Tax dispute resolution avenues

Author: | Published: 1 Aug 2012
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Domestic law dispute resolution process

Traditional avenues

Supreme Court 11-17 Years
High Court 11-13 Years
Appellate Tribunal 7-9 Years
Commissioner(Appeals) 5 Years
Assesing Officer 3 Years

Non traditional avenues

Dispute Resolution Panel

As of now, Central Board of Direct Taxes has constituted 10 Dispute Resolution Panels (DPRs) at eight locations across India

City No. of panels
Delhi 2
Mumbai 2
Pune 1
Kolkata 1
Hyderabad 1
Afmedabad 1
Bangalore 1
Chennai 1
Total 10

Key highlights of the DRP system

When it was first introduced in April 2009, the pro-activeness of the income tax department was welcomed as a good measure for the timely disposal of international tax disputes pertaining to transfer pricing and foreign companies. However, as the directions started coming, tax experts felt that the purpose and objective of creating high powered DRPs had been achieved. There was a common feeling that DRP directions are a mere confirmation and reproduction of the draft order and, in some cases, further refinement of the draft order to add to the grievance of the taxpayer.

Informal justification from the DRP, for their tendency to approve the draft order, is that since the DRP directions are binding on the tax department, unlike for the taxpayer who has a right to appeal in the ITAT, the DRP cannot allow taxpayer objections. Thus, other than serving as a fast track route to the ITAT, it did not emerge as an ideal dispute resolution avenue. Furthermore, the recent amendments introduced by the below Finance Act 2012 (FA 2012) are as under:

  • Right to appeal: The FA 2012 has provided the right to the tax officer to file an appeal before the ITAT against the directions of the DRP with respect to objections filed before the DRP. This amendment is to take effect from July 1 2012.
  • Widening scope of DRP: The provisions under the Act provide that the DRP has the power to enhance the variations proposed in the draft assessment order. However, this power was earlier limited only to the source/ variation which has been considered by the tax officer or on which the taxpayer has raised an objection. This has however been amended by the FA 2012 with retrospective effect from October 1 2010. The DRP did not have the power to raise altogether a new issue that has not been objected to before it. The FA 2012 has widened this power of the DRP to consider an issue arising out of the audit proceedings relating to the draft order, irrespective of whether such issue was considered by the Tax Officer or raised by an eligible taxpayer or not. This amendment will be effective retrospectively from April 1 2008.
  • The FA 2012 proposes to provide that, similar to the other assessments, the time limit for completion of assessments involving search and seizure will also be as per the provisions relating to the DRP, and that the other provisions of time limit will not apply to such assessments. The FA 2012 further introduces an exclusion of orders passed by the tax officer pursuant to the DRP directions from the jurisdiction of the CIT(A), and provides for filing the appeal directly with ITAT in such cases. These amendments will be effective retrospectively from October 1 2009.
  • Applicability of transfer pricing regulations to certain domestic transactions
    The FA 2012 proposes to extend the applicability of the transfer pricing provisions to the 'Specified Domestic Transactions'. This amendment appears to recognise the Supreme Court observation in the case of CIT vs. Glaxo SmithKline Asia (P) Ltd., which suggested that the Ministry of Finance should consider appropriate provisions in law to make transfer pricing regulations applicable to certain related party domestic transactions. This was after examining the complications that arise in cases where 'fair market value' is to be assigned to transactions between domestic related parties. Thus, the DRP will go a long way in resolving disputes on such specified domestic transactions along with the transfer pricing cases of foreign companies etc.

Can Jurisdictional Commissioner be a member to the DRP directions – a controversy?

The Mumbai ITAT held that Jurisdictional CIT should not be part of DRP to avoid likelihood of bias.

A transfer pricing adjustment was made to the taxpayer's income, against which the taxpayer filed objections before the DRP. The DRP however, confirmed the adjustment.

Aggrieved by the directions of DRP, the taxpayer filed an appeal before Mumbai ITAT challenging the validity of the DRP's order. The taxpayer contended that one of the members of the panel was a Jurisdictional Commissioner and hence the order was contrary to the principles of natural justice. For this purpose, the taxpayer relied on Uttarakhand HC's decision in Hyundai Heavy Industries vs. UOI.

The ITAT held that in light of Uttarakhand HC's decision and CBDT Notification dated September 1 2011, which was issued subsequent to the HC's decision to ensure that a Jurisdictional Commissioner is not appointed as a member of the DRP, the order passed by the DRP was liable to be set aside.

Recently, vide Notification dated July 10 2012, the CBDT, under the powers conferred by clause (a) of subsection (15) 144C of the Income Tax Act, 1961, has notified Alternate DRP, in case of presence of Jurisdictional Commissioner in DRP of that location.

Authority of Advance Ruling – recent trends and controversies

Maintainability of AAR application

1) When application is filed after filing of the return of income

The Authority of Advance Ruling (AAR) has rejected various applications on grounds that questions on which rulings were sought were pending before the tax authority. AAR observed that the applicants had filed tax returns before filing application for advance ruling. Accordingly, the issue raised in application would be regarded one question pending before the income tax authority, in terms of proviso Sec 245R. AAR also held that the date of filing of the return was crucial to deciding whether the question raised in application was pending before the income tax authority. AAR placed reliance on its earlier ruling in SEPCOIII Electric Power Construction Corporation.

The taxpayers contended that merely filing a tax return meant the question could not be said to be pending before the tax authority. Rejecting this contention, AAR observed that by filing a tax return, a taxpayer invites adjudication on all the questions arising out of that return. If the return is accepted after scrutiny or without scrutiny, it would only mean that the claim of the taxpayer has been accepted by the tax officer. Therefore, the proviso restricting application gets attracted even when the ruling is sought on any one question pending before the tax officer. AAR held that the crucial date for determining the applicability of proviso to Sec 245R would be the date of filing of the return. Since in all these cases the tax returns were filed before filing of an application, AAR rejected all the applications.

2) When an issue is pending at the instance of the payer

In the case of Nuclear Power Corporation of India Ltd. (applicant), the AAR has ruled on the issue of maintainability of an application before it. Since the application relates to a 'transaction' that is bilateral, the AAR held that pendency of proceedings in the case of any of the parties to the said 'transaction' would operate as a barrier to the other party approaching the AAR. As the issue regarding chargeability of receipt, in the hands of the payee, is already pending before the tax authority, appellate tribunal or any court in India, the question of withholding tax on such payment, in the hands of the payer, is not maintainable.

The issue of maintainability of application during the pendency of proceedings in the case of the other party to a transaction has been a contentious one. There have been conflicting decisions of the AAR on the scope of pendency of proceedings. In the present ruling, the AAR has held that pendency of proceedings, in the case of the payee, for determining taxability of income recipient, would act as a barrier to the admission of an application of the payer for determining the issue of tax withholding obligation.

Special leave petition before Supreme Court or writ before the High Court maintainable

The general view is that there should be a right to appeal against a ruling of the AAR, either before the High Court by way of a writ petition or before the Supreme Court by way of a special leave petition (SLP).

In the Sanofi ruling, the AAR chairman made strong observations on the growing trend of petitions against AAR decisions before the High Court and Supreme Court.

We understand that the Supreme Court, while concluding hearings in cases of 11 SLPs filed before it against AAR rulings, has directed that specific guidelines be laid down to distinguish cases of AAR rulings where petitions can be filed before the High Court or Supreme Court.

Advance Pricing Agreement

  • An Advance Pricing Agreement (APA) is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g., method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time.
  • The Act does not provide a mechanism for APAs. The FA 2012 has introduced a scheme of APAs by empowering the Central Board of Direct Taxes (Board), the tax administration body, to enter into an APA with any person undertaking an international transaction. The FA 2012 has empowered the Board to formulate a scheme providing for the manner, form, procedure and any other matter generally with respect to the APA mechanism.

The APA mechanism introduced by the FA 2012 would broadly be as follows:

  • The taxpayer can approach the Board for determination of the arm's length price in relation to an international transaction that may be entered into by the taxpayer.
  • The ALP in an APA shall be determined using any method including the prescribed methods with necessary adjustments or variations.
  • The ALP determined under the APA shall be deemed to be the ALP for the international transaction with respect to which the APA has been entered into.
  • The APA shall be binding on both the taxpayer and the revenue authorities as long as there are no changes in law or facts that served as the basis for the APA.
  • The APA shall be valid for the period specified in the APA subject to a maximum period of five consecutive financial years.
  • The APA mechanism requires a person entering into an APA to necessarily furnish a modified return, for previous years to which the APA applies, within three months of the end of the month in which the said APA went into effect. The modified return has to reflect the modification to the income only with respect to the issues arising from the APA and should be in accordance with it.
  • The mechanism also requires the revenue authorities to complete the assessment or reassessment (audit proceedings) in accordance with the APA and any modified return, if applicable.
  • The mechanism empowers the Board to declare, with the approval of Central Government, any APA to be void ab initio if it finds that the agreement has been obtained by the taxpayer by fraud or misrepresentation of facts. Once an agreement is declared void ab-initio, all the provisions of the Act shall apply to the taxpayer as if such APA had never been entered into.

The author is presently working with Ernst & Young India as a partner. The views and opinions expressed in this article are that of the author and not that of Ernst & Young India. He may be contacted for further details about the contents of this article at

Rajan Vora
  Rajan Vora heads Ernst & Young India's direct tax litigation practice and is presently based in Mumbai, India. He has been rated as among the Top 10 tax dispute advisers in India by Euromoney's International Tax Review magazine, published from London.

He has extensive experience in representing tax litigation matters before the Income Tax Appellate Tribunal and Authority for Advance Rulings. His experience includes more than 35 years in litigation and corporate tax advisory services, including transfer pricing and international tax issues.

He was co-opted for various special committees by the Institute of Chartered Accountants of India. He was the president of the Bombay Chartered Accountant Society in 1990-91. He has authored several publications of professional organisations such as that of the Institute of Chartered Accountants of India, the Bombay Chartered Accountant Society and the Chamber of Tax Consultants. He is a member of the taxation committee of the Bombay Chartered Accountant Society and chairman of the Direct Taxation Committee of the Indian Merchants' Chamber.

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