To provide a suitable mechanism for resolution of tax disputes between the tax department and foreign companies operating in India, the Government of India initially inserted provisions relating to Advance Rulings vide the Finance Act, 1993. An Authority for Advance Rulings was constituted in this regard, which is headed by a retired judge of Supreme Court.
Subsequent to the Advance Ruling Provisions, provisions relating to transfer pricing were introduced in the Act. This led to creation of new disputes particularly in determination of “Arm’s Length Price” which is to be followed in international transactions. The advance ruling legislation does not provide any effective remedy for determination of ALP.
Therefore, the government introduced provisions relating to a Dispute Resolution Panel (DRP) in the Finance Act, 2009. The finance minister while introducing the new law declared that “the dispute resolution mechanism currently in place is time consuming and finally in high demand cases is attained only after a long drawn litigation till the Supreme Court. Flow of foreign investment is extremely sensitive to a prolonged uncertainty in tax-related matter. Therefore, it is proposed to amend the Income-tax Act to provide for an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes on a fast track basis.”The main advantage of DRP is that the Assessment Order passed by AO as per the direction of DRP is appealable to the Tribunal by the assessee only. The order is binding upon the AO; the AO is not left with any further appellate option. The DRP is required to pass its order within nine months. In this manner, the litigation would end up in a very short time in case the foreign enterprise accepts the decision of the DRP.
Initially, the orders passed by the DRP were generally found extremely disappointing. It appeared that its role was more to supplement and strengthen what the Transfer Pricing Officer (TPO) had done rather than to hear the case as a judge or conciliator.
The Tribunal in most of the appeals which were filed against the order of the DRP remanded the issue back to the DRP to adjudicate afresh. However, after lapse of some time and representation by various institutions in this regard, there was a sea change in the attitude of the DRP. The orders are now being passed after considering the law and the facts of each case.
After the aforesaid change in the attitude of the DRP, the foreign enterprises started opting for the route of DRP in most of the cases instead of going in for the route of CIT(A) for filing appeals.
However, in the Budget 2012, it has been proposed that the AO shall also have the power to appeal against the order of the DRP. In the Memorandum to the Finance Bill it is explained that “As the directions given by the DRP are binding on the Assessing Officer, it is accordingly proposed to provide that the Assessing Officer may also file an appeal before the ITAT against an order passed in pursuance of directions of the DRP”.
In other words, after the aforesaid amendment, the foreign enterprises will again be exposed to the long drawn litigation despite the fact that the DRP has decided the issue in their favour. The amendment proposed in the Finance Bill 2012 is against to the intent with which DRP provisions were introduced in the Act. If the orders of the DRP are appealable both by the assessee and by the AO, then there is no difference between the order passed by CIT(A) or by DRP. Then, why create a high forum like DRP which consists of three commissioners?
It is strongly recommended that the Government should seriously reconsider the proposals to amend DRP provisions. There is no justification to effectively dismantle DRP which is doing a good job as far as foreign enterprises are concerned.
The author is a senior partner in S S Kothari Mehta & Co.e-mail: hp.agrawal@sskmin.com
