The income tax department cannot proceed with the collection of disputed taxes from associate enterprises of US-based entities when Mutual Agreement Procedure (MAP) proceedings invoked under the double tax avoidance treaty between India and the US are pending, the Punjab and Haryana High Court has ruled.
The court recently upheld a memorandum of understanding (MoU) under the India-US tax treaty that barred the taxman from collecting disputed tax during the pendency of MAP proceedings. MAP proceedings are provided in tax treaties to allow competent authorities of the government of the contracting states to resolve matters of international taxation through negotiation.
The Indo-US tax treaty provides for MAP, whereby a person aggrieved by taxation can present his case to the competent authority of the country of his residence. As per the MoU in the tax treaty, the assessing authority is required to suspend collection of taxes and interest till such time as MAP proceedings are disposed of. The assessee, on the other hand, is required to provide an irrevocable bank guarantee as security to the authority.
In this case, the Deputy Commissioner of Income tax (DCIT), Gurgaon, had raised a tax liability amounting to R27.15 crore against Motorola Solutions India, a subsidiary of Motorola Solutions, USA, in March 2013 for assessment years 2003-04, 2004-05 and 2005-06.
After sending a notice to the company, the DCIT appropriated R26.26 crore from the company?s account as demand for assessment year 2005-06. Against this action of DCIT, Motorola approached the high court.
During the proceedings before the high court, Motorola said that the matter had been agitated before the CIT (A), Bangalore, in February 2009 and that Motorola USA had then invoked MAP proceedings before the competent authority in that country. The competent authority in India i.e. the Joint Secretary (Foreign Tax & Tax Research-1), CBDT, had been informed about the invocation of the proceedings and had admitted the pendency of MAP before the CIT (A).
The CIT(A) had disposed of the matter after suspending the collection of the disputed tax demand till the disposal of the MAP proceedings and had asked the company to furnish a bank guarantee as per the treaty.
Later on, when the matter was transferred to Gurgaon, the DCIT raised the tax demand despite a stay on the collection of the tax by the CIT(A) and went on to appropriate R26.26 crore.
The DCIT, in his tax demand, had stated that it was ?not clear? as to whether a request for suspension of collection of taxes had been admitted by the Indian competent authority and that without confirmation of the suspension, the assessee should deposit the raised tax demand.
The high court, in turn, quashed the DCIT?s order and directed him to refund the said amount, observing that it is ?distressing? that DCIT drew ?an artificial distinction? between the pendency and admission of the MAP and used it as a device to appropriate an amount, whose recovery had been stayed.