Tax relief for firms engaged in trade with US

In a relief to Indian companies, the Income-Tax Department has decided to suspend collection of taxes if the Mutual Agreement Procedure is invoked by a US-based entity under the Indo-US Double Taxation Avoidance Convention (DTAC).

Article 27 of the Indo-US DTAC provides for Mutual Agreement Procedure for avoidance of double taxation.

To avoid hardship to taxpayers, the competent authorities of India and the US had entered into a memorandum of understanding (MoU) regarding suspension of collection during the pendency of MAP in 2003.

The collection of outstanding taxes in the case of a resident of the US, whose request under MAP is under consideration of the competent authorities, was kept in abeyance, subject to furnishing a bank guarantee of an amount equal to the amount of tax under dispute and the interest accruing thereon according to the provisions of the Income-Tax Act.

"Now references have been received for extending the applicability of the MoU to Indian resident entities in the cases where Mutual Agreement Procedure is invoked by the US resident," a source said.

In order to avoid hardship to Indian resident taxpayers especially in cases involving transfer pricing, where the Indian resident entity is liable to pay taxes on such income which may have been charged to tax in the hands of the associated entity in the US, it has been decided to extend the applicability of the MoU to such Indian entities during the pendency of the MAP.

"This clarification will be helpful as there were instances where the MoU benefit was sought to be denied at India in respect of the demands raised as a result of transfer pricing adjustments made in the hands of Indian entity for which the US Resident invoked the MAP option," said Samir Gandhi of Deloitte.