ALTERNATE DISPUTE RESOLUTION –

PERSPECTIVE, REALITY & WAY-FORWARD

1Sunil Agarwal

1. Unmitigated tax litigation

1.1 With:

(i) approximately 70,000 tax disputes pending before Income-tax Appellate 2

Tribunal [“ITAT”] and approximately 28,000 tax disputes pending before 3

various High Courts ;

(ii) Indian economy practically having ducked the global economic downturn of 2008-2009

and poised to grow at over 8% in coming years;

(iii) Indian economy having attracted an FDI of USD 7.18 billion in the very first quarter of 4

2010 and cumulative FDI of approximately USD 165 billion for the period April 2000 to

April 2010; and

(iv) tax disputes expected to take 7-12 years before reaching finality;

there could not have perhaps been a more opportune time to set up a statutory mechanism aimed at

speedy and efficacious resolution of tax and transfer pricing disputes involving non- 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

the efforts aimed at attracting foreign investment.

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

dispute resolution hierarchy is marked in the table below:

Sunil Agarwal

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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 the Tax-payer

(i) Tax payer is not required to pay huge and, more often than not, unreasonable tax bills

imposed by the AO while its appeal before the CIT(A) is not disposed off.

(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,

brighten up.

(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

end to the tax dispute resulting in certainty.

3.2 For the Revenue

(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

pause and think:

(a) whether unremitting pursuit of mindless appeals before ITAT/Courts are revenue-

producing or mere litigation without revenue-producing;

(b) whether to promote DRP in passing reasonable orders;

(c) whether to spare Revenue's finite investigational resources towards new and

sunrise areas rather than beating a dead-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

and consequently widening the tax-base of India.

4. Challenges & Future

4.1 As of now, the DRP has 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

prolonged litigation.

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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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

sharply deviate from his own position while sitting as a member of DRP.

4.3 This brings us to another more fundamental issue, i.e. lop-sidedness in the constitution of DRP.

DRP's orders are binding on AO, 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 5

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 6

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,

while the tax-payer is free to litigate right upto the Supreme Court.

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 choose AAR, 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

other Assessment 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

forum in at least those cases where tax-payer chooses this channel, thus realizing its objective.

4.5 Otherwise, we should not be surprised to find a scenario in near future where:

(i) tax-payers utilize the forum only as a short-term measure of avoiding payment of taxes till

their appeal reaches ITAT with no hope of any reasonable order;

(ii) litigation remains as virulent as always; and

(iii) Government being criticized for not providing an efficacious remedy against litigation.

1. Partner, AZB & Partners (Formerly Commissioner of Income-tax)

2. Refer – http://www.financialexpress.com/printer/news/402620/, Dec 25, 2008

3. Refer http://www.business-standard.com/india/news/%5Ctribunalisation%5Chc-powers-not-unconstitutional-

sc/395110/ May 17, 2010

4. Refer – http://dipp.nic.in/fdi_statistics/india_fdi_april2010.pdf (Chart for April 2010)

5. Except constitutional remedies of writ (Article 226) and SLP (Article 136).

6. Except constitutional remedies of writ (Article 226) and SLP (Article 136).

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