Speedy resolution of tax disputes and certainty in tax aspects has been a long-standing demand of foreign companies doing business with/in India. The Indian Government finally reacted to this demand and announced alternate dispute resolution mechanism in the form of a Dispute Resolution Panel (DRP) in the last budget.
Traditionally, the Indian tax authorities have had the infamous image of being unduly revenue–biased; and the tax litigation process unduly complex, multi– layered and time consuming. In fact, speedy resolution of tax disputes and certainty in tax aspects has been a long-standing demand of foreign companies doing business with/in India. The Indian Government finally reacted to this demand and announced an alternate dispute resolution mechanism in the form of a Dispute Resolution Panel (DRP) in the last budget. However, it was after several months of uncertainty that the government introduced the DRP mechanism, finally giving life to a mechanism which was till then only on paper.
The DRP mechanism applies to Indian companies where the tax authorities have proposed to make an adjustment to the arm’s length price in relation to their transactions with overseas affiliates. It also applies to all foreign companies who are assessed to tax in India. However, it does not apply to withholding tax orders passed by the tax authorities.
The DRP is collegiums of three Commissioners of Income Tax based in eight major cities in India having distributed jurisdiction across the country. These Commissioners will have this added responsibility in addition to the respective revenue administrative charge they hold.
The tax payer is required to file his/her objections or otherwise to the draft order proposed by the field level tax officer (assessing officer or AO), within 30 days of the receipt of such draft order. The DRP would then have the time frame of 9 months to consider the facts and arguments of the AO as well as the taxpayer, and issue directions to the AO. Such directions issued by the DRP are binding on the AO and the AO is required to pass the final order based on such directions within 30 days of receipt of such directions. The DRP has wide powers as vested in a Court and can either confirm, reduce or enhance the additions proposed by AO. It, however, has to pass a definitive order and cannot remand the matter back to the AO. If the tax payer does not get the relief as desired, s/he has the option to file an appeal with the Income Tax Appellate Tribunal (ITAT).
The introduction of the DRP mechanism has been applauded by several tax and policy experts; and not without reasons. A significant benefit of the DRP mechanism is that the tax payer would now have an alternate dispute resolution forum before the tax demands are actually raised by the AO. The tax demand, if any, is made on the tax payer only after completion of DRP proceedings. The DRP has a fixed time frame to pass the directions unlike the current CIT (A) process where the matters could get dragged for ages. Also, since the directions of DRP are binding on the tax authorities, this would provide finality in the litigation process at least in cases where the directions passed by the DRP are in favour of the taxpayer. It also cuts short one level of appeal since the appeal against the order based on DRP directions can now directly be made to ITAT.
However, on the other hand, situation at the ground level may not sound very encouraging. The most important concern is regarding the independence of the members of the DRP. Since these members are revenue officers and some of them will be ultimately responsible (not necessarily directly) for revenue collection from the concerned tax payers, there are questions on whether they would be objective and independent! Also, the Government has notified the “positions” that would form the DRP and as has been the case in the past there would be frequent changes in persons who would occupy these positions. This would lead to more time being spent by the Panel on the disputes referred to them. Questions are already being raised on whether the Panel would be able to pass appropriate directions in an effective manner in the stipulated 9 months time frame, given the number of cases (almost 60% of the total cases scrutinized) in which adjustments were proposed made by AOs. There are also certain other open issues especially regarding the role of the CIT (A) in the revised scheme of things.
Ultimately, whether the DRP is a success or a failure in the Indian context would largely depend on how the DRP conducts itself in practice. It is imperative that the collegium operates in the spirit of its name i.e. with an objective to resolve the dispute like an arbitrator and to avoid further litigation. Much would also depend on the tax payer’s conduct and representation before the DRP; and whether the tax payer is able to support its case with robust documentation to enable DRP to give appropriate directions. All in all, the DRP as an alternate dispute resolution mechanism would be welcomed by MNCs who either are reeling under the cumbersome, time consuming and expensive tax litigation process or have heard about India’s reputation as a notorious tax jurisdiction. If the government can iron out some of these procedural lacunas (esp. independence) and provide sufficient capacity and competent officers to the DRP, it will finally be walking the talk on an alternate dispute resolution mechanism.