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MAP initiated under the India-USA tax treaty for deferment of assessment
proceedings and su...
 In view of this background, the taxpayer made an
2
application to the US competent authority under MAP as
per India-USA ...
 The tax officer could not have passed nil withholding
tax order since the acceptance of the taxpayer's claim
for AY 2010...
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MAP initiated under the India-USA tax treaty

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Recently, the Bombay High Court (High Court) in the case of UPS Worldwide Forwarding Inc (the taxpayer) held that Mutual Agreement Procedure initiated on the taxpayer for deferment of assessment proceedings and suspension of collection of taxes for past year would also cover subsequent year under the India-USA tax treaty. The High Court directed the tax department to issue appropriate nil withholding tax certificates in respect of subsequent Assessment Year to the taxpayer, upon the taxpayer giving an undertaking to keep alive the bank guarantee already furnished to secure the tax department of its dues with respect to tax and interest.

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MAP initiated under the India-USA tax treaty

  1. 1. KPMG FLASH NEWS KPMG IN INDIA MAP initiated under the India-USA tax treaty for deferment of assessment proceedings and suspension of collection of taxes for past year would also cover subsequent year 22 November 2013 Background Recently, the Bombay High Court (High Court) in the case 1 of UPS Worldwide Forwarding Inc (the taxpayer) held that Mutual Agreement Procedure (MAP) initiated on the taxpayer for deferment of assessment proceedings and suspension of collection of taxes for past year would also cover subsequent year under the India-USA tax treaty (tax treaty). The High Court directed the tax department to issue appropriate nil withholding tax certificates in respect of subsequent Assessment Year (AY) to the taxpayer, upon the taxpayer giving an undertaking to keep alive the bank guarantee already furnished to secure the tax department of its dues with respect to tax and interest. Facts of the case  The taxpayer, a US company, engaged in the business of international express delivery and has developed an international network of transporting documents, parcels and other items from one country to another.  The taxpayer entered into an agreement with an Indian company for rendering of services in respect of delivering parcels outside India having originated in India, while the Indian company renders services to the taxpayer in respect of documents or parcels to be delivered in India having originated outside of India.  For the services rendered for outbound documents, the taxpayer receives compensation and in respect of inbound documents, the taxpayer pays the compensation. The taxpayer claimed that the compensation received from its overseas customers in respect of parcels to be delivered in India was not taxable. However, the Assessing Officer (AO) did not agree on the same. _________________ 1 UPS Worldwide Forwarding Inc. v. ADIT/DIT (Writ Petition No. 1455 of 2013) – Taxsutra.com © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  2. 2.  In view of this background, the taxpayer made an 2 application to the US competent authority under MAP as per India-USA tax treaty, for AY 2001-02 to 2009-10 and claimed that income received from the Indian company was not taxable. Subsequently, the taxpayer made an application for inclusion of AY 2010-11 in the pending MAP proceedings.  Keeping in view the hardship faced by the taxpayer during pendency of the MAP proceedings, the competent authorities of India and USA entered into a Memorandum of Understanding (MOU). As per the MOU, the competent authorities have agreed to defer assessment and/or suspend collection of tax including collection of tax on income that is subject to MAP proceedings for prior, current or future taxable years. However, during the pendency of the MAP proceedings, the taxpayer was required to furnish a bank guarantee securing the dues of the Indian tax department in which the income is the subject matter of tax.  Consequent to the application made by the taxpayer to the AO, the AO issued nil withholding certificates for AY 2007-08 to 2009-10 for which original MAP was pending. However, he declined to grant withholding certificate for AY 2010-11.  Subsequently, the taxpayer filed an application with the AO for nil withholding certificates for AY 2010-11 and furnished a bank guarantee in favour of the tax department, securing the tax department in respect of its legitimate tax dues in MAP proceedings. However, the AO rejected the application on the grounds that the taxpayer's request for inclusion of AY 2010-11 was not pending before the Indian competent authorities.  The higher tax authority has not considered revision application made by the taxpayer and dismissed the same.  Aggrieved by the order of lower authorities, the taxpayer filed a writ petition before the High Court. Issue before the High Court  Whether subsequent year is also covered under the original MAP for deferment of assessment proceedings and suspension of collection of taxes under the tax treaty? ______________________________________________________ 2 As per the Mutual Agreement Procedure (MAP), a taxpayer can approach the US competent authority in case he was of a view that the action of Indian tax authorities are not in accordance with the tax treaty. The taxpayer can approach the US competent authority, notwithstanding that he has remedies available under the domestic laws of India. Under these circumstances, the competent authorities of both the countries endeavour to resolve the dispute raised by MAP. Taxpayer’s contentions  Once MAP was initiated on a specific issue, the suspension of collection of withholding taxes is also mandated for all future taxable years. In the present case, identical issues over the earlier years have been admitted under the MAP and the benefit of the same should also be available in the future years till the issue has been resolved. Thus the suspension of collection of taxes under the MOU would be available even in respect of subsequent year.  The taxpayer had made an application to the competent authority for admission of subsequent year under MAP and the said application has been acknowledged by both the competent authorities. Therefore, the findings of the tax authorities were contrary to the application.  The MOU provides that suspension of collection of withholding tax would apply even to MAP proceedings for prior years. The grant of nil tax withholding certificate for AY 2010-11 under Section 197 of the Income-tax Act, 1961 (the Act) would cause no prejudice to the revenue as its interests were protected by the taxpayer since it had furnished a bank guarantee for the requisite amount of tax payable.  It was known to the tax officer that the issue arising in AY 2010-11 had been admitted for MAP proceedings and acknowledged by both the competent authorities. Therefore, the tax officer ought to have granted the benefit of MOU. Tax department’s contentions  As per CBDT Instruction , the pendency of the MAP proceedings can be taken cognizance only when it has been admitted by competent authority in India by confirmation. In the present case, though bank guarantee has been furnished, the requirement of the CBDT Instruction of obtaining the confirmation from the competent authority of India had not been fulfilled. 3  The application made by the taxpayer before the competent authority of USA to include AY 2010-11 as a part of original MAP proceedings was made subsequent to the application made for past years. When AO passed an order, rejecting the application, the competent authorities of India had clarified that no request for inclusion of AY 2010-11 in MAP proceedings has been received. __________________ 3 CBDT Instruction No. 2 of 2003, dated 28 April 2003 © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  3. 3.  The tax officer could not have passed nil withholding tax order since the acceptance of the taxpayer's claim for AY 2010-11 in MAP proceedings came after the end of AY 2010-11. Therefore, in the absence of a certificate being available during the course of AY, the taxpayer could not be granted a nil withholding certificate.  Relying on CBDT Instruction, it was contended that unless the application made to the competent authority under the MAP has been admitted, the MOU does not become operational so as to suspend the assessment and collection of taxes. High Court’s ruling  Perusal of the tax treaty read with MOU, it was clear that the suspension of assessment and collection of tax takes place, as soon as the application was made to the competent authorities to settle the dispute under MAP and the revenue is secured by the taxpayer furnishing a bank guarantee. Our comments This is a welcome ruling of the Bombay High Court for tax disputes under MAP. The term ‘admitted’ by the Indian competent authority has been held by the High Court to mean that the competent authority in India has to acknowledge that the MAP proceedings have been invoked by taxpayers through the US competent authority. The High Court also observed that the MOU of the tax treaty explicitly provides that withholding of tax on income can be a subject matter of MAP for prior, current and future taxation years. The High Court appropriately dealt with the importance and precedence of clauses under the MOU read with the Article on MAP of the IndiaUSA tax treaty while applying the procedures of MAP. Recently, the Punjab and Haryana High Court in the case 4 of Motorola Solutions India Pvt. Ltd. quashed the show cause notice for tax demand issued to the taxpayer in a MAP case by holding that the department was not justified in drawing an artificial distinction between ‘pendency’ and ‘admission’.  There is no provision either in the tax treaty or the MOU for a process of admission and thereafter final consideration from income-tax authority.  The MOU of the tax treaty explicitly provides that withholding of tax on income can be a subject matter of MAP for prior, current and future taxation years.  When an AY for which a certificate as sought has expired, yet the suspension of assessment and collection of taxes will take place, if the proceedings are under consideration of Competent Authorities under the MAP.  The word ‘admitted’ by the Indian competent authority only means that the competent authority in India has to admit i.e. acknowledge that the MAP proceedings have been invoked by taxpayers through the US competent authority.  In view of the aforesaid findings, the High Court held that a subsequent assessment year is also covered under the original MAP application. Accordingly, the High Court directed the tax department to issue appropriate nil withholding tax certificate in respect of AY 2010-11 to the taxpayer, upon the taxpayer giving an undertaking to keep alive the bank guarantee already furnished and to give a further bank guarantee, if necessary, to secure the tax department of its dues with respect to tax and interest to the satisfaction of the tax department. ____________________ 4 Motorola Solutions India Pvt. Ltd. v. CIT (Writ Petition No.7652 of 2013) © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  4. 4. www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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