The Finance Bill (No 2) in July 2009 introduced the mechanism of Dispute Resolution Panel (“DRP”) as a step towards achieving fast track resolution of Transfer Pricing and cross border tax disputes. Under the scheme, eligible taxpayers are allowed to approach the DRP, a collegium of 3 Income-tax Commissioners before a tax demand is crystallised by the officer. The mechanism of DRP was legislated in response to frequent criticism of tax administration and Revenue’s approach in deciding growing Transfer Pricing and international tax cases, which were locking significant tax demands.
A welcome policy shift The Revenues’ tax target driven approach coupled with inherent mismatch of principles on interpretation of complex cross border issues and Revenues’ persistent appeal to higher appellate authorities were at the root of hard ship. DRP mechanism in the law was premised on a policy level shift targeted to set right the ungainly approach to tax dispute resolution, particularly on laws such as Transfer Pricing and treaty interpretation, wherein International precedents and principles play an important role.
DRP in-principle seeks to redress an omnibus anomaly in the present tax administration. Essentially, under the DRP scheme, an Assessing Officer can not raise a demand until the addition /enhancement of income is vindicated by the collegium of Commissioners. The DRP has the authority to review the draft order and pass directions which are binding on the tax administration. The directions issued by the DRP, however, are not binding on taxpayers and hence, taxpayers can appeal to the Tribunal against orders passed in line with DRP directives.
The supplementary rules provided for constitution of eight panels across major Indian cities. Further, powers of DRP are broadly in line with the powers of a Commissioner (Appeals) and includes examining additional evidence, witnesses etc. The DRP however unlike a Commissioner (Appeals) can not annul the assessment made by the officer.
Two important aspects of DRP are certainly to taxpayers’ delight – taxpayers approaching DRP are not required to cough up tax demands until approved by DRP. Further, taxpayers can appeal against such assessments (pursuant to DRP directives) to the Income tax tribunal, thus skipping first appellate level and undefined timelines for appeal disposal. The objective being that the DRP would make the otherwise expansive litigation less taxing for multinationals.
Ground ‘realities’ can bite
Several months after the DRP was operationalised, we are witnessing the first set of directives and initial reactions suggest that taxpayers expectations at large have remained unfulfilled. The reasons are varied - administrative mishaps, conventions and some intricate legislative gaps being the foremost.
At the field level, several DRP Members /Commissioners are far from convinced on the degree of empowerment - legislative and administrative. One of the common misgivings is selection of Commissioners to man the DRP given that it imposes an additional burden and that the adequacy of secretarial assistance and infrastructure bottlenecks have added to their woes. DRP members feel that they are less empowered than a Commissioner (Appeals), though, a reading of the law suggests immaterial difference between powers of Commissioner (Appeals) and those conferred on DRP. I would tend to veer on the thinking of law makers and discount minor dichotomy such as absence of power to annul the assessment. As a matter of fact, a three member collegium should feel more empowered to take bold and objective decisions including on legal interpretation as there is no bar from doing so.
Independence of the collegiums of Commissioners
This is an aspect that was raised at the time of legislating DRP and on subsequent announcement of administrative guidelines for constituting the panels. The larger concern in the tax payers mind being - how can a grouping of three senior Revenue officers holding administrative charge and responsible to meet tax collection targets adjudicate on an order passed by his subordinate? If one has to go by practice in the revenue department, most assessment orders that entail significant adjustments are passed by the officer in consultation with the jurisdictional Commissioner. Appointing a jurisdictional Commissioner as member of the DRP clearly manifests an inherent conflict. The DRP would have gained greater credence if a law officer and/or an experts in the field such as an Economist were inducted , particularly to adjudicate on complex Transfer Pricing matters or interpretation principles.
Further, the jurisdictional Commissioner is also part of decision making process when it comes to government filing an appeal with higher appellate authorities ( Income tax Tribunal, High Court, and Supreme Court). In this situation, why would a DRP member grant relief on legal grounds or precedents if the tax administration has decided to appeal on the very same issues. This aspect clearly dilutes the role of DRP.
Outcome – mixed reactions!
Tax advisors and tax payers have varied experiences with a nascent and evolving mechanism. Whilst some tax payers seem to have pursued the ordinary appeals forum for reprisal of dispute, others has echoed pessimism remarking that DRP as an institution could loose its relevance and the experience has not been encouraging.
The resentment is understable given that the first set of directives has rarely witnessed any meaningful relief (to the tax payer) barring setting right mathematical errors and errors of omission and commission. Huge backlog of pending cases before the DRP panels (unofficial data suggest over 1000 cases have been filed in the 8 cities) seem to have added to unplanned burden of the administration particularly given the nine month statutory deadline to conclude them. The outcome is rushed hearing resulting in ineffectiveness of the mechanism and not adhering to principles of natural justice. Examples such as a 30 minute time limit for hearing each DRP case and 24-48 hour notice to appear makes the entire process sound uninspiring to the tax payers and advisors.
The approach does not leave any doubt in my mind that most DRP orders will land before the tribunal thereby defeating the very purpose of administrative reforms in this important wing of law.
Looking in the future!
A larger concern that needs debate is the need for recalibrating DRP’s role given the new Direct Taxes Code provisions. In the present form, the DRP is not a compromise or settlement platform and hence constrained from delivering an outcome on the principles of arbitration. In the context of jurisdictions such as United States, dispute resolution entails compromise with the tax payer and has been instrumental in avoiding protracted tax litigation. Under such compromise mechanism, it is obvious that DRP’s directions would bind the taxpayers as well as the administration. We need and deserve an independent institutionalised form of DRP given that all matters which entail invoking general anti-avoidance and treaty override shall find their way to DRP.
I hope policy makers would take cognisance of impending realities and give the ‘need for independence’ a hard look before we see the final version under the new tax code. Even in its present form, we are way off before the DRP institution settles as the limited administrative guidance requires calibration and more importantly, an attitudinal change in approach by the members.
(The author is a Partner with BMR Legal, and was assisted by Sumit Singhania; views are entirely personal)
