Cross-border tax disputes over transfer pricing adjustments, and permanent establishment between assessees and tax authorities of countries with which India has tax treaties and vice versa, can be resolved by an alternative resolution mechanism, called mutual agreement procedure (MAP).
The Central Board of Direct Taxes (CBDT) in August 2020 issued detailed guidance concerning the MAP which raised several queries from the stakeholders and treaty partners. To resolve such queries, CBDT has notified1 updated MAP guidance (MAP Guidance/2022).
The updated MAP guidance deals with the following two important issues:
- Direct tax Vivad se Vishwas Act (VsV) and MAP
- Responsibilities of the applicants
Key takeaways from the updated MAP guidance are as follows
1. Vivad se Vishwas Act (VsV) and MAP
The guidelines clarify how tax officials and businesses should approach disputes under the two different mechanisms meant for minimising litigation i.e. The VsV (direct tax dispute settlement Act) and the MAP that resolves disputes giving rise to double taxation or taxation, not in accordance with Double Taxation Avoidance Agreements (DTAAs or Tax treaties).
- A resident taxpayer who has opted for VsV for a tax dispute over a cross-border transaction, and the same is accepted by tax authorities. But the AE in the other country has sought resolution under MAP before the tax authorities of the other country.
- In the above case, the competent authority (CA) of other country may accept the MAP application and shall notify the CA of India.
- The CA of India shall allow access to the MAP but cannot deviate from the results under VsV.
- The CA of India can request the CA of other countries to provide correlative relief.
- A non-resident taxpayer is not allowed to access MAP if he opts for VsV scheme on the same issue, because the right to access MAP is disallowed in accordance with sub-section (3) of Section 5 of the VsV act in such cases. Subsection (3) of Section 5 states that the “amount determined under the VsV act shall be considered to be conclusive and no matter shall be reopened in any other proceeding under the Income Tax Act or under any other law or any agreement entered into by India with other country or territory outside India”.
2. Responsibilities of the applicants
Recently a couple of cases were noticed by CAs wherein the taxpayers suppressed information (invoking MAP in respect of adjustments made by one treaty partner without mentioning the fact that adjustment has also been made by the other treaty partner on the same transaction) or did not give the same set of information to the CAs particularly in cases where both BAPA and MAP were involved. Therefore, the CBDT in addition to 4 parts earlier, added a new Part E in the guidelines stating the responsibilities of the applicants of MAP.
- Responsibility for making true disclosure
All the material facts which can affect the negotiation process of the case shall be disclosed in item k of Form No. 34F – Form of application for MAP in accordance with Rule 44G of Income-tax rules.
Example: Adjustments made to the same international transaction by Indian tax authorities as well as tax authorities of the treaty partner.
- Responsibility to provide up-to-date information
All material changes in the information or documentation previously submitted and any updated or new information or documentation relevant to the issues under consideration shall be submitted to the CAs.
The above guidance is to deal with the interplay of MAP with other processes such as regular tax appeals, tax settlements, and domestic dispute resolution schemes.
Further, if there arises any conflict between MAP and the domestic legislation, rules, instructions, and circulars in India or with the DTAAs entered by India, the provisions of such domestic legislation, rules, instructions, and circulars or the DTAAs, as the case may be, shall prevail.
As mentioned earlier, MAP is an effective tool in tax dispute resolution if utilised appropriately and the update to the guidance provides more clarity to the niche issues and queries faced by the stakeholders and the treaty partners. Further, the guidance places the onus on MAP applicants to provide information and documentation from time to time to the CAs at appropriate/relevant stages to assist in the smooth and efficient operation of the MAP process.
1 CBDT Notification F. No. 500/09/2016-APA-I dated 10 June 2022