Domestic law dispute resolution process
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
No. of panels
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
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
Authority of Advance Ruling – recent trends and
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
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
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
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
- 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
- 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
- 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 firstname.lastname@example.org.
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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