OVERVIEW
Transfer Pricing provisions were introduced in India in 2001 which provided the determination of Arm’s Length Price in case of international transactions taking place between Associated Enterprise. In order to provide tax certainty and unanimity in international transactions, the Finance Act, 2012 introduced the concept of “Advance Pricing Agreement” (APA) in section 92CC and 92CD of Income Tax Act, 1961 which came into effect from 1.7.2012. The APA process is voluntary and will supplement appeal and other DoubleTaxation Avoidance Agreement (DTAA) mechanism for resolving transfer pricing disputes. The Board has prescribed an “Advance Pricing Agreement Scheme” (Rules 10F to 10T of Income Tax Rules, 1962) in this regard in notification No. 36/2012 dated 30.08.2012.
ADVANCE PRICING AGREEMENT (S.92CC)
APA is an agreement between the Board and the Taxpayer which determines in advance the ALP or the specific manner of determination of ALP or both in relation to International Transactions. APA once entered shall be binding the taxpayer and the Board. The APA can be for a maximum of 5 consecutive years. Such APA entered shall be declared as void-ab-initio if it is signed by fraudulent means and misrepresentation. The Central Board of Direct Taxes (CBDT) must get the approval from Central Government before declaring any APA to be void.
PERSON ELIGIBLE TO ENTER INTO APA
Any person is said to be eligible for entering into APA-
a. Any person who carries out international transaction.
b. Any person who is contemplating to carry out international transaction.
TYPES OF APA
There are three types of APA,
1. Unilateral Agreement
2. Bilateral Agreement
3. Multilateral Agreement
The Unilateral APA is an agreement between the Board and the applicant and does not involve any agreement with the treaty partner. Therefore, it does not guarantee the ALP or Transfer Pricing Method determined under an APA being accepted by the other country.
In Bilateral APA, the applicant is required to make an application with the competent authority of India and simultaneously the applicant or its AE should apply to the competent authority of the other country. The two competent authorities are required to reach an arrangement through Mutual Agreement Procedure (MAP) negotiation. This arrangement is required to be accepted by the applicant before a bilateral APA can beentered into.
In multilateral APA, the applicant is required to make an application with the competent authority of India and simultaneously the applicant or its AE should apply to the competent authority of the other countries which are relevant for such a 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 applicant.
ADVANTAGES OF APA
a. provides tax certainty with regard to determination of ALP of the international transaction with respect to which the APA has been entered.
b. reduces the risk of potential double taxation through bilateral or multilateral APA.
c. reduces compliance cost by eliminating the risk of transfer pricing audit and resolving long drawn and time-consuming litigation.
d. reduces the burden of record keeping, as the taxpayer knows in advance the required documentation tobe maintained to substantiate the agreed terms and conditions of the agreement.
APA BOARD
i. Board consists of-
a. One Commissioner
b. Four Additional Commissioner
c. Four Deputy Commissioner
ii. The Competent Authority of India is the Joint Secretary of Ministry of Finance and their representatives will be one Director and two Secretaries.
PROCEDURE TO BE FOLLOWED IN APA (RULES 10G-10H of IT RULES, 1962)
i. Pre-filing consultation (R.10h)
Before filing APA, the Taxpayer is required to request for a pre-filing consultation by applying to the Director General of Income Tax (DGIT) of International Taxation. The issues dealt in pre consultation are-
a. Determination of nature and scope of the Agreement
b. Identify the Transfer Pricing issues like FAR Analysis
c. Proposed Transfer Pricing Method and determination of ALP
d. Details of other International Transactions. The outcome of pre-filing consultation is not binding the taxpayer. The request for Pre- filing consultation is to be given in Form. 3CEC.
ii. Furnishing of APA application (R.10 I):
After pre-filing consultation, the taxpayer gets some stability and he may apply to APA in Form. 3CED. Theapplication fees will be-
If the amount does not exceed 100crores- 10 lakhs If the amount does not exceed 200crores- 15 lakhs If theamount exceeds 200 crores- 20 lakhs.
iii. Withdrawal of APA application (R.10 J):
The Taxpayer may withdraw the application any time before it gets finalized by the Board by furnishing inForm. 3CEE. In such case the application fee paid will be refunded.
iv. Acceptance or rejection of APA application:
If the application is defective or it does not have relevant document attached within the time allowed or the application are not in accordance with R.10 H, the application may be rejected after being heard from the applicant. The fees paid will also be refunded in such case.
v. Action by taxpayer, Assessing officer, Transfer pricing officer:
Till the application gets accepted, the AO and TPO must carry out the assessment process and audit process for that relevant Assessment Year. As the taxpayer has filed for APA will not have any impact on the actions taken by AO and TPO and the taxpayer must maintain all necessary documents required for audit.
vi. Amendment to APA(R.10 N):
Before finalizing the APA, amendments can be made in writing by paying additional fees. Amendment here refers to alteration only.
vii. Examination and analysis of APA application (R.10 L):
The Board and the Competent Authority have the power to hold meetings and call for additional documents, visit the premises of the applicant for approving the application for APA.
viii. Annual Compliance Report (R. 10 O):
The assessee must file an Annual Compliance Report in Form. 3CEF to DGIT (International taxation) for every year covered in APA. It should be filed within 30 days from due date of filing IT Returns for that assessment relevant to the previous year or within 90 days of entering into the agreement (whichever is later).
ix. Compliance audit report(R. 10 P):
This is to be carried out by the Jurisdictional Transfer Pricing Officer (TPO) to ensure compliance with APA and application of Transfer Pricing Methods and submit it to the DGIT (International Taxation) in case of Unilateral APA and to the Competent Authority of India in case of Bilateral and Multilateral APA.
x. Cancellation of APA (R.10 R):
The APA will be cancelled if Annual Compliance Report is not filed, APA has errors and mistake. The requestfor cancellation will be given in writing with reason and opportunity if being heard is given. Formal communication about cancellation of APA is also given to AO and Transfer pricing officer.
xi. Revision of APA (R. 10Q):
Revision shall be initiated by the taxpayer himself or by the Board or DGIT for change in law for the timebeing. If the taxpayer agrees, the procedure as regard to original agreement shall be repeated. If the taxpayer does not agree to the revision of APA, then it will give rise to cancelling of APA by the Board.
xii. Renewal of APA (R.10 S):
Renewal of APA follows same procedure by initiating a new application after the expiry of the existing APA. Fee is applicable as to a new application.
ROLLBACK PROVISION
This provision was introduced by the Government on 10.7.2014 through the Finance Act, 2014. This rollback provision gives tax certainty for 9 years (5conseutive years+4previous years) in which the APA is entered. This shall be applicable if Form. 3CEDA is furnished along with extra 5 lakhs as additional fees.
EFFECTS OF APA (S. 92CD)
1. Returns to be filed prior to the date of entering into APA.
2. Modified Returns must be filed within 3 months of entering into APA.
3. Modified Returns shall be deemed to be a return u/s 139 of IT Act, 1961.
STATISTICAL REPORT ON APA’S IN INDIA
Italy was the first Country to come up with APA in 1987 and USA in 1992 and China in 2005.
From 2012 to 2019, there were 1155 APA Applications were filed, out of which 271 applications are in force, 82 applications were disposed off and 802 are still under process.
India has APA with other Countries through AE’s
1. USA-29, 2. UK-17, 3. SINGAPORE- 16,
4. GERMANY-14, 5. CHINA- 12
CONCLUSION
The object of introducing APA's are achieved as it resolves the transfer pricing disputes. The APA's are verymuch significant in determining the ALP methods for the International Transactions in advance, it is a boon for the taxpayers as they have clarity and certainty in tax payments in India. The APA works well as it also applies retrospectively (rollback) for the transactions which was not taxed earlier. As APA’s are entered the compliance procedure in determining ALP has reduced and saves the time of AO and TPO.
SUGGESTIONS
i. As many Countries have no or less application fees for APA, India might also consider in revising the application fees.
ii. As it increases Revenue to the Government, the pending APA can be signed of which might result in growth of economy and International Taxation.
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