It is said that justice delayed is justice denied. It is true that if justice is not delivered in time, it loses its relevance. The direct tax litigation process in India is a long one. It starts with an appeal filed by the taxpayer with the first level appellate authority (the Commissioner (Appeals)), if it is aggrieved with the order passed by the assessing officer. Next the party, (taxpayer or Revenue), who objects to the verdict of the Commissioner (Appeals) goes to the Tax Tribunal, which is the last of the fact finding authorities. The process generally culminates at the High Court or Supreme Court level, in the event of disputes on questions of law. As such, there is no stipulated time limit for disposal at each level, which leads to a prolonged litigation process and thus significant uncertainty among taxpayers in matters of dispute resolution.
Effective litigation machinery, coupled with timely resolution of disputes, is one of the critical factors influencing foreign investments in any country. Foreign investors have long been praying for speedy redress of disputes with respect to cross border transactions in India.
In order to improve the foreign investment climate and to reduce the overall litigation process, the government of India introduced the concept of a DRP in 2009, for dealing with general transfer pricing issues for all taxpayers and also any dispute arising in the hands of foreign companies. A DRP comprises three commissioners and have been set up in all major cities across India.
Before the introduction of the concept of DRP, the eligible taxpayers had to approach Commissioner (Appeals) for resolution of disputes. Under the new framework, the taxpayers can directly approach the DRP, though the Indian Revenue has clarified that an eligible taxpayer has the clear option of either approaching the DRP or the Commissioner (Appeals). Thus, DRP is an alternative dispute resolution mechanism and not compulsory.
Under the revised scenario, the assessing officer shall first issue a draft assessment order to the eligible taxpayer. The taxpayer can either accept the adjustments proposed therein or object to the same. In case, the taxpayer objects to the proposed adjustments made in the draft order, the taxpayer is required to file his objections in the form of an application to the DRP and also to the assessing officer, within a period of 30 days from the date of receipt of the draft order. If the objections are not filed within the 30 day period, the assessing officer passes the final assessment order within a period of one month from the end of the month in which the time period for filing the objections expires.
After hearing the taxpayer, the DRP is required to issue directions within nine months from the end of the month in which the draft order is forwarded to the eligible tax payer, based upon which, the assessing officer shall finalise or formalise the assessment order. Incidentally, the DRP is required to settle the dispute at its level itself, without restoring the matter back to the assessing officer for fresh verification or adjudication.
The directions issued by the DRP are final and binding upon the Revenue, it cannot appeal to any higher forum, unlike in the case of orders passed by Commissioner (Appeals), which the Revenue could challenge before the Tax Tribunal. However, the taxpayer, can challenge the final order passed by the DRP, in an appeal before the Tax Tribunal.
The constitution of DRP for speedy redress of disputes is certainly a welcome step, as it reflects the commitment of the government in moving towards providing efficient machinery for dispute resolution, which is not only robust but also ensures timely adjudication of the dispute. Since the DRP is a part of the assessment proceedings, in the sense that it adjudicates with respect to a draft assessment order instead of a final assessment order, as is the case with the Commissioner (Appeals), no tax demand is actually fastened to the taxpayer until the confirmation, by the DRP, of the adjustments proposed in the draft assessment order. This is a huge relief for taxpayers, who were generally required to pay a significant portion of the tax demand, even while appeals were pending the Commissioner (Appeals), unless stay of demand was granted by the Revenue. In several cases, taxpayers were forced to approach the High Courts through writ petitions, where the Revenue did not grant stay of demands in high-value assessments.
Since the immediately next forum to the DRP is the Tax Tribunal, there are very good chances of the demand arising against the taxpayers for the first time upon adjudication of the case by the DRP, being stayed by the Tax Tribunal, which has statutory powers of granting stay of demand in fit and deserving cases. The measure of the Revenue being bound by the directions given by the DRP and not entitled to challenge the same in appeals before the Tax Tribunal, is welcome as this would weed out or mitigate protracted litigation.
While the move of the government in setting up of the DRP mechanism is hugely welcome, there are measures the government could consider to develop an efficient and meaningful functioning of the DRP from a practical standpoint.
First, given the scope of DRP mechanism, the major issues covered would be adjustments on account of transfer pricing, involving intricate and advanced matters, which result in the largest form of tax litigation for MNC taxpayers in India. Thus, a pressing need is to have at least one, if not two, expert(s) in the subject of transfer pricing as part of the panel of the three commissioners in the DRP, since the DRP is required to review the draft order passed by the transfer pricing officer or assessing officer and act in an advisory capacity, by giving necessary directions for its betterment.
However, in practice, it has been observed that in the majority of the DRPs, particularly for the tier one cities, which face the brunt of transfer pricing assessments and adjustments, none of the panel members have any background of handling transfer pricing cases. Although they surely are extremely proficient and carry rich and unmatched experiences in matters relating to direct taxes and tax treaties. Though transfer pricing is a dialect of income tax, it is otherwise a very specialised subject, requiring expertise to deal with it, which can only be acquired through several years of experience in handling sophisticated and niche matters relating to transfer pricing.
A doubt therefore automatically comes into the minds of taxpayers, namely notwithstanding the best of intentions of the government in providing a fair, efficacious and efficient mode of dispute resolution, whether DRPs, which do not have any commissioners specialising in transfer pricing, shall be able to do proper justice to significant and large disputes on transfer pricing matters or would merely prefer to err on the side of the Revenue, more so given the fact that the Revenue would not have a right of appeal against the directions of the DRP ?
The government would do well to ensure that each DRP consists of at least one expert in the subject of transfer pricing. In order to ensure independence and avoid conflict of interest in having to review a draft order earlier approved at the request of the transfer pricing officer, the commissioner(s) in charge of transfer pricing matters of any particular city might not be inducted in the DRPs constituted for that city, but could be inducted in DRPs of other cities, as has been done in a few cases.
Further, transfer pricing being a largely fact-based subject, requiring significant knowledge of the relevant industry and also fundamentals of economics, the government should consider creating a panel of independent economists and industry specialists to provide the necessary guidance to the DRP while settling intricate issues on transfer pricing.
Huge expectation has built up among taxpayers around the DRP. It is to be seen as to what extent the DRP mechanism would be able to live up to the hopes and fulfil the role for which it is been established, namely to provide a collegial, fair, speedy and efficacious alternate dispute resolution method.
Rahul Mitra (rahul.k.mitra@in.pwc.com) Navneet Kothari (navneet.kothari@in.pwc.com) PricewaterhouseCoopers, India
