To bring about certainty and uniformity with regard to the determination of arm’s length price of the international transaction, the Finance Act, 2012 has inserted section 92CC and 92CD in the Income-tax Act, 1961 introducing the provisions of Advance Pricing Agreement (‘APA’).
An APA is an agreement between the Central Board of Direct Taxes (‘CBDT’) and any person, which determines, in advance, the arm’s length price 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 Advance Pricing Agreement, will be determined only in accordance with the APA. The Advance Pricing Agreement once entered into shall be binding on the person as well as the Commissioner of Income-tax (and his subordinate income tax authorities) having jurisdiction of such person and such transaction. The term of APA can be maximum of 5 years.
The Advance Pricing Agreement Scheme envisages following types of APAs:
- Unilateral Advance Pricing Agreement (APA) is an agreement between the CBDT and the person and does not involve any agreement with the treaty partner;
- In Bilateral APA, the person is required to make an application with the competent authority of India and simultaneously the person or its associated enterprises should apply to the competent authority of other country. The two competent authorities are required to reach an arrangement through mutual agreement procedure negotiation. This arrangement is required to be accepted by the person before a bilateral APA can be entered into;
- In Multilateral Advance Pricing Agreement, the person is required to make an application with the competent authority of India and simultaneously the person or its AE should apply to the competent authority of the other countries which are relevant for such an agreement. Indian competent authority has to reach an arrangement through MAP with competent authorities of more than one country, before that agreement could be offered to the person. This arrangement is required to be accepted by the person before a multilateral APA can be entered into.
Our team of professionals understand the complexity of the transfer pricing regulations in India, and provide end to end solutions to our clients which include both Indian and Foreign enterprises.
How can ASC help you in this regard?
- Assistance in evaluating & formation of strategy for the Advance Pricing Agreement;
- Assistance in preparation and filing of application for Advance Pricing Agreements with Tax Authority;
- Assistance in representation before the tax authorities for negotiations and other matter related to Advance Pricing Agreements;
- Assistance in compliances after getting the agreement signed with the CBDT
Frequently Asked Questions
What is pre-filing consultation for an Advance Pricing Agreement?
A person willing to enter into an Advance Pricing Agreement can request a pre-filing consultation for the following purposes:
- Identifying the transfer pricing issues
- Determining the scope of the agreement
- Discussing the terms of the agreement
- Determining the suitability of the international transactions for the agreement
The pre-filing consultation shall not be deemed that the person is entering into Advance Pricing Agreement nor shall it bind the applicant and the income tax department.
What are the cases when the Advance Pricing Agreement shall cease to be binding?
It is only upon a change in law or facts bearing the APA that Advance Pricing Agreement shall cease to have binding effect.
Whether withdrawal of the application for Advance Pricing Agreement is permissible?
The applicants are allowed to withdraw the application for agreement before the terms of the agreement are finalised. However, the fees paid for the application of Advance Pricing Agreement shall not be refunded.
What is the annual compliance report for Advance Pricing Agreement?
The assessees who have entered into Advance Pricing Agreement shall furnish an annual compliance report for each year covered in the agreement, stating the compliance with the terms of the agreement. The annual compliance report shall be submitted in quadruplicate to the Director General of Income Tax (International Taxation) within 30 days after the due date of filing the income tax return for the relevant year or within 90 days of entering into the agreement, whichever is earlier.
What are the conditions for revision of Advance Pricing Agreement?
The Advance Pricing Agreement can be revised if:
- There is a failure to meet a condition based on which the agreement was entered into
- There is a change in critical assumptions for the agreement
- There is a change in law
- Upon request received from the competent authority of other countries for revision of agreement in case of bilateral or multilateral agreements.
The revised agreement shall indicate the date up to which the original agreement shall apply and the date from which the revised agreement shall apply.
What are the situations in which the agreement can be cancelled by the CBDT?
CBDT may cancel the Advance Pricing Agreement in the following cases:
- The findings of the compliance audit indicate the failure of the assessee to comply with the terms of the agreement.
- Failure by the assessee to file the annual compliance report
- There are material errors in the annual compliance report filed by the assessee
- The assessee does not agree with the revisions proposed in the agreement
- The agreement is cancelled under Rule 10RA(7) of the income tax rules i.e., failure to implement the rollback provision of the agreement.
The agreement shall not be cancelled unless an opportunity of being heard has been given to the assessee.