ICAI Journal October 2026

 

Transfer Pricing & International Tax for Indian GCCs: From Cost Centre to Value Creator

CA. Suraj R Agrawal

Member of the Institute

India's Global Capability Centre (GCC) ecosystem has moved well beyond the traditional captive back-office model. Many GCCs now undertake product development, engineering, analytics, cybersecurity, artificial intelligence, research and global decision-support functions. This evolution has direct transfer pricing and international tax consequences. A cost-plus model cannot be treated as a permanent characterisation merely because an Indian entity is captive. The appropriate tax outcome must follow the actual functions performed, assets employed, risks controlled and value created in India. The 2026 safe harbour reforms, multi-year ALP determination framework and the APA framework provide useful certainty mechanisms, but their suitability depends on the underlying operating model.

India's GCC story has changed

The scale of India's GCC ecosystem is now significant. The Economic Survey 2025-26 records approximately 1,700 GCCs in FY24, employing about 19 lakh professionals and generating an estimated revenue of USD 64.6 billion. More importantly, the Survey notes that GCCs have evolved from support-orientated functions into integral components of multinational groups, undertaking product development, engineering, analytics, cybersecurity and AI-enabled digital functions.

That evolution creates a basic tax question. Can a centre that was historically characterised as a routine captive service provider continue to be priced in the same manner after it begins to employ product architects, lead global transformation programmes, influence product roadmaps, manage important risks or contribute materially to intellectual property?

For transfer pricing purposes, "GCC" is a business description, not a tax characterisation. The Indian analysis must still begin with the arm's length principle and the actual controlled transactions. Section 165 of the Income-tax Act, 2025, read with Rules 79 and 80 of the Income-tax Rules, 2026, requires the arm's length price to be determined using the most appropriate method, having regard, among other factors, to the nature of the transaction and the functions performed by the associated enterprises. The OECD Transfer Pricing Guidelines similarly require accurate delineation of the transaction based on economically relevant characteristics, including functions, assets and risks, with particular attention to the conduct of the parties and control over economically significant risks.

Characterisation must precede benchmarking

A recurring practical problem is to start with the desired pricing result and then draft the functional analysis around it. For a GCC, the order should be reversed. The operating model should first be understood, then the transaction characterised, and only thereafter should the pricing method and comparable set be selected.

A useful way to view GCCs is as a continuum as depicted in Table 1 below.

Indian jurisprudence supports this emphasis on functional substance. In Rampgreen Solutions Pvt. Ltd. v. CIT, the Delhi High Court rejected a broad approach that treated all ITeS providers as comparable, recognising the importance of differences between lower-end BPO functions and higher-end KPO activities. The principle is directly relevant to GCC benchmarking: industry labels cannot substitute for a detailed functional comparison.

Table 1: Viewing GCCs as a continuum

GCC operating profile	Indicative characteristics	Primary tax focus
Routine support centre	Executes defined processes under group direction; does not control economically significant risks or make unique contributions to valuable intangibles.	A cost-based return under TNMM or another appropriate method may be supportable, subject to proper comparability analysis. Generic low-end ITeS comparable may not reflect employee profile, complexity or value contribution.
Specialist or knowledge centre	Undertakes analytics, finance, cybersecurity, data science, regulatory support or other judgement-intensive functions.	(Primary tax focus spans across specialist and knowledge functions subject to appropriate methodology)
Contract R&D or product engineering centre	Performs development activity and may influence technical outcomes, while funding, strategic direction and risk control may remain overseas. Senior India personnel may lead global products, platforms, functions or transformation programmes.	Analyse who conceptualises the product, controls development risk, makes go/no-go decisions and owns or economically contributes to resulting intangibles.
Strategic or innovation hub	Where India and overseas entities make unique and valuable contributions or jointly control important risks, a routine tested-party approach should be re-examined.	(Re-examination of routine tested-party approach required where joint contributions and risk control exist)

Cost-plus is an outcome, not a permanent entitlement

There is nothing inherently inappropriate about cost-plus remuneration for a captive GCC. It can be an arm's length outcome where the Indian entity performs routine or limited-risk functions, and the foreign principal genuinely performs and controls the economically significant entrepreneurial functions. The risk arises when a model designed for yesterday's functions is carried forward after the business has changed.

Three areas merit particular attention:

• First, risk control: Contractual allocation alone is insufficient where conduct points elsewhere. The current safe harbour rules themselves reflect this principle. For eligible information technology services, an Indian service provider must operate with "insignificant risk". The Rules look to whether the foreign principal performs the economically significant and critical functions, provides capital and significant assets, actually supervises and controls the activities, and retains legal and economic ownership of relevant intangibles. If the contract says that the foreign principal controls a risk, but the conduct shows that the Indian entity does so, the contractual terms are not the final determinant.

• Second, intangibles: A GCC need not legally own an intellectual property right to make economically significant contributions to it. For development and technology-intensive GCCs, the analysis should identify who performs and controls the development, enhancement, maintenance, protection and exploitation functions, who bears the relevant risks, and whether the Indian entity possesses unique know how, systems, workforce capability or other valuable contributions. The objective is not to assign residual profit to India merely because skilled employees are located here. It is to ensure that the remuneration reflects the functions actually performed and risks actually controlled.

• Third, business restructuring: Section 163 expressly includes a business restructuring or reorganisation with an associated enterprise within the definition of an international transaction, irrespective of whether it has an immediate or future bearing on profit, income, losses or assets. Therefore, when a GCC moves from execution to ownership of functions, when decision rights or risks are transferred to India, or when valuable teams, know-how, contractual rights or business opportunities are relocated, the issue may be wider than a change in markup. The group should consider whether a restructuring transaction has occurred and whether independent parties would have required compensation.

"For development and technology-intensive GCCs, the analysis should identify who performs and controls the development, enhancement, maintenance, protection and exploitation functions, who bears the relevant risks, and whether the Indian entity possesses unique know-how, systems, workforce capability or other valuable contributions."

The 2026 certainty tools: safe harbour, multi-year ALP determination and APA

The Income-tax Rules, 2026, have made the safe harbour regime more relevant to GCCs. "Information technology services" now cover software development services, IT-enabled services, KPO services and software-related contract R&D. For an eligible transaction, the safe harbour requires an operating profit margin of at least 15.5 per cent on operating expenses where aggregate operating revenue does not exceed INR 2,000 crore.

For qualifying IT services, a valid safe harbour option continues for five consecutive tax years, with the INR 2,000 crore threshold tested for the first year. This can materially reduce annual pricing uncertainty for a stable limited-risk model. However, it should not be viewed simply as a margin election. The eligibility conditions require the underlying functions and risk profile to fit the safe harbour framework. Transfer pricing documentation and reporting obligations also continue notwithstanding the election.

There is also a strategic trade-off. Rule 93 provides that where the transfer price is accepted under the safe harbour provisions, the taxpayer cannot invoke the mutual agreement procedure under the applicable tax treaty for that transaction. Groups with material bilateral double taxation exposure should therefore compare the certainty offered by safe harbour with the protection available through a bilateral APA.

The APA programme has become increasingly significant. CBDT entered into 219 APAs in FY2025-26, including 84 bilateral APAs, taking the cumulative number to 1,034. For a large GCC with recurring transactions, a stable operating model and significant potential controversy, an APA can address method selection, mark-up, cost base, segmentation, critical assumptions and, in a bilateral case, double taxation risk over multiple years.

The Rules also contain a specific procedural framework for unilateral APAs where the primary covered transaction is eligible IT services. If such an agreement is not entered into within two years from the end of the quarter in which the application is made, the proceedings are treated as closed, subject to a taxpayer-requested extension of six months. This should be described as a procedural time limit rather than a guarantee that an APA will necessarily be concluded within two years.

A separate 2026 reform permits an option for determination of arm's length price for two succeeding tax years in the same transfer pricing proceeding. The mechanism applies only where the relevant transactions remain similar, including material consistency in functions, assets and risks, no change in the pricing method and no material change in contractual allocation of responsibilities, risks and benefits. This is especially relevant to GCCs because it creates a useful dividing line: a stable service model may benefit from multi-year certainty, while a GCC undergoing genuine functional transformation may not satisfy the required consistency.

The international tax perimeter cannot be separated from TP

As GCCs become more integrated with global operations, the analysis should not stop at the Indian entity's margin.

Permanent establishment is one such area. The existence of an Indian subsidiary or the outsourcing of work to India does not, by itself, create a fixed place for PE of the foreign enterprise. In E-Funds IT Solution Inc., the Supreme Court emphasised that the foreign enterprise must have a fixed place in India at its disposal through which it carries on its own business. However, the PE analysis remains treaty-specific and fact-dependent. The role of foreign personnel, authority exercised by India-based personnel, contract negotiation, customer interaction, secondments and the actual use of premises can all become relevant under the applicable DTAA, as modified where relevant by the Multilateral Instrument.

Transfer pricing and PE attribution also intersect. In Morgan Stanley, the Supreme Court recognised that where an Indian associated enterprise constituting the relevant PE has been remunerated at arm's length and the transfer pricing analysis fully captures the functions performed and risks assumed, no further profit may remain for attribution. Conversely, where the analysis does not adequately capture those functions and risks, further attribution may be required. For a GCC, this makes the quality of the FAR analysis important beyond the Indian entity's transfer pricing assessment.

Place of effective management, or POEM, is another emerging governance issue where senior global roles migrate to India. Under section 6(10) of the Income-tax Act, 2025, a foreign company may be resident in India if its place of effective management is in India, meaning the place where key management and commercial decisions necessary for the business as a whole are, in substance, made. CBDT's POEM guidance requires a fact-based enquiry into who actually makes such decisions and where they are made, with substance prevailing over form. The presence of senior executives in an Indian GCC does not automatically establish POEM. The relevant question is whether they are making business-wide key management decisions for the foreign company rather than merely managing Indian operations or implementing global policy.

"A GCC can remain a limited-risk service provider even while becoming larger and more sophisticated, provided the facts support that characterisation."

Cross-border payments should also be reviewed separately from the service-provider margin. Royalty, software, technical service, management fee, cost allocation and secondment arrangements may raise withholding and treaty-characterisation questions. The answer may differ materially depending on the wording of the relevant DTAA, including whether a fees-for-technical-services or fees-for-included-services article contains a "make available" condition. A GCC tax framework should therefore link transfer pricing, withholding tax and treaty analysis rather than treat them as independent compliance streams.

What should GCC tax governance look like?

For a mature GCC, the annual transfer pricing study should be the output of the governance process, not the first time the group examines its functional profile.

A practical framework should include:

• An annual review of decision rights and risk control.

• Mapping of global and India-based senior roles.

• Identification of changes in product ownership, IP-related functions and customer-facing activity.

• Transaction-level and segmental financial data.

• Intercompany agreements aligned with actual conduct.

• Evidence supporting the foreign principal's control of important risks where a limited-risk model is adopted.

• Contemporaneous documentation of significant restructurings.

The group should also establish trigger events for a deeper review. Examples include appointment of a global product or functional head in India, transfer of R&D leadership, commencement of direct customer negotiations, migration of IP-related decision-making, assumption of material market or development risk, major acquisitions or reorganisations, or a significant change in the GCC's employee and cost profile.

The central point is straightforward. A GCC can remain a limited-risk service provider even while becoming larger and more sophisticated, provided the facts support that characterisation. Equally, growth in strategic decision-making, control of risk or unique contributions may require a different pricing analysis. Neither outcome should be presumed.

Closing Perspective

India's GCC growth is creating a new generation of transfer pricing and international tax questions. The challenge is no longer merely to benchmark a markup at year-end. The more important task is to ensure that the legal agreements, transfer pricing characterisation, risk allocation, IP framework and international tax position continue to reflect how the business is actually operated. For tax leaders and advisers, the right starting question is therefore not "What margin should the GCC earn?" but "What has the GCC become, and does the tax model still match it?"

Author may be reached at eboard@icai.in

References & Footnotes

1. Government of India, Ministry of Finance, Economic Survey 2025-26, para 7.34 and Chart VII.12, 'Growth of GCCs Ecosystem'.

2. Income-tax Act, 2025, section 165; Income-tax Rules, 2026, rules 79 and 80.

3. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, particularly Chapters I and VI.

4. Rampgreen Solutions Pvt. Ltd. v. CIT (2015) 377 ITR 533 (Delhi).

5. Income-tax Rules, 2026, rule 87(1)(a) and rule 87(2).

6. Income-tax Act, 2025, section 163(1)(e).

7. Income-tax Rules, 2026, rules 88 and 89(2), Table, Sl. No. 1.

8. Income-tax Rules, 2026, rule 91(1) and (2).

9. Income-tax Rules, 2026, rule 89(6), read with sections 171 and 172 of the Income-tax Act, 2025.

10. Income-tax Rules, 2026, rule 93.

11. Press Information Bureau, Ministry of Finance, 'CBDT signs record 219 Advance Pricing Agreements (APAs) in FY 2025-26', 31 March 2026.

12. Income-tax Rules, 2026, rule 109(13) and (14).

13. Income-tax Rules, 2026, rule 82, particularly rule 82(5).

14. Assistant Director of Income-tax v. E-Funds IT Solution Inc. (2017) 399 ITR 34 (SC).

15. DIT (International Taxation) v. Morgan Stanley & Co. Inc. (2007) 292 ITR 416 (SC).

16. Income-tax Act, 2025, section 6(10).

17. CBDT Circular No. 6 of 2017 dated 24 January 2017, Guiding Principles for determination of Place of Effective Management (POEM).

Critical Issues in the Taxation of Individuals' Global Mobility and the Interplay of Double Taxation Avoidance Agreements (DTAAs)

CA. Sachin Sinha

Member of the Institute

Global mobility involves the cross-border movement of employees, professionals, executives, and business personnel for work assignments, projects, secondments, transfers, or remote work. Previously, it often meant sending employees abroad for fixed periods. Today, it encompasses extended expatriate postings, short business trips, cross-border secondments, international transfers, commuter roles, remote work from abroad, virtual assignments, and global talent hiring.

With multinational expansion and the rise of remote work, global mobility has become central to international tax and workforce strategy. Managing it requires coordinating cross-border employee movement for both short-term and permanent roles. From a tax perspective, this includes employment law, immigration, payroll, personal taxation, social security, transfer pricing, corporate tax, and navigating Double Taxation Avoidance Agreements (DTAAs). At its core, global mobility raises a fundamental question:

When an individual works across borders, which country has the right to tax their income, to what extent, and how is double taxation avoided?

Resolving this requires more than identifying the country issuing the paycheck. It involves assessing residential status, work location, employer, income source, treaty provisions, foreign tax credits, payroll obligations, and the relevance of permanent establishment and transfer pricing rules.

Residence and the Source of Salary

An individual may be a resident of India in one year and a non-resident in another. The question is whether a change in residential status alters taxability or leaves it unchanged. Determining an individual's residential status is, therefore, the starting point for testing the taxability of their income. If the individual is a resident, India taxes their global income under Section 5(1) of the Income-tax Act, 2025. If the individual is a non-resident of India, taxability is limited under Section 5(2) to income received or deemed to be received in India, or income that accrues or arises, or is deemed to accrue or arise, in India. Thus, the taxation of mobile employees depends on the interplay between residential status and the source of income.

Under Section 6 of the Income-tax Act, 2025, a person is a resident of India if they are in India for 182 days or more in a tax year, or for 60 days in that year and 365 days in the preceding four years.

For Indian citizens or Persons of Indian Origin (PIO) visiting India, the 60-day threshold extends to 182 days (or 120 days if Indian-sourced income exceeds 15 lakhs).

If an individual is a resident of both contracting states under domestic tax law, the DTAA provides a residency test based on the tie-breaker. Another critical concept is 'split residency', often utilised in the year of relocation. While Indian domestic law under the Income-tax Act, 2025, determines residential status for the entire financial year as a single, indivisible unit, DTAAs allow for a more granular application. As seen in Raman Chopra v. Dy. CIT [2016] 69 taxmann.com 452 (Delhi Trib.), the treaty tie-breaker tests under Article 4(2) can be applied to specific periods within a tax year. This allows a taxpayer to be a resident of one country for part of the year and another for the remainder, effectively shielding foreign-sourced income earned during the non-resident period from Indian taxation, despite having a 'Resident and Ordinarily Resident' (ROR) status under domestic law for the full year.

In Binny Bansal v. DCIT [2026] 182 taxmann.com 226 (Bangalore Trib.), the decision emphasises that the 'centre of vital interests' test is increasingly qualitative rather than merely quantitative. If an individual has physically relocated and established a home abroad, deep-rooted economic ties, such as significant immovable property, active business involvement, or substantial loans to Indian entities, can result in the individual being deemed a treaty resident of India. A distinction is drawn between 'active' economic engagement (running a business) and 'passive' investments (bank accounts or mutual funds), with the former carrying significantly more weight in residency disputes.

A change in residential status also has practical consequences. For returning NRIs, it is advisable to redesignate NRE/NRO accounts as resident accounts immediately to avoid compliance defaults, noting that interest on NRE accounts becomes taxable immediately upon a change in residency status.

Once residential status is settled, the next question is where the salary is earned. Section 9(3)(a) of the Income-tax Act, 2025 (corresponding to Section 9(1)(ii) of the Income-tax Act, 1961) provides that income under the head "Salaries" is deemed to accrue or arise in India if it is earned in India. The statute clarifies that salary for services rendered in India is treated as income earned in India, irrespective of the place of receipt or the residential status at the time of receipt. Salary income, including ESOP perquisites, is therefore deemed to accrue in India if earned for services rendered in India. Since salary is taxed on a due basis, it will be deemed to accrue or arise in India if the service is rendered there.

The courts have strictly interpreted this 'place of performance' test to require physical presence. In the landmark ruling of Clifford Chance vs. Deputy Commissioner of Income-tax [2009] 176 Taxman 458 (Bombay) / [2009] 318 ITR 237 (Bombay), the Hon'ble High Court held that for a non-resident to be taxed, services must be rendered in India. This 'territorial nexus' is vital. Similarly, in Santanu Sanyal vs. ACIT [2024] 165 taxmann.com 390 (Kolkata Trib.), it was held that foreign allowances received by a non-resident for services rendered outside India do not fall within the scope of total income under Section 5(2), even if paid by an Indian employer. This principle is further reinforced in Kachana Raghunatha Reddy vs. DCIT/ACIT [2026] 189 taxmann.com 512 (Bangalore Trib.), where the tribunal remanded the matter to verify services rendered in Korea, noting that salary for foreign services cannot be taxed in India merely because an Indian company has paid the salary and deducted TDS.

At the same time, commentaries on global mobility caution against automatically assuming that lump-sum living allowances or social security-related reimbursements are tax-exempt. In Sun Outsourcing Solutions (P.) Ltd. v. CIT [2018] 92 taxmann.com 339, it was clarified that payments intended to meet personal expenses or higher costs of living abroad constitute taxable perquisites and do not qualify for the 'official duty' exemption under Section 10(14)(ii) of the Income-tax Act, 1961 (corresponding to Schedule III (13) of the Income-tax Act, 2025).

ESOPs and Social Security: Income Spread Across Years and Countries

Two kinds of income pose special difficulty for mobile employees, because they build up over several years during which the employee may have worked, and been resident, in more than one country. These are ESOPs and social security benefits.

Under the Income-tax Act, 2025, the primary charging provision for ESOPs is Section 17(1)(d) (corresponding to Section 17(2)(vi) of the Income-tax Act, 1961). This section defines 'perquisite' to include the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the current or former employer, free or at a concessional rate. ESOPs are valued as perquisites at exercise, based on Fair Market Value (FMV) under Rule 15 of the Income-tax Rules, 2026. Although vesting is not the taxable event, the option value increases even in years when the employee rendered services outside India. The challenge in ESOP taxation arises when the year of vesting and the year of exercise are different, and the individual is resident in the year of vesting and non-resident in the year of exercise, or vice versa.

The question, then, is which country has the right to tax when the option value increases during the years in which the employee rendered services outside India. The OECD publication "The taxation of employee stock options" states that:

"Where the employment services to which a stock-option relates have been provided in more than one State, an allocation rule is necessary for the application of Article 15 and Articles 23A and 23B. A logical allocation method would be to attribute the employment benefit attributable to a stock-option to services performed in a particular country in proportion to the number of days during which employment has been exercised in that country, to the total number of days during which the employment from which the stock-option is derived has been exercised."

Indian courts have followed the same logic. The statutory valuation of ESOPs under Rule 15 of the 2026 Rules is often complicated by cross-border movement, and the judiciary resolved this by applying the 'vesting period' allocation. In Assistant Commissioner of Income-tax vs. Robert Arthur Keltz [2013] 35 taxmann.com 424 (Delhi Trib.), affirmed by the Delhi High Court, it was held that where an employee was in India for only part of the ESOP vesting period, only the proportion of the perquisite attributable to service rendered in India is taxable. Conversely, if the services were rendered in India but the exercise occurs while the individual is a non-resident, India retains the right to tax the India-leg portion. In Unnikrishnan V S vs. Income-tax Officer [2021] 123 taxmann.com 238 (Mumbai Trib.), the tribunal held that ESOP benefits relate to the time of grant and the period of service. Since the qualifying services were rendered in India, the income was taxable in India despite the assessee's non-resident status at the time of exercise.

The position becomes more complex when the employee changes residence during the vesting period. The OECD publication on "The taxation of employee stock options" addresses such multiple residence taxation, which says:

"Where an employee who is a resident of one State is taxed as a non-resident in another State, Article 23 provides relief from any double taxation. However, an employee might reside in different countries at the time an option is granted, at the time it vests, at the time it is exercised, and at the time the shares acquired with the option are sold. All of these countries may claim the right to tax as States of residence, and if each of them taxes the benefit from the stock option at the time the taxpayer is a resident of that country, there will be multiple residence taxation. While Article 23 deals with residence-source double taxation, it does not provide relief for all cases of residence-residence double taxation. The risks of multiple residence taxation may be compounded in the case of countries that have a 'departure tax' on capital gains, i.e., countries that deem capital gains to be realised when a person ceases to be a resident or that maintain, through their tax conventions, a right to tax capital gains of former residents."

The situs of accrual for salary and related social security benefits is the place where services are rendered. If an employee works outside India, the right to receive salary and social security contributions arises outside India.

Social security contributions and benefits raise a similar problem of time and place. For tax purposes, the treatment of social security is complex due to the situs of accrual and the point of receipt. Employer and employee contributions are made in one year, but the right to receive benefits arises in different years. If the employee was resident in some years and non-resident in others during the contribution period, how will it be accrued during the contribution period and at the time of withdrawal of benefits?

The distinction between the 'accrual' of salary and its 'receipt' in India is vital for employees on deputation who may maintain NRE accounts. The situs of accrual for salary and related social security benefits is the place where services are rendered. If an employee works outside India, the right to receive salary and social security contributions arises outside India. Mere remittance of such funds into an Indian NRE account does not trigger taxability under Section 5(2)(a), as the 'first point of receipt' is a foreign location where the employee acquired the lawful right to the money. This supports the view that India should not tax mandatory foreign social security contributions solely because funds move through Indian banking channels.

Under the Income-tax Act, 2025, employer contributions to foreign social security funds are generally taxable as perquisites under Section 17(1)(h) because such funds typically do not qualify as 'approved' or 'recognised' funds under Indian law. The specific 7.50 lakhs threshold under Section 17(1)(h) applies only to Indian statutory funds (RPF, NPS, and approved superannuation funds) and not to foreign funds. Employee contributions to foreign funds are generally ineligible for deduction under Section 123 or Section 124, as they are not 'notified' schemes. Withdrawals are taxable as 'profits in lieu of salary' under Section 18(1)(c)(ii) to the extent of the employer's contribution and interest.

However, Section 158 of the Income-tax Act, 2025 (corresponding to Section 89A of the Income-tax Act, 1961) provides critical relief for income accrued in a specified retirement account in a notified country. Under Rule 74 of the Income-tax Rules, 2026 (corresponding to Rule 21AAA of the Income-tax Rules, 1962), a resident who opened the account while being a non-resident can opt to defer Indian taxation until the year of withdrawal or redemption in the foreign country. This mechanism primarily addresses the timing mismatch in taxation.

Regarding retirement benefits, the judiciary aligns with the principle that past services rendered outside India while being a non-resident cannot be taxed in India upon receipt. In Commissioner of Income-tax vs. Anant Jain [2012] 21 taxmann.com 19 (Delhi), the High Court held that retirement benefits received from a US employer for services rendered in the US were not taxable in India for a 'Not Ordinarily Resident'. For residents, Section 158 of the 2025 Act provides relief. In Jignesh Naresh Jariwala vs. Deputy Director of Income-tax [2025] 178 taxmann.com 233 (Mumbai Trib.), the tribunal clarified that once an option is exercised via Form 10EE (now Form No. 40) in one year, it continues to apply to subsequent years. Relief cannot be denied on procedural grounds for not re-filing the form annually.

Relieving Double Taxation

Even after applying these rules, an employee on deputation may face double taxation due to the timing of accrual and receipt of income, the place of rendering services, and residential status. To avoid double taxation, the employee can claim foreign tax credit (FTC) in the resident country. Under the Income-tax Act, 2025, FTC is available under Section 160. As per Rule 76 of the Income-tax Rules, 2026 (corresponding to Rule 128 of the Income-tax Rules, 1962), residents paying tax abroad can claim credit in India by filing Form No. 44 (corresponding to Form 67). The two areas where FTC matters most for resident employees on deputation outside India are ESOPs and social security benefits.

If ESOP income (perquisite value) is taxed in India (as salary) and in the foreign country (e.g., at vesting, exercise, or sale), the employee is eligible to claim foreign tax credit. DTAA articles on "Dependent Personal Services" (e.g., Article 15 of the India-UAE DTAA, Article 16 of the India-USA DTAA, Article 15 of the India-Germany DTAA), as seen in Hewlett Packard India Software Operation (P.) Ltd. [2018] 91 taxmann.com 473 (AAR - New Delhi), determine the taxing rights of the residence and source states for employment income, including ESOPs. DTAA provisions are crucial in determining whether ESOP income is taxable in the foreign country and, consequently, whether it is eligible for FTC in India. Since India and the foreign country may tax the same ESOP benefit in different years, the timing of the tax matters. The OECD publication on the taxation of employee stock option schemes states that:

"The provisions of the Convention that allow the State of source to tax particular items of income or capital do not provide any restriction as to when such tax is to be levied. Since both Articles 23 A and 23 B require that relief be granted where the State of source may tax an item of income or capital in accordance with the provisions of the Convention, it follows that such relief must be provided regardless of when the tax is levied by the State of source. The State of residence must therefore provide relief of double taxation through the credit or exemption method with respect to such item of income or capital even though the State of source taxes it in an earlier or later year. Some States, however, do not follow the wording of Article 23A or 23B in their bilateral conventions and link the relief of double taxation they provide under tax conventions to what their domestic laws provide. These countries, however, would be expected to seek other ways (the mutual agreement procedure, for example) to relieve the double taxation which might otherwise arise in cases where the State of source levies tax in a different taxation year."

The same principles apply to social security benefits. As discussed earlier, employer contributions to foreign social security funds are generally taxable as perquisites in India, and withdrawals are taxable as 'profits in lieu of salary' under Section 18(1)(c)(ii) of the Income-tax Act, 2025. If these social security benefits (e.g., pension, lump-sum withdrawals) are received by a resident employee on deputation and are taxed in the foreign country, they would generally be eligible for foreign tax credit. The deferral relief under Section 158 addresses the timing mismatch. Where social security benefits are taxed in India upon withdrawal and also taxed in the foreign country, the foreign tax paid on such benefits would be eligible for tax credit. For instance, in Jaspal Singh Bindra vs. Deputy Commissioner of Income-tax [2025] 170 taxmann.com 80 (Kolkata Trib.), the ITAT allowed FTC for pension income earned from a UK pension fund, taxed in the UK and also offered to be taxed in India. This case highlights that pension/social security benefits, when doubly taxed, are eligible for FTC.

Finally, the specific DTAA with the country of deputation would also play a significant role. Many DTAAs contain articles on "Pensions and Social Security Payments" that may allocate taxing rights or provide for credit. The more beneficial provisions of either the DTAA or the Income-tax Act would apply.

Conclusion

Taxing global mobility is now a complex mix of residential status, place of performance, source rules, DTAAs, ESOPs, social security, and foreign tax credits. To determine what is taxable, one must look not only at the employer's country and the country of residence but also at the place of performance, which plays a significant role in determining each country's taxing right. Ongoing issues include changes in residence during the year, ESOP taxes after working in different countries, and social security that covers several countries and years. These factors can cause timing differences, double taxation, and extra compliance work.

The OECD notes that new types of cross-border and remote work bring more uncertainty. The challenges are not limited to the taxation of ESOPs or the taxation of social security benefits. Work-from-anywhere and digital automation have fundamentally altered the global work landscape. Multinationals implementing work-from-anywhere policies face complex mobility compliance challenges, such as tracking employees' location (i.e., their physical presence). Because of digital automation, it is sometimes very difficult to track where the employee is rendering services.

Further, the concept of an employer has been the subject of significant judicial interpretation in India. Tax authorities and courts have adopted an economic employer test, i.e., looking beyond the formal legal arrangement to identify who bears the economic risk, exercises control, and derives the benefit of employees' services. Another challenge is the risk of creating a permanent establishment (PE) in the other contracting state. Deploying employees outside India may create a PE in that country if the conditions in Article 5 of the OECD Model Convention are met.

To make global mobility taxation effective, the Government should implement robust foreign tax credit systems and effective dispute-resolution mechanisms. In the end, global mobility is not just about the movement of people, but also income, tax rights, duties, and risks, making it a key topic in international tax.

Author may be reached at eboard@icai.in

Tax Treaty Disputes and Mutual Agreement Procedure ('MAP'): Navigating Complexities in a Globalized Environment

CA. Pramod Kumar Siva

Member of the Institute

CA. Hardeep Singh Lamba

Member of the Institute

Introduction

Cross-border commerce, digitalization, and the international mobility of people and capital have increased both the frequency and complexity of cross-border tax disputes. A striking insight from the most recent OECD's Tax Administration 2025 report is that India's tax administration prevails in only about 35% of tax litigation cases. In practice, roughly 7 out of 10 contested tax assessments are overturned by the judiciary, highlighting systemic weaknesses in audit and assessment quality. The success rate amongst the worst in major economies indicates structural issues in tax administration, including capacity deficits, pressure for revenue over fairness, and poor accountability for assessment errors.

In stark contrast to the uncertainties of litigation, the treaty-based Mutual Agreement Procedure (MAP) has emerged as a more reliable avenue for resolving international tax disputes. According to the latest OECD statistics, approximately 76% of MAP cases in 2024 reached a full resolution of the issue in favour of the taxpayer, and only about 4% ended without any agreement.

In short, the MAP process achieves relief in a vast majority of cases, making it a critically important tool for avoiding double taxation and prolonged conflict between tax authorities. As globalization intensifies cross-border tax frictions, these comparative outcomes cast a sharp light on the need for effective dispute resolution mechanisms. In this evolving environment, in-house tax experts of multinational enterprises (MNEs) must understand the MAP framework, common treaty dispute issues, and best practices to navigate the process effectively.

For in-house tax managers, managing risk in tax disputes is crucial. In India, taxpayers win about 65% of court cases, but outcomes come after lengthy and costly legal battles. Even in victory, funds tied up in disputes and interest on demands create significant costs. Conversely, the Mutual Agreement Procedure ('MAP') process offers a more efficient, cooperative solution, with approximately 75% of cases resulting in full taxpayer relief within 2-3 years. This approach reduces contingent liabilities and allows for quicker resolutions, while also fostering better relationships with tax authorities. Despite treaty-based remedies, many in-house tax officers remain cautious and prefer domestic litigation, viewing it as a more predictable option compared to the variability of outcomes in MAP.

This article explains the technical landscape of tax-treaty disputes, the MAP framework, common dispute types, practical challenges, and concrete steps taxpayers and advisors can take to improve outcomes.

MAP: Treaty-Based Dispute Resolution

MAP is a treaty-based process by which the "competent authorities" (CAs) of two treaty jurisdictions consult to resolve issues arising from the interpretation or application of a tax convention. MAP is an administrative, government-to-government procedure under the double tax convention, not a judicial proceeding. Its outcomes rely on cooperation and diplomacy rather than adversarial adjudication.

The typical objectives of a MAP case are to eliminate double taxation that is "not in accordance with the treaty" and to resolve jurisdictional conflicts, for example, dual-residence issues or both countries taxing the same income. In transfer pricing disputes, MAP entails one country agreeing to correlative adjustments or other relief after another country's tax adjustment, so that the same income isn't taxed twice.

"MAP is a treaty-based process by which the 'competent authorities' (CAs) of two treaty jurisdictions consult to resolve issues arising from the interpretation or application of a tax convention."

Key features of MAP

• Bilateral Negotiation: Authorities work together to reach an agreement; taxpayers present information but cannot compel results. Success depends on goodwill and complete facts.

• Timelines: Many treaties set a target of 24 months for resolution, though complex cases may take longer. Thorough preparation can expedite the process.

• Domestic Remedies Relationship: Taxpayers must notify authorities within a set period (often three years from the action leading to dispute) to invoke MAP, which can be pursued alongside domestic appeals or litigation. MAP agreements usually require taxpayer approval and may mean dropping other appeals.

• Arbitration Possibility: More treaties now include mandatory arbitration if no agreement is reached within two years, encouraging earlier settlements. Some countries like India remain cautious due to sovereignty, cost, and bias concerns.

MAP helps resolve double taxation through cooperation and compromise, with taxpayers playing a key role by providing clear facts but not controlling the outcome.

Common Types of Treaty Disputes

1. Transfer pricing adjustments

   • Unilateral adjustments (e.g., one country adjusts profit) that result in economic double taxation are a frequent MAP trigger. The taxpayer or one Competent Authority (CA) can request consultation to eliminate resulting double taxation.

2. Permanent establishment (PE) issues

   • Whether a business has a PE in a source state is a key dispute point: agent activities, dependent agent rules, and digital presence create repeated controversies. Disputes over whether a business has a taxable presence in a source state are quite frequent. Questions about agents, dependent status, or digital/remote presence recur.

   • Illustrative case: In 2025, India's Supreme Court in Hyatt International ruled that a UAE company's continuous and substantive control over hotel operations in India constituted a PE, even without its own fixed offices. Consequently, the income from the contract was attributable to the Indian PE and taxable in India, even if the foreign enterprise overall had losses, affirming that profit attribution is based on source business presence.

3. Dual residence and tie-breaker disputes

   • Two jurisdictions may claim both an individual or an entity as their resident. Treaties provide tie-breaker tests (e.g., centre of vital interests, place of effective management), but factual disagreements can arise.

4. Characterization/attribution differences

   • Countries may classify the same payment differently. For example: one treats it as business profits, another as royalties or fees. This affects taxing rights and treaty relief. MAP can resolve whether, say, a software payment is a royalty or business profit under the treaty definitions.

5. Treaty entitlement and beneficial ownership

   • Disputes occur over whether an entity is entitled to treaty benefits (lower withholding rates, etc.), especially if one side alleges the entity being a conduit or engaged in treaty shopping. Beneficial ownership tests in treaties can become contentious.

India MAP Statistics | 2016-2024

• Inventory Reduction: 29% reduction since 2020 peak (498 to 354 total cases).

• Success Rate: 68% resolved favorably (fully/partially eliminating double taxation).

• Closures vs New Filings: 119 vs 96 closures vs new filings (18% YoY closure improvement).

• 2024 Metrics Summary:

  • Total Inventory: 354 (2024) vs 392 (2023) (-9.7% YoY).

  • Cases Closed: 119 (2024) vs 101 (2023) (+17.8% YoY).

  • New Cases: 96 (2024) vs 68 (2023) (+41.2% YoY).

The MAP Process: Practical Steps and Expectations

1. Identify MAP eligibility

   • Confirm a double taxation treaty exists between the two jurisdictions and the issue falls within the treaty's scope (e.g., interpretation or application).

   • Check any applicable time limits in the treaty (commonly from the first notification of taxation, often three years, but this varies).

2. Submit a MAP request

   • File the request with the CA of the taxpayer's residence (or as specified in the treaty). Provide a clear statement of facts, the issue in dispute, the treaty provisions at issue, the relief sought, calculations of alleged double tax, and supporting documentation (tax assessments, correspondence, transfer pricing study, etc.).

3. CA review and acceptance

   • The home CA will review if the request is admissible under the treaty and domestic procedures. If accepted, that CA engages the treaty partner's CA to negotiate a resolution.

4. Negotiation between CAs

   • The CAs consult, often through multiple rounds of position papers and meetings. They exchange information and viewpoints on the facts and applicable law. Discussions may delve into comparables and economic analyses, and functional and risk profiles, etc., for transfer pricing and PE cases respectively. This phase can be lengthy.

5. Outcome and implementation

   • If the CAs reach an agreement, they formalize a mutual agreement. This typically results in either one country providing relief (a tax refund or the cancellation of an adjustment) or both countries making correlative adjustments. The agreement is implemented through domestic procedures (e.g., an amended assessment or tax credit). Suppose the treaty provides for arbitration and the CAs cannot agree within a specified period (often 2 years). In that case, the matter can be referred to an independent arbitration panel whose decision will be binding.

Practical Challenges and Delays

• Unpredictable Timelines: MAP cases often take years to resolve. The OECD's 2024 statistics show an average resolution time of about 27.4 months globally (over 30 months for transfer pricing cases). Some jurisdictions experience much longer timelines. For example, India's post-2016 MAP cases have averaged ~46-48 months to resolve, nearly double the world average. On a positive note, countries have made progress clearing backlogs of very old cases: as of 2024, only ~3.3% of worldwide pending MAP cases predate 2016 (down from 5%+ a year before).

• Information asymmetry: One tax authority may lack relevant information or face taxpayer confidentiality constraints. Delays occur if taxpayers or treaty partners are slow to share necessary data. The UN tax committee has noted that asymmetries in access to information (e.g., for transfer pricing comparables) impede effective dispute resolution and is exploring solutions like improved access to databases.

• Differing legal standards: Even with a treaty in place, countries may apply key concepts differently. For instance, transfer pricing methodologies or PE threshold criteria might be interpreted differently across jurisdictions under their laws and courts. Bridging these gaps requires negotiation and sometimes creative compromises.

• Non-binding nature: Unless the treaty has a binding arbitration clause, a MAP agreement still relies on mutual consent. Suppose one CA ultimately refuses to implement the deal or the two CAs simply cannot agree. In that case, the taxpayer may be left without relief, though such outright failures are relatively rare - only ~4% of MAP cases in 2024 closed without agreement.

When Arbitration Comes Into Play

Many modern treaties, including those revised by the BEPS Action 14 process, include an arbitration provision as a backstop for MAP. Arbitration offers a binding resolution when negotiators reach impasse and can incentivize timely settlements (since CAs know an unresolved case will go to panel). Indeed, experience shows that most disputes submitted to arbitration get resolved by CAs before the panel decision is needed.

"Many modern treaties, including those revised by the BEPS Action 14 process, include an arbitration provision as a backstop for MAP. Arbitration offers a binding resolution when negotiators reach impasse and can incentivize timely settlements."

In summary, arbitration can significantly enhance tax certainty by guaranteeing dispute resolution, but its adoption is limited. Taxpayers should check if the relevant treaty or instrument provides for arbitration and any conditions on its use (some treaties exclude certain cases from arbitration). Where arbitration is available, it sets a clear timeline and endpoint to the MAP process, which can be advantageous in protracted disputes.

Best Practices for Taxpayers and Advisors

Proactive and well-prepared engagement in MAP can greatly improve the outcome. Practitioners keeping watch on MAP and recent global movement & OECD guidance suggest the following strategies:

• Engage early and preserve rights: Don't wait for a dispute to fully ripen or for litigation to commence. Initiate MAP as soon as it's clear there is a qualifying issue (e.g., a proposed adjustment) and ensure you meet the treaty's filing deadline. Early notification to tax authorities can also facilitate cooperation; some jurisdictions even allow pre-emptive consultation between competent authorities before a disputed assessment is finalized.

• Complete and organized documentation: Provide a concise but thorough submission. This includes a clear narrative of facts, a timeline of events, copies of relevant tax returns, audit reports or notices, and any correspondence with the tax authorities. Technical analysis should be attached as needed. For example, for a transfer pricing case, include the transfer pricing study and economic analysis; for a PE case, include detailed functional analyses. A well-prepared MAP request helps CAs grasp the issue quickly.

• Leverage available preventive tools: Where possible, avoid disputes through Advance Pricing Agreements (APAs) or other rulings. Many tax authorities encourage APAs for transfer pricing. As of 2024, 80 jurisdictions offer bilateral APA programs. APAs can pre-emptively resolve pricing issues for future years, and some countries allow "roll-back" of APAs to resolve past years as well. In fact, the OECD noted that some jurisdictions now resolve over half of their transfer pricing matters via APAs rather than MAP (Japan, for example, had ~85% of its 2024 transfer pricing cases handled as APAs).

• Consult CAs during audits: If a cross-border adjustment is threatened (for example, a tax auditor in one country proposes a large transfer pricing increase), consider alerting your competent authority or using any consultation mechanism in the treaty. Early involvement of CAs can sometimes nip disputes in the bud or at least pave the way for a smoother MAP if the adjustment is made. Some treaties and forums (like the OECD FTA MAP Forum) encourage "ahead-of-time" discussions to prevent disputes.

• Track and respect time limits: MAP requests must be made within the treaty's allowed timeframe (often 3 years from notification of the action, though some newer treaties or the MLI extend this). Diarize all relevant deadlines. Also track the progress of ongoing MAP cases. If a case exceeds the typical timeline, polite inquiries about status can sometimes keep momentum.

• Contractual clauses for tax cooperation: In joint ventures or other cross-border contracts, consider including clauses that require the parties to cooperate in seeking treaty relief if a tax dispute arises. For instance, if a withholding tax issue or PE issue could affect both parties, a clause could require them to jointly pursue MAP or arbitration. While such clauses are not common, they signal intent and can facilitate information sharing needed for MAP.

• Reference past resolutions: If the two countries' CAs have previously resolved similar issues (and those outcomes are known through publicly available MAP reports or practitioner experience), tactfully remind the CAs of that precedent. For example, if there was a past MAP settlement on a comparable transfer pricing arrangement, noting it (without breaching any confidentiality) can encourage a consistent approach. However, never disclose taxpayer-specific details of another case. Only reference what is on public record (some jurisdictions publish anonymized MAP case summaries).

• Prepare for implementation early: Think ahead to how a MAP agreement could be implemented in each jurisdiction. Will it require an amended return, or will a credit or refund be issued? Are there any secondary effects (e.g., interest or penalties that need abatement)? Being ready to assist with the implementation can speed up the actual relief once an agreement is reached. For instance, if a refund will be due, ensure bank account details and payee information are up to date with the tax office. If an assessment will be reduced, ensure that the domestic statute allows giving effect to the MAP (some countries require the taxpayer to formally consent to the adjustment, etc.). Anticipating these steps helps avoid post-agreement snags.

Practical Checklist for a Strong MAP Request

• Clear issue summary: Begin with a crisp summary of what issue is disputed (e.g., "double taxation of €5 million in profits due to a transfer pricing adjustment by Country X on sales"). State the treaty articles involved and the relief sought (e.g., corresponding adjustment or exemption).

• Chronology: Include a timeline of key events such as tax filings, audit notices, submissions made, meetings held, etc., to give context.

• Relevant documents: Attach or enumerate the critical documents: audit report or tax assessment, the local protest/objection filed (if any), financial statements if relevant, the intercompany agreements for transfer pricing cases, etc.

• Analysis and positions: Summarize your arguments as to why the treaty provides relief. This might involve showing how an adjustment was arbitrary or how double taxation results contrary to the treaty. In transfer pricing cases, reference the arm's-length principle and where you think the initial adjustment erred. In residency or PE cases, outline the factual and legal basis for your position. While MAP is not litigation, presenting a reasoned case can help the competent authority understand the merits.

• Proposed resolution: It can be helpful to propose a solution. For example, "Country X could relieve double taxation by corresponding adjustment to profits in 2019 and 2020, reducing taxable income by [...] which aligns with the arm's length results." Providing a calculation of the relief sought shows the impact clearly. CAs may not adopt your proposal, but it serves as a starting point.

• Arbitration stance (if applicable): If the treaty has an arbitration clause that requires the taxpayer's acceptance (some treaties have optional arbitration that a taxpayer must elect), explicitly state whether you accept arbitration. Typically, if you want to keep that option, you must so indicate in the MAP request (and sometimes separately to each CA).

Conclusion: A Strategic Approach to Treaty Dispute Resolution

MAP remains an effective mechanism for resolving international tax disputes with or without litigation. The fundamental strategies for success remain timeless: timely action, clear factual presentation, and robust technical support (especially for complex transfer pricing or PE issues).

"MAP remains an effective mechanism for resolving international tax disputes with or without litigation. The fundamental strategies for success remain timeless: timely action, clear factual presentation, and robust technical support (especially for complex transfer pricing or PE issues)."

The developments through 2025 reinforce the need for a proactive approach, from considering APAs to prevent disputes, engaging early with authorities when issues surface, to leveraging new tools like arbitration or mediation, where available. Taxpayers who approach MAP with thorough preparation and a cooperative mindset will be best placed to achieve relief from double taxation. At the same time, they should be mindful of the changing environment: new multilateral solutions and standards are on the horizon that aim to make dispute resolution more uniform and effective globally. By combining diligent case management with awareness of policy trends, taxpayers can navigate the resolution process more efficiently and improve the prospects of a favourable, timely, and implementable outcome to even the most complex treaty disputes.

Authors may be reached at ca.hardeeplambal@gmail.com and eboard@icai.in

References & Footnotes

1. M. Olbert & C. Spengel, International Taxation in the Digital Economy: Challenge Accepted?, 9 World Tax J. 3 (2017).

2. Organisation for Economic Co-operation and Development (OECD), Tax Administration 2025: Comparative Information on OECD and Other Advanced and Emerging Economies, fig. 8.4 (2025) (showing that India's tax administration had a success rate of roughly 35% in court-decided tax cases in 2023) available at oecd.org.

3. S. De, Direct Taxes Litigation Management and Alternate Dispute Resolution (Nat'l Inst. of Pub. Fin. & Pol'y 2023).

4. See ECON. SURV. 2017-2018, INDIA, ch. 8 (Ministry of Fin., Dep't of Econ. Affs.), discussed in Tax Litigation in India and Its Impact on Indian Economy, FORUMIAS (Jan. 29, 2018), https://forumias.com/blog/tax-litigation-in-india-and-its-impact-on-indian-economy; Insights into the Low Success Rate of the Indian Income Tax Department in Litigation, 22 E-J. TAX RES. (2024); MUKESH BHUTANI, TAX DISPUTE RESOLUTION: CHALLENGES AND OPPORTUNITIES FOR INDIA (LexisNexis 2016).

5. OECD, Mutual Agreement Procedure Statistics for 2024 (OECD Tax Certainty Day release, Nov. 2025) (reporting that about 76% of MAP cases globally in 2024 fully resolved the issue for taxpayers, while only 4% were closed without agreement) available at oecd.org.

6. Article 25 in the OECD Model Tax Convention, 2017 and the UN Manual Model Double Taxation Convention Between Developed and Developing Countries 2021.

7. G.R. Berridge, Diplomacy: Theory and Practice (Springer Nature 2022).

8. A correlative (or corresponding) adjustment in transfer pricing is a tax adjustment made by a tax authority to the income of one entity, matching a "primary adjustment" made by another country's authority on a related party. It ensures consistent profit allocation between associated enterprises to eliminate double taxation.

9. J. Gröper, The Mutual Agreement Procedure in International Taxation: The Need for Procedural and Administrative Rules vol. 129 (utzverlag GmbH 2020).

10. It must have to first be approved by the taxpayer before it gets applied. If the taxpayer is unhappy with a MAP ruling similar to APA, he may choose not to use it.

11. K.C. Kim, Justice, Third-Party Funding, and Tax Treaty Arbitration, 33 Ind. Int'l & Comp. L. Rev. 39 (2023).

12. Economic double taxation means the same income being taxed in the same tax period, but in the hands of two different persons.

13. Yariv Brauner, An International Tax Regime in Crystallization, 56 Tax L. Rev. 259 (2002).

14. Hyatt International Southwest Asia Ltd v. Additional Director of Income-tax, Civil Appeal Nos. 9766-9773 of 2025 (India SC July 24, 2025). The foreign company's staff frequently worked on-site under a 20-year services contract, exercising core managerial functions (hiring key personnel, implementing policies, managing finances).

15. Id. The Court emphasized that exclusive physical premises were not required. Even shared or temporary use of the client's space can qualify as a fixed place if the business is carried on through that space. It also found that the treaty's "service PE" clause (presence exceeding 9 months within 12 months) was met in aggregate by the rotating staff visits, even if each individual visit was brief.

16. Supra note 5.

17. Id.

18. Id.

19. United Nations Committee of Experts on International Cooperation in Tax Matters ("UN Tax Committee"), WSIII Co-Leads' Concept Note on Ideas for Potential Solutions A/AC.298/CRP.22 (Oct. 24, 2025).

20. Supra note 5. OECD, 2024 MAP & APA Statistics, at 2 (2025) (showing approximately 4% of MAP cases globally closed without agreement in 2024).