INCOME TAX

Instruction No : 2

Date of Issue  : 28.04.2003

Subject : Indo-US Double Taxation Avoidance Agreement (DTAA) - Suspension of Collection during Mutual Agreement Procedure (MAP) - regarding.

Reference is invited to Article 27 of the Indo-US DTAA regarding Mutual Agreement Procedure. Para 4 of the Article 27 authorises the competent authorities to develop appropriate bilateral procedures, conditions, methods and techniques for implementation of MAP provided for in the Article. Reference is also invited to a number of references received regarding difficulty faced by a number of non-resident tax payers due to enforcement of collection of outstanding taxes during the pendency of the Mutual Agreement Procedure between the two competent authorities. In order to avail the unintended hardship to the taxpayers, as well as for efficient management of collection of revenue, the competent authorities of India and U.S.A have signed a Memorandum of Understanding (MOU) regarding suspension of collection during the course of pendency of the MAP. In terms of the MOU, the collection of outstanding taxes in case of a taxpayers, who is a resident of USA and whose request under MPA is under consideration of 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.

A copy of the MOU is enclosed along with a model draft of bank guarantee to be furnished by the tax-payer. These are self-explanatory.

On receipt of a formal request in terms of this MOU from a tax payer resident of USA, the Assessing Officers (A.O.) are required to keep the enforcement of collection of outstanding taxes in abeyance in respect of such tax payers who have-

i) Invoked MAP through U.S. competent Authorities and same has been admitted by the Indian Competent Authority (a conformation to this effect to be obtained from the Foreign Tax Division of Central Board of Direct Taxes), and;

ii) Furnished Bank Guarantee in the model draft format for an amount calculated in accordance with the manner indicated therein.

The effect of the Memorandum is that the furnishing of bank guarantee should be treated as a sufficient arrangement to qualify for exercising discretion by the A.O. for extension of time limit for payment of taxes in terms of Section 220(3) of the Income-tax Act. The extension, however, shall be only till 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 A.O., who shall, thereafter be entitled to invoke the guarantee in case the tax payer fails to pay the demand.

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

The Assessing Officers as well as the Additional commissioners of Income-tax/Commissioners of Income-tax are also advised to keep a close watch on the limitation of guarantee furnished under the MAP.

These instructions are issued under Section 119 of the Income Tax Act. These may be brought to the notice of all officers in your charge.

Sd/-

Devendra Shanker

Director (FTD)