When a demand is raised on completion of an assessment, a tax-payer is obliged to make payment within 30 days of the service of the notice.
While the department insists on payment of demand raised by it even if taxpayer does not accept the assessment and files an appeal against it, a tax-payer is generally reluctant to pay any disputed demand until the matter is decided by appellate authorities.
Because the government is keen to collect even the disputed taxes, the Income Tax Act has been so carved that a taxpayer is obligated to pay even a disputed demand unless he gets a stay from the department or higher authorities.
Experience of foreign enterprises in India shows that the discretion to grant stay of demand is not judiciously exercised. Those who are in charge of the collection of taxes are more influenced by their targets for collection rather than by judicious considerations.
Therefore, some countries have initiated the move to amend the double taxation avoidance agreements to the effect that foreign companies may be allowed to provide a bank guarantee against their disputed taxes.
In view of the above problem, an understanding has already been reached between the US and India, as well as between UK and India that a disputed tax demand against US or UK companies will remain suspended if a bank guarantee is furnished by the assessee.
It is, however, to be noted that the suspension of demand as aforesaid does not relieve the tax payer from payment of interest .Therefore, if the demand is ultimately found payable by the taxpayer, payment will have to be made along with interest up to the date of payment.
The procedure for suspending the demand will be provided in the relevant Tax Treaty. The treaties contain a provision for redressal of grievances, which is popularly known as Mutual Agreement Procedure (MAP).Therefore, if a USA based entity desires the suspension of tax demand, it has to invoke the MAP procedure as provided in the Indo-US Tax Treaty.
It has recently been reported (Business Standard, October 31) that the collection of outstanding taxes in case of a US resident can be kept in abeyance under the MAP of the tax treaty. It appears that this facility is not available to Indian tax entities.
Therefore, on representation from Indian resident entities, the government has decided to extend the facility of suspension of disputed tax demand both for US residents as well as for Indian residents. The clarification issued provides as under:
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 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 in India in respect of the demands raised as a result of transfer pricing adjustments made in the hands of the Indian entity for which the US resident invoked the MAP option.
This is undoubtedly a welcome move by the competent authorities in India and the US. It is strongly felt that suspension of disputed demand against an adequate bank guarantee should be allowed as a general principle in all cases of foreign enterprises.