One of the long-standing demands of foreign investors doing business in or with India has been for a speedy and judicious dispute resolution mechanism to achieve certainty on income-tax (I-T) disputes arising out of cross-border transactions.
The finance minister, while presenting the Budget in June 2009, introduced the framework for setting up a dispute resolution panel (DRP) to deal with I-T and related transfer pricing (TP) disputes. While the DRP framework was largely projected to deal with tax assessments of foreign firms, in reality the same is also extended to other taxpayers, whether Indian or foreign, who have TP disputes arising out of cross-border transactions. In the latter cases, while the trigger to access the DRP framework is a TP adjustment, it seems the DRP scope would cover giving directions on other tax adjustments as well.
The DRP provisions mandate the tax officer to provide a draft assessment order to the eligible taxpayer, where any tax or TP adjustments are proposed to be made. The taxpayer can approach the DRP to file his objections within one month. The DRP would then, within nine months, make necessary inquiries and issue the directions to the tax officer to finalize the assessment order. This order can then be challenged before the tax tribunal by the taxpayer.
The DRP is sought to be constituted as a collegium comprising of three commissioners. Last week, the Central Board of Direct Taxes (CBDT) notified the Income-tax (Dispute Resolution Panel) Rules, 2009 (DRP rules) in this regard. The DRP rules pave the way for setting up the panel in eight (mostly tier 1) cities. It also deals with the procedure for filing the objections with the DRP, the role of the commissioners constituting the panel, conduct of hearings by DRP and the issue of directions and, lastly, the filing of the appeal before the tribunal.
Under the existing framework, if a taxpayer disagrees with the assessment order passed by the tax officer, he can challenge it before the first appellate authority—the commissioner (appeals).
Now, under the DRP framework, upon being served the draft order with the proposed tax or TP adjustments, the taxpayer may either file his objections with the DRP or file his acceptance to the proposed adjustments with the tax officer. Let’s take a scenario where the taxpayer would not want to pursue the DRP option; he may be required to file his letter of acceptance with the tax officer. Naturally, in such a case, the taxpayer’s right to challenge the adjustments before the commissioner (appeals) under the normal litigation framework should remain intact.
Section 246A of the Income-tax Act provides for filing of appeal before the commissioner (appeals) by the taxpayer against the assessment order. Considering that the taxpayer may have filed an acceptance letter with the tax officer, just so as not to opt for the DRP, the issue arises as to whether he would at all be regarded as aggrieved by the adjustment made in the assessment order. In such a case, he may not be able to file the appeal under the normal course. If so, the taxpayer would have no option but to pursue the DRP framework to seek remedy against the assessment made.
Clearly, this does not seem to be the intent; the DRP is merely an alternative course of remedy as the finance minister also sought to project in his budget speech. However, a clarification to the effect that the taxpayer will have a right to appeal to the commissioner (appeals) would provide clarity. In essence, the DRP seeks to do away with the first appellate authority, the commissioner (appeals). The emphasis on speedy disposal and consistency is certainly welcome, but a judicial disposal is what will, ultimately, determine the success of DRP roll-out. As stated earlier, DRP will be constituted by tax commissioners, generally being revenue officers, who in the normal course work also carry out the administrative functions of the tax department.
One hopes the DRP acts not merely as an administrative body, but more as a judicial one. This would necessitate a mindset change for the DRP constituents; the need to recognize a judicial role would be the need of the hour and would eventually, decide the success or otherwise of the DRP framework. This assumes further importance since the DRP also has powers to enhance adjustments proposed by the tax officer. It seems the enhancement power is restricted to the adjustments proposed by the tax officer and not on other issues. Nonetheless, this would call for a judicious approach.
Neither the statutory framework under the Act nor the DRP Rules mandate a minimum limit to trigger the recourse to the DRP. This is likely to result in even small cases being referred to the panel. One only hopes that this does not impact the ability of the panel to devote sufficient time to hear out the objections of the taxpayer on involved tax disputes and provide the necessary directions to the tax officers in this regard, where it is needed the most.
The DRP rules also throw up some practical challenges in accessing the DRP framework. The CBDT has notified eight panels in the initial phase in Mumbai, New Delhi, Ahmedabad, Kolkata, Chennai, Hyderabad, Bangalore and Pune.
One realizes that it is not possible to have a DRP in every city; however, given the enormous amount of commitment of time and resources for each hearing, it might be worthwhile for guidelines to be issued that the DRP would outline in advance the likely issues on which they want clarity/submissions from the assessee and that there would not be more than two DRP hearings.
The role of the commissioners as the DRP collegium is over and above the normal role being currently assigned to them. Incidentally, all three commissioners need to be present for the DRP hearings. Even if one of the panel members is on other duties, the panel could become dysfunctional, and this may affect the speedy disposal objective.
Another potential challenge to counter would be to deal with transfer of commissioners constituting the panel, especially if this happens while some cases are being heard by the DRP. Not only would the CBDT be required to frequently amend notifications constituting panels (which may be time consuming), the taxpayer may also be required to present its case all over again.
Besides the mindset change as discussed above, it would also be a challenge to devote sufficient time to the disposal of DRP cases. What is equally important is that commissioners nominated to the panel have a level of knowledge and familiarity, both technical and business wise, in dealing with tax/TP issues on cross-border transactions.
The DRP is a very important initiative and is conceptually a step in the right direction in the sense that the intent of a speedy and consistent disposal is indeed welcome. However, the key lies in intent translating into ground-level action. Incidentally, the proposed direct tax code seeks to expand the role of the DRP and extend the coverage thereof to all taxpayers where the proposed adjustment exceeds Rs25 lakh. Clearly, it is of paramount importance that the tax department gets it right, given the opportunity that this route offers to reduce tax litigation and thereby attract more investments.
Ketan Dalal is executive director and Vishal Shah is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at groundrules@livemint.