Sharing Protected documents to external user

Hi Vinay 

You want to share labeled and/or protected content with external partner. You have O365 and MPIP license and all requirements are meet for functional Sensitivity Labeling solution.

• For emails, Azure B2B is not required for external collaboration where OME portal is independent from B2B accounts. Azure B2B is only helpful when external users needs to classify content with your labels. Azure B2B is recommended approach for most other collaboration workloads such as Teams, SPO, ... since sharing via SPO / Teams requires two permissions sets, the MIP and SPO/Teams permissions (via B2B account).
• External partners do not require Microsoft Cloud (O365 / Azure), where for email scenario consumer identities and OTP would work but AAD identity is required for Word/Excel/PowerPoint.
• The limitation for external collaboration is encryption or custom permissions. Hence, the recommended approach for external collaboration is Azure B2B.

If you agreed with your partner for MIP consumption with creating a label or sublabel with encryption which include external accounts via groups, then your partner require the use of Azure AD and provide group names (be aware of conditional access policy). Alternatively, you can use individual accounts via internal distribution list (or individual accounts instead of groups) which would not require external partner to have Azure AD.

https://learn.microsoft.com/en-us/azure/active-directory/multi-tenant-organizations/cross-tenant-synchronization-overview 

Thank you and kind regards