Global Tax Alert | 30 October 2013

India's Bombay HC rules on inclusion of subsequent tax year under a pending MAP

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Executive summary

This tax alert summarizes the recent ruling of India’s Bombay High Court (Bombay HC) in the case of Writ Petition filed by UPS Worldwide Forwarding Inc. (Taxpayer). The Taxpayer had initiated a Mutual Agreement Procedure (MAP) under the India- US Double Tax Avoidance Agreement (Treaty) through its US Competent Authority (US CA) with respect to its Indian transactions for certain specific tax years. In light of the Memorandum of Understanding regarding Deferment of Assessment and/or Suspension of Collection of Taxes during Mutual Agreement Procedure (MOU) entered into between the CAs of India and USA, Indian tax authorities had, for these tax years, passed orders confirming nil tax withholding while making payments to the taxpayer. The Taxpayer thereafter requested the US CA to include one more tax year in the pending MAP proceedings. The Taxpayer submitted an application to the Indian tax authority for a nil withholding order in respect of such subsequent tax year. This application was not favorably considered on the basis that, up to the date of passing of the order for nil withholding order, the application for including subsequent tax year in the original MAP application was not formally admitted by the Indian CA. Receiving confirmation from the Foreign Tax Division (FTD) of Central Board of Direct Taxes (CBDT) to the effect that MAP application has been admitted by the Indian CA was considered to be a necessary requirement by Indian tax authorities.

The Bombay HC directed the Indian Tax Authority to issue a nil withholding tax order for the subsequent tax year as well. The HC concluded that the MOU specifically refers to suspension of collection proceedings for prior, current or “future” taxable years as well in relation to withholding tax on income that is the subject of MAP proceedings, provided there is a furnishing of a bank guarantee to protect the interest of revenue. Further, with respect to the MOU, it was inappropriate to expect that the relief was conditional upon confirmation from the FTD about the admission of the proceedings.

Background

The Taxpayer, a US company has ongoing transactions with an Indian company and the Taxpayer contends that the income earned is not taxable in India. The Indian tax authorities do not agree with such contention.

The taxpayer pursued MAP proceedings in his home country. A MAP is an alternate dispute resolution mechanism under which a US taxpayer can approach the US CA under MAP where he is of the view that the action of the Indian tax authorities is not in accordance with the provisions of the treaty. Under these circumstances, the CAs of both countries endeavor to resolve the dispute raised by mutual agreement.

Keeping in view the hardship faced by taxpayers during the pendency of MAP proceedings, a MOU was entered into by the CAs of the US and India. As per the MOU, the CAs have agreed to defer assessment and/or suspend collection of tax including withholding taxes for prior, current or future taxable years on income that is subject to MAP proceedings upon fulfillment of certain prescribed conditions. Accordingly, the Taxpayer was required to furnish a bank guarantee securing the dues of the Indian revenue which was the subject matter of MAP.

Pursuant to the MOU, an internal administrative instruction (Instruction No.2 of 2003 of CBDT1) was issued in India advising Indian Tax Officers to keep the enforcement of collection of outstanding taxes in abeyance for taxpayers who have invoked MAP through the US CA and a confirmation that the same has been admitted by the Indian CA is obtained from FTD of CBDT.

The Taxpayer, having furnished the requisite bank guarantee, was issued nil withholding tax orders for preceding tax years, for which the original MAP was pending. The Taxpayer thereafter filed an application with the US CA to also include a subsequent tax year. The taxpayer applied for nil withholding order for the subsequent tax year. However, for this subsequent tax year, the Taxpayer was not issued a nil withholding tax order on the basis that with respect to the said tax year, up to the date of his order, the confirmation to the effect that the request for inclusion of this tax year in the original MAP was not yet “admitted” by the Indian CA. Obtaining such confirmation was regarded as a necessary condition. The request for revision was also not considered favorably by Indian Tax Authority.

The Taxpayer subsequently filed a Writ Petition before the Bombay HC.

HC decision

The Bombay HC held the following:

  • The provisions of the treaty read together with the MOU, make it clear that the suspension of assessment and collection of tax takes place, as soon as an application is made to the CA to settle the dispute under MAP and the interest of revenue is secured by the taxpayer furnishing a bank guarantee.
  • There is no provision either in the treaty or the MOU for a process of formal admission or confirmation from the Indian Tax Authority.
  • The MOU specifically provides that withholding tax on income can be a subject matter of MAP for prior, current and even future taxation years. The NIL tax withholding order can be issued for a past year even after the conclusion of the tax year.
  • Further, reference in the Indian internal instruction that the application is “admitted” can mean nothing more than the acknowledgement that the MAP proceedings have been invoked by taxpayer through the US CA.

Deciding the issue in favor of the Taxpayer, the Bombay HC held that a subsequent tax year is also covered under the original MAP application. Accordingly, the Indian Tax Authority was directed to issue the appropriate nil withholding tax order for this year, upon the Taxpayer ensuring the validity of the bank guarantee already furnished and to providing an additional bank guarantee, if necessary, to secure the estimated tax and interest of subsequent year.

Implications

This decision clarifies that if a subsequent tax year is added to the original MAP application, the relevant reference date for seeking relief of suspension of proceedings and tax collection is the date when the taxpayer moves such an application with its home country CA in the matter of recovery. The subsequent acknowledgement or consideration by the Indian CA at a later date should not adversely impact tax consequences for the MAP applicant.

In another matter regarding MAP, the Punjab and Haryana HC in the case of Motorola Solutions India Pvt. Ltd.2 quashed the demand recovery notices raised by the Indian Tax Authority. The demand was sought to be sustained on an argument that an internal confirmation on admission of MAP was yet to be received from the Indian CA in terms of the internal Indian instruction. In this context, the HC noted that it is rather surprising or distressing that an artificial distinction was drawn between “pendency” and “admitted” and was used as a device to proceed and appropriate an amount, recovery of which had already been stayed. Such assumption of jurisdiction in violation of the treaty is clearly erroneous and bordering on the bad faith.

These decisions provide clarity on the scope of relief which a taxpayer can expect as per MOU and should be useful in instilling confidence among taxpayers seeking resolution of their tax disputes under MAP. It may also be noted that where a MAP resolution has been arrived at and accepted with respect to a particular issue for a relevant tax year, it has effect for the taxpayer for that relevant tax year and for that particular issue. Such a taxpayer also has the option to either accept the MAP resolution or follow the course of appeal prescribed under the domestic tax laws. Also, a provision comparable to the US MOU keeping the tax demand in abeyance is presently available in relation to India’s treaties with the UK and Denmark in addition to that of the US

Endnotes

1 Dated 28 April 2003.

2 TS-529-HC-2013 (P&H).

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India), Mumbai
  • Sudhir Kapadia
    +91 22 6192 0900
    sudhir.kapadia@in.ey.com
Ernst & Young LLP (India), Hyderabad
  • Jayesh Sanghvi
    +91 40 6736 2078
    jayesh.sanghvi@in.ey.com
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
  • Nachiket Deo
    +44 20 778 30862
    ndeo@uk.ey.com
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
  • Gagan Malik
    +65 6309 8524
    gagan.malik@sg.ey.com
Ernst & Young LLP, Indian Tax Desk, New York
  • Tejas Mody
    +1 212 773 4496
    tejas.mody@ey.com

EYG no. CM3921