Bombay High Court
States Of America Having Its ... vs 4 Director Of Income Tax on 25 October, 2013
Bench: M.S. Sanklecha
wp-1455-2013
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.1455 OF 2013
UPS Worldwide Forwarding Inc. ]
a Company incorporated in the United ]
States of America having its principal place ]
of business at No.55, Glenlake Parkway ]
N. E.., Atlanta, Georgia, 30328, United ]
States of America. ] .. Petitioner.
V/s.
1
UPS Jetair Express Private Limited ]
a company incorporated in India ]
having its Principal place of business ]
at Plot No. 6A, Shyam Nagar, ]
Jogeshwari Vikhroli Link Road, ]
Majas Village, Jogeshwari, ]
Mumbai 400 060. ]
2 Union of India ]
Ministry of Law, Ayakar Bhavan, ]
M. K. Road, Mumbai 400 020. ]
3 Assistant Director of Income-tax ]
(International Taxation) -2 (2), ]
Mumbai, Room No.116, 1st floor, ]
Scindia House, N. M. Road, ]
Mumbai 400 038. ]
4 Director of Income Tax ]
(International Taxation), Mumbai -I ]
Room No.107, 1st floor, Scindia ]
House, N. M. Road, Mumbai 400 038 ] .. Respondents.
S.R.JOSHI 1 of 17
::: Downloaded on - 27/11/2013 20:29:51 :::
wp-1455-2013
Mr. Percy Pardiwala, Sr. Advocate with Ms. Aarti Sathe and Mr. Kalpesh
Turalkar, for the Petitioner
Mr. Vimal Gupta, Sr. Advocate with Mr. Tejveer Singh and Mrs. S. V.
Bharucha, for the Respondents.
CORAM: MOHIT S. SHAH, C.J. &
M.S.SANKLECHA,J.
PRONOUNCED ON : 30 SEPTEMBER 2013.
RESERVED ON : 25 OCTOBER 2013
JUDGMENT (Per M. S. Sanklecha, J.):-
RULE, returnable forthwith and by consent of the parties,
taken up for final disposal.
2 By this petition under Article 226 of the Constitution of India,
the petitioner challenges the order dated 21 March 2013 passed by the
Director of Income Tax (International Taxation) (respondent No.4) under
Section 264 of the Income Tax Act, 1961 ("the Act"). By the impugned
order dated 21 March 2013, the Director of Income Tax (International
Taxation) has upheld the order, rejecting the petitioner's application
dated 29 March 2010 for NIL Tax Withholding certificate under Section
197 of the Act passed by Assistant Director of Income Tax (International
Taxation) (respondent No.3).
3 Briefly, the facts leading to the present petition are:-
(a) The petitioner is a Company incorporated in United States of
America (USA) and is also a tax resident of USA. The petitioner is
admittedly eligible to the benefit under the Double Taxation Avoidance
Agreement (DTAA) entered into between USA and India;
S.R.JOSHI 2 of 17
wp-1455-2013
(b) The petitioner is engaged in the business of International Express
Delivery and has developed an international network of transporting
documents, parcels and other items from one country to another. In
accordance with the agreement entered into with one UPS Jetair Express
Pvt. Ltd., (respondent No.1), the petitioner renders services to respondent
no.1 in respect of delivering documents/parcels outside India having
originated in India, while respondent No.1 renders services to the
petitioner in respect of documents/parcels to be delivered in India having
originated outside India. For the services rendered for outbound
documents, the petitioner receives compensation (forwarding fees) and in
respect of inbound documents, the petitioner pays to respondent No.1
delivery compensation;
(c) The petitioner has been filing its return of income in India under
the Act. However, the the petitioner has taken a stand that the income
which it earns under the agreement entered into with respondent No.1
and from its overseas customers in respect of parcels/documents to be
delivered in India are not taxable. The taxing authorities in India viz:
respondent Nos.2 to 4 have not yet accepted the same;
(d) In accordance with Article 27 of the DTAA entered into between
USA and India, a Mutual Agreement Procedure (MAP) has been
established whereby a tax payer can approach the competent authority of
the Contracting State of which he is the resident in case the tax payer is of
a view that the action of the other Contracting State is not in accordance
with the provisions of DTAA. The tax payer is entitled to approach the
competent authority of the State of which he is resident (in this case, the
S.R.JOSHI 3 of 17
wp-1455-2013
petitioner is resident of USA), notwithstanding that he has remedies
available under the domestic laws of the other Contracting State i.e.
India. Under the MAP proceedings provided under Article 27 of DTAA, the
authorities of both India and USA endeavor to resolve the dispute raised
by the individual tax payer by Mutual Agreement;
(e) In accordance with the provisions of Article 27 of the DTAA, the
petitioner on 13 November 2006 preferred an application before the
competent authority of USA, seeking its assistance in respect of its stand
that its income received from respondent No.1 is not taxable in India for
fiscal years 2001 to 2007 (i.e. Assessment Year 2001-02 to 2007-08). For
subsequent Assessment Years 2008-09 to 2009-10 also the petitioner
requested the competent authority of USA to include them in the pending
MAP proceedings. On 3 November 2009, the petitioner made an
application for inclusion of Assessment Year 2010-11 in the pending MAP
proceedings;
(f) Keeping in view the hardship faced by the tax payer during
pendency of the MAP proceedings, the competent authorities of India and
USA under the DTAA entered into "Memorandum of Understanding
regarding Deferment of Assessment and/or Suspension of Collection of
Taxes during Mutual Agreement Procedure" (MOU). Under the aforesaid
MOU, the authorities in USA and India have agreed to defer assessment
and/or suspend collection of tax including Withholding taxes on income
that are subject to MAP proceedings for prior, current or future taxable
years. However, during the pendency of the MAP proceedings, the
assessee is required to furnish a bank guarantee securing the dues of the
S.R.JOSHI 4 of 17
wp-1455-2013
revenue of the Contracting State in which the income is the subject matter
of tax to which the MAP procedure relate;
(g) Consequent to the application made by the petitioner to respondent
No.3 on 28 March 2007, 6 November 2007 and 5 February 2009,
respondent No.3 issued Certificates under Section 197 of the Act for the
Assessment Years 2007-08 to 2009-10. By the above certificates, it
directed that there would be no obligation on the part of the respondent
No.1 to deduct any tax while making payment to the petitioner in respect
of services rendered by the petitioner to respondent No.1 i.e. Nil Tax
Withholding orders;
(h) On 29 March 2010, the petitioner filed an application under Section
197 of the Act with respondent No.3 and requested him to issue Nil Tax
Withholding order for Assessment Year 2010-11. In the above letter, the
petitioner pointed out that NIL Tax Withholding order/certificate were
issued for earlier years and also its application dated 3 November 2009 to
the Competent Authority to include Assessment Year 2010-11 in the
pending MAP proceeding. In view of the above, it sought a direction from
respondent No.3 to respondent No.1 not to deduct any tax in respect of
any payment made to petitioner for Assessment Year 2010-11.
(i) On 30 March 2010, the petitioner submitted a bank guarantee of
Rs.6,07,55,238/- in favour of respondent No.3, securing the revenue in
respect of its legitimate tax dues in case the MAP proceedings fail. This
guarantee was submitted in terms of the MOU so as to enable an order
under Section 197 of the Act for the Assessment Year 2010-11;
S.R.JOSHI 5 of 17
wp-1455-2013
(j) On 15 December 2010, respondent No.3 passed an order rejecting
the petitioner's application for Nil Tax Withholding order/certificate under
Section 197 of the Act in respect of Assessment Year 2010-11. This was
on the ground that petitioner's request for inclusion of financial Year
2010-11 is not pending before the MAP authorities as informed by the
Foreign Tax Division (FTD) of the Central Board of Direct Taxes (CBDT).
(At the hearing, Mr. Vimal Gupta, learned Senior Counsel for the revenue
informs us that there is a typographical error and should be read as
financial Year 2009-10). Consequently, respondent No.3 directed
respondent No.1 to deduct tax at 8.6094% in respect of all payments
made by respondent No.1 to the petitioner;
(k) On 17 December 2010, the competent authority of USA under the
DTAA issued a certificate confirming that Withholding tax application in
respect of Assessment Year 2010-11 i.e. financial Year 2010 is being
considered under the MAP proceedings. Consequent to the aforesaid
communication dated 17 December 2010 from the competent authority
of USA, the petitioner made an application on 28 December 2010 to
respondent No.3. By the above application, a modification of order dated
15 December 2010 was sought by seeking the grant of necessary
certificate of Nil Withholding tax under Section 197 of the Act in respect
of Assessment Year 2010-11. However, no order on the same was passed;
(l) On 31 May 2011, the petitioner filed a Revision Application under
Section 264 of the Act with respondent No.4. By the above application,
revision of the order dated 15 December 2010 dismissing the application
S.R.JOSHI 6 of 17
wp-1455-2013
under Section 197 of the Act passed by respondent No.3 was sought;
(m) On 15 January 2013, the petitioner appeared before respondent
No.4 in support of its above revision application. At the hearing, the
petitioner pointed out that it understands that in November 2012,
respondent No.4 had received a communication from FTD, stating that the
competent authority of USA has invoked fresh MAP proceedings inter alia
in respect of Assessment Year 2010-11. Thus seeking a direction to the
Authorities under the MOU to suspend assessment and collection of taxes
i.e. Withholding for Assessment Year 2010-11.
(n)
On 21 March 2013, respondent No.4 rejected the petitioner's
application for revision of the order dated 15 December 2010 passed
under Section 197 of the Act by respondent No.3. The respondent No.4
held that no MAP proceedings for the Assessment Year 2010-11 was
pending at the time the petitioner filed an application under Section 197
of the Act with respondent No.3 nor when the order dated 15 December
2010 of respondent No.3 was passed, rejecting the application for
issuance of Nil Tax Withholding order/certificate. The respondent No.4
reached the above conclusion on the ground that MAP proceedings for
Assessment Year 2010-11 was admitted only on 21 September 2012 as
informed by the FTD. Thus, holding that the order dated 15 December
2010 of respondent No.4 cannot be faulted. Besides, the respondent No.4
held that the entire period relevant to the Assessment Year 2010-11 has
expired and in view thereof, allowing of the application now would be
infructuous.
S.R.JOSHI 7 of 17
wp-1455-2013
4 In the context of the above facts, Mr. Pardiwala, learned
Senior Counsel appearing for the petitioner challenges the impugned
order on the following grounds:-
(a) The impugned order ignored the fact that once a MAP proceedings
is initiated for a specific issue, then the suspension of collection of
withholding taxes is mandated for all future taxable years also. In the
present case admittedly, identical issues for the earlier Assessment Years
2001-02 to 2007-08 have been admitted under the MAP and the benefit of
the same is available in the future years till the issue is resolved. Thus
suspension of collection of taxes under the MOU would be available even
in respect of subsequent Assessment Year 2010-11.
(b) The impugned order ignores the fact that the Appellant had made
its application to the competent authority in USA on 3 November 2009 for
admission of Assessment Year 2010-11 to MAP proceedings. The fact that
the above application has been made is also acknowledged on 17
December 2010 by the competent authority in USA and also by the
competent authority in India in September 2012. Inspite of the aforesaid,
the impugned order holds that at the time when the application for
issuance of certificate under Section 197 of the Act was made by the
petitioner and also when the order rejecting the application was passed by
the Assessing Officer, there were no MAP proceedings pending in respect
of Assessment Year 2010-11. This finding is contrary to the application
dated 3 November 2009 which is on record and ignored in the impugned
order.
S.R.JOSHI 8 of 17
wp-1455-2013
(c) The respondent No.4 in the impugned order holds that as the
financial Year 2009-10 i.e. Assessment Year 2010-11 had already
expired/ended, then the entire proceedings for an order under Section
197 of the Act has become infructuous. This finding is in the face of
Clause 6 (iii) of the MOU which provides that suspension of collection of
Withholding tax would apply even to MAP proceedings for prior years;
(d) The grant of Nil Tax Withholding certificate for the Assessment Year
2010-11 under Section 197 of the Act would cause no prejudice to the
revenue as its interests are protected by the petitioner, having furnished a
bank guarantee for the requisite amount of tax payable; and
(e) In any view of the matter, at the time when respondent No.4 passed
his order, it is undisputed position that the issue arising in Assessment
Year 2010-11 had been admitted for MAP proceedings and so also
acknowledged by the competent authority in both USA as well as in India.
In this view of the matter, the respondents ought to have take into account
the subsequent development and granted the benefit of the MOU which
suspended taxation of income at source pending the resolution of the
issue before the authorities under MAP.
5 On the other hand, Mr. Vimal Gupta, learned Senior Counsel
appearing for the Respondents supports the impugned order and submits
as under:-
(a) In terms of Instruction No.2 of 2003 of CBDT dated 28 April 2003,
the pendency of the MAP proceedings can be taken cognizance of only
S.R.JOSHI 9 of 17
wp-1455-2013
when it has been admitted by competent authority in India by
confirmation to that effect being issued by FTD of CBDT. In this case,
though bank guarantee has been furnished, the requirement of the
Circular of obtaining the confirmation from the FTD of CBDT had not
been fulfilled on 15 December 2010 when the Assessing Officer viz
respondent No.3 rejected the application of the petitioner for certificate
under Section 197 of the Act;
(b) The application made by the petitioner before the competent
authority of USA to include Assessment Year 2010-11 as a part of original
MAP proceedings dated 13 November 2006 was only made on 3
November 2009. On 15 December 2010 when respondent No.3 i.e.
Assessing Officer passed an order, rejecting the petitioner's application
for an order of Nil Withholding Tax under Section 197 of the Act, the
FTD of CBDT had clarified that no request for inclusion of financial year
2010-11 i.e. Assessment Year 2011-12 in MAP proceedings had been
received by that office (orally it is submitted that same should be read as
financial year 2009-10 i.e. Assessment Year 2010-11); and
(c) The respondent Nos.3 and 4 could not have passed an order under
Section 197 of the Act issuing a Nil Tax Withholding order as the
acceptance of the petitioner's claim for Assessment Year 2010-11 in MAP
proceedings came much after the end of the Assessment Year 2010-11.
Therefore, in the absence of a certificate being available during the course
of the Assessment Year, the petitioner could not be granted a certificate of
Nil Withholding Tax under Section 197 of the Act. Thus, the respondent
No.1 was duty bound to have deducted tax in the absence of any order
S.R.JOSHI 10 of 17
wp-1455-2013
under Section 197 of the Act in respect of any payment made or amount
credited to the petitioner during the previous year relevant to the
Assessment Year 2010-11.
In view of the above, it was submitted that the impugned
order called for no interference.
6 As is evident from Article 27 of the DTAA entered into
between USA and India, a procedure for resolving a conflict between the
DTAA and the tax regime in one of the Contracting States has been
evolved and is known as Mutual Agreement Procedure i.e. MAP. If the tax
payer in any one or both of the Contracting States considers the action of
the one of the Contracting State would result in his being charged to tax
not in accordance with the provisions of the convention, he may invoke
the MAP proceeding (notwithstanding that a remedy is available under
the domestic law of the State) by moving Competent Authority of the
Contracting State of which he is a resident or national. By the aforesaid
MAP proceeding, the competent authority of both the Contracting States
would endeavor to resolve the conflict by mutual agreement.
7 Consequent to the above, the competent authorities in USA
and India, exercising powers under MAP procedure realized that during
the pendency of MAP proceedings, it would be necessary to protect the
assessees (tax payer) concerned till the successful resolution or failure of
the issue referred to MAP. In view thereof, an MOU was arrived at
between USA and India which inter alia, provides for deferment of
assessment and/or suspension of collection of tax during MAP procedure.
This MOU was arrived at so as to prevent unnecessary harassment and/or
S.R.JOSHI 11 of 17
wp-1455-2013
collection of taxes during the time the issue raised by the tax payers is
under consideration of MAP. The fact that MOU was entered into between
USA and India so as to obviate harassment and/or hardship to the tax
payer is also stated in Instruction No.2 dated 28 April 2013 issued by
Central Board of Direct Taxes (CBDT).
8 However, to protect the interest of the revenue, the MOU
provides that deferment/suspension of assessment and collection of taxes
to only available those tax payers who provide a security. The MOU
provides that the security should be in the nature of irrevocable bank
guarantee, securing the revenue of the Contracting State whose
assessment or collection of taxes is suspended pending the MAP
procedure.
9 It is undisputed that an identical issue as arising in the
Assessment Year 2010-11 is a subject matter of MAP proceedings for
earlier Assessment Year and Nil Tax Withholding orders have been issued.
For the Assessment Year 2010-11, the petitioner has by letter dated 3
November 2009 moved the Competent Authority in USA under the MAP
procedure, seeking to resolve its claim that no Withholding tax is payable
in respect of the amounts received by it from respondent No.1. On 29
March 2010, an application for a certificate of Nil Withholding Tax under
Section 197 of the Act was made to the Assessing Officer i.e. respondent
No.3 while pointing out certificates/orders passed for Nil Tax Withholding
orders passed for the earlier assessment years and its application dated 3
November 2010 to the Competent Authority in USA. Besides, in terms of
the MOU, the petitioner furnished a bank guarantee of Rs.6,07,55,238/-
S.R.JOSHI 12 of 17
wp-1455-2013
securing the revenue. However, respondent No.3 being the Assessing
Officer by an order dated 15 December 2010 informed the petitioner that
no Nil Withholding Tax Certificate can be issued to the petitioner as the
FTD of CBDT had informed the respondent No.3 that no request for
inclusion of Assessment Year 2011-12 i.e. financial Year 2010-11 had been
received for MAP. However, at the hearing, we are informed that it is a
typographical error on the part of respondent No.3 i.e. the Assessing
Officer, and it should read as financial Year 2009-10. It must be pointed
out that no affidavit of respondent No.3 to clarify the above position has
been filed. Therefore, the basis of the order dated 15 December 2010 is
suspect. Be that as it may, in any case on 17 December 2010, the
Competent Authority of USA informed the petitioner that the petitioner's
application for MAP in respect of the Assessment Year 2010-11 was being
considered by the Competent Authority. On the basis of the aforesaid
clarification, the petitioner sought rectification of the order dated 15
December 2007 passed by respondent No.3 but no order was passed by
the Assessing Officer on the application of the petitioner.
10 It was in the aforesaid circumstances, that the petitioner was
constrained to file a revision application/petition under Section 264 of
the Act with respondent No.4. The respondent No.4 by an order dated
21 March 2013, rejected the petitioner's application on the ground that
the MAP proceedings for Assessment Year 2010-11 had been admitted
and initiated only on 21 September 2012. Consequently, it is submitted
by Mr. Gupta on behalf of the revenue, no fault according to respondent
No.4 can be found with the order of respondent No.3, rejecting the
application for a Nil Withholding Tax order under Section 197 of the Act.
S.R.JOSHI 13 of 17
wp-1455-2013
The impugned order has proceeded on the basis that suspension of
assessment and collection of taxes (including Withholding taxes) under
MOU can only take place when the issue raised by a tax payer have been
admitted for consideration under MAP proceedings. According to Mr.
Gupta, Counsel appearing for respondent No.4, the trigger for the MOU
coming into force is the MAP proceedings being admitted for
consideration. This is not so for the reason that Article 27 of DTAA read
with the MOU, makes it clear that the suspension of assessment and
collection of tax takes place, no sooner an application is made to the
Competent Authorities to settle the dispute under MOU proceedings and
the revenue is secured by the tax payer furnishing a Bank Guarantee.
There is no provision for a process of admission and thereafter final
consideration provided either in Article 27 of DTAA or MOU. Thus, it is
not open to read the same into it.
11 Further, in any view of the matter, when respondent No.4
was exercising jurisdiction under revision and he does not dispute the
fact that MAP proceedings for the Assessment Year 2010-11 have been
admitted and are pending for the Assessment Year 2010-11 w.e.f. 21
September 2012 as recorded in the impugned order, it was obligatory on
his part to have directed the grant of Certificate of Nil Withholding Tax
under Section 197 of the Act. The contention of the revenue that grant of
such Certificate of Nil Withholding Tax after the completion of the
Assessment Year 2010-11 would be an exercise in futility is not
sustainable. This is for the reason that under Article 27 of the DTAA,
the tax payer is entitled to apply for MAP procedure and claim
deferment/suspension of assessment and collection of tax within three
S.R.JOSHI 14 of 17
wp-1455-2013
years of receipt of notice from the authorities. In this case, notice had
been issued to respondent No.1 to deduct the tax in respect of payment
being made by it to the petitioner only on 8 August 2013. If the
submission of the revenue were to be accepted, then Article 27 of the
DTAA providing for a period of three years to move the Competent
Authority from the date of the receipt of the notice would be rendered
redundant. This understanding of ours is further supported by MOU
which in clause 6 (iii) thereof, inter alia, provides that Withholding tax on
income can be a subject matter of MAP for prior, current and future
taxation years. Consequently, this also supports our understanding that
even when an Assessment Year for which a certificate as sought has
expired, yet the suspension of assessment and collection of taxes will take
place, if the proceedings are under consideration of Competent
Authorities under the MAP. The collection and assessment of taxes will
stop at least from that date when the MAP proceedings are commenced
for Assessment Year 2010-11. In case the submission of the revenue is
accepted, then the suspension of Assessment and collection of taxes
would be applicable only in respect of current taxation years and not
previous and future years which is clearly contrary to and in the face
clause 6 (iii) of MOU.
12 The submission of Mr. Gupta, learned Counsel appearing on
behalf of the revenue that no fault can be found with the impugned
order of respondent No.4 in view of Instruction No.2 dated 28 April 2003
issued by CBDT. In particular, learned Counsel place reliance upon the
following observations of Instruction No.2 dated 28 April 2003 which
reads as under:-
S.R.JOSHI 15 of 17
wp-1455-2013
" 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 form 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-
(a) Invoked MAP through U.S. Competent Authorities and
same has been admitted by the Indian Competent Authority (a
confirmation to this effect to be obtained from the Foreign Tax
Division of Central Board of Direct Taxes), and;
(b) Furnished Bank Guarantee in the model draft format for
an amount calculated in accordance with the manner indicated
therein."
Taking support for the above, 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.
13 In the circumstances, we find that the impugned order passed
by respondent No.4 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
S.R.JOSHI 16 of 17
wp-1455-2013
in respect of application made to any of them under the MAP proceedings.
We make it clear that we have not found it necessary in the present
facts to examine the issue of the pending MAP proceeding enuring to the
benefit of a tax payer for future taxable years.
14 We, therefore, quash and set aside the impugned order dated
21 March 2013 passed by respondent No.4 and the order dated 15
December 2010 passed by respondent No.3. We further direct respondent
No.3 to issue appropriate Nil Withholding Tax order in respect of
Assessment Year 2010-11 to the petitioner, upon the petitioner giving an
undertaking to keep alive the bank guarantee already furnished and to
give a further bank guarantee, if necessary, to secure the revenue of its
dues (tax and interest) to the satisfaction of respondent No.3.
15 Accordingly, petition is allowed in the above terms, with no
order as to costs.
CHIEF JUSTICE
(M.S.SANKLECHA,J.)
S.R.JOSHI 17 of 17
