Instruction No. 3/2015

F.No.  500/2/2015-APA-11
Central Board of Direct Taxes
Foreign Tax and Tax Research Division- I APA-11 Section

New Delhi, dated the 10th April, 2015

To
All Principal CCsIT and CCsIT, All Principal DsGIT and DsGIT

Subject: India-UK Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (DTAC or the Convention) - Suspension of Collection of Taxes during Mutual Agreement Procedure (MAP) – Regarding

Article 27 of the I ndia-UK DTAC provides for a Mutual Agreement Procedure (MAP) for avoidance of double taxation. Paragraph 4 of Article 27 authorises the Competent Authorities to develop appropriate bilateral procedures, conditions, methods and techniques for implementation of MAP provided for in the Article. Accordingly, with a view to· avoid unintended hardship to the taxpayers, as well as for the efficient management of collection of revenue, the Competent Authorities of India and UK had entered into a Memorandum of Understanding (MoU) regarding suspension of collection of taxes during the pendency of MAP

2. This MoU was brought to the notice of the field formation vide Instruction No. 3/2004 dated 19/3/2004, wherein it was stated that the collection of outstanding taxes in the case of a taxpayer, who is a resident of UK and whose request under MAP is under consideration of the Competent Authorities, shall be kept in abeyance subject to furnishing of a bank guarantee of  an amount equal to the amount of tax under dispute and interest accruing thereon as per the provisions of the Income-tax Act

3. In view of a large number of transfer  pricing disputes arising over a period of time and also in view of the stated intention of the MoU to avoid unintended hardship to the taxpayers involved in MAP, it is clarified that the provisions of the MoU  are  equally  applicable  to  Indian  resident  taxpayers   in  cases  involving transfer  pricing adjustments, where  MAP has been invoked by the  UK resident. Thus, an Indian resident taxpayer  liable to pay taxes on income, due to transfer pricing  adjustments,  which  may  have  been charged  to  tax  in the  hands  of  its Associated Enterprise (AE) in UK, is covered under the provisions of the aforesaid MoU.

4. In view of the above, Instruction No. 3/2004 dated 19/3/2004 is modified as under:

4.1 On receipt of a formal request for suspension of collection of outstanding tax in terms of the MoU from a taxpayer being a resident of UK, or a resident of India in cases involving transfer pricing adjustments, where MAP has been invoked through the UK Competent Authority, the Assessing Officers  are required to keep the enforcement  of  collection  of  outstanding  taxes  in abeyance in respect of such taxpayer subject to fulfillment of the following conditions.

(i) the Foreign Tax and Tax Research Division of the Central Board of Direct Taxes confirms the pendency of MAP; and
(ii)  the taxpayer furnishes  a bank guarantee to the Assessing  Officer in the model draft format annexed to the MoU for an amount calculated in accordance with the manner indicated therein.

4.2 The effect of the MoU is that the furnishing of the bank guarantee should be treated as sufficient arrangement to qualify for exercising discretion by the Assessing Officer for extension of time limit for payment of taxes in terms of sub­ section (3) of Section 220 of the Income-tax Act. The extension, however, shall subsist only till the time the case is under MAP. In case the Competent Authorities agree that there is no resolution possible, an intimation to this effect shall be given to the Assessing Officer who shall, thereafter, be entitled to invoke the bank guarantee in case the taxpayer fails to pay the demand.

4.3 In cases where a resolution of dispute is arrived at by the Competent Authorities after mutual consultation, the  tax  payable  shall  be determined  by the Assessing Officer in terms of such resolution as per the procedure laid down in Instruction No. 1 dated 6.11.2002. After the revised notice of demand is sent to the taxpayer, the amount shall be recoverable from the taxpayer. In case the taxpayer fails to pay the demand, the bank guarantee so furnished shall be invoked after seeking the consent of  the  Indian  Competent  Authority,  which shall grant the same after intimating its counterpart in UK.

4.4 The Assessing Officers as well as their controlling officers are advised to keep a close watch on the limitation of the bank guarantee furnished under the MAP.

5. A copy of the MoU, along with its Annexure containing the model draft format of the bank guarantee, is enclosed.

6. These instructions are issued under section 119 of the Income-tax Act and the same may be brought to the notice of all the officers in your charge.

[Anchal Khandelwal]
Under Secretary to the Government of India

MEMORANDUM OF UNDERSTANDING REGARDING SUSPENSION OF COLLECTION OF TAXES DURING MUTUAL AGREEMENT PROCEDURE

Having regard to the hardship faced by the taxpayers during the course of a mutual agreement procedure, the Competent Authorities of India and the United Kingdom under the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains {the "Convention") have determined and agreed that efficient processing of Mutual Agreement Procedure ( "MAP") cases will be facilitated by suspending collection of any amounts of tax, including also any related interest or penalties, for any taxable years which are subject of MAP proceedings.

WHEREAS:

(A) The Competent Authorities have arranged and desired to agree that with regard to amounts of taxes covered under Article 2 of the Convention and potentially payable to the government of the United Kingdom, the Inland Revenue will suspend collection proceedings until putting into effect a mutually agreed disposition of the MAP proceedings concerning the amounts in question; and

{B) The Competent Authorities have arranged and desired to agree that with regard to amounts of taxes covered under Article 2 of the Convention and potentially payable to the Government of India, the Assessing Officer will suspend collection until putting into effect a mutually agreed disposition of the MAP proceedings concerning the amounts in question.

NOW THEREFORE, in consideration of the premises, covenants and conditions herein contained and in implementing this arrangement.

IT IS HEREBY AGREED  between the Competent Authorities  as follows:

( 1) The tax authorities of India and the United Kingdom shall retain the right to demand security in appropriate cases, as deemed fit and necessary to avoid prejudicing the interests of their respective governments.

( 2) In India, as security, a taxpayer shall provide an irrevocable Bank Guarantee issued by any scheduled bank, or by an _ Indian branch of a foreign bank approved by the Reserve Bank of India to carry out banking business in India, as per annexure 'A' to this Memorandum.

( 3) In the United Kingdom, as security, a taxpayer shall, upon demand, provide a Bank Guarantee issued by any bank approved by the United Kingdom.

( 4) The amount, if any, for which security is demanded under paragraph {2) or (3) above, as the case may be, shall not exceed the amount of additional tax proposed or demanded by the tax authority requiring the security {aggregated for all the period{s) pending before the Competent Authorities), as adjusted by the Assessing Officer in accordance with domestic  laws, and subject  to  further  adjustment  for  interest  on these amounts calculated at the statutory rate on non-payments or late payments, as the case may be.

(5) Collection and assessment (if applicable) of any interest or penalty levied from the concerned taxpayer, in relation to amounts suspended from collection or deferred from assessment (if applicable) under  this Agreement, shall also be suspended. For the avoidance of doubt, interest, if appropriate will continue to run whilst collection is suspended.

(6) The amounts of tax(es) identified under recitals (A) and (B) above, shall include but are not limited to:

(i) Tax demands that have arisen as a result of tax audit or appeal proceedings pending at the time of this agreement.

(ii) Tax demands, as a result of a tax assessment of re-assessment proceeding, or a tax appeal,  or on  a review by a Commissioner of Income Tax of an assessment (or re-assessment} proceeding on the grounds that it is prejudicial to the interests of the revenue that could arise subsequent to this agreement.

(iii) Withholding tax on income or other similar advance taxes that are the subject of MAP proceedings for prior, current or future taxable years.

(7) The Competent Authorities shall endeavour to either resolve or close the case within a period of two years from the date on which one Competent Authority notifies the other that the application from the Taxpayer(s) for assistance under the MAP has been received.

(8) Any draw-down upon a bank Guarantee or Letter of Credit referred to in paragraph (2) or (3) above will be authorized only after notice by one Competent Authority to the other at the conclusion of the Mutual Agreement Procedure.

(9) In the event of a lapse of security under paragraph (2) or (3), the taxpayer shall be permitted to substitute another form of security under such paragraph, provided such substitution takes effect not less than 30 days prior to the lapse of the prior security. Such substitution will relieve the bank which provided the first Bank Guarantee from its obligations to the concerned Government of India or the United Kingdom under that first security.

(10) The  terms  of  this  Memorandum  may  be  reviewed  by  the  Competent Authorities at anytime in the future upon the request of either party.

Annexure-A    Click Here >>