Relief for Swedish firms facing tax litigation

Swedish companies doing business in India and facing tax demands from Indian authorities have cause for cheer.

The Central Board of Direct Taxes (CBDT) has directed income tax authorities to keep the enforcement of collection of outstanding taxes in abeyance till a decision is made on their mutual agreement procedure (MAP).

The relief will be available only in situations where a MAP is pending and the Swedish company concerned has furnished a bank guarantee for the disputed tax demand, according to CBDT’s instruction to its field formations.

The latest CBDT instruction on this matter follows the memorandum of understanding (MoU) — signed in 2013 between two countries — regarding suspension of collection of taxes during the pendency of MAP.

The relief is provided for an initial period of two years, which can be extended up to five years.

A MAP is a process under which a tax dispute of a non-resident is resolved by mutual discussion between competent authorities of two countries, namely the country which seeks to tax income earned by resident of another country, on application made by such non-resident in a prescribed form and manner.

MAP is generally a lengthy process and during pendency of such proceedings, the Indian tax authorities ask such non-residents/foreign companies to pay the entire amount or a substantial portion of disputed tax demand.

This creates a substantial financial burden on such foreign companies, if ultimately their income is decided to be not taxable in India by the competent authorities.

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said this initiative should give a fillip to alternate form of dispute redressal by resorting to MAP.

Rakesh Nangia, Managing Partner, Nangia & Co, a CA firm, said this was another welcome move to provide relief to foreign companies (this time Swedish companies) doing business in India and facing tax litigation with income tax authorities.

“This instruction is intended to promote alternate dispute resolution measures. The interest of revenue has been duly safeguarded by providing that the Swedish company shall furnish a bank guarantee for the disputed tax demand,” Nangia said.