Advance Pricing Agreement

Advance Pricing Agreement

The Ministry of Finance has notified an “Advance Pricing Agreement Scheme” (Rules 10F to 10T of Income Tax Rules, 1962) vide notification No. 36/2012 dated 31-8-2012. The Finance Act, 2012 had inserted sections 92CC and 92CD in the Income Tax Act 1961 introducing the provisions of Advance Pricing Agreement (APA). The APA Scheme shall come into effect from the date of its publication in the Official Gazette, i.e. from 31.08.2012.                                                                                                                           

An APA is an agreement between the Central Board of Direct Taxes and any person, which determines, in advance, The Arm's Length Price (ALP) or specifies the manner of the determination of arm’s length price (or both), in relation to an international transaction. Hence, once APA has been entered into with respect to an international transaction, the arm’s length price with respect to that international transaction, for the period specified in the APA, will be determined only in accordance with the APA. The APA process is voluntary and will supplement appeal and other Double Taxation Avoidance Agreement (DTAA) mechanism for resolving transfer pricing dispute. The term of APA can be a maximum of five years. 

APAs are a tool to facilitate voluntary compliance with India’s transfer pricing rules. An APA can deliver significant benefits to both a taxpayer and the tax authorities in terms of certainty of outcomes and efficiencies with compliance and administration. Moreover, both parties may achieve savings in compliance and administrative costs that inevitably arise from transfer pricing rules. Therefore, having regard to the mutual benefits that derive from an APA, it is further recommended that each party should approach the APA process in a spirit of cooperation and openness and with an intention to achieve a win-win outcome for each party.

The APA scheme notifies three types of APA:

1. Unilateral
2. Bilateral
3. Multilateral

The choice is on the applicant to choose a particular type of APA at the time of making the application.

Unilateral APAs:-

Unilateral APA is an agreement between the Board and the applicant and this process does not involve any agreement with the treaty partner. In case of unilateral APA, the application is required to be furnished with the Director General of Income Tax (International Taxation), New Delhi. A unilateral APA is best suited to those cases where it is unnecessary to involve a foreign tax authority in the APA process (e.g., where the counter-party to an Indian resident’s international related party transaction is a taxpayer in a country which does not have a tax treaty with India) A unilateral APA would also be appropriate where a foreign tax authority declines to participate in what would otherwise be a bilateral APA. Unilateral APAs would therefore involve only the Indian taxpayer and the tax authorities. This limited involvement of parties to the APA means that a unilateral APA is likely to be able to be finalized in a relatively brief period of time compared to an APA that would necessitate the involvement of another tax authority.

Bilateral and multilateral APAs:-

In bilateral and multilateral APA request, the applicant is required to make an application with the Competent Authority of India as well as the Competent Authority of the other country. In case of bilateral/multilateral APA, the application is required to be furnished with the Competent Authority of India, i.e. Joint Secretary (FT&TR-I) in the Ministry of Finance.   A bilateral or multilateral APA would require the involvement of at least one other tax authority in the APA process. This involvement would occur under the provisions of the mutual agreement procedures article and/or the exchange of information article in India’s tax treaty with the other relevant country. This type of APA is often referred to as mutual agreement procedures (MAP APA). A MAP APA is therefore best suited where the Indian resident’s international related party transaction(s) occurs with a related party that is a taxpayer in a tax treaty partner country. The agreement with the foreign tax authority ensures there is no economic double taxation in respect of the transaction(s) covered by the APA.

A MAP APA generally consists of at least three agreements –

(1) between the Indian tax authorities and the foreign tax authority,

(2) between the Indian taxpayer and the Indian tax authorities, and

(3) between the foreign tax authority and the related party in the foreign country. The involvement of the foreign tax authority inevitably adds additional time to the period for finalizing a MAP APA relative to a unilateral APA.

Key highlights of the APA Scheme

1.    Available to all taxpayers falling within the ambit of Indian TP Legislation. No Threshold limit Prescribed.

2.    APA application to be filed before the start of the year in case of continuing transactions and before the transaction in case of isolated or new transactions

3.    Scheme provides for a pre-filing consultation on a ‘no name basis’.

4.    APA to be entered by the CBDT with the approval of Central Government.

5. The Arms length Price (“ALP”) of any international transaction covered under such APA, shall be determined in accordance with the terms of APA and the provisions of section 92C or section 92CA which normally apply for determination of arm’s length price would be modified to this extent.

6. The APA shall be binding on the person and the revenue authorities, in respect of the transaction in relation to which the agreement has been entered as long as there is no change in law or facts having bearing on such APA.

7.    The APA can be applied for the period of 5 consecutive previous years.

8. Where an application is made by a person for entering into such an APA, proceedings shall be deemed to be pending in the case of the person for the purposes of the Act.

9.    For computing period of limitation under the act, the period of beginning the date of such APA & ending on date of declaring such agreement void-ab-initio. Otherwise the period of limitation referred in any provision of the act is less than 60 days and those 60 days to de added in remaining period.

10.  The person who wants to get entered into such APA has to furnish modified return with period of three month from the end of month in which the said APA was entered. The modified return has to reflect modification of the income only in respect of issues arising from the APA.

11.  All the other provision of this act shall apply accordingly as if the modified return is a return furnish under section 139.