DISPUTE RESOLUTION PANEL

[C.A. DEV KUMAR KOTHARI]

International transactions:

Provisions relating to the 'Dispute Resolution Panel' (DRP') have limited scope. It is not likely to yield desired result.

Suggested procedure:  issue of SCN on proposed variations and  reply by assessee in all cases involving variation to returned income to apply principal of natural justice.

Synopsis:

Preliminary and synopsis:

As per new provisions DRP shall be constituted to expeditiously resolve disputes in course of assessment by following procedure of draft assessment order, acceptance or  objections of assessee. Accordingly DRP's have been constituted. Completion of assessment in case of acceptance of variations in draft assessment order by assessee and reference to DRP in case of objections by the assessee. DRP will act like a court, and can confirm, reduce or enhance the draft assessment. The order of DRP will be final and binding on the revenue, there appears no scope of revision or appeal by revenue authorities against  an order passed by DRP. However, the assessee will have right to file an appeal before the Tribunal  against the order passed by the A.O. in pursuance of the directions of the DRP as well as against any rectification order passed by the A.O. in such cases.DRP will be a collegium comprising of three CIT  constituted by the CBDT for this purpose.

DRP shall hear the A.O. and assessee and can make further enquiry and collect further information and evidences. DRP shall not restore any issue to the A.O. for further enquiry that means that final directions shall be given by DRP.

As per author better course could be draft assessment, objections by assessee, if any, reconsideration by A.O. of objections and passing of order. Then first appeal before CIT(A) and second appeal before ITAT. This can be for all assesses. By providing a draft assessment order, it will become necessary for the A.O. to open up his mind before the assessee and to really provide opportunity to assessee to explain his case. At present we find that in assessment the A.O. makes many variations  about which A.O. had never asked any explanation or evidence in writing or verbally.           

New Section 114C

The Finance (No.2) Act, 2009 had effect of  Insertion of a new section which  takes effect from 1-4-2009. The section with heading reads as follows (with highlights provided):

Reference to Dispute Resolution Panel. 

144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.

(2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,—

      (a) file his acceptance of the variations to the Assessing Officer; or

       (b) file his objections, if any, to such variation with,—

             (i) the Dispute Resolution Panel; and

             (ii) the Assessing Officer.

(3) The Assessing Officer shall complete the assessment on the basis of the draft order, if—

       (a) the assessee intimates to the Assessing Officer the acceptance of the variation; or

       (b) no objections are received within the period specified in sub-section (2).

(4) The Assessing Officer shall, notwithstanding anything contained in section 153, pass the assessment order under sub-section (3) within one month from the end of the month in which,—

       (a) the acceptance is received; or

       (b) the period of filing of objections under sub-section (2) expires.

(5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.

(6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:—

       (a) draft order;

       (b) objections filed by the assessee;

       (c) evidence furnished by the assessee;

       (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;

       (e) records relating to the draft order;

       (f) evidence collected by, or caused to be collected by, it; and

       (g) result of any enquiry made by, or caused to be made by, it.

(7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),—

       (a) make such further enquiry, as it thinks fit; or

       (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it.

(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.

(9) If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members.

(10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer.

(11) No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively.

(12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee.

(13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153, 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.

(14) The Board may make rules for the purposes of the efficient functioning of the Dispute Resolution Panel and expeditious disposal of the objections filed under sub-section (2) by the eligible assessee.

(15) For the purposes of this section,—

       (a) "Dispute Resolution Panel" means a collegium comprising of three Commissioners of Income-tax constituted by the Board for this purpose;

       (b) "eligible assessee" means,—

             (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and

             (ii) any foreign company. 

Limited scope of DRP cases:

On reading of the above section and particularly the meaning of eligible assessee, we find that the section and the scheme have very limited scope.

The assesses to whom these provisions shall apply are limited because as they will apply to only             (i)         any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer (TPO)  passed under sub-section (3) of section 92CA; and

(ii) any foreign company.

The scope of TPO passing an order and variations arising consequent to such order itself is limited to certain type of assesses in specified circumstances of international transactions involving related parties only, therefore the scope of the new provisions is limited and is not for general assessee and is also not wider for the  eligible assesses, other than foreign companies.

To understand the purpose and effect of new provisions:

For better understanding of the provision let us have a look at notes and explanations for the amendment.

Income-tax Act which relates to power regarding discovery, production of evidence, etc.

Vide clause 55 of the Bill proposes to insert new section 144C in the Income-tax Act so as to provide that the assessee shall file his objections among others to the Dispute Resolution Panel against the draft of the proposed order of assessment of Assessing Officer.

It is, therefore, proposed to amend sub-section (1) of section 131 so as to provide that Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C shall have the same power as are vested in a court under the Code of Civil Procedure, 1908. The proposed amendment is consequential in nature.

Discussion

This is amendment to empower DRP This amendment could be made in simple manner by just inserting   'and DRP' and deleting word 'and' before Chief Commissioner.

It is surprising that in S. 131 the authorities are mentioned in order of junior to senior. The section can be presented in better manner by following order in senior to junior as is the case of S. 116.

EXPLANATORY MEMORANDUM:

Provision for constitution of alternate dispute resolution mechanism

The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained only after a long drawn litigation till Supreme Court. Flow of foreign investment is extremely sensitive to prolonged uncertainty in tax related matter. Therefore, it is proposed to amend the Income-tax Act to provide for an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes in a fast track basis.

The salient features of the proposed alternate dispute resolution mechanism are as under :—

  (1)  The Assessing Officer shall, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.

  (2)  On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,—

    (a)  File his acceptance of the variations to the Assessing Officer; or

    (b)  File his objections, if any, to such variation with,—

     (i)  The Dispute Resolution Panel; and

    (ii)  The Assessing Officer.

  (3)  The Assessing Officer shall complete the assessment on the basis of the draft order, if—

    (a)  The assessee intimates to the Assessing Officer the acceptance of the variation; or

    (b)  No objections are received within the period specified in sub-section (2).

  (4)  The Assessing Officer shall, notwithstanding anything contained in section 153, pass the assessment order under sub-section (3) within one month from the end of the month in which,—

    (a)  The acceptance is received; or

    (b)  The period of filing of objections under sub-section (2) expires.

  (5)  The Dispute Resolution Panel shall, in a case where any objections are received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.

  (6)  The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely :—

    (a)  Draft order;

    (b)  Objections filed by the assessee;

    (c)  Evidence furnished by the assessee;

    (d)  Report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;

    (e)  Records relating to the draft order;

    (f)  Evidence collected by, or caused to be collected by, it; and

    (g)  Result of any enquiry made by, or caused to be made by it.

  (7)  The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),—

    (a)  Make such further enquiry, as it thinks fit; or

    (b)  Cause any further enquiry to be made by any Income-tax authority and report the result of the same to it.

  (8)  The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.

  (9)  If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members.

(10)  Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer.

(11)  No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively.

(12)  No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee.

(13)  Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which the direction is received.

(14)  The Board may make rules for the efficient functioning of the Dispute Resolution Panel and expeditious disposal of the objections filed, under sub-section(2), by the eligible assessee.

(15)  For the purposes of this section,—

    (a)  "Dispute Resolution Panel" means a collegium comprising of three Commissioners of Income-tax constituted by the Board for this purpose;

    (b)  "eligible assessee" means,—

     (i)  any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and

    (ii)  any foreign company.

Discussion:

On careful study of the new provisions and the memorandum following important points are observed:

The provision is mandatory as the words used are:

a.       The Assessing Officer shall,

b.       notwithstanding anything to the contrary contained in this Act.

c.        AO shall forward a draft assessment order to the eligible assessee.

d.         However, the requirement is only when the A.O. proposes to make, any variation in the income or loss returned which is prejudicial to the interest of such assessee.

e.       This will apply only  in respect of order passed or to be passed or after the 1st day of October, 2009. Therefore there is no such requirement of order which A.O. may pass till 31.08.09.

Duty of eligible assessee:

He  shall, within thirty days of the receipt by him of the draft assessment  order:

  Either file his acceptance of the variations to the Assessing Officer; or file his objections,   

   if any, to such variation with the DRP and the A.O.        

Order based on draft assessment order:

In case acceptance is communicated by assessee or  objections are not filed within specified time 30 days from receipt of draft order  The A.O  shall complete the assessment on the basis of the draft order. Such assessment order shall be  passed  within one month from the end of the month in which, the acceptance of assessee is received; or    the period of filing of objections under sub-section (2) expires.

Example:

Suppose Draft assessment order (DAO) is received by assessee on 01.10.2009, he can communicate his acceptance or objections immediately or within thirty days from date of receipt of the DAO that is by 31.10.09. In case acceptance is filed or  any objection is not filed by 31.10.09, it will be deemed that the assessee has no objection. Then the A.O. can pass order based on DAO within one month that is by 30.11.09.

Receipt of DAO in next month and its effect:

Now suppose DAO is received by assessee on 04.10.2009, he can communicate his acceptance or objections immediately or within thirty days from date of receipt of the DAO that is by 03.11.09. In case acceptance is filed  on say 31.10.09  then assessment order will have to be passed before 30.11.09 that is one month from the end of the month in which acceptance is received. Suppose acceptance is filed on 03.11.09 then the A.O. can pass order by 31.12. 2009.  Suppose any acceptance or objection is also not filed, then the AO can pass assessment order based on DAO by 31.12.2009 that is one month from the end of the month in which the limitation to file objection ends.

Simplification: To avoid doubts, calculation mistakes etc. it is advisable to simply provide time as 30 days from receipt of DAO by assessee 30 days from receipt of acceptance or 30 days from the end of period by which assessee could file objection, instead of one month from end of the relevant month.

When an objection is filed by eligible assessee before DRP (and AO):

DRP shall,  issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.

DRP shall  considering the following before issuing any directions:

   (a) draft order of assessment ( against which objections have been filed by assessee),

  (b)  objections filed by the assessee;

  (c)  evidence furnished by the assessee;

  (d)  report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;

  (e)  records relating to the draft order;

  (f)  evidence collected by, or caused to be collected by DRP  and

  (g)  result of any enquiry made by DRP.

Further enquiry:

DRP  may, before issuing any directions make such further enquiry, as it thinks fit; or

  cause any further enquiry to be made by any income-tax authority and report the result of the same to it.

Therefore, the proposal provide full fledged scheme of examination of original  records further records, making enquiry  directly or through other officers and collecting evidences, obtaining reports from concerned authorities, and consideration of the same.

Order of DRP

The DRP may:

       Confirm the DAO,

       Reduce the DAO or

      Enhance the DAO by enhancing variations proposed in the draft order. It appears that the DRP can enhance only on matters of variations proposed in DAO and cannot make any new enhancement.

 No restoration-l DRP shall not set aside any proposed variation or issue any direction under sub-section for further enquiry and passing of the assessment order.

Majority to prevail

DRP shall consist of three CIT. Therefore there can be difference of  opinion on any point, amongst members of DRP. In such case the point of difference shall be decided according to the opinion of the majority of the members.

Binding nature of direction only on revenue:

 Every direction issued by the DRP  shall be binding on the Assessing Officer.

Opportunity of hearing:

Any direction prejudicial to assessee or revenue shall not be issued by DRP unless  an opportunity of being heard is given to the party to be prejudiced. Since opportunity is to be given it will be in fairness of justice that DRP issues a SCN to concerned party on the issue by which the party may be adversely affected.

Limitation for directions bt DRP:

DRP shall not issue  direction under sub-section (5) after nine months from the end of the month in which the draft order is forwarded to the eligible assessee.

Example:

a.   DAO is forwarded by the AO to the assessee. Suppose DAO is forwarded on any day between  01.10.09 to 31.10.09, the DRP has an overall limitation to issue directions within nine months from end of October,2009 that is by 31.07.2010.

b.   Suppose DAO is forwarded on any day between  01.11.09 or any day of November 2009 then  the DRP has an overall limitation to issue directions within nine months from end of November 2009 that is by 31.08.2010.

Suppose the assessee has received DAO (forwarded on 01.10.09) very late on say 01.07.2010 due to some reasons and he files objections on say 30.07.2010. In this case the DRP should pass order by 31.07.2010 because the AO forwarded DAO on 01.10.09. It seems that the limitation for issuing directions by DRP should be counted from the day of filing of objections by assessee and not from the date of forwarding of DAO by the AO to the assessee.

Order on receipt of directions from DRP:

The AO shall complete assessment in conformity with the directions 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 limitation prescribed is independent and it is notwithstanding anything contained in S.153.

Rules to be framed by Board:

The CBDT may make rules for the purposes of

       the efficient functioning of the DRP and

       expeditious disposal of the objections filed  by the eligible assessee.

For efficient functioning and expeditious disposal of objections Rules can be made by CBDT. For these purposes author feels that the Rules should specifically provide for:

            Standardization of :

            Draft Assessment order (DAO)

           Notice accompanying the DAO with DAO and prescribed forms.

           Instructions to the assessee about  accept or  make objection  in prescribed time and in prescribed from and  jurisdiction and address of  concerned DRP.

           Form of  memo of objections  and list of accompanying documents. 

Discussion about DRP and eligible assessee has already been made in preamble.

Amendment of section 246A

As per proposed amendment in section 246A appeal before CIT(A) shall not lie before CIT(A) when an assessment is made in pursuance of directions of the DRP that measn when assessee preferred objections on DAO and DRP passed order and issued directions to the A.O. The  amendment in section 246A as proposed read as follows"

                  71. In section 246A of the Income-tax Act, in sub-section (1), in clause (a), for the words, brackets and figures "under sub-section (3) of section 143", the words, brackets and figures "under sub-section (3) of section 143 except an order passed in pursuance of directions of Dispute Resolution Panel" shall be substituted with effect from the 1st day of October, 2009.

Thus when directions are issued by DRP and assessment is made according to such directions then appeal shall not be preferable before CIT(A). This is because (a) DRP consists three commissioners who are likely to be senior than CIT(A) or in any case DRP is a body of three CIT even if they are equal in rank or seniority of CIT(A) and (b)  in such cases remedy by way of  appeal is provided before ITAT.

However, suppose the assessee could not file an objection within thirty days from receipt of DAO, and the AO passed order based on DAO, then the assessee can definitely file an appeal if he has ground to show reasons for not filing objections ( or filing objections in prescribed time). Similarly suppose objections filed were rejected on ground of delay or on some other technical reasons, then also assessee will be entitled to file an appeal against assessment order which is based on DAO, against which assessee did not or  could not file valid objections in prescribed time. Though in such cases, assumption of accepting DAO will have to be rebutted by the assessee and the A.O. and CIT(A) can make objection for the same.

Appeal before ITAT:

A new clause in section 253 is proposed which reads as follows:

"(d)  an order passed by an Assessing Officer under sub-section (3) of section 143 in pursuance of the directions of the Dispute Resolution Panel or an order passed under section 154 in respect of such order..

Thus an appeal before ITAT  is provided when an order is passed by AO  u/s 143(3)  in pursuance of directions of the DRP and also against  an order passed under section 154 in respect of such order.

Effective date and  advise to work  fast:

All the above amendment will take effect from 1st October, 2009. These amendments are procedural in nature and have effect of prescribing a set of new procedures fro assessment. Therefore, if the A.O. of any eligible assessee want to make any variation in returned income independently he is advised to work fast. Otherwise come 1st October, 2009 his hands will be tied and any variation, howsoever small it may be, will be subject to rigors of new provisions.  

Similarly if assesses want to complete assessment with some variations which are acceptable to them( as in past), they can expedite the matter and get assessment completed fast. Otherwise, even on accepted variations, the procedure of DAO, acceptance will have to be complied with.

Suggestions to the Finance Minister:

It is suggested that in all cases of any assessee  where the A.O. want to make variation in returned income, he must give DAO or list of variations proposed and reasons fro such proposed variations and give SCN and  allow opportunity  to assessee to  file his views and objections to proposed variations and also allow reasonable  hearing. Thereafter the AO should pass final order considering views, objections and fresh evidences and explanations filed in response to the SCN and DAO/ list of proposed variations. The appeal against such final assessment order can be filed before CIT(A).

Many times we come across that assessee had filed details, evidence and explanations as asked by the A.O. The A.O. do not ask any thing further as evidence or explanations, but the A.O. makes lot of variations in returned income and it comes to a shocking surprise for the assessee and his counsel who represented his case. This is in complete disregard of principal on natural justice. This can be avoided by provi8ding DAO/ list of proposed variations and SCN to explain as to why variations should not be made.  

Consequential amendment of section 131 to empower DRP:

Section 131 relates to power regarding discovery, production of evidence etc. In this section various authorities have been mentioned who are vested with such powers. As the DPP is a newly created authority, necessary powers have to be conferred to DPP. Therefore the section 131 is also  amended. The clause of the Bill  and the notes thereon are reproduced below with high lights and catch words for easy understanding:

Notes on clause 49 - the Bill seeks to amend section 131 of the

Amendment of section 131

49. In section 131 of the Income-tax Act, in sub-section (1), for the words "and Chief Commissioner or Commissioner", the words "Chief Commissioner or Commissioner and the Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C" shall be  substituted with effect from the 1st day of October, 2009.

Dispute Resolution Panel- remedy is optional:

The assessee can choose not to go through the DRP procedure. The Board has also clarified that a choice has been given to the assessee either to go before the DRP or to prefer the normal appellate procedure of filing first  appeal before the CIT(A)  second appeal before  ITAT instead of going to DRP. Thus if assessee does not file objections to draft assessment order, before the DRP, then the AO will make assessment only after hearing assessee. Against such order the assessee can prefer appeal before CIT(A). If assessee is not satisfied with order of the CIT(A) he will be able to file appeal before ITAT.

Experience shows that due to complexity of law, and different possible interpretations, it is generally more beneficial to go through regular course of appeals instead of short-cut procedures. When there is long drawn process which take longer time, it is possible that the law get clarified, and there can be precedence on the subject.