India Tax Insights – eighth edition

Curbing tax litigation is vital

Rajan Vora, tax partner in a member firm of EY Global

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EY - Rajan VoraThe Income-tax Act provides for a four-tier appellate hierarchy for resolving disputes arising out of assessment orders issued by the revenue department.

In this article, we will analyze the recent actions of the Government on the functioning of the Dispute Resolution Panel (DRP), Income-Tax Appellate Tribunal (ITAT), Authority of Advance Ruling (AAR), Supreme Court and High Courts.

  1. Functioning of DRP

    Changes welcomed by taxpayers

    With effect from 1 January 2015, the Central Board of Direct-taxes (CBDT) set up permanent DRP benches with dedicated members. As a result, the DRP has been functioning smoothly and the members have started passing speaking orders (reasoned orders) after considering the facts of the case and judicial precedence.

    Mixed reactions from taxpayers

    In order to reduce litigation, it was a call from taxpayers that the tax department’s right to appeal against the DRP direction be withdrawn, which has been acceded by the Government in the Finance Act, 2016, by way of an amendment in the provisions of Section 253 of the Act. However, this amendment could affect the judicious functioning of the DRP: instead of functioning as an appellate authority, it will function as an approving authority, as it was doing for appeals up to AY2009–10.

    Imperative changes required

    In order to make DRP effective, the number of permanent benches for DRP needs to be increased from the current six, considering the number of pending cases. The scope of DRP should be expanded to Indian corporates and other taxpayers in cases where additions and adjustments (other than transfer pricing adjustment) exceed a particular amount, say INR25 crore.

  2. Functioning of AAR

    Changes welcomed by taxpayers

    The CBDT has issued circulars to commissioners handling matters before AAR (equally applicable for ITAT) to speed up the dispute resolution process by not seeking undue adjournments. As a result, the number of matters being disposed of at AAR has increased and the number of applications pending for admission has also reduced to significantly.

    Mixed reactions from taxpayers

    In December 2014, the CBDT extended the scope of AAR to resident taxpayers where the tax liability arising out of one or more transactions valued at INR100 crore or more (in aggregate). However, the fees payable for availing the ruling were also revised. On account of the high fees and high transaction value limit for approaching AAR by resident taxpayers, it has not been able attract a large number of applications. Both these limits need to be revisited to attract more resident taxpayer to approach AAR for ruling.

    Further, in February 2015, the Cabinet approved two additional benches of AAR — one in New Delhi and one in Mumbai — to dispose of cases related to income tax. However, the benches have not been set up yet.

    Imperative changes required

    It is imperative to set up these benches at the earliest to reduce pendency and attract taxpayers to approach AAR.

    It is also imperative to notify that the rulings of AAR would be appealable directly to the Supreme Court considering the confusion around the jurisdiction in which appeals against AAR orders lie.

  3. Functioning of ITAT

    More than 1 lakh cases are pending across all the benches of ITAT in India.

    Changes welcomed by taxpayers

    During the last two years, the Government has filled more than 35 vacancies at ITAT. As a result, most of the benches of ITAT have started functioning regularly and the number of matters being heard and disposed of by ITAT has increased.

    The CBDT, vide circular no 21/2015 dated 10 December 2015, increased the monetary limit for filing of appeal before the ITAT to INR10 lakh from INR4 lakh. The limit of the matter that can be disposed of by a Single Member Bench (SMC) has also been increased to INR50 lakhs with effect from 1 June 2016. These limit are applicable for all new as well as pending appeals filed by the department. As a result, a significant number of appeals are being/likely to be disposed of by the ITAT. Going forward, the tax department will not be able to file appeals where the tax effect is less than INR10 lakhs, resulting in a decrease in the number of appeals it files.

    Imperative changes required

    It is imperative that with an increased number of litigation around transfer pricing and international taxation issues, the members should be required to update their knowledge on the subject at regular intervals. It is also imperative to provide appropriate assistance to the ITAT members and departmental representatives to function appropriately.

  4. Matters before the Supreme Court and High Courts

    The current Government has issued a number of benevolent circulars and issued clarifications in order to settle certain litigious issues (instructing the tax department to withdraw the appeal wherever it may have been filed), resulting in a number of matters being disposed of by the Supreme Court/High Court and the ITAT. The monetary limits for filing an appeal before a High Court have been increased to INR20 lakh (from INR10 lakh), on account of which a number of appeals have been disposed of and pendency is likely to decrease.

The actions being taken by the Government, such as making amendments to the Act and issuing circulars and clarifications, are expected to reduce the pendency of litigation.

(Pranay Gandhi, senior tax professional, EY also contributed to the article)

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