Transfer Pricing provisions were brought under the purview of Income Tax Act in 2001. Over the years, there have been substantial amount of additions/adjustments at the time of transfer pricing assessments wherein the transfer price charged by the assesses are not accepted by the Income Tax authorities on account of difference in opinion and this has created huge uncertainty as well resulted in substantial litigation on this matter.
Hence in order to provide certainty as well as to avoid unnecessary litigations on the determination of arm’s length, the Government in Budget 2012 had introduced provisions relating to Advance Pricing Agreements (APA) effective from 01st July 2012. These provisions allow CBDT (Board) to enter into Advance Pricing Agreements (APA) with any person for determining the arm’s length price or specifying the manner in which arm’s length price will be determined, in respect of an international transaction proposed to be entered into by such person.
The salient features of the Advance Pricing Agreements are as under:
1. The arm’s length price in respect of such transactions will be determined as per the Advance Pricing Agreement entered into by a person with the board.
2. The validity of such agreement shall not exceed a period of 5 consecutive years.
3. Advance Pricing Agreements shall be binding on:
a. The assessee in whose case and in respect of the transaction for which the APA has been entered into.
b. The Commissioner and authorities subordinate to him, in respect of such assessee and such transaction.
4. Advance Pricing agreement shall not be binding if there is a change in the law or facts which has a bearing on the agreement entered into.
5. The Board (after obtaining approval from Central Government) has the powers to declare any such agreement to be void ab initio; if it finds that such agreement has been entered into by fraud or misrepresentation of facts.
Section 92C(9) gives the powers to the Board to prescribe a scheme specifying the manner, form and procedure to be followed in respect of Advance Pricing agreements. Accordingly CBDT in pursuance of these powers have issued the much awaited ‘Advance Pricing Agreement Scheme’ vide Notification No. 36 dtd. 30th August 2012 - laying down the procedure to be followed in the case of APA’s.
Persons eligible to apply:
Any person who has entered into an international transaction or is planning to enter into an international transaction shall be eligible to enter into APA.
All applications for APA would be dealt by a ‘team’ consisting of income tax authorities as constituted by Board and would also include such number of experts in economics, statistics, law or any other field as may be nominated by Director General of Income Tax – International Taxation (DGIT)
Types of Advance Pricing Agreements:
1. Bilateral Agreement: Agreement between the board and the applicant based on the agreement entered into by competent authority in India (officer appointed by the Central Government) with the competent authority in other country for most appropriate transfer pricing method or arm’s length price.
a. This kind of agreement is relevant in case wherein an assessee is doing a particular transaction with associated enterprise in another country (where transfer pricing provisions are also applicable).
b. This kind of agreement provides stability in terms of transfer pricing implications to such assesses for a single transaction in both the countries. E.g. Royalty arrangement between Indian Company and its associated Company in Singapore.
2. Multilateral Agreement: Agreement between the board and the applicant based on the agreement entered into by competent authority in India with the competent authorities in other countries for most appropriate transfer pricing method or arm’s length price.
a. This kind of agreement is relevant in case wherein an assessee is doing similar transaction with various associated enterprises based in various countries (where transfer pricing provisions are also applicable).
b. This kind of agreement provides stability in terms of transfer pricing implications to such assesses doing such transactions with various associated enterprises in multiple countries. E.g. Royalty arrangement between Indian Company and its associated companies in various countries
3. Unilateral Agreement: An agreement between the board and the applicant which is neither bilateral agreement nor unilateral agreement.
Pre - Filing Consultation:
1. Any assessee (applicant) proposing to enter into APA needs to make an application in writing for pre filing consultation in Form No. 3CEC to DGIT.
2. On receipt of Form No. 3CEC, the team shall hold pre- filing consultation with the assessee to:
a. Determine the scope of the agreement;
b. Identify transfer pricing issues
c. Determine the suitability of international transaction for the agreement.
d. Discuss the broad terms of the agreement.
3. Pre filing consultation shall not bind either the Board or the assessee to either initiate the agreement process or enter into an agreement.
Application for Advance Pricing Agreements:
1. Any applicant on entering into pre filing consultation (as mentioned above), if he desires to enter into APA needs to make an application in Form No. 3CED along with proof of requisite fee to DGIT (in case of unilateral agreement) and to competent authority (in case of bilateral or multilateral agreement).
Amount of international transaction proposed to be undertaken in respect of which APA is proposed during period of agreement.
Amount not exceeding Rs. 100 crores
Amount not exceeding Rs. 200 crores
Amount exceeding Rs. 200 crores
3. The applicant can withdraw the application for APA at any time before finalization of the terms of the agreement in Form No. 3CEE.
Procedure for Agreement:
1. Once an application is proper in all respects and is allowed to be proceeded with, the team or competent authority in India shall process the same in consultation and discussions with the applicant and this would include holding meetings with the applicants, obtaining additional documents/information, visiting applicant’s business premises, etc.
2. Advance Pricing Agreement shall include:
a. International transactions covered the agreement;
b. Agreed Transfer Pricing methodology, if any.
c. Determination of arm’s length price, if any.
d. Critical assumptions.
e. Conditions if any other than provided in the Act/Rules
3. The applicant can amend or withdraw his APA application at any time before finalization of terms of the agreement.
4. In case of Bilateral or multilateral APA, the competent authority of India has to formalize the terms of the agreement with the competent authorities of respective countries.
a. The applicant is not entitled to be a part of the discussion between competent authority of India and the competent authorities of other countries.
b. In case of failure to reach agreement between the competent authorities, the applicant shall be informed of the failure to reach an agreement with the competent authority in other country/countries.
c. In case the competent authorities are able to formalize the terms of the agreement, the applicant has to convey acceptance of the agreement within 30 days of it being communicated.
d. In case the terms of the agreement are not acceptable to the applicant, then he has the option to continue entering into unilateral agreement or withdraw its application for APA.
Post Advance Pricing Agreement Compliances:
1. The assessee shall furnish annual compliance report to DGIT for each year covered in the agreement in Form 3CEF within 30 days from the due date of filing of return of income for that year or within 90 days from the date of entering the agreement whichever is later.
2. The Transfer Pricing officer (TPO) shall conduct a compliance audit of the agreement for each of the year covered in the agreement.
3. The TPO shall submit compliance audit report for each year covered in the agreement to the DGIT in case of unilateral agreements or to the competent authority in case of bilateral or multilateral agreements within six months from the end of the year in which Annual Compliance Report is received by the TPO.
4. The regular audit of the transactions covered under the APA shall not be carried out by the TPO.
Revision of APA:
An agreement once entered into can be revised by the Board if:
1. There is change in a critical assumption or failure to meet any condition mentioned in the agreement;
2. Change in the law;
3. Request from competent authority in the other country for revision.
Cancellation of APA:
An agreement entered into can be cancelled by the Board if:
1. The assessee has failed to comply with the terms of the agreement;
2. The assessee has failed to file the annual compliance report or the compliance report contains material errors.
3. The assessee is not in agreement with the proposed revision to the agreement.
The step taken by the Government to introduce APA seems to be positive and will surely help to reduce litigations, however there are certain concerns that have remained in the existing provisions/rules and hence it would be better if the same are addressed by the Government/Board at the earliest.
1. Certain specified domestic transactions are also now covered under Transfer Pricing. Hence it would have been better if the provisions pertaining to Advance Pricing Agreement (Unilateral agreements) would have been extended to these specified domestic transactions.
2. Time limit has not been laid down for completion of APA process.
3. Though Section 92CC(2) allows usage of any other method [other than the method prescribed u/s. 92C(1)] for determination of arm’s length price in case of APA, the rules notified restricts it only to the usage of method prescribed u/s. 92C(1).
4. The rules are silent on confidentiality of the data provided by the assesses.