2013 (11) TMI 429 - HC - Income Tax

TDS u/s 195 - Issuance of Certificate of No TDS or Nill Rate of TDS u/s 197 - DTAA between USA and India - AO refused to issue the certificate on the ground that the FTD of CBDT had informed that no request for inclusion of Assessment Year 201112 i.e. financial Year 201011 had been received for MAP - CIT refused to revise the order u/s 264 - Mutual Agreement Procedure (MAP) to approach to competent authority for resolving tax issues - taxability of income under an agreement from its overseas customers in respect of parcels/documents to be delivered in India. Held that - it is 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. The word admitted by 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 tax payers through the Competent Authority in USA. It does not mean that the invocation of the MAP proceedings by Competent Authority by the tax payer has been admitted for the future consideration by the authorities. Order of CIT rejecting revision application u/s 264 is not sustainable in law as it is in the face of Article 27 of the DTAA entered into between USA and India and clause 6 (iii) of MOU entered into between Competent Authority in USA and India in respect of application made to any of them under the MAP proceedings. - Decided in favor of assessee.

Issues Involved:
1. Challenge to the order dated 21 March 2013 under Section 264 of the Income Tax Act, 1961.
2. Rejection of the petitioner's application for NIL Tax Withholding certificate under Section 197 of the Act for Assessment Year 2010-11.
3. Applicability and interpretation of the Double Taxation Avoidance Agreement (DTAA) between USA and India.
4. Application of the Mutual Agreement Procedure (MAP) under Article 27 of the DTAA.
5. Validity of the Memorandum of Understanding (MOU) regarding deferment of assessment and suspension of collection of taxes during MAP proceedings.
6. Requirement of furnishing a bank guarantee to secure revenue during MAP proceedings.
7. Impact of the timing of MAP proceedings on the issuance of NIL Tax Withholding certificates.

Detailed Analysis:

1. Challenge to the order dated 21 March 2013 under Section 264 of the Income Tax Act, 1961:
The petitioner challenged the order dated 21 March 2013 passed by the Director of Income Tax (International Taxation), which upheld the rejection of the petitioner's application for a NIL Tax Withholding certificate under Section 197 of the Act for Assessment Year 2010-11. The petitioner argued that the impugned order ignored the initiation of MAP proceedings and the provisions of the DTAA and MOU.

2. Rejection of the petitioner's application for NIL Tax Withholding certificate under Section 197 of the Act for Assessment Year 2010-11:
The petitioner filed an application on 29 March 2010 for a NIL Tax Withholding certificate, which was rejected by the Assistant Director of Income Tax (International Taxation) on 15 December 2010. The rejection was based on the information that no request for inclusion of Assessment Year 2010-11 in MAP proceedings had been received by the Foreign Tax Division (FTD) of the Central Board of Direct Taxes (CBDT).

3. Applicability and interpretation of the Double Taxation Avoidance Agreement (DTAA) between USA and India:
The petitioner, a tax resident of the USA, argued that its income from services rendered to an Indian entity was not taxable in India under the DTAA. The DTAA provides a framework for resolving conflicts between the tax regimes of the contracting states through the MAP.

4. Application of the Mutual Agreement Procedure (MAP) under Article 27 of the DTAA:
Under Article 27 of the DTAA, a taxpayer can invoke MAP proceedings if they believe that the actions of one contracting state result in taxation not in accordance with the DTAA. The petitioner invoked MAP proceedings for Assessment Years 2001-02 to 2007-08 and sought to include subsequent years, including 2010-11.

5. Validity of the Memorandum of Understanding (MOU) regarding deferment of assessment and suspension of collection of taxes during MAP proceedings:
The MOU between the competent authorities of the USA and India provides for the deferment of assessment and suspension of tax collection during MAP proceedings, provided the taxpayer furnishes a bank guarantee. The petitioner argued that the MOU should apply to subsequent years until the issue is resolved.

6. Requirement of furnishing a bank guarantee to secure revenue during MAP proceedings:
The petitioner furnished a bank guarantee of Rs. 6,07,55,238 to secure the revenue, as required by the MOU. The petitioner contended that this should have enabled the issuance of a NIL Tax Withholding certificate for Assessment Year 2010-11.

7. Impact of the timing of MAP proceedings on the issuance of NIL Tax Withholding certificates:
The respondent authorities argued that the MAP proceedings for Assessment Year 2010-11 were only admitted on 21 September 2012, which was after the rejection of the petitioner's application. The court held that the suspension of assessment and collection of taxes should take place as soon as an application is made to the competent authorities, provided the revenue is secured by a bank guarantee.

Conclusion:
The court found that the impugned order was not sustainable in law as it was contrary to Article 27 of the DTAA and the MOU. The court quashed the orders dated 21 March 2013 and 15 December 2010, and directed the issuance of a NIL Tax Withholding certificate for Assessment Year 2010-11, subject to the petitioner maintaining the bank guarantee. The petition was allowed with no order as to costs.

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