In the recent past, there have been significant tax controversies in India which have been closely monitored around the globe by Multi-National Enterprises (MNEs), tax administrators, policy-makers and international tax organisations.

The dynamic nature of the present day business world along with aggressive tax planning measures and a protective approach to revenue often make it difficult for the law to expressly address all potential questions that may arise from its application in the future. This is where tax litigation plays a crucial role in the interpretation of law in different situations and provides the necessary aid for policy makers to amend the law wherever necessary. To this effect, tax litigation is an important pillar of tax certainty.

This write-up elucidates certain matters pending before the Supreme Court of India, which will have far reaching effects on businesses once the Court pronounces its verdict.

Does 'excessive' marketing expenditure in India result in the creation of marketing intangibles for oversea entities and does it call for transfer pricing adjustments?

The creation of marketing intangible has been the subject of much debate recently, when the Indian arm of a multinational entity incurs advertising, marketing and sales promotion (AMP) spend in India.

The tax authorities have adopted a position wherein, if Indian companies spend excessive amounts on AMP activities, it leads to the creation of marketing intangibles for the brand which is owned by a foreign multinational. Hence, Indian taxpayers ought to be compensated for the 'alleged brand promotion services'.

This issue has led to an intense battle between the taxpayers and the Tax Authorities with the Special Bench of the Tribunal ruling in favour of the Tax Authorities, and the High Courts ruling in favour of the taxpayers.

The Supreme Court will now have to decide whether excessive AMP spend attracts transfer pricing provisions, and if yes, what is the right method for determining the arm's length price of the AMP spend.

This is presently one of the most eagerly awaited verdicts from the Supreme Court, and it will have far reaching effects on the tax environment in India at large. It would be interesting to note whether the Supreme Court coins guiding principles around this issue or whether its verdict remains specific to the facts of a particular case.

If an Indian agent is a Permanent Establishment (PE) of the foreign principal but it is remunerated on an arm's length basis, can further profit be attributed to the PE?

The Supreme Court of India in its earlier decision in the case of Morgan Stanley1 has affirmed that when an agent is already paid on an arm's length basis considering the risk taking functions of such an agent, there cannot be further attribution of profits to the PE. A similar view is pronounced by the Bombay High Court in the case of B4U Holdings Limited2. The Tax Authorities have appealed against this judgment to the Supreme Court and the verdict is expected to be delivered in 2017.

It would be worth noting the verdict of the Supreme Court on this matter especially in light of the position of commissionaire arrangements under the BEPS Project. It would also be interesting to note whether Tax Authorities argue the matter on the basis of differential tax rates for an Indian company and for a PE, even though the amount of profit attributable to the PE does not change.

The Finance Act, 2012 provided that failure to deduct TDS on expenditure does not result in disallowance if the payee has paid income-tax thereon. Can this amendment be given retrospective effect?

The Finance Act, 2012 provided that despite the failure to deduct tax by the payer, disallowance of the expenditure shall not be made if the resident payee has paid tax on the income received by it, subject to certain other conditions. This amendment was to take effect from 1 April 2013. Certain courts and tribunals have taken a view that this amendment should be given retrospective effect and should also apply to periods before 1 April 2013. This matter is pending before the Supreme Court3.

This is an interesting case where the taxpayer is arguing to apply a law retrospectively. In certain earlier cases, Courts have held that if an amendment in the law is to address an existing anomaly, it can be applied to periods before the amendment. Given this backdrop, it will be interesting to note the position the Supreme Court takes on this particular issue.

Is Project Office acting merely as a Communication Channel to the foreign entity's project in India, a PE?

The Delhi High Court in a recent case4 dealt with a situation wherein a foreign company was undertaking certain projects in India for which it had opened a Project Office in India. The High Court held that the Project Office was not a PE of the foreign company since the Project Office was acting only as a communication channel for the foreign company and therefore was rendering only auxiliary services to the main project. The Tax Authorities took the matter before the Supreme Court.

The Supreme Court will decide whether splitting a contract between the foreign company and the Indian Project Office was done in order to avoid PE status in India or whether such a splitting of contract is permissible when the customer is located in India. Another aspect that could be considered is that while the BEPS Project provides specific rules to deal with artificial splitting of contracts, whether splitting of contracts is permissible under the existing law.

Splitting of contracts between different entities is not an uncommon practice particularly in the EPC sector. Hence, the Supreme Court verdict in this case will have far reaching effects on the taxation aspect of EPC contracts.

Whether service tax authorities can conduct Special Audits?

The Delhi High Court5 held that the power of Service tax authorities to conduct Special Audits and demand records under the Service tax legislation is ultra vires (bad in law) and had struck down the circular issued by the Central Board of Excise and Customs in this regard.

When the Tax Authorities approached the Supreme Court on this issue, the Supreme Court granted a stay on the order of the Delhi High Court as an interim measure, and the verdict of the Supreme Court on merits of the case is awaited. If the Supreme Court decides the matter against the Tax Authorities, an amendment in the law to overcome the Supreme Court verdict cannot be ruled out.


1. DIT v Morgan Stanley and Co., Inc (292 ITR 416)(SC)

2.DIT v B4U International Holdings Limited [2015](57 146)(Bom)

3.CIT v. Ansal Landmark Township (P.) Ltd. (2015)(61 45)(Del)

4.National Petroleum Construction Company (2016](66 16)(Del)

5.Mega Cabs Private Limited v Union of India and Others [WP No. 5192/2015]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.