Direct tax code will lead to faster settlement of disputes

The finance ministry, on July 6, 2009, introduced the direct tax code to moderate levels of taxation, reduce the scope of litigation etc.

At present, the code is in the public domain for discussion and feedback and will replace the Income-Tax Act, 1961, when it becomes applicable on April 1, 2011. This article attempts to examine the changes in the litigation process that will take effect after the introduction of the code and its impact on the litigation time frame.

Under the Act, after the receipt of an assessment order there are four broad stages of litigation i.e. appeals before (i) the commissioner (appeals) [‘CIT(A)’], (ii) the appellate tribunal (‘ITAT’), (iii) the high court and (iv) the Supreme Court. There is also the authority for advance rulings, which provides redress on issues arising out of transactions with non-residents.

Under the code, there will be no change in the first, second and the fourth levels, but the third level i.e. the high court will be replaced by the national tax tribunal (‘NTT’). In addition, there will also be the dispute resolution panel (‘DRP’) and advance pricing agreements (‘APAs’) with the central board of direct taxes (‘CBDT’) which the assessee will be able to go to for tax dispute resolution. The new litigation channels are dealt with below:

Dispute resolution panel
The DRP would comprise of three commissioners appointed by the CBDT. Where the variation or adjustment to be made by the assessing officer (‘AO’) is Rs 25 lakh or more, the AO shall pass a draft order. On receipt of the draft order, the assessee shall file his acceptance of the variations to the AO, or file objections with the DRP and the AO, within 30 days.

Where the taxpayer prefers to approach the DRP, the AO shall pass an order in accordance with the directions of the DRP within 21 months of the end of the month in which the return of tax bases was filed.

However, the order of the AO, pursuant to the directions of the DRP, will be liable to appeal only before the ITAT, which means the time lag between the filing of the appeal before the CIT(A) and the disposal of the appeal by the CIT(A) under the Act, which may be approximately two or three years, will be done away with by the code.

Though the concept of the DRP was introduced by the Finance Act, 2009, only foreign companies or assessees in whose cases an adjustment had been made by the transfer pricing officer were allowed to approach this panel. However, the code has now extended the availability of this panel to resident assessees.

National tax tribunal
The Act provides that from every order passed in appeal by the ITAT (before the date of establishment of the NTT) an appeal shall be lodged before the high court. The code now provides that every appeal arising out of an order passed in appeal by the ITAT shall be lodged with the NTT.

Tax appeals filed in the high court take several years for final disposal as the high court, in addition to tax disputes, is actively engaged in resolving civil and criminal litigation. On the other hand, the NTT will only be involved in settling tax disputes, which will result in the speedy disposal of appeals.

Advance pricing agreement
In the current scenario, the taxability of international transactions between two associated enterprises involving two tax jurisdictions has resulted in huge litigation with respect to the determination of the arm’s length price (‘ALP’). Therefore, in order to reduce such huge litigation, APAs are now going to be introduced.

The APA is a voluntary process whereby the CBDT, with the approval of the central government and the taxpayer, may enter into mutual agreements towards the determination of the ALP. APAs shall be binding on the assessee and the tax authorities for a period of five consecutive financial years (only for those international transactions for which the APA has been entered into), subject to uniformity in the tax laws. Thus, if the APA is successfully implemented, it will result in a substantial reduction in transfer pricing litigation.

No doubt an effort has been made to make the provisions of the code simpler, but as it stands today, it raises several unanswered issues which are open to litigation. However, whether or not there is a reduction in litigation, thanks to the DRP, NTT and APAs, the litigation will certainly move at a much faster pace.

The writer is executive director-tax litigation practice, PwC