APAs and MAP are tools of alternative tax dispute resolution mechanism in matters involving transfer pricing.

The income tax department will continue to receive applications for bilateral advance pricing agreement (APA) and mutual agreement procedures (MAP) from companies despite the absence of a particular clause — corresponding adjustment — in the double taxation avoidance agreement (DTAA) with the countries concerned, the Central Board of Direct Taxes (CBDT) said on Monday.
The clarification would likely encourage more MAPs and provide consistency in the country’s direct tax regime, experts said.

APAs and MAP are tools of alternative tax dispute resolution mechanism in matters involving transfer pricing.

The ‘corresponding adjustment’ clause in transfer pricing matters provides that if tax demand is raised on a company by a DTAA-signatory country, the revenue authorities in India would reduce the tax liability of the parent company based in India.

“Clarification of India’s position on DTAAs where Article 9(2) (corresponding adjustment) was absent is certainly a welcome news and strengthens the government’s resolve of fostering a non-adversarial tax regime. This will open the gates for many bilateral APAs and MAP cases. This sends out a positive signal and assures India Inc’s resolve to counter the pending litigation in an efficient manner,” Nitin Narang, executive director of transfer pricing at Nangia & Co, said.

The CBDT was responding to several references received by it on the issue. Although OECD has clarified in its model convention on tax treaties, which is the basis of transfer pricing agreements, that the absence of ‘corresponding adjustment’ in DTAAs doesn’t stop two contracting states to apply the provision, CBDT had earlier said the absence of the clause would mean the benefit can’t be extended to companies and hence MAP applications couldn’t be accepted .

“…it has been decided to accept transfer pricing MAP and bilateral APA applications regardless of the presence or otherwise of Paragraph 2 of Article 9 (or its relevant equivalent Article) in the DTAAs,” CBDT said. FE