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| Alternative conflict resolution mechanism for foreign firms |
| H P Agarwal / New Delhi Jul 13, 2009, 00:26 IST |
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In an article which appeared on 29 June 2009 in these columns, it was suggested to enlarge the scope of Advance Ruling to provide a more effective mechanism for resolution of tax disputes between the tax department and foreign companies operating in India.
It is heartening to note that the finance minister has also taken cognizance of the problem and the Finance Bill 2009 presented in the Parliament on July 6, 2009 declares that:
“The dispute resolution mechanism presently 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 in a fast track basis.”
In order to implement the above, it is proposed to constitute a “Dispute Resolution Penal” (DRP) which will have the legal authority to issue directions to an Assessing Officer (AO) to complete the assessment of a foreign company as per the directions. The directions issued by the DRP shall be binding on the assessing officer. The time frame for issuing directions is nine months from the end of the month in which the assessing officer forwards the proposed order of assessment to DRP.
DRP shall be constituted by Central Board of Direct Taxes (CBDT) comprising of three commissioners of Income Tax.
The scheme of the proposal is that the assessing officer, wherever he proposes to make variations in the income or loss returned by a foreign company, shall forward a draft of the proposed order to the foreign company. The foreign company on receipt of the draft order shall either accept the variation made by the assessing officer or file objections to such variations with the DRP within 30 days of the receipt of the draft order.
The DRP shall issue directions in respect of the draft order after making proper enquiries and after giving an opportunity to hear both the foreign company and the assessing officer. The Assessing Officer is obliged to pass the final assessment order within 30 days from the end of the month in which such directions are received.
It has been specifically provided that the assessment order shall be passed in conformity with the directions without providing any further opportunity of being heard to the assessee. It is also to be noted that whereas directions of DRP are binding on the assessing officer, the foreign company can file an appeal against the order to the Appellate Tribunal.
The scheme of DRP is available only to an “eligible assessee”. The term “eligible assessee” means any foreign company, and any person who has entered into an international transaction and whose assessment has been referred to the Transfer Pricing Officer.
It is to be noted that DRP shall be constituted apart from the existing Authority for Advance Rulings (AAR). The main advantage of DRP as compared to AAR appears to be that the Assessment Order passed by the AO as per the directions of DRP is appealable to the tribunal by an assessee, although the same is binding upon the AO. Thus a foreign company does not lose its legal rights after raising objections before DRP. Therefore, it appears that the scheme of DRP will prove to be more beneficial to the foreign companies as compared to the existing scheme of Advance Rulings.
The proposal for formation of DRP is a very welcome step. However, only the time will prove the utility and effectiveness of DRP. The success of the scheme also will largely depend upon the CBDT which has been authorised to make rules for the efficient functioning of the DRP and expeditious disposal of the objections filed by the foreign companies.
Author is a Partner inS S Kothari Mehta & Co.
hp.agrawal@sskmin.com
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