Several multinationals operating in India today are affected by issues relating to source based taxation, attribution of profits and transfer pricing (TP). Huge TP adjustments have also plagued several Indian companies. Increasing backlog of disputes has become a source of significant uncertainty in taxation of international business.

Under the present litigation process, certainty on disputed income-tax matters cannot be expected before three years, which could extend to even over fifteen years. Not to mention the cost of litigation it entails. Such a long turnaround time is quite detrimental to India's competitive position in the global markets.

With an objective of providing ‘eligible taxpayers' a short-cut from the otherwise long drawn litigation process, the Finance Act, 2009 introduced the Alternative Dispute Resolution Mechanism (ADRM).

This route, which is aimed at providing a fair and just mechanism of resolving income-tax disputes, is available to all taxpayers for TP matters and to foreign taxpayers for all income-tax matters (eligible taxpayers).

Historically, ADRM in its varied forms of arbitration, mediation, conciliation and negotiation has been implemented in various parts of the world such as the US, the UK, China, and so on.

Looking back

Even in India, ADRM's have existed in the form of the Arbitration Act, 1940, the Arbitration and Conciliation Act, 1960, Lok Adalats, among others.

The increasing caseloads in the traditional courts and the probabilities of lesser cost and time have made ADRMs popular.

In fact, the 2009 Global TP survey by Ernst & Young, which provides tax authority insights in 49 countries across the globe, indicates that various countries such as the US, Canada, China, Indonesia and Japan are looking at implementing/strengthening their dispute resolution mechanisms for early resolution of TP issues.

Thus, the introduction of ADRM in the Indian income-tax law appears to be a march up north.

To briefly touch upon the modalities, this mechanism, while inserted in the Income-Tax Act with retrospective effect from April 1, 2009, requires an assessing officer (AO) to provide the eligible taxpayer with a draft order of assessment proposed to be made on or after October 1, 2009, if the AO proposes to make an adjustment to the income/loss which is prejudicial to the taxpayer.

Elaborate form

In case of disagreement, the taxpayer may file objections before the Dispute Resolution Panel (DRP, consisting of three Commissioners of Income-Tax) within 30 days in the specified format, namely, Form 35A.

The form is fairly elaborate and requires the taxpayer to list down the facts and modifications thereof by the AO, factual/legal arguments taken and case laws relied upon by both parties. The taxpayer may produce additional evidence before the DRP under a separate application. Equally, the AO has a chance to file a report to the objections filed by the taxpayer.

The DRP has powers to increase/decrease the adjustments proposed by the AO and deal with new issues as well. The DRP will provide directions to the AO on the issues within nine months.

The AO is bound by DRP's directions and will need to pass the final order in one month. An appeal against such an assessment order would lie directly before the second appellate level (viz the Appellate Tribunal). This is where the time efficiency kicks in.

Also, the sunny side is that the AO does not have the right to appeal against the directions of the DRP. Hence, a positive outcome at the DRP stage would put protracted litigation to rest.

At present, eight DRPs are planned, each of which have specified jurisdictions assigned to them. For instance, the Mumbai DRP will adjudicate cases of Mumbai, rest of Maharashtra (except Pune), Goa, Madhya Pradesh and Chattisgarh.

Interestingly the CITs to form the Panel would hold this forte in addition to their existing duties. In this sitaution, the objective of expedition seems challenging. Moreover, it will need to be ensured that the same CIT who approved the TP assessment is not also on the DRP, from an independence and objectivity perspective.

Right to appeal?

The other areas that remain open are whether a taxpayer retains the right to appeal under the normal litigation provisions if he has not exercised the choice to resort to ADRM, whether the taxpayer has rights to withdraw objections filed by it before the DRP, whether the orders set aside by the appellate authorities for reconsideration by the AO would be covered, etc.

We have also seen that courts, in the HCL and Kamla Dials cases, have given an option to the taxpayer take recourse to ADRM even before the DRP rules were announced. This gives an indication that even the courts are keen on ADRM being explored to its optimum. How well the ADRM works will depend on how effectively and simplistically the intent and procedures are implemented.

Article by Divya Kumar and Ashish Kasad