Should DRP condone technical errors?

To regain the confidence of the foreign companies/investors, the Government has initiated several measures including enhancing the limits of FDI investments.

The formation of a Dispute Resolution Panel (DRP) is an off- shoot of such a tax initiative by the Government. Initially, by virtue of the Finance Act, 1993, Advance Ruling mechanism was brought in the statute. The said mechanism resulted in a reasonable amount of certainty for the taxpayer and as a result, the number of cases which were referred to the Authority for Advance Ruling kept on increasing with the passage of time.

Post the introduction of the advance ruling mechanism, a new section was added in the Income-tax act, 1961(Act) relating to transfer pricing provisions. The advance ruling mechanism legislation did not provide any effective remedy for determination of arms length price (ALP) to the tax payer and the litigation with the revenue authorities for determination of ALP kept increasing with the passage of time.

Wooing foreign investors

The Government realised that flow of foreign investment is extremely sensitive to prolonged uncertainty in tax-related matters and therefore to overcome the sentiments of foreign companies it was proposed in the Finance Bill 2009 to amend the Act, to provide for an alternative dispute resolution mechanism which would facilitate expeditious resolution of disputes on a fast track basis.

The intention of formation of DRP was as a positive step towards ensuring faster resolution of transfer pricing and other international tax related disputes.

As of today, DRP is still at the nascent age and therefore the question which often arises is, after a cycle of approximately two years, whether the objective with which the DRP was formed has been achieved?

The objective of setting up of DRP was to mitigate the hardships arising out of a conservative view taken by the assessing officer on transfer pricing matters and to facilitate the foreign companies to expeditiously resolve disputes on a fast track basis.

POWERS OF DRP

DRP is a collegium comprising of three commissioners of income-tax constituted by the Board.

The powers of DRP are very wide. DRP may make enquiries it may think fit or cause further enquiries to be made by any Income tax Authority and report the result of the same to it. Further the DRP may confirm, reduce or enhance the variations proposed in the draft order. According to the Act, the direction issued by the DRP shall be binding on the assessing officer.

The only limitation before DRP is that it cannot set aside any proposed variation or issue any direction for further enquiry for passing of the assessment order.

As a matter of natural justice, the Act further provides that DRP must provide an opportunity of being heard to either the tax payer or the tax officer whose interest is prejudiced by the said directions.

Rejecting application

The directions are issued by DRP after affording reasonable opportunity of being heard to the applicant and therefore as matter of natural justice and considering the fact that the purpose of DRP is to facilitate expeditious resolution of disputes, the right approach is to rectify the errors, if any, and not to reject the application on technical grounds. Rejection of the application on technical grounds would defeat the entire purpose of scheme of the arrangement of DRP.

It is true that the DRP has the powers to confirm, reduce or enhance the variations proposed in the draft order after affording the reasonable opportunity of being heard, to the applicant. Practically, there have been some instances wherein the DRP has rejected the petition on the technical grounds.

Take a situation wherein certain adjustments are made by the transfer pricing officer and a draft order is passed by the assessing officer.

Against the said draft assessment order, the applicant has filed an appeal before the DRP. Assuming that in the grounds of appeal filed before the DRP, the applicant has stated that ‘the assessing officer has erred in making the transfer pricing adjustments….' Though technically the correct ground should be that ‘the transfer pricing officer (TPO) has erred in making the transfer pricing adjustment', the DRP should not reject the ground of appeal on a technical mistake of the applicant.

Once the applicant has filed all the documents including the transfer pricing order, transfer pricing report etc, it would become aptly clear that the applicant is aggrieved by the transfer pricing order and therefore the appeal before DRP ought to be framed accordingly.

The moot issue now is whether the DRP ought to have rejected the application on technical grounds?

What is the sanctity of the formation of DRP if the application is to be rejected on technical grounds? Whether the DRP mechanism should facilitate in resolving the disputes or increasing the litigation?

DRP is still at the nascent stage and therefore one would need to wait and watch the outcome of the various directions issued by the DRP to form a view on the issue of whether the DRP can reject the application on technical grounds?

However, if one approaches the issue holistically and considers the entire scheme of arrangement, the pendulum ought to shift partially in favour of the applicant and one can opine that the opportunity should be afforded to the applicant to rectify the technical errors, if any in the spirit of law and accordingly the directions should be issued by DRP on the merits of each case.

(The author is Client Service Director with Walker, Chandiok and Co.)

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