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ARTICLE 25
MUTUAL AGREEMENT PROCEDURE
(1) Where a person considers that the actions of one or both of
the Contracting States result or will result for him in taxation not in accordance with
the provisions of this Convention he may, irrespective of the remedies provided by the
domestic law of those States, present his case to the competent authority of the
Contracting State of which he is a resident or, if his case comes under paragraph (1) of
Article 24, to that of the Contracting State of which he is a national. The case must be
presented within three years from the first notification of the action resulting in
taxation not in accordance with the provisions of the Convention.
(2) The competent authority shall endeavour, if the objection appears to it to be
justified and if it is not itself able to arrive at a satisfactory solution, to resolve
the case by mutual agreement with the competent authority of the other Contracting State,
with a view to the avoidance of taxation which is not in accordance with this Convention.
Any agreement reached shall be implemented notwithstanding any time limits in the domestic
law of the Contracting States.
(3) The competent authorities of the Contracting States shall endeavour to resolve by
mutual agreement any difficulties or doubts arising as to the interpretation or
application of the Convention. They may also consult together for the elimination of
double taxation in cases not provided for in the Convention.
(4) The competent authorities of the Contracting States may communicate with each other
directly for the purpose of reaching an agreement in the sense of the preceding
paragraphs. The competent authorities, through consultations, shall develop appropriate
bilateral procedures, conditions, methods and techniques for the implementation of the
mutual agreement procedure provided for in this Article. In addition, a competent
authority may devise appropriate unilateral procedures, conditions, methods and techniques
to facilitate the above-mentioned bilateral actions and the implementation of the mutual
agreement procedure.
121. Scope
The aim of a Government in entering into an agreement with the other State is to gain
acceptance for the objectives demonstrated as desirable and to realise them as fully as
possible. Making a convention is only a means to achieve the purpose, viz, avoidance of
double taxation and prevention of fiscal avoidance so that there is free flow of
technology and capital between the countries. These objectives can be attained by the
Governments concluding agreements. But many topic or subjects falling within the scope of
these objectives could not be perceived at the time of drafting the convention without
divine prescience and may, therefore, arise subsequent to the ratification of the
convention. Situations may also change subsequent to such ratification. Many topic or
subjects of the convention may require expertise, technical knowledge and a degree of
adaptability to changing situations. The convention, therefore, delegates powers to the
competent authorities of the respective Governments to attempt and to agree to a solution
through mutual agreement, to the problem arising out of difficulties or doubts as to the
interpretation or application of the convention or to the matters relenting to the
elimination of double taxation in cases not provided in the convention. The contractual
process for the convention would bog down if the Government were required to appraise
beforehand the myriad situations to which it wishes a particular policy to be applied and
to formulate specific provisions for each situation. The presence of the Article 'mutual
agreement procedure' in every convention is a pointer to the necessity of extensive
delegation to some authority described as competent authority.
122. Mutual agreement procedure is not a substitute to remedies
under the domestic laws
The Article lays down procedure for resolving difficulties arising out of the acts of the
taxing authorities which in the opinion of the taxpayer do not conform to the intent
express or implied of the double taxation agreement between the two Contracting States.
Such a procedure is not a substitute to the remedies available under the, domestic law for
redressal of the grievance, but is in addition to them. The aim and purpose of the
introduction of this Article appears to be, to save a taxpayer from the lengthy and
expensive procedure of litigation under the domestic laws and their uncertainties. Mutual
agreement procedure is special procedure outside the domestic laws and it could be made to
swing into action only if the objection relates to the incorrect application of the
provisions of the agreement in relation to taxes and persons covered under the agreement,
to determination of fiscal domicile, to the existence of a permanent establishment or to
the computation of business income or its allocation or attribution to the permanent
establishment, to the objection about discrimination vis-a-vis the nationals of the
States, to the taxability of income by States which the other State has exclusive right to
tax under the agreement and that State under its domestic law cannot exercise that right,
and so on. When a charge of tax has been or is proposed to be made in contravention of the
domestic laws and also of the agreement the former is outside while the latter is within
the scope of this Article. The objection is amenable to the mutual agreement procedure
only to the extent that the agreement is affected, unless the contravention of the
domestic law is intimately linked with the contravention of the agreement. Unlike under
the domestic law, redressal of objection under this procedure could be sought well when
proposed action of the taxing authority, in the opinion of the taxpayer, does not accord
with the agreement which if allowed to culminate in an order will result in taxation not
intended by the agreement.
The commentary on the OECD/UN Model makes it clear that this procedure is in addition to
and not in substitution of the remedies in the domestic courts or tribunals. This Article
could be invoked in addition to any legal form of appeal in the country Concerned. The German Federal Supreme Tax Court
has held that the existence of the 'mutual agreement procedure' does not prevent the court
from proceeding with the case. The same view has been taken by the Swiss Federal Tribunal. Even where the taxpayer initially invokes the mutual
agreement procedure and in case the said authorities fail to agree or their agreement is
not satisfactory to taxpayer, all countries are agreed that there will be no objection to
the taxpayer then moving the courts, within the prescribed time, if any. In Canada and the
United States, the view is entertained that taxpayers should protect their rights of
appeal before the courts while. applying for mutual agreement procedure. The Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust is of the view that the Article underlines
a procedure which is in addition to and not in substitution of the remedies before the
domestic courts or tribunal and the taxpayer may rely upon the agreement before the
domestic tribunal. Therefore, the taxpayer is entitled to seek the remedies available
under the domestic laws of the States, besides taking the matter with competent authority.
If a taxpayer has already taken up the matter with the competent authority and also taken
it up with a tribunal under the domestic law, and their decisions are at variance with
each other, the decision more favourable to the taxpayer should be implemented. The
agreement or the decision is exclusive and is not influenced by the other as regards its
implementation.
122.1. Presentation of a case - No form prescribed - No form
has been prescribed for the presentation of the case. In its absence the form as
prescribed by the domestic law for presentation of a similar case be followed. Whatever
the form, it must essentially disclose how an act of a State has resulted or will result
in taxation which is not in accordance with the agreement, and on what basis and how the
taxpayer considers the aforesaid or proposed action contravenes the agreement and what in
his opinion should be the correct interpretation and such contravention has the effect of
fastening unintended liability, as also that his case falls within the scope of the
Article.
122.2. Presentation of a case - Time limit - The presentation
of case should be made within three years to be reckoned from the date of the action(s) of
one or both the Contracting States which in the opinion of the taxpayer will 'result or
has resulted in taxation not in accordance with the convention. If the taxability is
effected by a series of actions or combination of decisions the period of three years will
run from the latest of them or the most recent. The running of the limitation commences
when the concerned person becomes aware of the action taken or proposed to be taken which
will have adverse effect on him and not from the date when he forms his opinion about such
adverse effects.
123. Competent authority - How resolves the case
The first stage of the procedure is the presentation of the case to the competent
authority of the State of which the taxpayer is the resident. That authority on receipt of
such a representation will first determine whether the objection prima facie is
justified. After having made such determination, it would attempt an appropriate solution
if such a solution is possible to be arrived at by itself. In a case the issue could be
resolved by mutual agreement with the competent authority of the another State, endeavour
should be made for the solution through such mutual agreement. Resolution of the
difficulty should aim at avoidance of taxation which is proposed to be or has been
imposed, not in accordance with the agreement. The limitation laid down in the domestic
law, if any, is not a bar for the implementation of the agreement. The implementation of
the agreement could also not be influenced by any adverse decision of the appellate
authority or the domestic court if the taxpayer has already taken up the matter with that
authority or the court under, the domestic law. Tendency of litigation in the domestic
court or tribunal is not a bar for-the taxpayer to resort to the remedy under the Article,
nor does the decision of that court or tribunal adverse to him. Proceedings for the
redressal of grievance under this Article or under the domestic lows are independent of
each other and are not mutually exclusive. It is open to the taxpayer to resort to either
of the two proceedings according to its efficacy or according to his convenience and need.
Though the competent authority can grant relief under this Article even if the domestic
court/tribunal has given decision adverse to the assessee in the proceeding also initiated
by the taxpayer, yet it may be bound under the Constitution of its country to abide by
that decision as any act contrary to it tantamounts to contempt of court, the competent
authority may then request the authority of another Contracting State to grant relief.
This is possible only when the issue arises wholly or in part on account of the measures
taken in that other State. The process of mutual agreement could be set in motion when the
measures taken by both the Contracting States, each asserting its right to tax, affects
adversely the taxpayer.
123.1. Competent authority - Endeavours to resolve the case -
The word ‘endeavour' in paragraph (2), to arrive at an appropriate solution or to
resolve the case by mutual agreement with the competent authority of the other Contracting
State, suggests that the obligation of the authority is to make an attempt to find a
solution to resolve the case, which may not result in the solution of the difficulty or
the resolution of the case. This paragraph entails a duty to negotiate but does not oblige
the Contracting States to reach a solution. The negotiation does not guarantee it. Such a
view could also be inferred when the last sentence of paragraph (2) about the limitation
relating to implementation of the agreement is read in the context of its incorporation.
That portion reads '... any agreement reached Shall be implemented notwithstanding any
time limits in the national laws of the Contracting States. The word 'any' in the context
means 'if'. Thus the bar of limitation as prescribed by the national laws will not be
applicable to an agreement, if an reached: The .question of limitation or of
implementation will not arise there is no agreement. Only the Contracting States should
use their be endeavours to resolve the difficulty or case by mutual agreement.
123.2. Implementation of the agreement- Time limit in the national
laws is not bar - The time limit in the national laws of the Contracting States will
not be impediment in the implementation of the agreement if mutually decided. Normally
such time limit relates to assessments and adjustments of tax refunds. The agreement '
shall have to be implemented irrespective a limitation of time in the domestic laws of the
Contracting States in regard to matters which are subject-matter of the agreement.
124. Difficulties or doubts of general nature - Resolution of
Paragraphs (1) and (2) relate to 'the resolution on individual case which according to
the taxpayer has resulted or will result in taxation not in accordance with the agreement.
The process of mutual agreement is set into motion at the initiation of an individual. The
starting point is the presentation by a resident of his case. Paragraphs (3) and (4)
relate to difficulties or doubts of general nature arising about the interpretation or
application of the agreement, or to the elimination of double taxation in cases not
provided in the agreement, and to how this purpose could be achieved. Such difficulties,
doubts or matters about avoidance of double taxation may come to the surface when the
agreement is applied to an individual case. The words are but mere vehicles of thought,
and are meant to express or convey one's thoughts. Generally a person's words and thoughts
are coincidental. But, not infrequently they are not. The words used in the agreement may
not adequately convey what is meant to be conveyed; the words may be ambiguous; these may
be capable of being differently understood by different persons. Sometimes words of the
agreement may not be designed to meet the several uncontemplated forensic situations that
may arise.
The agreement is supposed to be an authentic repository of the intent 'of both the
Contracting States. When the intent is clearly expressed in the language of the
convention, no difficulty will arise about its application. But where such intent is
covert and couched in language which is imperfect, imprecise and deficient, or is
ambiguous or enigmatic, and external aids to interpretation are few, scanty and
indeterminate, the difficulty or doubt as to interpretation or application of the
agreement may arise. Even reference to the reports, recommendations, discussions between
the Contracting States which precede the agreement, or the commentary on the OECD or UN
Model (which are held to be legitimate external aids to the construction) may not resolve
'the difficulty. The taxing authorities or even the domestic court may despite the
application of all its experience, ingenuity and ratiocination find itself in a position
no better than that of a person solving a crossword puzzle with a few given hints and
hunches. To apply the words literally may defeat the obvious intention of the Contracting
States, or could impair and impede the normal operation of the provisions of the agreement
as they are conceived by the negotiators. The impairment or impediment may also emerge
from the new system of taxation arising out of the change in taxation laws. Only the
Contracting States through the process of mutual agreement may furnish an efficacious and
speedy remedy.
The main object and purpose of an agreement are to avoid double taxation. The present
agreement may be insufficient to prevent it in all cases. This Article enables competent
authorities to deal also such cases which do not come within the purview and scope of the
provisions of the agreement. This purpose could also be achieved if the agreement is
supplemented by a protocol like the agreement itself subject to ratification or approval.
125. Procedure for resolving difficulties
Paragraph (4) prescribes procedure how competent authorities would proceed in
resolving the difficulties arising out of an individual case [paragraphs (1) and (2)] or
of general nature [paragraph 3]. These authorities may, in the first instance, communicate
directly with each other for the purpose of applying the provisions of the agreement,
without going through diplomatic channels. In order to reach an agreement, oral exchange
of opinion may be necessary or advisable. For that purpose a commission may be
constituted, consisting of the representatives of the competent authorities.
This Article is not a complete answer to the difficulties of a taxpayer. The competent
authorities are required to attempt a solution but are not obliged to arrive at one. There
is likelihood of the agreement being interpreted or applied differently in the two
Contracting States and the competent authorities not agreeing to a solution. Double
taxation may persist which the convention aims at avoiding.
