Explaining alternative dispute resolution (ADR)

General, 1. Dispute resolution is a preferred vehicle to settle cases where questions of facts or a composite question of facts and law is involved. Pakistan’s Income Tax Ordinance, 2001 introduced this vehicle through the Finance Act 2004; however, due to frequent changes this vehicle has not flourished even after the lapse of two decades. In the Finance Act 2023, the law was rewritten. However, rules for the same, as required under the law, were not prescribed.

2- Now, the Federal Board of Revenue has issued SRO 1377(I) 2024 dated September 6, 2024 to amend sub rules (1 to 15) of Rule 231C of the Income Tax Rules, 2002, which relates to all disputes brought for resolution as specified in sub-section (1) of section 134A of the Ordinance. Section 134A is titled ‘Alternative Dispute Resolution’ (ADR).

3- ADR provisions were revamped by the Finance Act 2023. This is a regular feature of FBR and these provisions have been rewritten at least four times. As a result of frequent changes, this relevant and reasonable vehicle has not developed. It is hoped that this mistake will not be repeated.

4- The person who can apply for formation of an ADR Committee is termed as an “applicant”, which has been defined as aggrieved person or a class of persons in case identical issues are involved and who have brought a dispute for resolution under section 134A.

Main issue for applicants

5- The main issue for the aggrieved party seeking the ADR procedure was the condition of withdrawing the appeals from all appellate forums. This was not possible for the aggrieved party for various reasons. At the same time, it was considered by the tax department that the right to seek remedy through ADR was not to be abused. When the Finance Act 2023 amended ADR provisions, it appeared that the condition of withdrawing the appeal had been made mandatory. This was not the correct view. Now in the rules this misapprehension has been clarified which is explained in the following paragraphs:

6. ADR procedure

a. Under the new provisions any taxpayer (having a tax dispute involving a sum of liability of tax of fifty million rupees or above) can seek remedy under the ADR. For the State-Owned Enterprises (SOEs), there is no limit of the amount and in those cases all matters are to be taken to the ADR. It appears that the threshold of 50 million Rupees will also be available to a class of persons who have referred a dispute jointly although the disputed tax liability individually may be less than 50 million Rupees.

b. “State-Owned Enterprise” shall have the same meaning as assigned thereto in the State-Owned Enterprises (Governance and Operations) Act, 2023 (VII of 2023);

c. When a matter is taken to ADR, the taxpayer will place before the ADR the initial proposition for resolution of the dispute and the amount is to be paid if that dispute is settled in the manner as suggested by the taxpayer. This procedure is laid down in the application form now prescribed under these rules. The examination of the said form reveals that settlement is with regard to the dispute not with reference to an assessment. This means that if there are more than one dispute between the taxpayer and the tax department then the taxpayer may refer all or any other number of disputes to the ADR. In the case of SOEs this option is not available and all matters are to be taken to ADR. In other words, the right of appeal for SOEs has now been withdrawn and all tax disputes are to be referred to ADR.

d. The recovery of tax relating to the dispute is stayed if FBR appoints a Committee to settle the dispute. There is effectively no stay unless FBR agrees to appoint a Committee to settle the dispute.

e. FBR is required to form an ADR Committee for all cases; however, the substantive provisions as laid down below give the impression that FBR may apply discretion whilst recommending cases to ADR:

The Board may, after examination of the application of an aggrieved person, appoint a committee, within fifteen days of receipt of such application in the Board,

f. The committee shall consist of:

(i) a retired judge not below the rank of a judge of a High Court, who shall also be the Chairperson of the Committee, to be nominated by the Board from a panel notified by the Law and Justice Division for such purpose;

(ii) the Chief Commissioner Inland Revenue having jurisdiction over the case; and

(iii) a person to be nominated by the taxpayer from a panel notified by the Board comprising

(a) chartered accountants, cost and management accountants and advocates having a minimum of ten years’ experience in the field of taxation;

(b) officers of the Inland Revenue Service who stood retired in BS 21 or above; or

(c) reputable businessmen as nominated by the Chambers of Commerce and Industry:

g. The application for ADR as per Section 134A requires

(b) an undertaking that the applicant shall accept the decision of the Committee which shall be binding on him in all respects and shall on receipt of the decision immediately withdraw any and all pending litigation or cases of any kind in respect of the dispute, mentioning details thereof:

Provided that if the applicant is an SOE, it shall withdraw any and all such pending litigation and cases immediately and mention the details thereof in the undertaking:

h. The ADR provisions may create an impression that the decision of the committee is mandatorily binding on the taxpayer. This impression is not correct, which has been adequately answered in Rule (9) of the Rules as under:

(9) The decision of the Committee under sub-rule (8) shall be binding on the Commissioner when the applicant; being satisfied with the decision, has withdrawn the appeal pending before the court of law or any appellate authority in the form as set out in Part III of the Schedule to this rule and has communicated the order of the withdrawal to the Commissioner:

Provided that if the order of the withdrawal is not communicated to the Commissioner within sixty days of the service of decision of the Committee upon the aggrieved person. The decision of the Committee shall not be binding on the Commissioner

i. It, therefore, means that an undertaking will be filed along with the proposal for resolution of a dispute. There will be no withdrawal of appeal at that stage. If the decision of the Committee is in line with the proposal then the taxpayer will be required to withdraw the appeal on that matter. If not then the taxpayer may pursue the appeal at a regular appellate forum. If the letter of withdrawal is not filed within six months of the decision of the Committee then the same will not be binding on the FBR. This is a very reasonable proposition and it is recommended that there should not be further amendment in the law and the rules for the time being.

j. The Commissioner shall also withdraw the appeal, if any, pending before any court of law or an appellate authority in respect of dispute within thirty days of the communication of the order of withdrawal by the aggrieved person to the Commissioner.

k. The Committee shall examine the issue and may, if it deems necessary, conduct inquiry, seek expert opinion, direct any officer of the Inland Revenue or any other person to conduct an audit and shall decide the dispute by majority, within forty-five days of its appointment extendable by another fifteen days for the reasons to be recorded in writing.

l. The decision by the Committee shall not be cited or taken as a precedent in any other case or in the same case for a different tax year.

No decision by ADRC

m. If the Committee fails to decide within the period of sixty days under sub-section (5), the Board shall dissolve the Committee by an order in writing and the matter shall be decided by the court of law or the appellate authority where the dispute is pending under litigation.

n. FBR shall communicate the order of dissolution to the aggrieved person, court of law or the appellate authority and to the Commissioner.

o. On receipt of the order of resolution, the court of law or the Appellate Tribunal shall decide the appeal within ninety days of the communication of the said order.

Copyright Business Recorder, 2024