Union Budget 2020: Making Alternate Dispute Resolution Forum Available To All Non-Residents

Intending to provide speedy redressal to the non-residents earning income from India and to the Indian residents transacting with non-residents, Section 144C of the Income-tax Act, 1961 (the Act) provides an ‘eligible assessee’ with an option to file its objections to the Dispute Resolution Panel (DRP) against the draft assessment order passed by the Assessing Officer (AO). This option is available to an assessee as against preferring an appeal before the Commissioner of Income Tax. Amongst the two, a reference to the DRP is more desirable to an assessee because of the following primary reasons:

 (i) the proceeding before the DRP is time-bound; (ii) the DRP proceeding being continuation of assessment proceeding, an income-tax demand is raised on the assessee only after the DRP proceeding is concluded and a final appealable assessment order is passed by the AO; and (iii) the appeal against the final order passed by the AO according to directions given by the DRP lies directly to the Income Tax Appellate Tribunal (ITAT), thereby helping in faster resolution.

Under the existing Section 144C of the Act, the AO is mandated to pass a draft assessment order for an eligible assessee, if the AO is proposing to make any variation in the income or loss returned by the assessee. Sub-section (15) defines an ‘eligible assessee’ as, (i) any person in whose case the variation is proposed according to the order of the Transfer Pricing Officer (TPO) passed under section 92CA(3) of the Act; and (ii) any foreign company. The section provides the eligible assessee with an option to file its objections to the Dispute Resolution Panel against the draft assessment order passed by the AO.

The section however poses practical difficulties to the non-residents. As per the section, the AO is required to pass a draft order only in those cases where a variation is proposed as regards the return filed by the eligible assessee. Often the AO takes a position that if an otherwise eligible assessee does not file the return of its income or loss due to any reason, it is precluded from approaching the DRP. Thus, the AO directly passes a final assessment order, leaving the assessee with the only recourse of filing an appeal before the Commissioner of Income Tax. This further raised a peculiar problem in the case of non-residents who do not have a PAN but dispute their tax liability in India as determined in the assessment order. In such scenarios, the non-residents are obligated to obtain a PAN in India to enable them to file an appeal before the Commissioner of Income Tax  through the online portal of the Income Tax Department. These problems have been sought to be remedied to some extent by the amendments proposed in the Finance Bill, 2020.

Proposed amendments and their implications

The Finance Bill, 2020, seeks to propose two amendments in Section 144C of the Act. Firstly, the definition of an ‘eligible assessee’ is proposed to be amended to include all non-residents as opposed to only a foreign company.

Secondly, the words ‘in the income or loss returned’ is sought to be omitted from Section 144C(1). With the deletion of the words concerning the filing of return by the assessee, it can be said that the amendment seeks to extend the option of filing a reference to the DRP even in those cases where an assessee has not filed a return of its income or loss. In other words, any proposed variation, which is prejudicial to the interest of an eligible assessee could now be objected to before the DRP, and the AO would have to first pass a draft order against the assessee.

On a co-joint reading of both the proposed amendments, the draft order would have to be passed by the AO in the case of every non-resident assessee, irrespective of the fact that the non-resident has not filed its return of income or loss. The amendments would, therefore, come as a relief to the non-residents who are not eligible to approach the DRP, as of today, and are often questioned and face practical problems on account of procedural requirements. The amendments will also facilitate expeditious resolution of tax disputes faced by the non-residents in the country, as was the intention of the Parliament at the time of introducing the Section in 2009.

The authors are the Partner and Associate, Lakshmikumaran & Sridharan Attorneys