The finance ministry will soon issue detailed guidelines for the new dispute resolution mechanism that it had promised in the budget earlier this year to swiftly settle tax liability disputes of non-resident companies. The proposal envisages setting up of five panels in different cities having powers to pass an order that would be binding on the assessing officer but not on the assessee, drastically reducing the chances of lengthy legal wrangling, a government official told ET.

The panel can provide relief on the tax liability calculated and raised by an assessment officer, but not on the penalty imposed for any violation, said the official who asked not to be named. The government had announced in budget 2009-10 that a new dispute resolution mechanism will be available for foreign companies from October 1.

Each panel will have three income tax commissioners each and be located in different cities instead of one centralised collegium of commissioners. There would be one panel each in New Delhi and Mumbai, said the official. The location of other panels will be decided later.

These panels would decide the tax liability of a non-resident tax payer, removing the subjectivity in the present system of a designated assessment officer taking a decision on whether the tax payer has under-reported his tax liability. As per the proposed system, the assessment officer would give a draft assessment order to the tax payer who gets one month to raise objections before the three-member panel. The panel will be required to give its verdict in eight months from then, which will be binding on the assessment officer but not on the tax payer.

If the assessment officer raises a demand for Rs 100, the tax-payer can explain before the panel and show why it should be less. Thus he gets an instant relief. Under the existing system, to get this relief, one has to first go to the Commissioner (Appeals) and if not satisfied, to the Appellate Tribunal and then to the high courts, explained the government official on condition of annonymity.

Even under the new system, the tax payer has to go through this normal route of grievance redressal in cases where the assessment officer orders penalty for any violation. We plan to extend the scope of this dispute resolution mechanism to domestic tax-payers too in the new direct tax code, said the official.

Consultancy firm KPMGs tax head Uday Ved told ET the new mechanism will reduce litigation significantly. Globally 60% of tax disputes are on transfer pricing (price at which an organisation transfers goods from one arm to another). In India, too, transfer pricing related tax disputes are rising day by day, said Mr Ved. He said that the new system would bring certainty on the tax liability of companies. Now, the assessee and the government go litigating at different levels of the judiciary.

That is because if the order of the Commissioner (Appeals) is favourable to the tax payer, the income tax department can appeal against it and vice-versa. Under the new system, the order of the collegium is binding on the assessment officer, but not on the tax payer. Mr Ved added that it was important that the government appoints officials with in-depth knowledge in international taxation in the panels.