Disputes between multinational companies and Indian tax authorities now stand a better chance of quick resolution, with the government announcing the setting up of a collegium of commissioners to look into the issue.

Under the new scheme, proposed by finance minister Pranab Mukherjee in the Budget on Monday, the collegium will decide on all disputes between the tax department and the taxpayer. The collegium will comprise three members, and its order will be binding on the assessing officer.

Cross-border deals were brought under the capital gains tax net last year after the government woke up to the possibility of a tax revenue goldmine when British mobile giant Vodafone bought a controlling stake in Hutchison Essar for $11 billion. More such deals followed, with companies contesting the tax demand.

After the amendment of the relevant provision of the Income-Tax Act, the assessing officer is expected to send a draft order to the taxpayer-company. On the basis of the draft order, the company can approach the collegium of commissioners.

The change eliminates the forum of first appellate authority, the commissioner income-tax (appeal), or CIT (A). It also restricts the possibility of litigation by making the collegium’s decision binding on the assessing officer. This is in total variance to the current practice, where any of the parties —the department or the taxpayer — can challenge the assessing officer’s decision before the first CIT (A).

“The introduction of collegium of commissioners is a much healthier system than the existing one, which is a one man body,” said Dinesh Kanabar, leader-taxation, PricewaterhouseCoopers.

However, the taxpayer can appeal against the decision taken by the collegium before the Income-Tax Appellate Tribunal (ITAT), the second appellate body, and the final fact-finding authority on tax matters. The lack of safe harbour rules, so far, has paved way for a series of litigations ever since transfer pricing rules were introduced in 2001. The captive units of the outsourcing industry have been asking for such rules for some time. Safe harbour rules mean that if the variation between the margin declared by a taxpayer company and the estimate of the income-tax department is within a specific margin, for example 5%, the return filed by the corporate should be accepted by the tax authority.

The Central Board of Direct Taxes (CBDT) will be framing the rules that would also specify the acceptable margins for different sectors. Safe harbour rules is currently in vogue among EU countries as well as in the US. The Income-Tax Appellate Tribunal (ITAT) has suggested this measure in several of its orders on the disputes between MNCs and Indian tax authorities.

Said Samir Gandhi, partner, Deloitte Haskins: “The objectives of safe harbour provisions confer a host of benefits to taxpayers and tax administrators. These include compliance relief, administrative simplicity and certainty. Many tax authorities apply safe harbour as a better administrative practice.”