Section 144C of the Income Tax Act: A Complete Guide to Draft Assessment and Dispute Resolution Panel (DRP)

Section 144C of the Income Tax Act plays a crucial role when it comes to safeguarding the interests of taxpayers, especially in cases involving international taxation & transfer pricing adjustments. Introduced to bring greater transparency & efficiency, Section 144C deals with the procedure for a draft assessment order & provides for the constitution of a Dispute Resolution Panel (DRP). This section offers an alternate mechanism to reduce litigation & ensure fair hearings.

What is Section 144C of the Income Tax Act?

Section 144C of the Income Tax Act, 1961 lays down the legal framework for issuing a draft assessment order in cases where the Assessing Officer (AO) proposes adjustments that are likely to be prejudicial to the taxpayer, particularly in cases involving foreign companies & transfer pricing. This ensures that taxpayers get a fair opportunity to raise objections before a final assessment is made.

The DRP (Dispute Resolution Panel) is constituted under this section to hear the objections filed by taxpayers. This panel comprises three Commissioners of Income Tax & acts as an independent body to ensure impartiality.

Applicability of Section 144C

The provisions of Section 144C apply when:

• The assessee is a foreign company or
• The case involves transfer pricing adjustments or
• Variations are proposed in income or tax which are prejudicial to the assessee.

The draft assessment order is mandatory in these cases before passing the final order."

Procedure Under Section 144C

Let’s break down the procedure into simple steps:

1. Issuance of Draft Assessment Order:
   The Assessing Officer (AO) first issues a draft assessment order when adjustments to income are proposed that the assessee may find unfavourable.
2. Objections to the Draft Order:
   The assessee has the right to file objections within 30 days from the receipt of the draft order. These objections are filed before both the DRP & the Assessing Officer.
3. Decision by Dispute Resolution Panel (DRP):
   The DRP hears the objections, considers the facts, & issues directions that the AO is bound to follow.
4. Final Assessment Order:
   Based on the directions of the Dispute Resolution Panel, the final assessment order is passed.
5. Appeal to ITAT:
   If the assessee is still aggrieved, they can appeal against the final assessment to the Income Tax Appellate Tribunal (ITAT).

Key Features of Section 144C

• Time-Bound Process: The DRP must dispose of objections within 9 months from the end of the month in which the draft order is forwarded.
• Binding Directions: The AO is legally bound to follow the directions issued by the DRP.
• No Demand Until Final Order: No tax demand is raised until the final assessment order is passed."

Importance of Dispute Resolution Panel (DRP)

The DRP under Section 144C provides a platform for speedy dispute resolution, reducing the burden on appellate forums & ensuring fair hearing. It helps taxpayers avoid prolonged litigation while maintaining the integrity of the tax system.

The DRP has been particularly beneficial in international taxation & transfer pricing cases, where complexities often lead to disputes between the tax authorities & foreign entities.

Section 144C and Faceless Assessments

In recent years, India has adopted faceless assessments to improve transparency & efficiency in the tax system. Even under faceless regimes, the draft assessment order & DRP mechanism continue to play a pivotal role in ensuring due process.

Benefits of Section 144C of the Income Tax Act

• Ensures a fair chance for the assessee to present their case.
• Reduces arbitrary tax assessments.
• Provides a time-bound, structured mechanism for dispute resolution.
• Lowers the litigation burden for both taxpayers & tax authorities.

Common Queries on Section 144C

1. What is the purpose of the draft assessment order under Section 144C?
   It gives the assessee an opportunity to raise objections before the assessment is finalized.
2. Who can approach the DRP?
   Foreign companies & cases involving transfer pricing adjustments.
3. Is the DRP's decision binding?
   Yes, the directions of the DRP are binding on the Assessing Officer.
4. Can the assessee appeal against the final order?
   Yes, appeals can be made to the Income Tax Appellate Tribunal (ITAT).

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