The Dispute Resolution Panel (DRP) under the Income Tax Act, 1961 [hereinafter referred to as "ITA"] is an Alternative Dispute Resolution (ADR) mechanism for resolving the disputes relating to Transfer Pricing in International Transactions. Section 144C [Reference to Dispute Resolution Panel] of the ITA governs the provisions relating to DRP and defines DRP as a collegium comprising of three Commissioners of Income-tax constituted by the Board [Central Board of Direct Taxes] for this purpose. Section 144C comes into picture when the Assessing Officer (AO) under the ITA proposes to make, any variation in the income or loss stated in the return filed by the assessee and such variation is prejudicial to the interest of the assessee and the AO forwards a draft of the proposed Assessment order to the assessee in order to invite his acceptance or objections to the same. Assessee under section 144C refers to a Foreign Company and any person in whose case AO proposes to make any variation in the income or loss stated in the return filed by such person, as a consequence of the order passed by the Transfer Pricing Officer under Sub Section (3) of Section 92CA of the ITA.
Section 144C was inserted in the ITA by the Finance Act, 2009 and came into effect from 1st October, 2009. In the Notes on Clauses to the Finance Bill, 2009 [Budget 2009-2010] the reason for insertion of Section 144C was given 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 take 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."
Prior to the formation of DRP the assessee had to approach the Commissioner of Income Tax Appeal CIT (A) against the Assessment Order if the assessee wanted to raise objections against the Assessment Order. However, after the formation of DRP the assessee has an additional option to approach DRP on the basis Draft Order issued by AO. The Draft Order can be acceptable or unacceptable to the Assessee. In case the variations made in the draft order are acceptable to the assessee he can file his acceptance to the Draft Order with the AO within thirty days of the receipt of the Draft Order. If no acceptance is filed within thirty Days the AO completes the assessment on the basis of the Draft Order and passes the assessment order, within one month from the end of the month, in which, the acceptance is received or the period of filing of objections expires.
In case the assessee wants to file the Objections against the variations made by the AO the assesse may file its objections with the DRP and AO.
The Procedure At DRP Is As Follows:
- After receiving Objections the DRP goes through the Draft Order; objections filed by the assessee; evidence furnished by the assessee; report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; records relating to the draft order; evidence collected by, or caused to be collected by, it; and result of any enquiry made by, or caused to be made by, it and issue such directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment.
- The DRP may confirm, reduce or enhance the variations proposed in the draft order, however, it shall not set aside any proposed variation or issue any direction for the guidance of the AO for further enquiry and passing of the assessment order.
- If the members of the DRP differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members.
- The Directions for the guidance of AO will be given only after the assessee and the AO have been given an opportunity to present their case.
- After receiving the Directions in the nature of guidance from DRP the AO shall, in conformity with the directions, complete the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.
- The Directions given by DRP are binding on the AO, the Directions can be challenged by the assessee before the Income Tax Appellate Tribunal (ITAT).
- The DRP has to complete the hearing and give its final Directions within a period of 9 months from the end of the month in which the draft order was forwarded to the assessee.
- Presently there are 10 DRP in India having Jurisdiction over different States and Territories.
Recently, a Division Bench of Hon'ble Bombay High Court, while deciding the Writ Petition filed by Vodafone India Services Pvt. Ltd. vs Union of India and Others1 directed Vodafone India Services Pvt. Ltd (wholly owned subsidiary of Mauritian Entity Vodafone TeleServices (India) Holdings Ltd) to approach the Dispute Resolution Panel (DRP) to submit objections to the Income Tax Department's demand of INR 1,300 crore and made the following observation with regards to DRP.
"The proceeding before the DRP is not an appeal proceeding but a correcting mechanism in the nature of a second look at the proposed assessment order by high functionaries of the revenue keeping in mind the interest of the assesee. It is a continuation of the Assessment proceedings till such time a final order of assessment which is appealable is passed by the Assessing Officer. This also finds support from Section 144C(6) which enables the DRP to collect evidence or cause any enquiry to be made before giving directions to the Assessing Officer under Section 144C(5) . The DRP procedure can only be initiated by an assessee objecting to the draft assessment order. This would enable correction in the proposed order (draft assessment order) before a final assessment order is passed. Therefore, we are of the view that in the present facts this issue could be agitated before and rectified by the DRP."
The DRP is an Alternative Dispute Mechanism, set up with a view to minimize the tax disputes relating to Transfer Pricing in International Transactions. The process of inviting objections to the Draft Assessment Order gives an opportunity to the assessee to raise objections, if any, at an early date and helps in giving finality to the Assessment Order. The fixed time frame of 9 months to decide the Matter assures the assesse that the Matter will be decided in a fixed time and the binding nature of the Order of the DRP on the Aseesssing Officer provides a clear picture to the Assessee with regards to its Tax Liability. The recent ruling of the Hon'ble Bombay High Court also shows that the Court would wants the assessees to approach the DRP first to resolve their disputes with regards to the Tax Liability.
1. Writ Petition No.1877 OF 2013
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