Mutual Agreement procedure for DTAT. - Income Tax - Instruction No. 12/2002

INSTRUCTION NO. 12/2002 Dated: November 1, 2002 Sub: Mutual Agreement Procedure for Double Taxation Avoidance Convention Procedure- regarding. The Double Taxation Avoidance Conventions (DTAC) are entered into by the Government of India with various countries for the purpose of avoiding double taxation of income and also fiscal evasion. These Conventions(hereinafter referred to as Treaties) lay down a mutual agreement procedure under respective Articles for resolving difficulties arising out of the application of the convention. 2. It is normally open to the tax payer to litigate any matter before the appellate authority after an order is served on him and the litigation may proceed as per the provisions of the Income Tax Act. However, the Treaty also provides that the taxpayer may approach the Competent Authority of the Contracting State of which he is a resident where he feels that the order is not in accordance with the terms of the Treaty. Thus, the mutual Agreement Procedure is a special procedure which originates from Section90 of the It Act read with the relevant provisions of the applicable Treaty. 3. It is also important to note that the mutual agreement procedure, unlike the other appellate procedure contained in the Income Tax Act, can be initiated by a tax payer without waiting for the final order of the Assessing Officer. To be able to initiate the procedure, he has to only establish that the action of one of the contracting state will result in a taxation which, according to him, would not be in accordance with the provisions of the convention. The assessee can also initiate this procedure after receipt of the assessment order, during the course of appellate proceedings or even during the stage of subsequent appellate proceedings. A Treaty, however, normally lays down a time limit within which such request may be presented before the Competent Authority. 4. The provisions contained in Section90 of the Income Tax Act, 1961 provide that where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax or for avoidance of double taxation, the provisions of the Income Tax Act shall apply only to the extent they are more beneficial to the assessee. 5. Instances have come to notice of the Government where the tax payers have been aggrieved due to difficulties in getting the decisions arrived at under MAP implemented. Since these provisions are not frequently administered, there appears to be lack of understanding in certain quarters with regard to the procedures involved in the implementation of these provisions. Needless to mention such situations arising in the field formation cause serious embarrassment to the Government vis- -vis our treaty partners. 6. Therefore, it is essential that Income Tax authorities keep this perspective in mind while applying the provisions of the Treaty and circumstances under which the MAP is invoked and finally the manner in which the agreement, if any, arrived at by the Competent Authorities under the treaty provisions needs to be implemented. In this regard, the following aspects need to be borne in mind: a. Under the provisions of the Income Tax Act, the treaty provisions override the domestic law if these are more beneficial to the assessee. b. Article on Mutual Agreement Procedure in our respective treaties does give an option to the tax-payer of India as also of other countries to approach the respective Competent Authorities if he is aggrieved by the action of the tax authorities which, according to him are not in accordance with the provisions of the treaty. c. The Treaty provides for a well-laid procedure to resolve the case by mutual agreement in terms of the provisions stipulated therein. As per the procedure followed in the Ministry, such agreements are first arrived at the level of Competent Authorities, then these are put up to the Chairman of the CBDT for his approval before these are communicated to the field authorities. d. The time limits or the procedures laid down under the Income Tax Act will not restrict the application of the treaty provisions or the implementation of the agreement arrived at by the Competent Authorities. 7. After careful consideration of these issues it has been decided that once the Competent Authority communicates the decision to the Chief Commissioner/Director General in respect of any taxpayer, the effect shall be given to the decision of the Authority treating it as a part of provision of the Treaty itself as applicable to the particular case of the applicant. In order to give effect to the decisions under MAP the A.O. may have to deal with any one of the following situations: - i. In case where the assessee refuses to accept the decision under MAP, the Assessing Officers or the appellate authorities shall proceed with the assessment or the appellate proceedings as the case be, as if there were no MAP agreement in the case after taking into account the provision of law as well as all the circulars/instructions and respective provisions of the Treaty applicable to such cases. ii. Where the assessment proceedings are pending:- This will be one of the simplest cases for giving effect to the decisions. The Assessing Officer will give effect to the decision arrived at under MAP while completing the assessment irrespective of the fact that a different view has been taken in the preceding years. However, the tax-payer shall be required to give an acceptance of the decisions under MAP and he will not have any right to appeal under any of the provisions of the I.T Act against the issues so decided once he accepts it. Therefore, an undertaking to this effect, has to be obtained from the assessee under signature of a person authorised to sign the return before giving effect to the decision under MAP. Moreover, while completing the assessment, the facts of MAP proceedings, decisions taken under MAP and also the fact that assessee has given an undertaking to abide by such decision and not to file appeal may be expressly mentioned in the order. The order shall be passed under section 143(3) read with sections 90(2) of the IT Act and the relevant Article of the Treaty. iii. Where the appeals are pending before the CIT(A):- In cases where the assessments have been completed and the assessee has filed an appeal before the CIT(A), the A.O. shall give effect to the decision and bring such facts to the notice of CIT(A). The A.O. shall also obtain an undertaking from the assessee regarding withdrawal of appeal on the issues on which decisions under MAP has been received. The assessee shall also undertake not to agitate the decision under MAP any further. There may be cases where the decision under MAP may require the AO to re-compute the income after incorporating certain findings (like guidelines regarding attribution of income to and deduction of expenses on PE). In such cases, re-computation of income shall be carried out by the A.O by passing an order under section 143(3) read with section 90(2) and the respective Article of the DTAC. It is also important to note that once the decision under MAP has been accepted by the assessee and he has withdrawn his ground of appeal relating thereto, there will be no grounds of appeal pending before CIT(A). CIT(A) may, however adjudicate upon other issues of consequential nature, if any, arising out of the MAP decision e.g. item or quantum of income or expenses attributable or distributable to the PE to the extent they have not been decided under MAP. iv. Where the appeal has been decided by the CIT(A) but the appeal is pending with the ITAT:- In such cases, the assessment order u/s 143(3) would have been revised u/s 250 as per the directions of the CIT(A). The MAP decision may give certain relief to the assessee. Such relief is to be read as if provided under the Act and accordingly the order u/s 250 will have to be revised by the A.O. as per the provisions of sub section90 (2) read with relevant Article of the DTAC relating to MAP after incorporating the relief allowed under MAP. However, this will be carried out only after the assessee withdraws his appeal from the ITAT on the points on which the decisions has been arrived at under MAP. Similarly, in cases where department has filed an appeal before the ITAT, the same shall also be withdrawn on the issues which have been decided under MAP. 8.Thus, the effect to the order under MAP shall be given subject to:- The acceptance of the agreement by the assessee, and Assessee's withdrawal of the pending appeal or the grounds of appeal concerning the points settled in the mutual agreement between the Competent Authorities. 9. These instructions are being issued with the approval of the Central Government in terms of Section 90 and the Article relating to Map incorporated in respective Treaties entered into by India with other countries. 10. These instructions may be brought to the notice of all the officers working in your region / charge. F.NO.480/3/2002-FTD (Davendra Shanker) Director (FTD) Central Board of Direct Taxes.