Will Dispute Resolution Panels really be able to resolve disputes?

Finance (No. 2) Act, 2009, has inserted a new section 144C in the Income-tax Act with retrospective effect from 1-4-2009 titled “Reference to dispute resolution panel”. In the Notes on Clauses to the Finance Bill the purpose and context of this provision is explained as under –

“The subjects of transfer pricing audit and the taxation of foreign company are at nascent stage in India. Often the Assessing Officers and Transfer Pricing Officers tend to take a conservative view. The correction of such view takes very long time with the existing appellate structure.

With a view to provide speedy disposal, it is proposed to amend the Income-tax Act so as to create an alternative dispute resolution mechanism within the income-tax department and accordingly, section 144C has been proposed to be inserted so as to provide inter alia the Dispute Resolution Panel as an alternative dispute resolution mechanism.”

The Explanatory notes to Finance (No.2) Act 2009 issued by the Board also give the same reason for this amendment -

“45.1 The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained after long drawn litigation till Supreme Court. In order to address the concern of the multi-national companies and to provide mechanism for speedy disposal of their cases so as to attain finality, a new section 144C is inserted in the Income-tax Act to facilitate expeditious resolution of disputes.”

Two points need to be noted at the outset. First, the existing appellate structure is acknowledged to be time consuming and long drawn. The purpose of this mechanism is to provide speedy disposal of disputes. Second, Assessing authorities tend to take a conservative view which this mechanism is expected to correct.

2. Constitution of Dispute Resolution Panels (DRP) - Section 144C(15) names the alternative dispute resolution mechanism, “Dispute Resolution Panel”, and defines it as a collegium of three Commissioners of Income-tax to be constituted by the Board. This mechanism is made available only to those assessees in whose case variation to returned income is proposed as a consequence of an order of Transfer Pricing Officer under section 92CA(3), and to foreign companies - described as “eligible assessees”.

3. Procedure before the Dispute Resolution Panels – A brief review of the provisions of Section 144C is necessary to understand its implications. It provides that-

• Where the Assessing Officer (AO) proposes to make any variation in the returned income or loss prejudicial to an eligible assessee he must first forward a draft assessment order (called Draft Order) to such an assessee.
  
  
• The eligible assessee has the option to either accept the proposed variations or file objections against these before the DRP and the AO.
  
  
• Where the assessee accepts the Draft Order or does not file objections within thirty days of its receipt, the AO is required to complete the assessment on the basis of the Draft Order within one month from the end of the month in which the acceptance is received or the period for filing of objections expires.
  
  
• Where objections are filed by the assessee against the Draft Order the proceedings move over to the DRP. The DRP is then required to consider the Draft Order, the objections and the evidence furnished by the assessee, the relevant records, the report of the AO and the Transfer Pricing Officer etc, the evidence, and the results of any enquiry made or caused to be made by the DRP.
  
  
• The DRP is required to give proper opportunity of hearing to the assessee and the AO. It can make further enquiries itself or through any income-tax authority. It has also been given powers of issuing summons etc under Section 131. The DRP is thereafter required to issue such directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment. It may confirm, reduce or enhance the variations proposed in the Draft Order. But it cannot set aside any proposed variation or issue any direction for further enquiry by AO for passing the assessment order. The decisions of the DRP are to be reached by majority.
  
  
• The directions of the DRP are to be issued within nine months from the end of the month in which the Draft Order was forwarded to the eligible assessee. These are binding on the AO, who has to complete the assessment in conformity with the directions within one month from the end of the month in which such directions are received. No further opportunity of hearing needs to be given to the assessee by the AO. The time limit for completion of assessment in Section 153 have been amended accordingly.

4. DRP Rules – Vide its Notification 84/2009 of 20-11-2009, Board has notified a new set of Rules called Income-tax (Dispute Resolution Panel) Rules, 2009. Rule 3(2) of these provides that the Board shall assign three Commissioners of Income-tax by name to each DRP as members who, shall carry on the functions of the DRP in addition to their regular duties as Commissioners. Where a member of a DRP is transferred, the Board shall assign another Commissioner in his place. Each DRP will have a secretariat for receiving objections and documents etc, and for issuing notices and directions etc on its behalf. The objections of the eligible assessee to the Draft Order are to be filed with the Secretariat within the specified period in Form No. 35A in paper book form in quadruplicate together with copies of the Draft Order and evidence the assessee intends to rely upon including any documents submitted to the AO. The DRP has power to permit the assessee to produce new evidence or examine a witness or file an affidavit etc, but after recording reasons for doing so. Further, Rule 10(2) says that jurisdiction of the DRP shall not be confined only to the grounds raised in the objections but will cover all matters arising out of the proceedings.

5. Appeals - Appeal against an Assessment Order passed in pursuance of the directions of DRP can be filed only before the Appellate Tribunal in Form No. 36B, and not before the Commissioner (Appeals). The orders of the Tribunal can be challenged before the High court and Supreme Court as in respect of other orders of the Tribunal.

6. Notification of DRPs - Board has since constituted ten DRPs having headquarters at eight different stations and jurisdictions over different states/territories. Separate orders have been passed nominating three Commissioners for each of the ten DRPs. In most of these at least one Commissioner has been posted from outside the headquarter of the DRP.

7. Implications of introduction of DRP in the assessment process - Section 144C has been inserted in Chapter-XIV of the Income Tax Act. This chapter relates to procedure of assessment. Therefore, DRP is a part of the assessment machinery and the proceedings before the DRP are part of assessment proceedings. These are neither appellate nor settlement nor arbitration process. The directions of the DRP are binding on the Revenue only. The assessee has a right to go in appeal against assessment orders passed under directions of DRP to the Tribunal. An alternate dispute resolution mechanism that does not bind both parties to the dispute can have no finality. This only confirms that the DRP mechanism is part of the assessment process only. The implications of the new procedure are -

i. In the cases of the ‘eligible assessees' (foreign companies and Transfer Pricing cases under Section 92CA(3) ) the AO will have to first conduct assessment proceedings in normal course up to the stage of drafting the assessment order. But he will treat and mark it as a Draft Order and neither sign it nor issue the demand notice. Instead he will seek objections of the assessee on the Draft Order irrespective of the amount or nature of the proposed variation or the amount of proposed assessed income. The assessment proceedings will be over only after the procedure laid down in Section 144C is completed. Therefore, virtually each and every case of a foreign company and Transfer Pricing taken for scrutiny will be eligible to go before the DRP. However, since DRP is an alternate mechanism, it is open for these assessees to not file objections against the Draft Order before the DRP and instead challenge the assessment order before the Commissioner (Appeals).

ii. In cases where objections are filed against the Draft Order, the DRP has to issue directions within nine months, from the end of the month in which that order was forwarded to the assessee. The AO will have another month to pass the assessment order. Therefore, the assessment process in these cases will be extended by almost a year. This will be over and above the time taken by the TPO for passing the order under Section 92CA(3).

iii. The jurisdiction of the DRP will commence from the time assessee's objections against Draft Order are received and will continue till directions are issued by it. The proceedings before the DRP will be not administrative but quasi-judicial in nature. Therefore, principles of natural justice will apply. The DRP will have to consider the objections of the assessee, examine the records, the evidence produced before the AO as also any other evidence that the assessee produces, conduct any other enquiries that may be necessary, give opportunity of hearing to the assessee and the AO, apply its mind as a collegium to the issues before it, assess the rival evidence and pass a reasoned and speaking order on the objections raised by the assessee. Considering that the matters in these cases will be complicated and involve large revenues the responsibility of the DRPs will be onerous indeed.

iv. Since DRPs have been given the power (and therefore the duty) to enhance the income proposed in the Draft Order wherever necessary, their jurisdiction is not circumscribed by what has been stated in the Draft Order but will extend over the entire assessment. In other words the DRP can go over even those issues which the AO ought to have considered but has not considered or having considered not disputed in the Draft Order.

v. DRPs, being part of the assessment process, will be governed by normal rules of evidence and jurisprudence applicable to the assessing authorities – including Instructions of the Board. The normal practice in assessment proceedings is that in case of doubt the assessing authorities err on the side of Revenue, i.e. where two views are possible they take the view in favour of Revenue. Further, since DRPs are not appellate bodies they will also be bound to decide any ongoing disputes of law coming from earlier years in favour of Revenue till these legal questions are finally settled by High Court or Supreme Court. Again, unlike appellate authorities, the actions of DRPs will be subject to internal audit, revenue audit and vigilance controls etc. Therefore, in the very nature of things the DRPs will be severely constrained in taking a view very different from that of the AOs, except perhaps where some blatantly illegal or perverse variations are proposed by the AO. Glimpses of this have already started making appearance.

vi. The nature of the proceedings contemplated under Section 144C is substantially similar to the proceedings under the erstwhile Section 144B which was inserted by Taxation Laws (Amendment) Act, 1975 and was later omitted in 1987. That provision required that where the variation to the returned income proposed by an Income Tax Officer exceeded a certain threshold amount then the ITO will invite objections against the draft assessment order, which will then be referred to the Range head (then called Inspecting Assistant Commissioner) who will examine these, hear the assessee and issue appropriate directions for completion of the assessment. The stated objective was to avoid over-pitched assessments and creation of infructuous tax demands by lower authorities. Incidently, under Section 144B the Range heads did not have power of enhancement which the DRPs have been given. The provision remained in operation for 12 years but failed to fulfil its objectives. The present Section 144C appears to be a resurrection of the old Section 144B in new garb. We have not been told as to why the current Section 144C is expected to succeed where its predecessor failed, when the logistics involved in its working are far more complicated.

vii. Rule 3(2) of the DRP Rules requires the Board to assign Commissioners (by name) to function as members of different DRPs, in addition to their regular duties as Commissioners. The relevant notifications show that most of the DRPs have at least one out-station Commissioner. For example, Board's order of 30.11.2009 shows that the DRP at Ahmadabad includes an officer from Pune and vice-versa, the two DRPs at Mumbai include officers from Alwar and Jaipur, the DRP at Kolkata includes an officer from Delhi and so on. This means that such DRPs can conduct their sittings only when the out-station Commissioner comes on tour to the headquarter of such DRP. Commissioners of Income tax are already burdened with numerous statutory and administrative matters in their regular charges. Therefore, it will be impractical and even unfair to expect that these part-time (and touring) members of DRPs will be able to give the time and attention required for the kind of matters that would arise in these proceedings. The result will be that in actual fact proceedings would be taken up by DRPs only at fag end of limitation, and directions substantially approving the Draft Order would be issued to save the limitation. One such matter has already been reported in the order of ITAT in GAP International Sourcing India (P.) Ltd. Vs Deputy Commissioner of Income-tax, Circle 12(1) Delhi - 2010-TII-59-ITAT-DEL-TP. In this case the Tribunal noted that the DRP has passed a laconic order brushing aside the objections and voluminous submissions made by the assessee before it. Tribunal therefore remanded the matter back to the DRP for a fresh decision.

viii. First appeal against assessment orders completed as per the directions of DRP will lie to the Tribunal and not the Commissioner (Appeals). Tribunal is the final fact finding body. Its findings on facts cannot be disturbed even by the High Court - except on limited grounds of perversity etc. Therefore, the assessees opting for the DRP route will have to be content with only one level of appeal on dispute of facts instead of two levels available to others.

ix. It is common experience that Tribunal decides disputes of facts on the basis of assertions / averments made and evidence led before the lower authorities, except in a few cases where it admits new evidence on special grounds. In matters coming to it in second appeal from orders of Commissioner (Appeals), deficiencies in rival evidence get addressed in first appeal and the issues in dispute get fully crystallized by the time they reach Tribunal. This would not be so in matters coming to it in first appeal from the orders passed on the basis of directions of the DRP. A similar situation arose earlier when Finance Act 1995 provided that first appeals against assessment orders in search cases passed under Section 158BC with the approval of the administrative Commissioners will lie to the Tribunal. Since it was generally not always practicable for Tribunal to examine first level disputes of fact requiring examination of voluminous seized and other original documents a and witnesses etc a large number of these orders were set aside for being reframed by the AO after making specific enquiries. The result was protracted delays in finalisation of search assessments. Therefore, ultimately the position was reversed within two years by Income Tax Amendment Act 1997 and fist appeals in these cases were restored to Commissioner (Appeals). Again, we have not been told as to why the position will be any different now.

x. The Tribunal has 65 benches located at about 30 stations whereas there are nearly 300 Commissioner (Appeals) stationed at over 100 stations. Section 254(2A) of the Income Tax Act expects that the Tribunal will decide appeals within four years from the end of the year in which these are filed, that too wherever possible. Therefore, it is unlikely that first appeals in these cases will get decided faster than those going to the Commissioner (Appeals).

xi. The Tribunal has powers to stay tax demands up to an aggregate period of 365 days. However, where the Tribunal grants stay it has the obligation to decide the appeal within the stay period, provided the delay is not attributable to the assessee. The Tribunal also has the power of setting aside an assessment back to the AO. Both these powers are not available to the Commissioner (Appeals). Therefore, the assessees opting for the DRP route can move the Tribunal for grant of stay of disputed demand. Since this will be a first appeal it is more likely that the Tribunal would be inclined to stay the demand. However, it remains a moot point whether the Tribunal would be able to dispose of appeals in these complicated cases within one year. In case the Tribunal sets aside the matter to the AO then the purpose of fast tracking appeals to them will get defeated.

xii. Since both the Department as well as the taxpayer are entitled to go in further appeals against the orders of ITAT to the High Court and then to Supreme Court, neither the orders of DRP nor of the Tribunal will be final.

8. Assessing the effectiveness of the DRP mechanism vis-a-vis the stated objectives of expediting dispute resolution, preventing infructuous demands, and reducing litigation, one finds that –

 i. The assessment process in these cases will become cumbersome - with one round before the TPO, another before the AO and yet another before the DRP, before the assessment order could be completed.

 ii. The DRPs being part of assessment machinery, governed by the rules of evidence relating to assessment proceedings, subject to audit and vigilance reviews, and manned by part-time members, will hardly be able to resolve disputes. Instead of speeding up dispute resolution these will only add one more layer to the assessment process with consequent delays.

iii. The orders of DRPs are unlikely to bring finality. These will be open to challenge through the entire appellate structure, save the Commissioner (Appeals). The Board after acknowledging the existing appellate structure to be time consuming and long drawn has prescribed the same appellate structure for appeals against the orders of the DRPs. It is a known fact that the longest delays in the appellate machinery take place not at the level of Commissioner (Appeals) but at higher appellate levels. The problem of prolonged litigation in these cases will remain, and may even get worse if the past experience of first appeals against orders under Section 158BC going to Tribunal, is anything to go by.

To sum up, though named Dispute Resolution Panel these DRPs are in reality no more than an extension of the assessment process to a the level of a collegium of three Commissioners. This can at best curb blatantly illegal variations to the returned incomes. Only silver lining for the taxpayer is that it can straight away file appeal against the assessment order to Tribunal and seek stay of disputed tax demand.