May 1st, 2021

INTRODUCTION

On 23^rd March, 2021, the Indian Parliament passed the Finance Act, 2021. The Act entails a vision to strengthen the Alternative Dispute Resolution (hereinafter ‘ADR’) mechanism in taxation matters. Amongst the various changes introduced, a Dispute Resolution Committee (hereinafter ‘DRC’) has been constituted under the Act to encourage early tax certainty for the taxpayers belonging to all ends of the spectrum, be it small, medium or large taxpayers. The aim of the Committee is not only to prevent new disputes from emerging, but also to encourage settlement of disputes at the initial stage. Further, the assessee has discretionary power with regard to the adoption of the route of resolution of dispute via DRC. Here, only those disputes are to be considered by the Committee where the return income is INR 5 million or less and the aggregate amount of variation proposed in a specified order is INR 1 million or less. Further, the Committee shall have the powers to reduce or waive any penalty or grant immunity from prosecution for any offense committed under the Income Tax Act of 1961.^[1]

The incorporation of ADR in taxation matters has numerous benefits. In order to ensure surge in investor participation, it is essential that there should be legal reforms, which could potentially encourage foreign investment. Unfortunately, at present, Indian courts are finding themselves in a challenging position while resolving tax disputes. Our Nation being a Developing one, it is the responsibility of the Indian government to introduce reforms that are business-oriented and encourage an arbitration-friendly approach. Essentially, the huge amounts involved should not be at stake when a dispute has arisen between the parties.

Till now, there has been a mixed response while following the ADR mechanism in tax matters. The Income Tax Settlement Commission, Authority for Advance Ruling, Dispute Resolution Panel, and Advance Pricing Agreement i.e. the existing tax-related ADR mechanisms have proven to be beneficial only to some extent. With a view to boost the efficacy of ADR mechanism in tax matters, the recently passed Finance Act, 2021 promises an increase in the probability of having better outcomes.

‘BAR’ – THE NEW ENTRANT

Advance Rulings are decisions given by the Board to tax related questions asked by the applicants. A newly constituted Board for Advance Ruling (hereinafter ‘BAR’) has replaced the former Authority for Advance Ruling (hereinafter ‘AAR’). As per the Act, these advance rulings by the BAR will neither be binding on the applicant nor on the IT department. Further, when aggreieved, the applicant or the department may file an appeal before the High Court against any ruling or order passed by the Board.^[2]

Below mentioned are the kinds of taxpayers and the types of transactions on which an Advance Ruling can be sought in India:^[3]

1. Non-Resident Taxpayer –

A non-resident taxpayer can seek Advance Ruling for the the determination of tax liability for a transaction that has already taken place or is proposed to be undertaken. Further, Advance Ruling can also be sought to determine whether a transcation that is proposed to be undertaken is an impermissible avoidance arrangement under the General Anti Avoidance Rules. (hereinafter ‘GAAR’)

2. Resident Taxpayer

For resident taxpayers, Advance Ruling can be sought for determination of tax liability that is arising out of transactions that the resident taxpayer has undertaken with any non-resident. Secondly, for the purpose of determination of tax liability when the transaction which is undertaken or is proposed to be undertaken is valued at INR 1 Billion or more. And thirdly, for the determination of whether a transaction proposed to be undertaken is an impermissible avoidance arrangement under the GAAR.  

3. Resident Taxpayer (Public Section Enterprise)

For resident taxpayers belonging to Public Sector Enterprises, Advance Ruling can be sought when there is any matter concerning computation of total income, which is still pending before any income-tax authority or the appellate tribunal.

However, there are cases where the BAR is prohibited from giving any Advance Ruling.  When the question pertains to the determination of the market value of property, or there is a transaction which prima facie appears to for the avoidance of tax, or when the question in the application has been raised before any income tax authority, the BAR is not allowed to entertain the application for Advance Rulings. But when the question is raised by any Public Sector Undertaking, the BAR will have to give a ruling even if the matter is pending before an other income tax authority or appellate authority. Even in cases where Advance Ruling is sought w.r.t application of GAAR, the BAR shall be bound to give its ruling.

THE DISPUTE RESOLUTION PANEL

Another development unde the Finance Act, 2021 is the establishment of the Disupte Resolution Panel (hereinafter ‘DRP’) It comprises of three Principal Commissioners or Commissioners of Income Tax (under the Central Board of Direct Taxes).^[4] An assessee or a foreign company in whose case a transfer pricing adjustment has been made by the transfer officer, is eligible to approach this Panel. However, it is pertinent to mention that the DRP only acts as a fast track option. It doesn’t necessarily ensure a bid at a final settlement.

ADVANCE PRICING AGREEMENTS

The figures of the 2018-2019 Advance Pricing Agreements Report depicted that two hundred and seventy-one agreements accommodating INR 100 Billion have been signed during the financial year.^[5] Such a large sum has obligated the Indian government to incorporate non-adversarial methods in the taxation sector. One needs to keep in mind that the Advance Pricing Agreements (hereinafter ‘APA’) mechanism has been introduced as a means by which both the taxpayers and the tax administrations can mutually agree on transfer pricing issues well in advance. It can be a bilateral process that involves tax administrations in other nations in which the taxpayer transacted with associated enterprises or it can be a unilateral process where a tax administration of a resident nation enters into an agreement with the taxpayer on the transfer pricing issues.

DISCONTINUANCE OF ITSC

With the passing of the Finance Act, 2021, the erstwhile Income Tax Settlement Commission (hereinafter ‘ITSC’) has now been discontinued. Earlier, ITSC used to consider issues pertaining to taxation. An assessee, at any stage, could make an application, which contained full and true disclosure of his income before the Assessing Officer, including the manner in which his income had been derived. The Settlement Commission made the final decision in such matters. Now, a new Interim Board has been formed and has been delegated the duty to dispose all the pending cases. It has been made clear that now the Indian government will not give any opportunity to the persons who have not disclosed their income. The Indian government has taken this strict step to keep a check on tax defaulters so that they could be held liable for penalties. All this will result in maintaining better accountability and efficiency in the Income Tax Department. These new reforms will prove to be highly beneficial for the business community.

CONCLUSION

The financial stability of India has shaken badly with the outbreak of COVID-19. Under the present grim circumstances, it becomes imperative to carry out reforms which could safeguard nation’s interest. We need to appreciate the gound breaking changes that have been introduced by the Finance Act, 2021. An endeavour has been made to ensure a time-saving process while resolving tax matters in India. It will be interesting to see how the newly constituted DRC will conduct itself and have a smooth implementation in the coming years. Early resolution of disputes by the DRC will prove to be highly beneficial for the small and the medium assessees. It appears to be a game-changing step, which will eventually encourage investor participation in the business sector, making the business sector more efficient. In order to become more investment-friendly, India should also enhance participation in fair trade and adopt uniform practices, which would result in quicker recovery.

The Dispute Resolution Committee shows immense potential to become a great platform as an alternative method for taxpayers to resolve their taxation disputes. The adoption of this new dispute resolution mechanism will surely speed up transparency and efficieny in the Income Tax Department and ensure a solution oriented approach while resolving tax related disputes.