background image
Treaty between India and the United States – Indian Revenue clarifies availability of dispute settlement benefits in — Orbitax Tax News & Alerts

A Memorandum of Understanding (MoU) has been in place between India and the United States since 2002, for the purposes of the Mutual Agreement Procedure (MAP) under the tax treaty.

This MoU obliges the competent authorities of the two countries to defer assessment or suspend collection of taxes, including any related interest or penalties, during negotiations initiated by a US resident taxpayer under the MAP proceedings. However, the taxpayer has to furnish a bank guarantee of an amount equal to the amount of tax under dispute and interest accruing thereon as per the provisions of the Indian Income Tax Act 1961. Under the provisions of the MoU, the tax authorities keep disputed tax demands in abeyance, pending a decision through the MAP process, if a US resident taxpayer has a request under MAP under consideration of the authorities.

The Indian Central Board of Direct Taxes (CBDT) has clarified that the benefit hitherto available only to US resident (generally, the parent company) could now be availed of by the Indian resident entity as well (generally, the Indian subsidiary of a US parent), if the company has opted for MAP.

The objective of this clarification is to reduce hardship on Indian resident taxpayers, particularly in transfer pricing cases in which the Indian resident is subject to taxes on income that may already have been taxed in the hands of the associated entity in the US.