Reducing cross-border tax disputes

Justice delayed is justice denied, a proverb conceived in the realm of law has become the defiant voice of India Inc due to long pending tax disputes with portion of it attributable to complex tax regime, effectiveness of administrative processes, manifold appellate layers.

Multinationals operating in India have to deal with complex issues with fundamentals of international taxation being tested on regular basis. Phenomenal rise in cross border tax disputes leading to huge tax demands and delay in their dispensation has given rise to concerns in multinationals' confidence and may impact the future of investments.

Given the above, it would not be an understatement to say that tax disputes have assumed the centre stage! It has become crucial to effectively unlock the key to lengthened tax disputes and evolve new juristic standard for their speedy resolution.

Dispute Resolution Panels

Finance Act 2009 introduced DRP as an alternate dispute resolution mechanism to facilitate expeditious resolution of disputes on a fast-track basis.

Under the traditional mechanism, an assessing officer's order can be appealed before Commissioner (Appeals), and thereafter, the Tribunal, High Court and Supreme Court - a process that can take a couple of decades to attain finality!

DRP serves as an alternate to the Commissioner (Appeals) process in cases involving transfer pricing or international tax adjustments. The draft order passed by the assessing officer is litigated before the panel of three Commissioners (the DRP panel) which is required to adjudicate the matter within 9 months. The DRP's directive is binding on the tax department; however the taxpayer may appeal before the Tribunal.

The highlight of the mechanism is the automatic stay of demand till the final decision by DRP, disposal of cases on fast-track i.e. 9 months vis-à-vis Commissioner (Appeals) with no mandatory statutory limit disposal of cases and certainty that the tax department will not litigate further.

DRP panel is 2 years old and while the intent for speedy disposal is creditable, the experience has not been cheering. A joint EY–CII report ‘India, a new dawn' quoting a recent study by E&Y on the performance of DRPs for a period of two years notes that out of the total cases decided by the DRPs, 63 per cent were rejected and only partial relief was provided in 21 per cent cases. Given the above, it is vital to address the challenges being faced by the forum, in order to make it effective and enable it to meet its objectives:

Independence : With the three commissioners on the DRP panel wearing dual hats of panel members as well as Commissioners, the forum is faced with the fundamental issue of independence leading to conflict of interest. Central Board of Direct Taxes (CBDT) decision that Commissioners associated with transfer pricing orders will not be a part of DRP collegium is indeed a right step towards reinforcing DRP's independence.

However, to ensure effective functioning of the forum to its intent it is crucial to constitute an independent body to function as DRP.

Work Allocation : The panel members having an additional charge as DRP members have perceptibly divided attention. Accordingly, the CBDT must exercise its discretion to establish additional benches.

The Union Budget 2005 proposed to replace the appeal to High Court by the NTT with the objective of speedy adjudication of disputes.

The proposal of NTT was supposed to be followed by formation of 15 Tribunals with decision of NTT appealable only before the Supreme Court. The implementation of NTT would avoid conflicting decisions on the same issue thereby significantly reducing litigation. The NTT needs to become operational at the earliest.

Safe Harbour

In addition to the introduction of the DRP, Finance Act 2009 empowered the CBDT to formulate safe harbour rules i.e. circumstances in which the income-tax authorities shall accept transfer price declared by the taxpayer.

Introduction of safe harbour rules came as a cheer-up for the multinationals as the same intended to provide certainty on pricing of international transactions/determination of arm's length margins thereby resulting in significant reduction of transfer pricing litigation. Though the CBDT established a Committee to finalise the details of the provision, the rules are yet to see the light of the day. These rules should be issued at the earliest.

The Direct Tax Code had proposed the introduction of APAs which shall be valid up to 5 financial years.

Conceptually, APA is a mechanism to provide an opportunity to the taxpayer to reach an agreement with the revenue authorities on the future application of the arm's length principle in their international transactions. It works as an assurance by the revenue authorities not to make any adjustments to the transfer price as long as the taxpayer adheres to the principles agreed in the arrangement.

Introduction of APAs is a welcome measure and should provide a fair degree of certainty to the business transactions.

(The author is Tax Partner, Ernst & Young.)

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