Advance Pricing Agreement

Presented by Sanjay Kumar

Introduction

An Advance Pricing Agreement (APA) is an agreement between a taxpayer and the income-tax authorities on an appropriate transfer pricing methodology for a set of transactions to be entered for a particular time period in future. It offers better assurance on transfer pricing methods and provide certainty and unanimity of approach.

Sections 92CC and 92CD were introduced to provide a framework for formulation of APAs between the taxpayer and the income-tax authorities.

Section 92CC enables the CBDT (with the approval of the Central Government), to enter into an APA with any person determining the

• arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.
• income referred to in Section 9(1)(i) or specifying the manner in which the said income has to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident.

Manner of ALP determination

ALP can be determined in accordance with the following methods referred under Section 92C(1) or any other method provided by rules made under the Act with necessary adjustments or variations:

1. Comparable uncontrolled price method;
2. Resale price method;
3. Cost plus method;
4. Profit split method;
5. Transactional net margin method;

The provisions of the APA shall override the provisions of Sections 92C & 92CA, which are generally used for determination of ALP.

Types of APA

An APA can be of three types:

1. Unilateral APA: An APA that involves only the taxpayer and the tax authority of the country of taxpayer is located.
2. Bilateral APA: An APA that involves taxpayer, Associated Enterprise (AE) of the taxpayer in foreign country, tax authority of country where the taxpayer is located and foreign tax authority.
3. Multilateral APA: An APA that involves taxpayer, two or more AE’s of the taxpayer in different foreign countries, tax authority of country where the taxpayer is located and tax authority of AE’s.

Validity

The Agreement shall be valid for such period as specified in the agreement, however not exceeding five consecutive previous years.

Binding nature

APA shall be binding on:

1. the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and
2. the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

The APA shall not be binding if there is any change in law or facts having bearing on such APA.

Conditions & Consequences of declaration of an APA as void ab initio

• In case the Board finds that the APA so entered into has been obtained by the person by way of fraud or misrepresentation of facts, the Board is empowered to pass an order declaring any such APA to be void ab initio, with the approval of Central Government.
• As a result of such declaration:

1. all the provisions of the Act shall apply to the person as if such agreement had never been entered; and
2. the period beginning from the date of such APA till the date of order declaring the APA as void ab initio, shall be excluded for the purpose of computation of any period of limitation under this Act. This is irrespective of anything contained in any other provision of the Act.
3. in case the period of limitation after exclusion of the above-mentioned period is less than 60 days, such remaining period of limitation shall be extended to 60 days.

 

Prescribed Advance Pricing Agreement Scheme for Section 92CC purposes [Rule 10F to 10T]

Persons eligible to apply [Rule 10G]

Any person who-

• has undertaken an international transaction; or
• is contemplating to undertake an international transaction,

Pre-filing Consultation [Rule 10H]

1. Any person proposing to enter into an APA, by an application in writing, make a request for a pre-filing consultation in the Form No. 3CEC to the Director General of Income-tax (International Taxation) (‘DGIT’).
2. On receipt of the request, the team shall hold pre-filing consultation with the applicant.
3. The pre-filing consultation shall include the following things:

• • determine the scope of the agreement;
  • identify transfer pricing issues;
  • determine the suitability of international transaction for the agreement;
  • discuss broad terms of the agreement.

4.The pre-filing consultation shall –

• • not bind the Board or the person to enter into an agreement or initiate the agreement process;
  • not be deemed to mean that the person has applied for entering into an agreement.

Application for advance pricing agreement [Rule 10-I]

Application in Form No. 3CED may be filed by the person referred to in rule 10G at any time-

• • before the first day of the previous year relevant to the first assessment year for which the application is made, in respect of transactions which are of a continuing nature from dealings that are already occurring; or
  • before undertaking the transaction in respect of remaining transactions.

The fees payable shall be in accordance with following table based on the amount of international transaction entered into or proposed to be undertaken in respect of which the applicant wishes to obtain an APA:

 

Amount of international transaction	Fees (In INR)
< INR 100 Crores	10 lakhs
Between INR 100-200 Crores	15 lakhs
> INR 200 Crores	20 lakhs

 

Withdrawal of application for agreement [Rule 10-J]

The applicant may withdraw the application for agreement at any time before the finalisation of the terms of the agreement in Form No. 3CEE. However, application fees paid shall not be refunded on such withdrawal.

Preliminary processing of application [Rule 10-K]

• Every application filed in Form No. 3CED should be complete in all respects and accompanied by requisite documents.
• If any defect is noticed or any relevant document is not attached thereto or the application is not in accordance with understanding reached in pre-filing consultation, the DGIT (for unilateral agreement) and competent authority in India (for bilateral or multilateral agreement) shall serve a deficiency letter on the applicant before the expiry of one month from the date of receipt of the application.
• The applicant shall remove the deficiency or modify the application within a period of fifteen days from the date of service of the deficiency letter or within such further period which, on an application made in this behalf, may be extended, restricting to thirty days in total.
• If the defect in application is not removed within the prescribed timeline and after providing an opportunity of being heard, the DGIT or the competent authority may pass an order for providing that the application shall not be allowed to be proceeded with and fees shall be refunded.

Procedure [Rule 10-L]

• If the application has been accepted for processing, the team or the Competent Authority in India or his representative shall process the application in consultation and discussion with the applicant.
• It shall hold meetings, call for additional documents/information, visit the applicant’s business premises and make such inquiries in accordance with the circumstances of the case. The APA team shall have a detailed understanding of entities involved, transaction(s) covered, most appropriate method and mark-up percentage.
• Based on the discussion with the Applicant, the team shall finalize the pricing approach including mark-up percentage on the transaction(s).
• The team shall prepare a draft report which shall be forwarded to the DGIT (for unilateral) or to the competent authority in India (for bilateral & multilateral).
• The DGIT or the competent authority in India and the applicant shall prepare a proposed mutually agreed draft agreement.
• The agreement shall be entered into by the Board with the applicant after obtaining approval from the Central Government.
• Once an agreement is entered into, the DGIT or the competent authority in India, as the case may be, shall send a copy of the agreement to the Commissioner of Income tax having jurisdiction over the applicant.

Terms of the agreement [Rule 10M]

1. An agreement may among other things, include –

• • the international transactions covered by the agreement;
  • the agreed transfer pricing methodology, if any;
  • ALP determination, if any;
  • definition of any relevant terms to be used in item (ii) or (iii);
  • critical assumptions i.e., the factors and assumptions that are so critical and significant that neither party entering into an agreement will continue to be bound by the agreement, if any of the factors or assumptions is changed;
  • rollback provision referred to in Rule 10MA;
  • the conditions, if any, other than provided in the Act or these rules.

2.The binding effect of agreement shall cease only if any party has given due notice of the concerned other party or parties.

3.In case there is a change in any of the critical assumptions or failure to meet the conditions subject to which the agreement has been entered into, the agreement shall not be binding on the Board or the assessee. However, it can be revised or cancelled as the case may be.

4.The Board shall give a notice in writing of such change in critical assumptions or failure to meet conditions to the assessee as soon as it comes to the knowledge of the Board.

5.The revision or cancellation of APA shall be in accordance with the prescribed rules.

Amendments to Application [Rule 10N]

An applicant may request for an amendment to an application at any stage before finalization of the agreement terms. The DGIT or the competent authority may allow the amendment if it does not have any effect of altering the nature of the originally filed application. The amendment shall be given effect only if it is accompanied by additional fees, if applicable.

Furnishing of Annual Compliance Report [Rule 10-O]

The assessee shall furnish an annual compliance report in quadruplicate in Form 3CEF to the DGIT for each year covered in the agreement, within 30 days of the due date of filing income-tax return for that year, or within 90 days of entering into an agreement, whichever is later.

The DGIT shall send one copy each to the competent authority in India, the Jurisdictional Commissioner of Income-tax and the Jurisdictional Transfer Pricing Officer.

Compliance Audit of the agreement [Rule 10P]

1. The Jurisdictional Transfer Pricing Officer shall carry out the compliance audit of the agreement for each of the years covered in the agreement. For this purpose, the Transfer Pricing Officer may require –

• the assessee to substantiate compliance with the agreement terms, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method;

• the assessee to submit any information, or document, to establish that the terms of the agreement has been complied with.

2.The compliance audit report shall be furnished by the TPO within six months from the end of                       the month in which Form 3CEF is received by him.

Revision of an agreement [Rule 10Q]

• An agreement, after being entered, may be revised by the Board either suo moto or on request of the assessee or the competent authority in India or the DGIT, if:
  • there is a change in critical assumptions or failure to meet a condition subject to which the agreement has been entered into;
  • there is a change in law that modifies any matter covered by the agreement but is not of the nature which renders the agreement to be non-binding; or

• • there is a request from competent authority in the other country requesting revision of agreement, in case of bilateral or multilateral agreement.
• Except when the agreement is proposed to be revised on the request of the assessee, the agreement shall not be revised unless an opportunity of being heard has been provided to the assessee and the assessee is in agreement with the proposed revision.
• The revised agreement shall include the date till which the original agreement is to be considered and the date from which the revised agreement shall be applicable.

Cancellation of an agreement [Rule 10R]

• An agreement shall be cancelled by the Board for any of the following reasons:
  • the compliance audit has resulted in the finding of failure on the part of the assessee to comply with the agreement terms;
  • the assessee has failed to file the annual compliance report in time;
  • the annual compliance report furnished by the assessee contains material errors; or
  • the assessee is not in agreement with the revision proposed in the agreement or the agreement is to be cancelled under Rule 10RA(7);.
• The Board shall give an opportunity of being heard to the assessee, before cancellation.
• The order of cancellation shall be in writing and mention reasons for cancellation and non-acceptance of assessee’s submission, if any. Such order has to be intimated to the jurisdictional AO & TPO.
• Such order shall also specify the effective date of cancellation, where applicable.
• The order under the Act, declaring the agreement as void ab initio, on account of fraud or misrepresentation of facts, shall be in writing and mention reason for such declaration and non-acceptance of assessee’s submission, if any.

Renewing an agreement [Rule 10S]

Request for renewal of an agreement may be made as a new application in the same manner except for pre-filing consultation referred in Rule 10H.

 

Miscellaneous [Rule 10T]

• Mere filing of an application for APA shall not prevent the operation of Chapter X of the Act for ALP determination under that Chapter till the agreement is entered into.
• The negotiation between the competent authorities in India and the other country or countries, in case of bilateral or multilateral agreement, shall be carried out in accordance with the provisions of the tax treaty between India and such other country or countries.

Rollback Provisions

1. Roll back mechanism under Section 92CC(9A) is available to reduce the existing as well as future litigations.
2. Accordingly, the APA, subject to such prescribed conditions, procedure and manner, shall:
   • determine ALP or specify the manner for such determination in relation to an international transaction entered into by the person
   • determine the income referred to in Section 9(1)(i), or specify the manner for such determination, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident,

during any period not exceeding four previous years preceding the first of the previous years for which the APA applies in respect of the international transaction to be undertaken.

     Rollback of the agreement [Rule 10MA]

1. Conditions for applying rollback provisions

The agreement shall contain rollback provision in respect of an international transaction subject to the following, namely: –

1. the international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies;
2. the return of income for the relevant rollback year has been or is furnished by the applicant before the due date as specified in Section 139(1).
3. Form 3CEB had been filed in accordance with Section 92E;
4. the applicability of rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant; and
5. the applicant has made an application seeking rollback in Form 3CEDA.

      2.Non-applicability of Rollback provision

Rollback provision shall not be provided in respect of an international transaction if:

• the ALP determination of the said international transaction for the said year has been subject matter of an appeal before the Tribunal and the Tribunal has passed an order disposing of such appeal at any time before signing of the agreement; or
• the application of rollback provision has the effect of reducing the total income or increasing the loss of the applicant as declared in the return of income of the said year.

3.Where the rollback provision specifies the manner in which ALP shall be determined in relation to an international transaction undertaken in any rollback year, then such manner shall be the same as the manner which has been agreed to be provided for ALP determination of the same international transaction to be undertaken in any previous year to which the agreement applies, not being a rollback year.

     4.Time limit for filling application

The applicant may furnish along with the application for APA, the request for rollback provision in Form No. 3CEDA with proof of payment of an additional fee of INR 5 lakhs.

Procedure for giving effect to rollback provision of an Agreement [Rule 10RA]

• The applicant shall furnish modified return of income referred to in Section 92CD in respect of a rollback year to which the agreement applies along with the proof of payment of any additional tax arising as a consequence of and computed in accordance with the rollback provisions.
• Such return for a rollback year shall be furnished along with the modified return to be furnished in respect of first of the previous years for which the agreement has been requested for in the application.
• If any appeal filed by the applicant is pending before the CIT (Appeals), the Tribunal or the High Court for a rollback year, on the issue which is the subject matter of the rollback provision for that year, the said appeal to the extent of the subject covered under the agreement shall be withdrawn by the applicant before furnishing the modified return for the said year.
• If any appeal filed by the Assessing Officer or the Principal Commissioner or Commissioner is pending before the Tribunal or the High Court for a rollback year, on the issue which is subject matter of the rollback provision for that year, the said appeal to the extent of the subject covered under the agreement, shall be withdrawn by the Assessing Officer or the Principal Commissioner or the Commissioner, as the case may be, within three months of filing of modified return by the applicant.
• The applicant, the Assessing Officer or the Principal Commissioner or the Commissioner, shall inform the Dispute Resolution Panel or the CIT (Appeals) or the Tribunal or the High Court, as the case may be, the fact of an agreement containing rollback provision having been entered into along with a copy of the same as soon as it is practicable to do so.
• In case effect cannot be given to the rollback provision of an agreement in accordance with this rule, for any rollback year to which it applies, on account of failure on the part of applicant, the agreement shall be cancelled.