One of the announcements which was very anticipated in Transfer Pricing Arena was the Advanced Pricing Agreement (APA). CBDT released the rules on APA on 30th August.
The Finance Minister had announced that the APA will be released so that the department is not burdened by the litigation.
So what is this APA let's get deep into what exactly is this APA.
An APA is an agreement between taxpayer & the income tax department, regarding the transfer price as agreed in the agreement will be accepted by the department & no adjustment will be made to the Transfer price & no Transfer Price Audit is conducted. Such price is accepted by the tax authorities as the Arms length price & no Transfer pricing Audit is done.
The following persons are eligible to apply for a APA:
1. Any person who have undertaken International Transaction
2. Any person contemplating to undertake International Transaction
Let's see the process how the APA works:
The First Step during is the Pre Filing Consultation during which the CBDT or its representatives shall determine the scope of the agreement, identify transfer pricing issues, determine the suitability of international transaction for the agreement or discuss broad terms of the agreement.
After that if the applicant wants he can file Form 3CED for agreement, with requisite fees. The fees for filing is
|Amount of international transaction||Fee|
|Amount not exceeding Rs. 100 crores||10 lacs|
|Amount not exceeding Rs. 200 crores||15 lacs|
|Amount exceeding Rs. 200 crores||20 lacs|
Withdrawal: The Applicant may withdraw application any time & the application for withdrawal shall be filed in Form 3 CEC . No Refund of Fees shall be made to the applicant.
Then the further processing of Application is done if any defects are found it will must be intimated to the application within 1 month of the application. The applicant must remove the defects within 15 days of the intimation.
After this the CBDT & its representatives will discuss the application in depth & hold meetings with the applicant, call for additional document, visit the applicant’s business premises, or make such inquiries as it deems fit.
Then the agreement shall be drafted & sent to Central Government for approval. After its approval APA will come into existence.
Annual Compliance Report: Every year the Applicant shall file Annual Compliance Report to Director General of Income Tax(International Taxation) in Form 3CEF, so that whether all the terms as per the agreement have been complied. It should be filed with in 30 days of the due date of filing the income-tax return for that year, or within ninety days of entering into an agreement, whichever is later.
DGIT will send one copy to Transfer Pricing Officer (TPO) under whose jurisdiction the application is present & TPO will conduct a Compliance Audit for the same. It is different from regular Audit. No Transfer Price Audit will be conducted.
Cancellation: The Agreement can be cancelled by the Board if the Applicant has not filed Compliance Audit report, the report contains material errors. The Board shall give an opportunity of being heard to the assessee, before proceeding to cancel an application.
One of the most important rules which have been incorporated into the rules are the rules regarding the Bilateral & Multilateral Agreements. The above procedure will be followed in case of Unilateral, Bilateral & Multilateral Agreements, but some additional compliances are also put on assessee who are availing the Bilateral & Multilateral Agreements. These are incorporated into rule 44GA of the Act.
Rule 44GA says that if an assessee gets into Bilateral & Multilateral Agreements then the application shall be accepted only if the Associated enterprise (AE)situated outside India has initiated process of advance pricing agreement with the competent authority in the other country. The CBDT & the other country authorities shall discuss & consult and ascertain willingness of the competent authority in other country or countries, for initiation of negotiation for this purpose. In case of failure to reach the conclusion applicant will be intimated. The applicant will not be the part of discussion. This is one of the harsh rules as the applicant has to involve his AE for the APA. The APA may not be willing to do so.
Conclusion: The APA is a welcome move by the Board & will be very well accepted by the MNC’s who don't want to go to litigation & want to settle Transfer pricing issues. India now joins the league of nations having the APA rules. This move may make India, again a hot destination for Foreign Investment.