Introduction

The Organisation for Economic Co-operation and Development (OECD) in its Base Erosion and Proﬁt Shifting (BEPS) project, had, under the Action Plan 14 (Making Dispute Resolution More Eﬀective) had recommended that all countries that implement BEPS package of recommendations, must publish comprehensive guidance on Mutual Agreement Procedure (MAP).

In the later part of 2019, the OECD had also released a peer review report on India’s journey on MAP, wherein it had provided its comprehensive recommendations on the India MAP programme. These recommendations inter alia covered many aspects which Indian Revenue Authorities (IRA) were expected to act upon, covering changes in treaties and bringing out detailed guidance in relation to the MAP process which were essential for making taxpayers and other stakeholders aware of how India’s MAP regime functions.

Considering the above and in continuation of various initiatives taken by the Central Board of Direct Taxes (CBDT) for bolstering the Alternate Dispute Resolution (ADR) mechanisms comprising of Advance Pricing Agreements (APAs), Safe Harbour etc., as well as recently announced “Vivad Se Vishwas” Scheme, the CBDT has released ﬁrst of its kind MAP guidance on 7th August 2020. While the Indian Income-tax Rules, 1962 (the Rules) covered the process and administrative aspects vide Rules 44G and 44H, a detailed information and guidance on MAP was missing in a comprehensive and consolidated manner.

In this article, we endeavour to discuss the guidance in a threadbare manner and also put up certain interesting assertions and take a stock of the hits and misses by the CBDT on this important ADR called MAP.

What is MAP?

MAP is an ADR mechanism, laid out in the Double Taxation Avoidance Agreements (DTAA) entered into between countries. MAP cases involve cross-border double taxation that could either be:

- juridical double taxation (same income taxed twice in the hands of the same entity in two diﬀerent countries) or

- economic double taxation (same income taxed in the hands of two separate entities, who are Associated Enterprises, in two different countries).

MAP process enables the Competent Authorities (CAs) of India and the overseas treaty partner country to engage and facilitate discussion and negotiations to endeavour to resolve the tax disputes which are not in accordance with the DTAA and aim to provide a relief from double taxation, either fully or partially.

India with its extensive network of treaties with over 90 countries which contain an article in relation to allowing of MAP, has a well-established MAP programme and does have a signiﬁcant experience with resolving MAP cases. As many as 600 tax disputes have been resolved under MAP between 1 April 2014 to 31 December 2018.

Brief about the guidance

This recently released MAP guidance is aimed for the beneﬁt of taxpayers, tax practitioners, tax authorities and Competent Authorities (CAs) of India and treaty partners.

MAP process

The pictorial / flow-chart presentation of the MAP process, as per the CBDT’s guidance is as follows:

* Some of the processes described above would ﬂow similar to the above, where the MAP application has been accepted by the overseas CAs due to adjustment by IRA.

The guidance also speciﬁes that the CAs may either meet in person or negotiate remotely through teleconference, video conference or email, which is a welcome move and speaks volumes about the digital agenda and ﬂexibility of the CBDT / IRA. For multilateral MAPs, the guidance provides detailed conditions for its acceptance and speciﬁes that the case shall be executed in the form of series of parallel bilateral MAP cases.

Summary of CBDT’s MAP guidance has been tabulated in Annexure A. Interesting inferences and unfinished agenda

While CBDT has come up with a detailed guidance and addressed most of the issues raised in the peer review report of OECD, there are still some unanswered questions wherein there is indeed a need for more clarifications. Some of these are as follows:

. Instances that “will” result into double taxation – The typical MAP clause from DTAA speciﬁes the circumstances under which MAP application can be ﬁled, which is action by one tax authority which (a) results or (b) will result in taxation not in accordance with the DTAA.

India’s existing position for acceptance of cases in MAP generally necessitates the existence of ﬁnal assessment order, may be with an objective to avoid devotion of time and resources on cases for which the underlying tax has not been ﬁnalised, though, the OECD guidance and global interpretation does not mandate existence of a final order.

However, the current guidance seems to have acknowledged the fact that the MAP application could be accepted even in following circumstances:

- For an order to enforce tax withholding under Section 201 of the Act and the same is disputed by the non- resident entity - though the guidance speciﬁes that the MAP discussion will be taken up only after the assessment order is passed in the case of the non-resident taxpayer,

- Foreign CAs of the treaty partners may accept MAP applications from their taxpayers in respect of signed / under discussion Unilateral Advance Pricing Agreements (UAPAs) if any decision of the tax authorities of such other countries disturbs the income declared in the returns ﬁled in pursuance of the UAPAs. Again, the guidance speciﬁes that for the UAPA under discussion, the MAP will be taken up only after the UAPA is entered into.

While this is a welcome step by the CBDT, a facilitation of application owing to an interpretation of possible

double taxation instance may still help India to align itself with the OECD guidance. Following are some of the instances wherein taxpayer should, ideally, be allowed to apply for MAP for cases which may result in double taxation and are subject to treaty interpretations leading to multiple/ contrasting views:

- Existence or non-existence of Place of Effective Management (PoEM),

- Confirmation in relation to the residency status,

- Taxation of dividends etc.

In addition to the above, it would be worthwhile to evaluate granting MAP access at draft assessment order/ Transfer Pricing (TP) order stage itself, because at that moment also the proposed taxation that is not in accordance with the treaty is more probable and no longer merely possible. Same logic may also be extended to a show cause notice from which the proposition may lead to double taxation.

Thus, the facilitation of early acceptance of MAP could in turn provide the taxpayers an opportunity to achieve certainty and avoid double taxation at an early stage.

· UAPA along with MAP – option for Bilateral APAs :

As per guidance in case of UAPAs, AE/ related party of the Indian taxpayer can apply for MAP with the CA with the treaty partner and corresponding relief can be available to the AE/ related party of the Indian taxpayer.

Accordingly, it would be worth to explore whether to opt for Bilateral APAs or whether to go for Indian UAPA and then opt for a MAP with the overseas CA. Decision in this regard would depend on various factors such as follows:

- Comfort of taxpayer with higher margins/ mark up (as generally Bilateral APAs have better scope for negotiation);

- Additional time taken by Bilateral APAs vis-à-vis MAP resolution;

- Higher cost in case of Bilateral APAs vis-à-vis MAP resolution.

It would be important to gauge the willingness of treaty partner to accede to request of Indian CA and provide such relief (especially without any negotiation in terms). It would be interesting to see whether the similar relief would be provided by India CAs in case of reverse scenario, i.e. UAPA entered into by the overseas AE / related party and MAP sought with the Indian CA, as ideally it should be a two-way exchange, though, the current guidance doesn’t provide any views for such a scenario.

· Limited scope of MAP for cases where the Income Tax Appellate Tribunal (ITAT) has pronounced the order:

While it is understandable to deny the access to MAP for settlement by Income-tax Settlement Commission (ITSC), or an order from Authority for Advance Rulings (AAR) being voluntary and separate /independent processes under the domestic law and also to grant an access to purely facilitate a correlative adjustment for cases of ADR mechanisms such as UAPA / Safe Harbour (SH), the position of the Indian CA not being allowed to negotiate / deviate from the ITAT orders may somehow appear to be against the spirit of MAP, which aims at avoiding double taxation through the mutual consultation and negotiation process through an ADR. The current guidance somehow appears to put the ITAT proceedings at the same pedestal of APA / SH / settlement commission / AAR, though, these are voluntary procedures initiated by the Indian taxpayer, whereas, the ITAT is an appellate authority under the domestic litigation process, to which, typically, an ADR like MAP should be available to achieve double taxation relief. The current guidance seems to facilitate access to MAP for overseas CA for ITAT pronounced cases only to facilitate a correlative adjustment, which may not be acceptable to the overseas CA in all cases.

Moreover, while there have been practical instances, where the Indian taxpayers approach the ITAT and request for keeping the case in abeyance, wherever its AE has initiated a MAP and in many such cases the ITAT has also honoured such a request, however, the guidance doesn’t mandate the abeyance to the ITAT proceedings nor does it suggest to initiate any such outcome through some other mechanism either through Ministry of ﬁnance or Ministry of Law and Justice, which could keep up the spirit and objective of ADR like MAP intact.

This is also in line with the MOUs signed by India with certain Treaty partners like USA and UK wherein collection of taxes could be kept in abeyance and accordingly, it is somewhere acknowledged that payment

of taxes is not required due to ongoing MAP resolution process. However, if ITAT proceeds to decide such cases based on merits, the option for negotiating the case in MAP would therefore get lapsed for the taxpayer.

Thus, to strengthen the MAP mechanism, it is imperative that the Government of India comes up with necessary circulars/ internal guidance to keep the ITAT proceedings in abeyance in case the taxpayer has an ongoing negotiation in relation to MAP, which could save the efforts of Indian judiciary and also the taxpayers till the MAP process either concludes or fails.

· Timelines for MAP application in case of orders set aside by the ITAT for fresh adjudication

The guidance in relation to orders set aside by the ITAT for fresh adjudication by IRA provides that access to MAP would be provided again after the fresh adjudication by the IRA. It is important to note that with such an instruction, the ITAT sets aside the original order and requisitions the IRA to conduct a fresh adjudication, meaning thereby, that the order by IRA pursuant the fresh adjudication may replace the original order and may, practically, be considered to be “the ﬁrst instance of action not in accordance with the DTAA”, if such order results in double taxation.

The guidance in this regard may be further elaborated specifically in relation to following:

- Whether the time limit of three years (or otherwise as per the DTAA) would counted from the new order pursuant to fresh adjudication by the IRA, as mandated by the ITAT?

- If the AE of the taxpayer had not applied for MAP within the timelines prescribed under the DTAA against the original order, but intends to now proceed with the MAP route post the passing of the new order by the IRA pursuant to the fresh adjudication mandated by the ITAT, whether such application would be acceptable to Indian CA for negotiation under the MAP process?

While the logical answers to the above questions could be aﬃrmative, it would be important to get a speciﬁc guidance from the CBDT on such issues.

· Safe Harbour Rules (SHR) vis-à-vis MAP guidance:

Rule 10TG of the Rules speciﬁes that the assessee shall not be entitled to invoke MAP under DTAA if the transfer price is accepted by the IRA under the SHR, whereas, the MAP guidance mentions that overseas CAs may accept a MAP application if its tax authorities disturb the income reported pursuant to the SHR application in India and that the Indian CA will allow access to MAP, though won’t change the arm’s length price determined under the SHR.

While the MAP guidance may appear to be contradictory to the Rule 10TG of the Rules, a harmonious interpretation may lead to a conclusion that Indian CA will only allow access to the MAP, so that the overseas CA can facilitate a correlative adjustment to the AE of the Indian taxpayer, which, otherwise may not be available to the overseas CA/ tax authorities in the absence of access to MAP. Nonetheless, it would be advisable to incorporate an appropriate amendment to Rule 10TG to facilitate the above interpretation/ inference.

It would be interesting to track whether the overseas CAs accept the India SHR norms and provide a full correlative relief to the AEs of the Indian taxpayers and if no, whether such access to MAP remains theoretical and inoperative, unless, the domestic rules of such an overseas CA allow a partial and unilateral correlative relief.

· Corresponding relief in case of Vivad Se Vishwas Scheme (VSVS)

The guidance has broadly covered all the ADR / domestic dispute settlement mechanisms pursuant to which there could be an instance of double taxation. However, the recent amnesty scheme brought by the income- tax department this year, i.e. VSVS has been left untouched. It is important to watch whether the adjustments accepted by the taxpayers under VSVS would indeed be eligible for MAP at least from a correlative relief perspective if not a detailed negotiation. If yes, the combination of VSVS with MAP could provide taxpayers a significant cover from instances of double taxation.

· Penal implication on the MAP outcomes:

While the Indian taxpayers have taken arguments for waiver of penalties pursuant to a tax payment arising out of a MAP negotiation, especially since the outcome is a negotiation between the CAs to provide relief from double taxation and not necessarily an understatement / misreporting of income by the Indian taxpayer, the current guidance seems to prescribes that the CAs of India do not have the mandate to

consider consequential issues such as interest and penalties and they cannot negotiate disputes that arise from such issues.

However, considering the spirit of the MAP process, i.e. to facilitate a negotiation between CAs wherein detailed deliberation is undertaken to arrive a common agreeable taxability position, penal exposure on such negotiations could certainly be a deterrent against the success of a MAP process. Similar to the other ADR mechanisms like APAs, wherein penal exposure is mitigated, similar position could be adopted for MAP outcomes in case adequate documentation is maintained by the taxpayer.

· Multilateral MAPs – inferred guidance for Multilateral APAs as well?

The guidance prescribes that the CAs of India can participate in multilateral MAP discussions with more than one treaty partner. Multilateral MAP cases shall involve all the prescribed processes (like exchange of position papers, negotiations, ﬁnalization of mutual agreements, etc.) on a multilateral basis amongst the CAs concerned. However, the guidance suggests that a multilateral MAP case shall be executed in the form of a series of parallel bilateral MAP cases. The CAs of India can agree to accept a multilateral MAP request if certain conditions are fulﬁlled. This could be considered as an inferred guidance for multilateral APAs as well (being ultimately the CA proceedings) and thus it could be inferred that even for the multilateral APAs, the discussions may happen jointly – but agreements will happen bilaterally.

Concluding thoughts

Despite the above-mentioned issues which need to be appropriately addressed, the guidance released by the CBDT is a welcome move and it does strengthen the intent of the Indian Government to reduce the tax controversy and thereby providing more cohesive tax regime aligned with the global tax framework. It further .

Following are certain concluding thoughts:

· To make regimes like MAP more attractive, the government should provide more emphasis on the ADR mechanisms as against domestic remedies. This would inter alia include strengthening the tax infrastructure and allocation of more resources to handle cases involving MAP/ APA negotiations.

· Since MAP is required to be opted for each assessment year separately, a block processing/ bullet application for MAPs could be introduced for taxpayers having similar issues on a year on year basis. While this would expedite the overall process, it would deﬁnitely help in reducing the administrative hassles for the taxpayers as well as the tax authorities, especially since the guidance refers to resolution of recurring tax disputes on the basis of prior MAP negotiations.

This guidance will certainly give a much-needed push to resurrect the less explored MAP mechanism and also assist in improving the ‘ease of doing business’ index for India.

Annexure A: Summary of CBDT’s MAP guidance

Sr	Particulars	Comments
1	Cases/ situations for MAP access	a) Transfer Pricing (TP) adjustments; b) Determination of existence of a Permanent Establishment (PE); c) Attribution of profits to PE (whether admitted or not); d) Characterisation or re-characterisation of expense/ income; e) Even in a situation where the IRA apply domestic anti-abuse provision; f) Where obligation to withhold taxes from non-resident is enforced under Section 201 of the Income-tax Act, 1961 (the Act), though, the discussions will be only taken up after an order on non-resident by the IRA.
2	Timeframe for conclusion	India has given its commitment to endeavour to resolve cases within 24 months (domestic appeal process which might take upto 5 to 10 years).
3	Time limit for filing	Within three years from the first notification of the order/action of tax authorities that results or will result in taxation not in accordance with the relevant DTAAs (DTAAs specifying lesser period to be modified through bilateral negotiations or Multilateral Instrument (‘MLI’).
4	Circumstances where Indian CA would provide access to MAP but would not negotiate any other outcome than what has already been achieved and will request the overseas CA to provide a correlative relief	a) Unilateral APA (UAPA) · In case of already signed Indian UAPAs, Foreign CA may accept MAP from their taxpayers if their tax authorities disturb the income declared in the return filed in pursuance of UAPA, or · In case of ongoing UAPA, if action of IRA / overseas tax authorities during such pendency of UAPA gives rise to double taxation, though Indian CA would not process such MAP cases till UAPA is entered into. b) Safe Harbour (SH) For a SH application by the Indian taxpayer, Foreign CA may accept MAP from their taxpayers if their tax authorities disturb the income declared in the return filed in pursuance of such safe harbour. c) Income Tax Appellate Tribunal (ITAT) order In case order from ITAT is received before resolution of the MAP, then the Indian CA shall not deviate from order of tribunal (being independent statutory appellate body, outside the administrative jurisdiction of IRA and highest fact finding body on tax matters): will apply even wherein order of ITAT came to knowledge of Indian CA even after MAP has been resolved but not yet implemented.

Particulars

Comments

Denial of MAP application in certain cases

Indian CAs can deny access to MAP in some situations such as

· Delayed MAP applications

· Taxpayer objection not justified (but still mandated to undergo notification and bilateral consultation process between the CAs, though, such consultation shouldn’t be interpreted as consultation to resolve the case)

· Incomplete MAP applications/ documents/information and errors are not remedied within prescribed time limits (may include extensions)

· Settlement order from Income-tax Settlement Commission (ITSC), being an independent statutory dispute resolution body (access possible if ITSC refuses to issue a settlement order or issues order without settlement or where the proceedings before ITSC abate and IRA take action resulting in double taxation)

· An order from Authority for Advance Rulings (AAR), which is an independent statutory dispute prevention body.

· MAP access shall also not be provided in respect of issues that are purely governed by India’s domestic law/ legal provisions.

Technical issues

· Downward adjustment: not possible under MAP below the returned income, owing to the specific provision of Section 92(3) of the Act. However, for MAP cases involving adjustment by overseas tax authorities, Indian CA may go below the returned income to implement the MAP in full measure in accordance with treaty obligations.

· Resolution of recurring issues: can be on the same basis as prior MAP resolution, however, cannot accept application in advance, i.e. before any order by the IRA.

· Interest and penalties: since not connected with the quantum of income and being consequential in nature, cannot be negotiated, being out of mandate of Indian CAs.

· Secondary adjustments: Indian CAs obliged to make secondary adjustment under a MAP resolution in respect of cases pertaining to Financial Year 2016-17 or thereafter.

· Bilateral / Multilateral APAs: MAP application for same issue and same year cannot be accepted if covered under bilateral / multilateral APA, unless the APA fails to result into an agreement.

· Suspension of collection of taxes during pendency of MAP: subject to compliance with MoU with specific treaty partners. But where no MoU exists, domestic law shall prevail.

· Adjustment of taxes paid in pursuance of order under Section 201 of the Act: allowable for the non-resident in the event of resolution of MAP for relevant issue for relevant year.

TAX BY MANISH

Thursday 20 August 2020

Understanding CBDT MAP Guidance.