The Hindu Business Line : A MAP for transfer pricing disputes

With so many adverse orders passed on transfer pricing proceedings, devising an alternative to the appeal mechanism, within the redress framework provided under the Income-Tax Act, has become imperative. One dispute resolution mechanism could be the Mutual Agreement Procedure (MAP) in terms of the various double-taxation treaties entered into by India with various countries. But what are the applicability of MAP, and its pros and cons.

Applicability

In matters pertaining to potential double-taxation or taxation not in accordance with a Double Tax Convention (`tax treaty'), the option available before/after any domestic administrative appeals process is to either:

Apply for MAP under the relevant treaty; or

Litigate the matter in through the court.

Internationally, the key dispute resolution mechanism in use is MAP. Almost all Indian Tax Treaties include the Article on MAP. MAP is available irrespective of remedies available in domestic tax laws and supplements local remedies. The implementation of MAP overrides the provision of the domestic law restrictions.

Under MAP, the Revenue Authorities (`Competent Authorities') of two countries together strive to resolve a dispute that leads to double taxation. Transfer Pricing cases, in terms of an effected adjustment, under Article 9 of the treaties are most commonly resolved under MAP.

The India-US treaty stipulates a time limit of three years for all MAP references to be made under the treaty. The memorandum of understanding regarding deferment of assessment and/or suspension of collection of taxes during MAP between India and the US provides for the suspension of tax assessment and collection for taxable years that are the subject matter of MAP. Taxes covered under a MAP include tax on assessment, reassessment, withholding tax, advance tax, interest and penalty. Additionally, the memorandum provides for security and indemnity bond, to be provided for the additional tax demand subject to MAP. The memorandum also provides that the competent authorities should resolve or close the case within two years.

Brief process

A MAP process needs to be initiated with the Competent Authority of home country, who shall endeavour to resolve the dispute himself, unless it becomes necessary to involve another Competent Authority. If the Competent Authority of the US chooses to involve his Indian counterpart, the dispute resolution may happen mutually between them.

A MAP procedure is initiated having regard to the provisions of the Indo-US treaty, which is further backed up by the Indian Income-Tax Rules, 1962. As detailed above, a MAP application can be made to the Competent Authority within three years from being aggrieved. The entire MAP procedure, from "application to implementation," typically takes 30-36 months. While conducting the evaluation process, if the case is complicated, the Competent Authorities may involve/take assistance from specialists or experts in the relevant fields.

Where transactions are with multiple group entities, MAP proceedings need to be initiated with the respective Competent Authorities of those countries, under the specific provisions of the Tax Treaty between India and that country.

The Pros

A MAP request can be pursued parallely with the domestic appellate proceedings, that is, alongside or subsequent to filing an appeal before the CIT (A), a MAP request can also be made to the Competent Authorities in the US. MAP decision is not necessarily binding on the taxpayer and ultimately the taxpayer may choose not to go with the decision.

Once a MAP procedure is initiated, generally, the demand is stayed till the dispute is ultimately resolved depending on the protocol with the specific countries (a bank guarantee with an indemnity bond is required to be furnished by the applicant).

Considering that the Indian transfer pricing regulations are in the nascent stage and in the absence of judicial precedence the appellate authorities would be handicapped to giving a clear ruling in factual or otherwise. Thus, immediate and conclusive relief can be sought through MAP.

There are no precedents from India in relation to transfer pricing matters, which can influence the decision of the Competent Authorities.

The MAP procedure provides flexibility to the dispute resolution process since the issue can be single-handedly resolved by the Competent Authority of the US also, without involving his Indian counterpart.

MAP provides finality to the assessment and thus, if the decision of the Competent Authority is in the taxpayer's favour, all proceedings under the Act for that issue shall stand annulled.

The Cons

Time consuming process and may take two-and-half to three years to arrive at a resolution.

Grant of an opportunity for "personal hearing" before the Competent Authorities is not mandatory, even though opportunity for submissions/arguments is granted.

In case the facts are incomplete, inaccurate or erroneous, the Competent Authority may reject the MAP application.

The Effect

The consequences of using the MAP process could result in the following:

An agreement would be reached between the tax authorities that eliminate double or inconsistent taxation (most likely).

An agreement would be reached between the tax authorities that only partially eliminate double or inconsistent taxation (result based on presentation of facts).

No agreement would be reached (is a possibility).

Request for MAP, rejected by the Competent Authority (remote possibility).

MAP terminated at the taxpayer's request (advantageous, as the matter can be pursued through the courts, if the agreement reached is not favourable).

It would be worthwhile exploring the alternative dispute resolution mechanism, as the Revenue Authorities are unlikely to give-up on the aggressive positions being currently adopted by them and the appellate proceedings would a huge time consuming affair. Hence, MAP is a clear alternative worth considering and once a resolution is reached it would form the basis for subsequent periods.

(The authors are, respectively, Partner and Senior Manager, BSR & Co.)