Government of India has been keen to provide a suitable mechanism for resolution of tax disputes between the tax department and foreign companies operating in India. In this direction government inserted provisions relating to Advance Rulings vide Finance Act, 1993. For this purpose, government has constituted an Authority for Advance Rulings which is headed by a retired judge of Supreme Court. The Authority has been doing a commendable job in pronouncing Advance Rulings. Therefore, number of cases referred to Authority for Advance Rulings are rising day by day.
However, after introduction of advance rulings provisions, new sections were added in the Act relating to Transfer Pricing. This has 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 to avoid possible disputes with the tax department.
Taking cognizance of the above problem, the Finance Act, 2009 introduced provisions relating to Dispute Resolution Panel (DRP). The Finance Minister while introducing the new law declared 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.”
It is to be noted that DRP has been 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 AO as per the direction 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 will prove to be more beneficial to the foreign companies as compared to the existing scheme of Advance Rulings.
Subsequently the CBDT has notified the Income-tax (Dispute Resolution Panel) Rules, 2009 vide notification dated 20.11.2009. The panel has been constituted at 8 places in India and the Board has assigned 3 commissioners of Income-tax to each panel as members. The DRP has also started hearing the cases.
It is really unfortunate that the experience of representations before DRP is extremely disappointing. The three commissioners who sit as members of DRP are assigned this duty in addition to their regular duties as commissioners. This one single factor is more than enough to subsume the very objective of formation of DRP. The commissioners having more or less an additional charge as DRP members have obviously a divided attention. They cannot be blamed for remaining in undue hurry to finish the hearing. With the result, foreign companies are not getting a proper opportunity to present their case. Further, since the decision of DRP is binding on the AO against which no appeal can be filed by the department, the attitude of DRP members is heavily pro-revenue. Their role, it appears, is more to supplement and strengthen what the Transfer Pricing Officer (TPO) has done rather than to hear the case as a judge or conciliator. This defeats the intent and purpose of creation of DRP.
It is therefore, strongly recommended that if DRP is to fulfil the intent of law, then its constitution should be like an independent judicial body rather than just a departmental committee to lend support to assessing officers. The members of DRP should have statutory powers and authority like members of Income-tax Appellate Tribunal or Authority of Advance Rulings. The present style of working of DRP is likely to aggravate the problems of foreign companies instead of helping them in resolution of their disputes with the tax department.