This article is written by Harshita Agrawal, pursuing a Certificate Course in Advanced Corporate Taxation from LawSikho.com.

Background

As you would have been familiar with the fact that a single transaction cannot be taxed twice in two different countries as per the Double Tax Avoidance Agreement (“DTAA”). So what is DTAA? Is it a contract between nations? The answer to this can be in affirmative with little modification. DTAA is a bilateral or multilateral agreement between two or more countries for the avoidance of double taxation for the residents of their countries. The DTAA is signed in parlance with OECD and UN Convention which laid down the basic framework for international taxation between the countries. Briefly, DTAA guards a person from being taxed double for the same income or transaction. DTAA is a bilateral agreement which is signed between two nation States. These nations after signing the DTAA are called treaty partners. India has signed DTAA with 88 countries however, only 85 DTAA are in force. But do you know how the dispute resolution works in international taxation if any taxpayer of one country is having a problem with its income assessment by another country?

DTAA specifies:

1. Rules and procedure for assigning the taxing rights amongst the treaty partners; (It provides for various provisions like when the tax would be levied on international business transactions? When the Tax would be levied on royalty? etc.)
2. Avoidance of judicial and economic double taxation (DTAA provides relief to resident taxpayers of the signing countries by relaxing their taxation norms); and
3. Determination of Taxation not in accordance with the treaty through Mutual Agreement Procedure (“MAP”) ( we will discuss this in detail).

Let us look at these aspects  in detail-

Mutual Agreement Procedure (“MAP”)

MAP, as the word suggests, is a resolution mechanism for resolving tax related disputes which give rise to Double Taxation or which is not in accordance with DTAA(s). Such alternate dispute resolution mechanism is available to the taxpayers for resolving above specified issues relating to DTAA with a treaty partner. Every DTAA has an article for MAP based on Article 25 of the UN/OECD Model Tax Convention. MAP grants complete or partial relief to the taxpayer depending upon the issue. 

MAP cases covers cross border double taxation that can be either juridical double taxation i.e. same income is taxed twice in the hands of the same entity in two different nations; and economic double taxation i.e.,  two separate entities’ incomes who are Associated Enterprise (“AE”) are taxed twice  in two different countries. 

The circumstances which will attract MAP are:

1. Transfer pricing adjustment; 
2. Permanent establishment existence;
3. Permanent establishment’s profits attribution; and
4. Characterization or recharacterization of income/expense.

To resolve above mentioned disputes MAP enables the Competent Authorities (“CA” “CAs”) of India to engage with the CAs of other countries through negotiation and discussion. They try to resolve the taxation dispute relation to DTAA or non-compliance of DTAA with a mutual understanding. Currently, India has two CAs, they are senior officers in Department of Revenue, Ministry of Finance, who have been designated CAs by the Ministry of Finance –

1. Joint Secretary, FT & TR-I
2. Joint Secretary, FT & TR-II

These two CAs have their own territorial jurisdiction to deal with MAP cases. For cases relating to Europe and North America (including Caribbean) it is referred to Joint Secretary, FT & TR-I, and for cases relating to any other territorial jurisdiction than Europe and North America (Caribbean) it is referred to Joint Secretary, FT & TR- II.

Let us discuss the practicalities of the MAP Application. 

How can one make an Application for MAP?

A Resident taxpayer of India can make an application to CA of India of concerned territorial jurisdiction if it is of the view that the actions of the tax authorities of the concerned country has resulted or will result contrary to DTAA between India and that country. The application can be made in Form 34 F in consonance with Section 44G of the Income Tax Act, 1961. The relevant provision is reproduced below –

“44G (1): Where an assessee, being a resident of India, is aggrieved by any action of the tax authorities of any country or specified territory outside India for the reason that, according to him, such action is not in accordance with the terms of agreement with such other country or specified territory, he may make an application to the Competent authority in India seeking to invoke the mutual agreement procedure, if provided in such agreement, in Form No. 34F.”

The following details need to be provided in Form No. 34F while making an application for MAP to CA:

1. Name of the Applicant;
2. Permanent Account Number (PAN)/ Aadhar Number;
3. Circle/ Ward;
4. Assessment Year(s);
5. Previous Year(s);
6. Office Address & Telephone No.;
7. Residential Address & Telephone No. (if applicable);
8. Status;
9. Name and Designation of Taxation Authority in the other country or specified territory (Treaty Partner);
10. Date of the notice/order giving rise to the action;
11. Is the order/ action of the Tax authority of the other country who signed the DTAA not in accordance with the agreement? If so, the reasons thereof; Facts of the case; analysis of the issue; and
12. Details of remedy sought in the other country or specified territory, if any, with documentary evidence.

This Form also requires the information about the name of the country or specified territory, whose tax authorities’ action have aggrieved the Applicant.

Following documents also need to be furnished at the time of making an application in Form 34 F:

1. Copy of notice or order which has given rise to the action not in accordance with   DTAA;
2. Any document (s) for supporting the order or action of the tax authorities of the other country  to not be contrary to relevant DTAA;
3. Any document(s) as evidence of remedy sought  in the other country or specified country; and
4. Any other document that the applicant desires to submit or the CAs of India asked for.

Let us discuss the procedure involved when applying for MAP.

Procedure of MAP

1. After the approval of MAP application by CA of India of respective jurisdiction, CA of India shall  intimate through a written communication to  the CA of the  other DTAA country about the acceptance of application along with the reasons for acceptance of application; 
2. CA of India would also ask the CA of the other DTAA country to  issue her written position (“position paper”) on the order/action of the tax authorities of her country;
3. In the case, MAP application is not accepted by the CA of India having respective jurisdiction, CA of India shall then communicate to the CA of the other DTAA country in writing as to why she feels MAP application cannot be accepted and request the other country CA to send her comments or views on the same issue. After both the CAs of both the DTAA countries come to a common arrangement about all discussion and negotiation, then the CA of India shall communicate the decision to Indian taxpayer who applied for MAP (“applicant”);
4.  Once a MAP application is accepted then the CAs of both the countries will exchange their views and then the CA of India will examine the same and would try to make negotiations on the MAP application. If after the mutual discussion both the CAs come into common understanding then they would formalise a mutual agreement amongst themselves at earliest as possible.
5. The CA of India then communicates to the applicant about the terms and conditions of the resolution.
6. In case both the CAs fail to resolve the dispute then should set aside the case as unresolved and communicate the same to the applicant.

Can we apply for multilateral MAP if more than one country is involved?

Multilateral MAP

The CAs of India can engage in multilateral MAP discussions between more than one country. Multilateral MAP discussion goes in the same way as of bilateral MAP discussion however the following conditions need to be satisfied:

1. All the countries participating in Multilateral MAP discussion or specifies territories(“relevant countries”) shall have DTAA with each other;
2. The issue in dispute is related to all the treaty partners and non-resolution of the issue may lead to non-compliance of DTAA of all the relevant countries; and
3. It is agreed to negotiate a multilateral MAP by the CAs of the relevant countries.

Time limit for resolving MAP cases

Do you think there is any time limit for the resolution of dispute? India’s commitment to endeavour to resolve MAP cases within an average of 24 months. The commitment is not to resolve the dispute within 24 months as all cases cannot be resolved within a period of 24 months but the authorities should endeavour to do so. BEPS Action 14 final report recommends the minimum standards which need to be complied for MAP cases one such commitment is this commitment.

In India, the “Start Date” of a MAP is used to compute the period of 24 months. The CAs of other countries determine the “Starting Date” in accordance with the MAP Statistics  Reporting Framework. In most cases, delay in MAP cases happens because CAs of India receive intimation of MAP cases from relevant countries CAs much beyond the Starting date.

Access to MAP

Let us discuss in which all cases we can apply for MAP.

The CA of India provides wide access to MAP cases to tax payers in respect of the following issues:

1. Transfer Pricing Adjustments;
2.  Ascertaining Existence of Permanent Existence;
3.  Permanent Establishment’s attribution of profits, regardless if admitted by the taxpayer or not;
4. Characterization/ Recharacterization expense or payment as a taxable expense or payment;
5. Characterization/ Recharacterization receipt as a taxable income.

In India, access to MAP shall also be provided where domestic anti-abuse provisions are applied by the Income tax authorities. In cases under Section 201 of the Income Tax Act, 1961 wherein the Indian entity is obliged by an order to deduct tax at source on payment to non-resident, and such deduction is disputed by the non-resident, MAP access shall be provided to the non-resident foreseeing an event of double taxation or deduction is not in accordance with DTAA of the relevant country. MAP discussion can only be taken up if the assessment order is passed relating to the same issue and the non-resident is not satisfied with the assessment order as it foresees it not in accordance with DTAA.

There are certain situations wherein India provides access to MAP subject to a limitation that the CAs of India would not work out any other outcome than  what has already been discussed in such situations:

• Unilateral advance pricing arrangements

 If an Unilateral Advance Pricing Arrangements (“UAPA”) is entered into between an Indian or non-resident taxpayer with the Central Board of Direct taxes (“CBDT”), the CAs of the relevant counties may provide access to MAP to their taxpayers in respect of such UAPAS if any decisions of the tax authorities of the relevant countries affects the income declared in returns, which are filed in respect of UAPAs and communicate the same to the CAs of India. The CAs of India would accept MAP applications but subject to a limitation that they would not change the terms and conditions of UAPA. The CAs of India would request the treaty partners to request correlative relief.

• Safe harbour

In cases wherein safe harbour provisions are applied by the Indian or non-resident taxpayers on its international transactions , and the tax authorities of India accept their return of income, the CAs of the relevant countries  may provide access to MAP to their taxpayers in pursuant of any of the decisions of the tax authorities of such relevant countries, and if such decisions affects the return of income filed in pursuant to safe harbour provisions they shall notify same to the CAs of India. The CAs of India would accept MAP applications but would not change the arm’s length price of the international transactions and would try to come to a correlative relief with CAs of the relevant countries.

• Income tax appellate tribunal’s orders

As the taxpayer can have access to both MAP and domestic remedy proceedings simultaneously, any order passed by the Income Tax Appellate Tribunal (“ITAT”) on the same issue shall not be examined under MAP for that relevant year because the ITAT is the highest fact finding body in tax matters in India. The CAs of India shall request the CAs of the relevant countries to come into a common relief in view of the order passed by the ITAT, India. However, if the ITAT set aside the case then the CAs of India can provide access to MAP.

Now let us discuss the instances when application to MAP is not allowed.

Refutation of access to MAP

In the following situations the CAs of India has authority to deny access to MAP, this includes:

• In case of delayed MAP application

If the Indian or non-resident taxpayer makes a MAP Application to the CAs of India or other relevant country  beyond the stipulated time as provided under MAP’s Article of relevant DTAA (correlative to  Article 25(1) of OECD Model Tax Convention), the CAs of India would not accept applications to MAP. In most of the DTAAs the time limit is 3 years from the first order/action of tax authorities that has led to or that will lead to contravention of relevant DTAA.

• Unjustified taxpayer’s objection

If the CAs of India draw the conclusion that the objection raised by the taxpayer on the act of tax authorities is not justified, they can reject the MAP application. But before denying the access, the CA of India with respective jurisdiction shall discuss the matter with the taxpayer and CA of the relevant country.

• Incomplete MAP application/ documents/ information

 If the CAs of India find any error or defect in Form No. 34 F filed by the taxpayer, they can ask the taxpayer to remedy the defects or errors within a stipulated time. Normally, the CAs of India provides 30 days for remedying the error or defects and provides 90 days for providing additional information. If the taxpayer fails to perform the same within the stipulated time the CAs of India can deny the access to MAP to that taxpayer. There are instances wherein the CAs of India have extended the time depending on the facts and circumstances of the case.

• Income tax settlement commission

If a taxpayer has applied for resolution of dispute before the Income Tax Settlement Commission (“ITSC”), which is an independent statutory dispute resolution body, the MAP application shall not be accepted by the CAs of India if ITSC has issued a settlement order in pursuant to that case for the same issues filed for MAP. Likewise, the CAs of India shall not give access to MAP where the CAs of the relevant countries have provided access to MAP to their taxpayers who have already obtained a settlement order from the ITSC in respect of the same issue.

• Authority for advance ruling

If any taxpayer has filed an application before the Authority for Advance Ruling (“AAR”) for settlement of dispute relating to international tax, and if the order is issued by the AAR then the CAs of India cannot provide MAP access to the taxpayer in respect of the same issue. Moreover, the CAs of India will reject the application if the  AAR of other relevant countries have issued an order and the taxpayer of that country has applied for MAP access, the same cannot be entertained by the CAs of India even though the CAs of the relevant countries have accepted the MAP application.

Reformation in MAP implementation

In view of the Action 14 Final Report on “Making Dispute Resolution More Effective” of the Base Erosion and Profit shifting (“BEPS”) project of OECD and G-20 countries, which recommended that all countries which have implemented the BEPS package of measure must publish comprehensive guidelines of MAP, CBDT amended the Rule 44G and 44H of the Income Tax Rules, 1962 to incorporate a comprehensive guidelines for MAP. vide ‘G.S. R. 282 (E) dated 6th May, 2020’.

The erstwhile Rule 44G is reproduced below:

“44G. Application for giving effect to the terms of any agreement under clause (h) of sub-section (2) of section 295.—Where a resident assessee is aggrieved by any action of the tax authorities of any country outside India for the reason that, according to him, such action is not in accordance with the terms of agreement with such other country outside India, he may make an application to the Competent Authority in India seeking to invoke the mutual agreement procedure, if any, provided therein, in terms of Form No. 34F.”

What is the difference between erstwhile rule and new rule?

This Rule just briefly provided the application process. While the new Rule laid down a detailed procedure for MAP. The New rule provides-

1. The resident of a country being aggrieved by the action or order of the tax authorities of any country with whom India has signed DTAA then such resident can apply for MAP in Form No. 34F.
2. If a reference has been received by the Competent authority of India from the competent authority of its treaty partners for any action taken by the Indian tax authorities in relation to transaction of resident of such treaty partner, then competent authority of India has convey the acceptance or otherwise of MAP to the competent authorities of such treaty partner.
3. The Competent authorities may ask for records or additional documents from assessee or income tax authorities or the authorised representative of assessee in India, if it finds any regard in regard to MAP application Form No. 34F.
4. The Competent Authority will endeavour to arrive at a mutually agreeable resolution of the tax disputes which have arised from the actions of the income tax authorities in pursuant to the DTAA between India and the treaty partner within an average period of 24 months.
5. If the MAP is invoked by the action taken by the Indian income tax authority, then any resolution arrived in the previous year shall not result in decreasing the income or increasing the loss of the assessee in India, for the return declared by the assessee in that year.
6. Any resolution arrived between the competent authorities of India and its treaty partner the same shall be communicated to the assessee in writing.
7. After the communication being received by the assessee then within 30 days of the receipt of the resolution the assessee shall communicate its acceptance or otherwise to the competent authority of India.
8. The acceptance of such resolution by the assessee shall be accompanied by proof of withdrawal of pending appeal, if any on the issue that were the subject-matter of the resolution.
9. The acceptance of resolution with the proof of withdrawal of appeal, if any on receipt of such approval by the competent authority of India shall be submitted to the Principal Chief Commissioner or the Chief Commissioner or the Principal Director General or Director General, who shall finally submit it to the Assessing Officer.
10. After receiving the communication, the Assessing Officer shall give effect to the resolution by an order in writing, within one month from the receipt of such communication and communicate the assessee if any tax is to be paid by him.
11. The assessee shall pay the pending sum if any needs to be paid by him and send the proof of payment to the Assessing Officer, who shall then commence to proceed the pending appeal, if any in pursuant to the passed resolutions which were filed by any income tax authority.
12.  A copy of the Assessing Officer’s Order shall be sent to the competent authority in India and to the assessee.
13. The adjustment of amount of tax, interest or penalty determined shall be made in pursuant to the resolution and in the manner provided under the Act or the rules made thereunder but it should be contrary to the resolution arrived at.

Thus, it was the need of the hour to incorporate detailed guidelines and will be implemented to all MAP cases pending with CAs of India as on 6 May 2020.

Conclusion

MAP is indeed a best alternative dispute resolution for international taxation disputes which can help the taxpayers to get speedy redressal at less time and is more equipped as India has DTAA with 88 countries in the world and has to make friendly relations with these countries. MAP is the only way through which countries can settle their international taxation disputes with other countries in a friendly and amicable manner.

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