Mutual Agreement Procedure (‘MAP’) and Advance Pricing Agreement (‘APA’) are two alternate mechanisms for resolving income tax disputes pending under the Income-tax Act, 1961 (‘IT Act’), which in turn provides finality on such pending disputes to the taxpayers being non-resident(s). Further, these alternate mechanisms significantly contribute to promoting an investor-friendly environment and ease of doing business initiative launched by the Government of India. With this backdrop, the present article analyses the applicability of such MAP/APA entered into by taxpayers with the Income Tax Department (‘ITD’), on similar issues not covered by such agreement(s) for the same or different assessment years.

MAP is governed by the provision of Article 27 of the various double tax avoidance agreement(s) (‘DTAA(s)’) entered into by India wherein as per the procedure specified in the IT Act,^[1] the taxpayer undergoing scrutiny assessment may apply to the competent authority of either country for resolving such dispute by way of negotiation between the competent authorities of both the countries. Whereas APA originates from Section 92CC of the IT Act which provides that an eligible taxpayer could enter into APA for determining the arm’s length price (‘ALP’) of the international transactions entered into with related parties by the taxpayer or for ascertaining the taxability of the income attributable under Section 9(1)(i) of the IT Act. It is relevant to mention here that APA are of two types: (i) Unilateral APA; and (ii) Bilateral APA (‘BAPA’), and as such, the process of MAP/APA could be initiated at the behest of a taxpayer for specified disputed transactions. As per the latest report published by the ITD, during the financial year 2022-23, 32 BAPAs were signed by the Central Board of Direct Taxes with mutual agreement entered with India’s treaty partners namely Finland, United Kingdom, United States of America, Denmark, Singapore and Japan.

In this context, the recent judicial trend reflects the dichotomy in the approach adopted by the Income Tax Appellate Tribunal (‘Tribunal’) in applying the terms of settlement as adopted under MAP/APA to transactions/income not covered under such agreements, which per se is neither in accordance with the intent of the Legislature nor as per the mandate of the IT Act and DTAA. As an illustration, in a dispute relating to determination of the arm’s length price of the international transactions entered into by the taxpayer with its Singapore counterpart is settled through MAP, the Tribunal has remanded the matter back to adopt the same reasoning to determine ALP of similar international transactions entered into with related parties situated in the United Kingdom or the United States of America, which were not even a subject matter of MAP.^[2]

Now, the moot question which arises for consideration is whether the Tribunal has the power to travel beyond the mandate of the IT Act/DTAA to superimpose the terms of settlement agreed upon under the MAP/APA on transactions/income not covered by such agreements, especially when the taxpayer and ITD have determined the ALP of such transactions as per the mandate of the statute.

In this regard, it would be apposite to highlight that in terms of Article 27 of the DTAAs and section 92CC of the IT Act, the scope and applicability of MAP/APA is limited to treatment of the income settled by way of negotiations under MAP/BAPA and the same could not be applied or treated as a binding precedent/authority for settling the disputes not covered by such MAP/BAPA. What is unfathomable is how a settlement arrived at by way of mutual negotiation through MAP/BAPA can be applied sweepingly on international transactions that are not even deliberated upon during the negotiation of such agreements and without considering the relevant parameters affecting the taxability of such international transactions not resolved through MAP/BAPA. Needless to state that the settled principles of law dictate that what cannot be done per directum is not permissible to be done per obliquum, i.e., whatever is prohibited by law to be done, cannot legally be effected by an indirect and circuitous contrivance on the principle of “quando aliquid prohibeture at omne per quod devenitur ad illud”.^[3]

Further, the above legal issue assumes significance as it is not so uncommon that transactions with similar function, asset and risk analysis are executed between multiple group entities. However, based on quantum of tax liability, MAP/APA is restrictively opted for specific jurisdictions. Therefore, the ripple effect of the MAP/APA is not only required to be analysed transaction by transaction but also in relation to conclusiveness of pending disputes relating to jurisdictions not covered by such agreements. Another facet which requires consideration is that if such leeway of applying terms of settlement agreed upon in MAP/APA is given to the ITD, the misuse of selective application of such agreements cannot not be ruled out and the whole objective of achieving the finality of the dispute would stand prejudiced by such blanket application of the settlement as agreed upon in MAP/APA.

This controversy as elaborated above is pending adjudication before the High Court of Delhi (‘Delhi HC’) in the case of AON Consulting Pvt. Ltd. v. PCIT.^[4] Thus, it would be interesting to see the fate of the appeal pending adjudication before the Delhi HC and applicability of MAP/BAPA on similar issues not covered, negotiated or settled through such agreements.

[1] Please see: section 295(2)(h) of the IT Act read with Rule 44G of the Income-tax Rules, 1962.

[2] Texas Instruments (India) (P.) Ltd. v. ACIT (LTU), [2022] 141 taxmann.com 159 (Bangalore Tribunal); Amazon Development Centre (India) (P.) Ltd. v. ITO, [2018] 93 taxmann.com 30 (Bangalore Tribunal).

[3] Karnataka SRTC v. Ashrafulla Khan, (2002) 2 SCC 560 (Supreme Court).

[4] AON Consulting Pvt. Ltd. v. PCIT [Order dated 01.05.2024 in ITA No. 244 of 2024] (Delhi HC).