Published Mon, 27 Feb 2023
The Indian authorities have introduced unilateral, bilateral and multilateral APAs with effect from 1 July 2012. An APA is an agreement between the taxpayer and the tax authority on the pricing of future intercompany transactions in case of a roll-back, it would also include past years. The taxpayer and tax authority mutually agree on the transfer pricing methodology (TPM) to be applied and its application for a certain period of time for covered transactions (subject to fulfillment of critical assumptions).
In other words, An APA is an agreement between the board and taxpayer/ any person for determining ALP for specifying the manner of determining ALP in relation to international transactions. Section 92CC of The Income Tax Act, 1961 enables the board to enter into APA with any person for determining ALP or manner of determining ALP in relation to international transactions. However, the APA mechanism is not available for specified domestic transactions.
An APA may be unilateral, bilateral or multilateral, as explained below:
Unilateral: APA entered into between a taxpayer and the tax administration of the country where it is subject to taxation
Bilateral: APA entered into between the taxpayers, the tax administration of the host country and the foreign tax administration
Multilateral: APA entered into between the taxpayers, the tax administration of the host country and more than one foreign tax administrations
The Indian APA rules allow for all the three types of APAs.
There are no monetary or other conditions prescribed under the Indian APA rules for a taxpayer to be eligible to apply. However, the APA mechanism is not available for domestic controlled transactions. Per the Indian APA rules, the APA filing fees are set at relatively high amounts. Also, one of the objectives of pre-filing consultation is stated as ‘to determine the suitability of international transactions for the agreement’. Therefore, it appears that while there is no express limitation on eligibility, the government is possibly looking for taxpayers to use the programme for complex and high stake transactions. The past two seasons of APA filing have not shown too many cases of application rejection at the pre-filing consultation stage.
Any type of international transaction can be covered under an APA, e.g., transactions involving transfer of tangible and intangible properties, cost sharing, provision and receipt of services, supply of goods etc.
APAs are also possible for international transactions with permanent establishments. Further, similar to APA programmes in other countries, the Indian rules allow the taxpayer to selectively apply for an APA only for certain international transactions. In such cases, the taxpayer is required to disclose all other international transactions to the APA team. It is also pertinent to note that an APA can be applied for both continuing as well as proposed transactions.
There are four phases in an APA which is in line with global practice, as follows:
Pre filing phase: The process of an APA would start with a pre-filing consultation meeting. This meeting will be held to determine the scope of the agreement, understand the transfer pricing issues involved and to determine the suitability of the international transaction for the agreement. No fee is to be paid in this phase.
Formal submission phase: After the pre- filing meeting, if the taxpayer is desirous of applying for an APA, an application in the prescribed format would be required to be made containing specified information. The APA filing fee is payable at this stage. In the application, the taxpayer must describe critical assumptions. Critical assumptions refer to a set of taxpayer related facts and macroeconomic criteria (such as industry, business, economic conditions, etc.), the continued existence of which are material to support the position concluded under an APA. A material change in any of the critical assumptions may result in revision of the APA or even termination in extreme circumstances.
Negotiation phase: Once the application is accepted, the APA team shall hold meetings with the applicant and undertake necessary inquiries relating to the case. Post the discussion and inquiries, the APA team shall prepare a draft report which shall be provided to the Competent Authority in India (for unilateral/multilateral APA) or the Director General of Income Tax (International Tax and Transfer Pricing) (for Unilateral APA).
Finalization phase: This phase involves exchange of comments on draft APA, finalization of the APA, and giving effect to the initial years covered under the APA term that have already elapsed.
Withdrawal of APA application: APA Application can be withdrawn by the applicant at any time before the finalisation of agreement (i.e. signed by CBDT). However, fees paid during filing of application shall not be refunded.
Validity of APA [section 92CC(4)]: The APA can be entered for the period mentioned in the agreement. However, it shall not exceed 5 consecutive previous years.
Binding effect of APA [section 92CC(5)]: APA, once entered (i.e. signed by CBDT) shall be binding on the person in whose case agreement has been entered and income tax authorities in respect of the international transaction undertaken by the said person. However, the APA shall not have binding effect if:
a. There is a change in law or facts having effect on the agreement.
b. The APA has been obtained by the person (if board finds so) by way of fraud or misrepresentation of facts.
Annual Compliance Report: Assessee is required to furnish annual compliance report (in form 3CEF) to Director General of Income Tax (International Taxation) within 30 days of the due date of filing of income tax return or within 90 days of entering into the agreement, whichever is later, for each year covered under the agreement.
Compliance Audit of agreement: Transfer pricing officer is obliged to carry out compliance audit of the agreement for each year (covered under the agreement) on the basis of compliance audit report submitted by the assessee. The compliance audit report shall be submitted within 6 months from the end of the month in which annual compliance report is submitted by assessee.
The APA Agreement can be revised by board (either Suo moto or on request of the assessee or DGIT or competent authority) in following circumstances:
a. Change in critical assumptions or failure to meet an condition of agreement.
b. Change in law that modifies any matter which renders the agreement non-binding.
c. Request from competent authority from another country (in case of bilateral or multilateral agreement).
Agreement can be cancelled by board in the following circumstances:
a. Failure by assessee to comply with terms of agreement (ascertained by compliance audit report).
b. Assessee has failed to furnish an annual compliance report.
c. Annual compliance report furnished by assessee contains material errors.
d. Assessee is not in agreement with the revision proposed.
In order to reduce pending litigations, income tax law provides provision for roll back mechanisms under the APA scheme. Roll back provisions means application of APA terms and conditions from the years prior the year of application.
Income tax act allows application of APA terms from 4 years prior to the year in which application for APA is made by filing form 3CEDA along with application of APA. In case an applicant applies for roll back provisions, he has to compulsory opt for all 4 previous years (preceding the first year for which APA applies).
1. Income tax return for roll back year has been furnished before due date specified in section 139(1) (i.e. return should not be belated)
2. Audit report under section 92E has been furnished in respect of international transactions.
Roll back provisions cannot be opted in case determination of ALP for a particular roll back year is under appeal before Appellate tribunal and order has been passed before signing of agreement. Further, application for roll back provision should not have an effect of decrease in income/ increase of loss as declared in return of income of the said year.
1. In case taxpayer has furnished the income tax return (for any assessment year to which APA applies) before the date of entering into the agreement, then to comply with APA, he has to furnish a modified return within 3 months from the end of the month in which the APA has been entered into.
2. In case the assessment for the period covered by APA is completed, then AO will pass an order modifying total income as per APA within 1 year from the end of the financial year in which modified return is furnished.
3. In case the assessment for the period covered by APA is pending with AO, then AO needs to proceed with assessment taking into consideration the modified return furnished by assessee. The period of limitation for completion of assessment in this case will be extended by 12 months.