1. ALTERNATE DISPUTE RESOLUTION –
PERSPECTIVE, REALITY & WAY-FORWARD
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Sunil Agarwal
1. Unmitigated tax litigation
1.1 With:
(i) approximately 70,000 tax disputes pending before Income-tax Appellate
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Tribunal [“ITAT”] and approximately 28,000 tax disputes pending before
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variousHighCourts ;
(ii) Indian economy practically having ducked the global economic downturn of 2008-2009
andpoisedtogrowatover8%incomingyears;
(iii) Indian economy having attracted an FDI of USD 7.18 billion in the very first quarter of
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2010 and cumulative FDI of approximately USD 165 billion for the period April 2000 to
April2010;and
(iv) taxdisputesexpectedtotake7-12yearsbeforereachingfinality;
there could not have perhaps been a more opportune time to set up a statutory mechanism aimed at
speedyandefficaciousresolutionoftaxandtransferpricingdisputesinvolvingnon-residents.
1.2. Indian economy has been gradually opening up to foreigners since 1990s. Transfer Pricing laws
were enacted in the year 2001. First batch of Transfer Pricing orders were issued by tax authorities
in the year 2005. Indian laws do not still, inter-alia, have Advance Pricing Agreements [“APA”],
Safe Harbour Rules, Thin Capitalization Rules, Controlled Foreign Corporation Rules [“CFC
Rules”] etc. Indian Income-tax statute and regulations do not provide for specific and clear-cut
rules for taxing income from cross-border trade, investment and technology transactions, unlike
some other jurisdictions. Resultantly, tax officers have been applying the generic statutory
provisions to tax foreign entities, quite often in an extremely aggressive or even creative manner.
The result: a hydra-headed monster of burgeoning tax disputes assuming alarming proportions
with every passing year. On the one hand, we are gradually opening the sluice-gates to foreign
investment, on the other the uncertainty arising out of tax litigation is acting as a big dampener to
theeffortsaimedatattractingforeigninvestment.
2. Dispute Resolution Panel [“DRP”] – The Proposed Remedy
2.1 The recently constituted DRP proposes to be a statutory answer towards reducing the delays in
dispute resolution as an alternative to existing dispute resolution mechanism. DRP's place in the
disputeresolutionhierarchyismarkedinthetablebelow:
Sunil Agarwal
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3. tax demand; it is not so when the tax-payer is before the DRP. Collectible demand comes up only
after DRP's determination.
3. Risk-Reward Analysis
On a comparison, one can note the expected benefits to both: tax-payers and the Revenue, from the
DRP.
3.1 For theTax-payer
(i) Tax payer is not required to pay huge and, more often than not, unreasonable tax bills
imposedbytheAOwhileitsappealbeforetheCIT(A)isnotdisposedoff.
(ii) Since the DRP is constituted by a collegium of 3 CITs, [as opposed to CIT(A) mechanism
which is only a one man panel], the chances of determination being more reasonable,
brightenup.
(iii) The DRP's order being final and non-appealable from Revenue's side, the tax-payer has the
option of also treating it as final by not further appealing before ITAT; thereby putting an
endtothetaxdisputeresultingincertainty.
3.2 For theRevenue
(i) Current statistics show that the Revenue is a loser in majority of disputes after ITAT's
determination. Statistics further show that Courts affirm ITAT's determination in majority
of cases. In light of the same, DRP mechanism should provide the Revenue an occasion to
pauseandthink:
(a) whether unremitting pursuit of mindless appeals before ITAT/Courts are revenue-
producingormerelitigationwithoutrevenue-producing;
(b) whethertopromoteDRPinpassingreasonableorders;
(c) whether to spare Revenue's finite investigational resources towards new and
sunriseareasratherthanbeatingadead-horse;
(d) whether the prime focus should be towards winning the confidence of foreigners
doing business in India, thereby indirectly promoting foreign investments in India
andconsequentlywideningthetax-baseofIndia.
4. Challenges & Future
4.1 As of now, the DRPhas been functional for few months only.The experience so far, to say the least,
has been far from encouraging. The DRP has been approving the AO's orders mechanically. This
does not bode well for the future of a nascent institution conceived to be sort of panacea for
prolongedlitigation.
4.2 Without doubt, that could not have been the intention of law makers. One of the reasons for the
lack-lustre performance of the DRP so far could be that Director of Income-tax - International
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4. Taxation [“DIT(IT)”] is one of the members constituting the DRP. One cannot be oblivious of the
ground level reality that the AO works under the supervision of DIT(IT) and most orders of AO
would have had direct/indirect approval of DIT(IT). In all fairness, DIT(IT) is not expected to
sharplydeviatefromhisownpositionwhilesittingasamemberofDRP.
4.3 This brings us to another more fundamental issue, i.e. lop-sidedness in the constitution of DRP.
DRP's orders are binding onAO, but not on tax-payer. Tax-payer has the option of either accepting
them or further litigating them. If we look slightly further, we find that Authority for Advance
Rulings [“AAR”], a very popular forum among non-residents, delivers orders having no
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precedent value but are statutorily binding both on Revenue and tax-payer . Another institution,
the Income-tax Settlement Commission [“ITSC”], (which was very popular earlier, now not so
because of drastic curtailment in its jurisdiction by Finance Act 2007) delivers negotiated rulings
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having no precedent value but statutorily binding on both Revenue and tax-payers , just like the
AAR. The point sought to be made is: the rulings of DRP being statutorily binding on one party to
the dispute alone and not the other, perhaps it may be too much to ask the Revenue to fold its hands,
whilethetax-payerisfreetolitigaterightuptotheSupremeCourt.
4.4 In other words: both AAR and ITSC provide an alternate dispute resolution mechanism. As an
example, a tax-payer averse to litigation may chooseAAR, while another not so averse to litigation
may choose traditional route of AO - CIT(A) – ITAT – Courts. The two routes are mutually
exclusive. Likewise, the DRP's orders may be made statutorily binding on both: Revenue and tax-
payer (with or without the power of negotiated settlement like ITSC) with no precedent value for
otherAssessment Years [“AYs”]. The tax-payer can upfront evaluate the risks and rewards before
choosing a particular route. Similarly, there will be an incentive to Revenue to pass a reasonable
order, realize due amount of taxes expeditiously, without being bound by the DRP's order for other
AYs. If that be so, the institution has the potential of proving to be an efficacious dispute resolution
foruminatleastthosecaseswheretax-payerchoosesthischannel,thusrealizingitsobjective.
4.5 Otherwise,weshouldnotbesurprisedtofindascenarioinnearfuturewhere:
(i) tax-payers utilize the forum only as a short-term measure of avoiding payment of taxes till
theirappealreachesITATwithnohopeofanyreasonableorder;
(ii) litigationremainsasvirulentasalways;and
(iii) Governmentbeingcriticizedfornotprovidinganefficaciousremedyagainstlitigation.
1. Partner,AZB&Partners(FormerlyCommissionerofIncome-tax)
2. Refer–http://www.financialexpress.com/printer/news/402620/,Dec25,2008
3. Refer http://www.business-standard.com/india/news/%5Ctribunalisation%5Chc-powers-not-unconstitutional-
sc/395110/May17,2010
4. Refer–http://dipp.nic.in/fdi_statistics/india_fdi_april2010.pdf(ChartforApril2010)
5. Exceptconstitutionalremediesofwrit(Article226)andSLP(Article136).
6. Exceptconstitutionalremediesofwrit(Article226)andSLP(Article136).
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