are 111,506, before the Commissioner (Appeals) stage.

The relevant statistics with respect to cases initiated and terminated before the ITAT, High Court and Supreme Court are not publicly available.

The relevant statistics are not publicly available.

2.6 Strategic Points for Consideration During Tax Audits and 4.5 Strategic Options in Judicial Tax Litigation, outline the general strategies that can be undertaken by a taxpayer to equip themselves prior or during tax audits or judicial tax litigation. However, the specific strategies will vary on a case-by-case basis. Consulting with a legal professional would be of crucial importance, especially at the nascent stages of scrutiny to avoid protracted litigation.