DRP in Income Tax: Process, Timelines, and Comparison with CIT(A)

The (Dispute Resolution Panel) DRP in income tax, established under Section 144C of the Income-Tax Act, provides a fast-track mechanism to resolve transfer pricing disputes in India, offering an alternative to the conventional appellate route before the Commissioner of Income Tax (Appeals) [CIT(A)]. Understanding the DRP process, timelines, and directions is essential for assessees aiming for timely resolution and minimal litigation risk.

Transfer Pricing Litigation

Provisions relating to transfer pricing transactions are covered under the Income-Tax Act, 1961. These provisions ensure that the transactions between associated enterprises are governed by the arm’s length principle. In India, transfer pricing is an important area for tax compliance and is prone to frequent litigation as well. Mainly, the issue is related to the appropriateness of the pricing mechanism between the multinational company and its subsidiaries operating in India. These disputes lead to litigation in various forums. Two important mechanisms for dispute resolution are the Dispute Resolution Panel (DRP) and the Commissioner of Income Tax (Appeals) [CIT(A)]. In a litigation process, both DRP and CIT(A) play a pivotal role.

(Dispute Resolution Panel) DRP in Income Tax

To provide faster dispute resolution related to transfer pricing and international tax disputes, an alternative dispute resolution mechanism is established through DRP.  Typically, the Panel consists of three Commissioners of Income Tax.

DRP Process: Once a draft assessment order is received, the assessee can file its objections with the DRP within 30 days. The Panel, after considering the draft order, objections along with evidence, if any, provided by the assessee, and reports from the Assessing Officer (AO) or Transfer Pricing Officer (TPO), can confirm, reduce, or enhance the variations in the draft order.

DRP’s Directions and Time Frame: The nature of directions issued by the DRP is binding on the AO. These directions must be issued within a period of nine months, starting from the last date of the month in which the draft order is forwarded to the assessee.

Final Assessment Order: Upon receiving such draft order, the AO will then pass the final assessment order considering DRP’s directions.

DRP Mechanism – A Fast-track Process: The DRP mechanism is an alternate, fast-track DRP process specially introduced for disputes related to transfer pricing and international tax.It is a fast-track process where the CIT(A) level is skipped, and the assessee can directly approach the Income Tax Appellate Tribunal (ITAT) in case of any grievances without any cash outflow.

Commissioner of Income Tax (Appeals) [CIT(A)]

In the traditional tax litigation process, the CIT(A) is the first appellate authority. In case the assessee is aggrieved with the order of the AO, they can go to CIT(A). It is important here to note that CIT(A) is empowered to entertain the issues even related to transfer pricing if the DRP route is not followed.

CIT(A) Process: The assessee must file a detailed memorandum of appeal if they are aggrieved by the assessment order. The application for appeal must contain the grounds and relief sought. Once the appeal is filed, the CIT(A) considers the submissions made by the assessee and may even ask for additional documents or evidence from the AO/TPO. The CIT(A) can confirm, reduce, enhance, or even annul the assessment order and direct the AO to conduct a fresh assessment. The appeal against the order of the CIT(A) lies to the ITAT. A separate application is required to be made for stay of demand and to keep penalty proceedings under abeyance till the appeal is disposed off.

Time Frame: The assessee must file the appeal within 30 days from the receipt of the final assessment order.

Choice of Forum

For transfer pricing disputes, the DRP in Income Tax offers:

• Faster resolution: Quick directions from DRP, skipping CIT(A).
• Direct ITAT appeal: Allows taxpayers to approach ITAT directly in case of grievances.
• No cash outflow required initially: Unlike CIT(A), stay of demand is simpler.

Whereas CIT(A) provides:

• Broader appellate forum: Can entertain a wider scope of issues beyond DRP.
• Right to be heard: Offers detailed hearing and review opportunities.
• Stay benefits: Revised instructions may allow partial payment and abeyance of demand.

Taxpayers should carefully evaluate the advantages of the DRP in Income Tax versus CIT(A) before selecting the appropriate forum for transfer pricing disputes.