The Finance Act, 2009 inserted a new section 144C in the Income-tax Act providing an alternate mechanism to resolve tax disputes of the foreign companies expeditiously. The Finance Minister, taking cognizance of delays, which take place in any tax litigation, declared in the parliament that “The dispute resolution mechanism presently in place is time consuming and finality in high demanding cases is attained only after a long drawn litigation till the Supreme Court.
Flow for 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 alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes in a fast track basis”.
The new scheme provides that whenever an assessing officer proposes to make variations in the income or loss returned by a foreign company, he 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 variations with the DRP within 30 days of the receipt of the draft order.
The DRP shall issue directions within nine months from the end of the month in which draft order is forwarded to the assessee.
Thereafter the AO is obliged to pass the final assessment order within 30 days from the end of the month in which such directions are received.
The scheme of DRP is available only to a foreign company and to any person who has entered into an international transaction and whose assessment has been referred to the Transfer Pricing Officer.
In pursuance to the above provisions the CBDT has issued Income-tax (Dispute Resolution Panel) Rules 2009, vide notification no. 84/2009[S.O. 2958(E)/F. No. 142/22/2009- TPL] dated 20-11-2009. The rules, inter-alia, contain provisions relating to Constitution of the Panel, Procedure for filling objections, Hearing of objections, Power to call for or permit additional evidence, Issue of directions, Passing of Assessment Order, Rectification of mistake and Appeal against Assessment Order etc etc..
The scheme of DRP will certainly help in curtailing the time in tax litigation at least upto CIT (A) level. Under the law prior to amendment, it could easily take one to two years for deciding the first appeal. Under the new law this time will be curtailed to a maximum of 10 months.
Further, the new scheme does not provide for filing any appeal by the tax department against the order passed in pursuance of directions issued by the DRP. In other words, the directions issued by the DRP are final and binding on the revenue. However, the assessee has the liberty to file appeal before ITAT against orders passed in pursuance of directions issued by DRP.
This provision will help in curtailing the pendency of cases before ITAT. As a consequence of this provision, the foreign companies may be able to settle all tax disputes upto ITAT level in about fifteen months time after passing of the draft order.
The DRP scheme will also help foreign companies in the matter of stay of disputed demands. Prior to amendment, the assessing officers raise demand of tax when they make addition to the income filed by a foreign company. The foreign company has to get a stay of demand from the AO or the CIT even if the demand is disputed and appeal in this respect has been filed. The procedure for granting stay of demand is cumbersome and highly discretionary.
Under the new scheme, the demand will be created only after incorporating DRP’s directions. Against such demand, the stay can be granted by Income -tax Tribunal which is a judicial authority. In this manner, the powers of granting stay of demand have effectively seen shifted from administrative body (e.g. AO etc.) to a judicial body. This will certainly bring in relief to all the foreign companies in mitigating their hardship relating to disputed demands.