1 MAP Concept In brief (Article 25 of OECD Model convention)
1.1 MAP is one of alternate dispute resolution mechanism provided in double tax avoidance agreement (‘DTAA’ or ‘tax treaty’) for the resolution of international tax disputes
1.2 MAP resolution is provided in all DTAA entered by India with various countries
1.3 It provides resolution of disputes through the intervention of the Competent Authorities (‘CAs’) of each country who discuss and reach out for mutually acceptable solution
1.4 Scope under MAP is limited only to issues pertaining tax treaty and may not extend to issues covered under domestic tax laws
1.5 It is a process / mechanism for dispute resolution through a settlement by negotiated means
1.6 Relief under MAP is in addition to the dispute resolution mechanisms available under domestic tax laws, so both the proceedings can continue simultaneously.
2 Eligibility to apply for MAP
2.1 A person who is a citizen or resident of a Contracting State, can request assistance from the competent authority of that State, if the person believes that the actions of the Contracting State, a treaty country, or both, cause or will cause a tax situation not intended by the treaty between the two countries.
2.2 If the request provides a basis for competent authority assistance, the competent authority of the respective Contracting State will consult with the treaty country competent authority on how to resolve the situation.
3 Designated Indian Competent Authorities
3.1 All matters pertaining to Non-residents are dealt with by the Foreign Tax and Tax Research (FT&TR) Division in the CBDT.
3.2 Division negotiates tax treaty, interact with tax authorities of other countries. They also represent India in International Organisations, MAP, APA, etc.
3.3 The division is headed by Joint Secretary (FT&TR) – there are two CA’s. Work is allocated based on Zonal criteria (i.e. Europe and North America and other than Europe and North America) The Joint Secretaries are the CAs for India, based in Delhi
4 Need for MAP
4.1 DTAA are available for capturing and curtailing juridical double taxation.
4.2 DTAA’s generally do not cover instances of economic double taxation. MAP provides relief in cases of economic double taxation.
5 MAP process vis-vis normal tax litigation process
There is an urgent need for MAP due to following challenges faced in normal tax litigation process.
5.1 On an Average, MAP proceedings gets concluded within 3 years, as compared to litigation, which may take around 10-12 years
5.2 MAP proceedings are binding on revenue, whereas in litigation, revenue has a right to prefer an appeal
5.3 MAP is binding only if the same is accepted by Taxpayer, where as in case of appeal, it is binding, taxpayer may prefer an appeal, if it does not accept the order of relevant authorities
5.4 In MAP proceedings, there is a suspension of collections of tax in case of few countries as India has MOU with USA, UK, Sweden and Denmark. In case of MOU, demand is suspended on furnishing of bank guarantee, equal to the amount of tax demand, whereas certain minimum amount is required to be paid in litigation process. Stay is granted at the discretion of the revenue and appellate authorities
5.5 In MAP process, generally correlative adjustment is available, whereas in case of litigation, there is a double tax exposure, if the appeal is decided against the taxpayer
5.6 In MAP process, there is a more scope for CA’s to negotiate and arrive at a compromise agreement, whereas under tax litigation, there is a legalistic approach and there is no scope for negotiation
6 Correlative /corresponding Adjustment permitted
Under the Transfer Pricing legislation, every country has a power to re-determine the transaction price between the associated enterprises, if the same is not an Arm’s Length Price (“ALP”). The correlative adjustment arises in the other country on account of the primary adjustment made under the TP regulations.
For example, X Ltd. in India enters into an agreement with Y Ltd of Australia. The Indian revenue authorities consider that the price agreed between X Ltd. and Y Ltd. is not an ALP and hence the price is adjusted. The issue that arises is consequent to adjustment made by revenue authorities in the assessment of X Ltd. whether Y Ltd. is entitled for the adjustment in Australia
One more issue arises is whether corresponding adjustments are mandatory, for which following points to be noted:
6.1 The corresponding adjustments by the other country are not mandatory consequent to primary adjustments made by one country. The other country can resort to corresponding adjustment if the same is in accordance with provisions of its domestic legislation
6.2 The right to carry the corresponding adjustment in the other country primarily arises due to provisions of Article 9(2) of the OECD Model
6.3 If the countries have inserted the provisions of Article 9(2) in the double tax treaty, then those countries can make a corresponding adjustment provided the other country accepts the principle and quantum.
6.4 India under MLI, have accepted this article and now corresponding adjustments would be provided to all the countries, in case of transfer pricing adjustments.
7 Time limit to file a MAP
Time limit for presenting the case for MAP is three years from the first notification of the action alleged to have resulted in taxation not in compliance with the tax treaty.
In the Guidance issued in August 2020, it has been further clarified that where tax treaty provide a different time limit, India would change such time limit to three years in accordance with BEPS Action plan 14. It is also being mentioned that efforts are being made to amend those tax treaty having different time limit.
8 Tax framework for MAP under Income tax Act, 1961 read with rules and under DTAA framework
Guidance note issued in August 2020
The Central Board of Direct Taxes (CBDT) issued a detailed Guidance on MAP in August 2020 for the process to be followed by an Indian Competent Authority (‘CA’) and field officers, and comprehensive guidance on issues related to MAP processes. The said guidance is introduced to make the MAP resolution process rule-based, effective and predictive. It would include the introduction, access & denial, technical issues and implementation of MAP. Guidance is covered in Part A to Part D.
8.1 Part A of Guidance note – Introduction and basic information
MAP request can be made by a taxpayer when it considers that the actions of the tax authorities in one or both the treaty partners result or would result in taxation not in accordance with relevant DTAA.
MAP cases would involve cross-border double taxation that would either on account of Juridical double taxation [same income taxed twice in the hands of same entity in two different jurisdictions] or it could be on account of Economic double taxation [same income taxed twice in the hands of two separate entities, who are Associated Enterprises (“AE’s”) in two different jurisdictions]
8.2 MAP Process to be followed
Briefly, MAP process is provided below:
8.2.1 An Indian taxpayer needs to make an application to Indian CA in Form 34F.
8.2.2. In case AE or related party of an Indian taxpayer submits an MAP Application before the CA of its country of residence (DTAA partner) in respect of order / action of the tax authorities in India, a copy of MAP Application must also be provided to Indian CA
8.2.3. Once MAP application is accepted / rejected by Indian CA, it shall communicate its decision to CA of tax treaty partner through written communication.
126.96.36.199 The decision as to whether MAP application is accepted / rejected is also to be communicated to Indian taxpayer by Indian CA
188.8.131.52 The CA of Tax Treaty partner would provide the position to Indian CA. Indian CA, would exchange views and come to a decision and present a negotiated position from its side.
184.108.40.206 Once resolution is reached, the CA of tax treaty partner would communicate the terms and conditions of resolution to taxpayer
220.127.116.11 Where due to any reason, it is not possible to reach a resolution, the MAP would be closed and recorded as unresolved.
Internationally, in case, where it is not possible to reach a solution, matte would be referred for Arbitration. However, India has not accepted Arbitration and hence in India’s case, matter would remain unresolved.
Part B – Access and denial of MAP
8.3 Access to MAP is available:
8.3.1 Issues pertaining to determination of residential status under the tax treaty
8.3.2 Issues relating to existence of Permanent Establishment
8.3.3 Adjustment arising from Transfer Pricing assessment
8.3.4 Issues relating to Attribution of profits to Permanent Establishment, whether or not admitted by taxpayers
8.3.5 Issues related to Characterisation or re-characterisation of an item of expense or payment (Royalty or FTS or Interest)
8.3.6 Issues related to Characterisation or re-characterisation of an item of receipt as taxable income (Royalty or FTS or Interest)
8.3.7 Issues relating to Interpretation of provisions of tax treaty
8.3.8 When the Indian tax authorities apply domestic anti abuse provisions
8.3.9 When the obligation to deduct TDS on a payment made by Indian taxpayer to non-resident entity is enforced by an order passed under Section 201 of the Act and the same is disputed by non-resident entity, in anticipation an event of double taxation or taxation not in accordance with tax treaty (Please note that in this case, MAP discussions can be taken once assessment order is passed in the case of non-resident entity)
8.3.10 In case where Unilateral Advance Pricing Agreement (“UAPA”) applications have already been filed and accepted, then MAP for same issues for the same years should not be made by the taxpayers
8.3.11 If say, UAPA application is under consideration and negotiation, then Indian CA would allow access to MAP, but would keep MAP application under hold, till UAPA is entered. Once UAPA is entered, Indian CA would not change the terms and conditions of UAPA, but would request Tax treaty partner to provide correlative adjustment for the same.
8.3.12 Where UAPA is not entered into, Indian CA would process MAP Application
8.3.13 Where the Indian or Non-resident taxpayer has applied safe harbour provisions and Return of Income is accepted by Indian tax authorities, then CA’s of other countries may accept MAP Applications from their taxpayers in respect of any decision of tax authorities of other countries, if such a position / decision affects the return filed, and then can inform Indian CA
8.3.14 The Indian CAs would allow MAP Application, but would not change ALP [for the International transactions covered by safe harbour provisions] and would request the CAs of DTAA partners to provide correlative adjustment.
8.3.15 Order passed by the Tribunal in respect of the same disputes being examined under MAP (In case ITAT order is passed before implementation of MAP, it would have priority over MAP and Indian CA would request other CA to provide correlative adjustment to that effect)
8.3.16 In case where order of tribunal is set aside the issue to be reconsidered, then the access to MAP would be provided again after the decision is revaluated by Indian tax authorities
8.4 Denial of access to MAP
8.4.1. If MAP Application is filed beyond the timelines provided in tax treaty
8.4.2. Indian CA’s feel that objection raised by taxpayer is not justified
8.4.3 MAP application is incomplete, or the information / documents requested by the Indian CA’s are not provided by the taxpayer
8.4.4 Where the taxpayer has obtained the order or application is pending with settlement commission on the same issue
8.4.5 Issue covered squarely by Indian domestic law
8.4.6 Taxpayer has obtained the advance ruling on the same issue
8.5 PART C – Explanation provided for Certain Technical issues
8.5.1 No Downward adjustment i.e. Indian CA’s cannot go below the returned income, due to specific prohibition under Indian tax laws. However, in a case where MAP cases involving adjustments made by Tax Treaty Partner, the Indian CA’s may go below the returned income of the Indian taxpayer to implement the MAP
8.5.2 Indian CA’s may provide / resolve recurring issues on the same principles as agreed in a prior years MAP resolution, however, they do not have a mandate / authority to resolve the issue in advance
8.5.3 Indian CAs would be obligated to make secondary adjustment as part of MAP resolution in cases pertaining to FY 2016-17 onwards [Concept of Secondary adjustment has been explained briefly below]
8.5.4 In cases, where Bilateral and Multilateral APA is filed, MAP would not be accepted on the same issues for same years. In case where application under APA fails, then MAP application can be made on the same issues for the same years.
8.5.5 Indian CA’s does not have mandate to consider consequential issues of Interest and penalties and negotiate dispute arising from such issues
8.5.6 Suspense of collection of taxes during the pendency of MAP is based on MOU with various countries is provided. For Example, India have entered into MOU with USA, UK, Sweden and Denmark. Where there is no MOU entered, then domestic law of India would govern the procedures
8.5.7 In case of order passed under Section 201, the payment of tax [excluding interest] may be allowed to be adjusted against the tax liability of the non-resident taxpayer (payee)
8.6 Part D – Guidelines on implementation of MAP
The intimation of acceptance of MAP resolution by the taxpayer to be made in 30 days. The tax office to make the MAP resolution effective within one month from the end of month in which it receives the letter from the Indian CA.
9 Concept of Secondary adjustment
The provisions of secondary adjustment are applicable from Financial Year 2016-17, if the amount of primary adjustment exceeds INR 1 Crore. It applies in following situations:
9.1 Taxpayer on its own accord makes primary adjustment; or
9.2 Assessing officer makes primary adjustment which is accepted by the taxpayer; or
9.3 Primary Adjustments are determined in APA / arising as a result of resolution under MAP/ made under safe harbour rules
10 Concept of Multilateral MAP
Multilateral MAP is applicable, where in a dispute, more than two participating countries are involved.
It would be executed, if following conditions are satisfied:
10.1 All the participating countries have a tax treaty with each other;
10.2 The transaction or issue in dispute has bearing, directly or indirectly, on all tax treaty partners; and
10.3 The CAs of all participating countries agree to negotiate Multilateral MAP
11 Framework of Multilateral Instrument (“MLI”)
As a process of International consensus, following framework of MLI has been agreed and accepted by various countries
11.1 In the past, Multinational Enterprises (“MNE”) have arranged their corporate structures to artificially shift profits to no or low-tax locations where there is little or no real activity
11.2 Base Erosion and Profit Shifting (“BEPS”) refers to tax planning strategies that exploit gaps and mismatches in tax rules
11.3 In order to combat the above, the BEPS Project was launched in 2013 and Final report on 15 Action Plans was issued in 2015
11.4 BEPS Action plan need to be implemented by way of changes in domestic law and tax treaties
11.5 Traditionally, a change in DTAA can be introduced by way of protocol after extensive bilateral discussions and renegotiations, which is time consuming. To modify existing tax treaties in an efficient manner to implement BEPS measure, Action Plan 15 – Developing a Multilateral Instrument (“MLI”) to Modify Bilateral Treaty provide an innovative approach that enables jurisdictions to swiftly modify their bilateral tax treaties by introducing MLI
There are four minimum action plans that are mandatory for effective implementation of BEPS programme. One of such programme is “Action 14 – Making dispute resolution mechanisms more effective” under which MAP is covered.
12 India’s position for MAP under MLI
12.1 Action plan 14 is implemented through Article 16 to 26 of MLI. Although this is minimum standard, not all the provisions of this article are minimum standard and hence reservation can be made by respective countries
12.2 Article 16 briefly states the following:
“A person can approach the competent authority of either Contracting Jurisdiction (regardless of any remedy provided under domestic law), if person considers that the actions of one or both of the Contracting Jurisdictions results in taxation not in compliance with the provisions of the relevant tax treaty”
India has accepted the above subject to reservation. India has reserved its right for not adopting the modified MLI provisions on the basis that it will meet the minimum standard by allowing MAP access in the resident state and implementing bilateral notification or consultation process.
12.3 Article 17 briefly states the following:
It requires contracting states to make appropriate corresponding adjustments in transfer pricing cases.
12.4 India has chosen to apply the said provision of corresponding Adjustment in all CTAs, except for CTAs where the provisions already exist.
CBDT Circular issued for Bilateral APA and Transfer pricing MAP cases
12.5 In relation to number of requests received by CBDT from time to time regarding the acceptance of applications pertaining to Transfer Pricing MAP cases and bilateral APAs where the AE of the Indian entity is resident of a country with which India has entered into a DTAA, but the DTAA does not contain Paragraph 2 of Article 9 (or its relevant equivalent Article) relating to ‘Corresponding Adjustment’, it is clarified by CBDT vide press release dated 27 November 2017 that in such cases, it has been decided to accept such cases as well, regardless of the presence or otherwise of Paragraph 2 of Article 9 in the DTAAs.
12.6 Article 18 to 26 briefly states the following:
If, under the MAP process, the CAs do not agree on the correct Interpretation of the DTAA, the CAs can submit the matter to an independent arbitrator (or a panel of three arbitrators) for decision. The arbitrators will decide which of the CAs is correct.
India has not accepted the above and reserved this article completely as India is of view that it would affect its sovereignty
13 Role of Taxpayer in MAP process
The negotiation process between the CA’s under MAP, are generally a ‘closed door’ event. Thus, the taxpayer would not have access to and cannot participate in the negotiation process between the CA’s. Taxpayers can work with the CA’s to explain their own case and positions prior to the negotiation meetings between the CA’s.
14 Judicial decisions under MAP
14.1 Issue 1 – Whether MAP would be binding for subsequent years
Hon’ble SC in the case of Asstt Director Of Income Tax I New … vs M/S E Funds It Solution Inc (298 CTR 505)(SC) has assessed the above issue
E-Funds USA and its group company entered into contracts for providing Information Technology Enabled Services to their clients in the USA. These contracts were assigned or sub-contracted to E-Funds India, an indirect subsidiary of E-Funds USA in India, for execution. Indian and USA CA had initiated proceedings under the MAP article of the India – USA DTAA and had entered into an agreement as to attribution of profits between the USA entities and E-Funds India.
High Court decision
MAP proceedings had been initiated on a without prejudice basis and that the existence of a PE was a question of law that needed to be determined purely on merits
Brief explanation for Hon’ble SC decision
SC rules that a fixed place PE is only created where the foreign entity has a physical location in the source state at its disposal, and over which it exercises control, and through which the business is conducted;
If the services rendered by the entity in the source state are not provided to customers located in that state, there cannot be a service PE;
MAP procedure and agreement are relevant, but cannot be primary basis for determination of a PE. Further they cannot be used as a precedent for subsequent years;
Apart from PE related issues [which is not discussed here], one of the issues raised before Supreme Court was whether admissions made in the course of the Mutual Agreement Procedure under the India – USA Tax Treaty could be used to justify the creation of PE?
In response to above issue, Hon’ble SC has stated the following:
In this case, the competent authorities of India and the USA had initiated proceedings under the MAP article of the India – USA Tax Treaty and had entered into an agreement as to attribution of profits between the US entities and E-Funds India. The Revenue contended that the PE issue stood determined owing to certain statements made in the MAP Settlement Agreement to the effect that the US entities had PEs in India. It was argued that these statements should continue to remain applicable to the E-Funds Group as there had been no subsequent change in the factual position of the Group.
On this point, the High Court had concluded that MAP proceedings had been initiated on a without prejudice basis and that the existence of a PE was a question of law that needed to be determined purely on merits. Referring to Paragraph 3.6 of the OECD Manual on MAP Procedure, the Supreme Court observed that it was “very clear” that a MAP Settlement Agreement was time and case specific and could not be considered precedent for subsequent years. Thus, statements made in a MAP Settlement Agreement for a previous year could not be used in determining PE status for a subsequent year. One may refer relevant observations of SC is provided in Para 26 to 29 for the reason for arriving at the decision.
14.2 Issue 2 – Benefit of Section 10A allowed in case of MAP (for the amounts settled under India-USA MAP)
M/s. Dell International Services India Private Limited v. The Deputy Commissioner of Income tax (Bang ITAT) (73 taxmann.com 24)
Facts of the case
M/s. Dell International Services India Private Limited (“Taxpayer”) is a wholly owned subsidiary of Dell International Inc. Taxpayer provides support services to its group entities. The services provided by the taxpayer are Call Centre, Shared services and Offshore development Centre (testing and support).
Taxpayer was rendering Software Development Services (SWD) as well as Information Technology Enabled Services (ITES) to its AE. As far as international transaction of rendering ITES services is concerned, taxpayer received a consideration of Rs.629,43,81,078 towards call centre services and Rs.149,59,17,786 towards back-office support services. Both the aforesaid services were classified as ITES.
As regards the ITES segment, the TPO found that there was a shortfall in the price received by the taxpayer from AE and the shortfall was added to the total income of the taxpayer an adjustment under Section 92 of the Act.
Against the aforesaid addition, the taxpayer preferred an appeal before the CIT(A).
MAP option pursued
During the pendency of the taxpayer’s appeal before the CIT(A), the taxpayer’s AE in the USA had approached the Competent Authority under Article 27 of the DTAA between India and the USA seeking resolution as per MAP for determining the Arm’s Length Price in relation to the transaction between the Company and its Associated Enterprises in USA.
The competent authorities of the USA and India mutually arrived at terms with respect to the markup on cost to be earned by the Taxpayer for the ITE services rendered to US tax residents.
Order passed by CIT(A)
The CIT(A) passed an order inter alia rejecting the additional ground raised by the taxpayer and held that the upward adjustment made as per MAP is undisclosed in books of accounts and hence the same cannot be allowed as deduction.
Issue raised and order by the Tribunal
The issue raised in this case was whether CIT(A) has erred in not allowing deduction under section 10A of the Act on the enhanced export income amounting to Rs. 310,517,297 determined as per Mutual Agreement between the Competent Authorities of India and USA and as accepted by the Appellant.
The tribunal while setting aside the order of CIT(A), allowed the deduction under section 10A of the Act on the income determined as per Mutual Agreement between Competent Authorities of India and USA.
14.3 Issue 3 – Attachment of Bank Accounts during Pendency of MAP process is not allowed
In case of Motorola Solutions – [P & H HC] (263 CTR 215) quashed demand recovery notice based on peculiar facts.
Facts of the case
Motorola Solutions (‘Motorola’) had applied for MAP in respect of the adjustment made by tax authorities for particular tax year. Motorola had requested for stay of demand from tax authorities pursuant to provisions of India-USA DTAA. Tax authorities attached the bank account of the Motorola during pendency of admission of MAP application by CA.
For action of attachment of Bank accounts, revenue argued that bank guarantee had lapsed on account of expiry of time and it was not provided in the prescribed format.
Further, revenue also stated that confirmation from foreign tax division, in respect of MAP application for subsequent year was pending for admission
Ruling of High Court
There is no provision in the India -USA DTAA or the MOU for a process of formal admission or confirmation from the Indian Tax Authority
Bank guarantee agreement contained a clause which stated that, if the same is not renewed after expiry of time, the bank will send such intimation to tax authorities
No intimation sent by bank to tax authorities. Hence, agreement was automatically renewed
Affidavit by CA indicates that MAP was admitted subsequently
Bank has given statement that the guarantee still stands [which is contrary to stand taken by the tax authorities]
In view of above, facts, P & H HC has quashed recovery of demand notice.
14.4 Issue 4 – Stay to be granted for subsequent years under consideration in MAP (if application for MAP is pending for admission)
Bombay High Court in the case of UPS Worldwide Forwarding Inc [267 CTR 162] (Bombay) has held that stay of demand to be granted once MAP application is made.
Facts of the case
UPS Worldwide (‘UPS group’) stated that, income from its transactions during certain years was not taxable in India. Taxpayer initiated MAP under India-USA DTAA for these years. Tax authorities granted stay of tax demand considering the MOU provisions of India-USA DTAA. Taxpayer submitted application for inclusion of subsequent year in above MAP application and asked for stay of demand in respect of this year.
Tax authorities rejected the request for stay of demand in respect of subsequent year on contention that no relief in respect of subsequent year is provided as stay of demand order pursuant to MOU does not take into account the subsequent year and Confirmation from Foreign Tax Division of CBDT in respect of admission of MAP application for subsequent year was pending till date.
Decision of High Court
No provision exists either in the USA DTAA or the MOU for a process of formal admission or confirmation from the Indian Tax Authority for stay to be granted. Stay of demand should be granted once MAP application is made. Subsequent tax year is also covered if the same is covered under original MAP application
Certain other decisions on various issues raised is provided as under:
14.5 Issue 5 – MAP arrangement for ALP agreed for one related party country (AE party) can be applied for transactions with AE party of other countries
J.P. Morgan Services India (P.) Ltd.  105 taxmann.com 40 (Bombay)
IBM Daksh Business Process Services (P.) Ltd.  119 taxmann.com 404 (Delhi – Trib.)
14.6 Issue 6 – MAP arrangement entered can be applied for other years as well
Flowserve India Controls (P.) Ltd.  108 taxmann.com 376 (Bangalore – Trib.)
14.7 Issue 7 – AO cannot take different view and reopen the assessment contrary to view already taken in MAP in earlier years
Turner Broadcasting Systems Asia Pacific Inc.  62 taxmann.com 120 (Del HC)
Based on above and certain judicial precedents, following principles have emerged
Grievances intended to resolve under MAP that were not resolved, can be adjudicated by the Tribunal
MAPs resolved can be applied to the year not covered under MAP.
ALP determined under MAP for most international transactions with one country can be applied to the remaining transaction with other country
15 Time taken for resolving the MAP
India is committed to resolve MAP cases within 24 months. However, the said timeframe is not to resolve the MAP disputes but for endeavour to resolve such disputes.
If due to some or other reasons, it both the CAs are unable to resolve the dispute through MAP, then they would close such MAP dispute as unresolved. Consequently, the CAs of India having jurisdiction over the case shall inform the Indian taxpayer about the non-resolution of the dispute.
16 Effectiveness of MAP / Conclusion of MAP over normal litigation process
Circular issued in August 2020, is in line with International best practices to resolve the MAP dispute within 24 months by mutual negotiation. MAP in future would be more effective, considering litigation would take more than 10 years to settle. It would be speedier and faster process. Effective dispute resolution through MAP in a time bound manner would put India to be placed in top countries in parameters of “effective dispute mechanism” in future years to come.