Transfer Pricing

Advance Pricing Agreement

By: Nandita Naruka.

Advance Pricing Agreement (“APA”)

The Advance Pricing Agreement is an arrangment between the Taxpayer and the

Tax Authority covering the future transactions,with a view to solve the potential

transfer pricing disputes in a cooperative manner.The Finace Act 2012

introduced provisions to enable Advance Pricing Agreements in the Indian tax

law with effect from 1 July 2012.On 31st

August,2012 the Central Board of Direct

Tax isseud a notification introducing the rule for implementing APA.

The rule enable a Taxpayer to file an application for a unilateral,bilateral or a

multilateral APA.This is a welcome step since a unilateral APA may not be able to

assure relief from double taxation to the Multinational Enterprises. The

government has shown an inclination towards bilateral APAs by questioning the

Taxpayers on the reasons for filling a unilateral APA application where Double

Taxation Avoidance Agreement exists.However, in case the bilaterial APA as

decided by the Competant Authorities is not acceptable to the Tax payer,the

Taxpayer may at its option continue with process of entering into a unilaterial

APA without benefit of mutual agreement process.

The Rules contain procedure for APA applications, information, data, and forms

that need to be filled,circumstances under which the board discontinue an APA

and compliance procedures for monitoring a concluded APA.

Person eligible to apply

Any person who –

(i) has undertaken an international transaction; or

(ii) is contemplating to undertake an international transaction,

Definations/ Expression used in the document:

competent authority in India” means an officer authorised by the Central

Government for the purpose of discharging the functions as such for matters in

respect of any agreement entered into under section 90 or 90A of the Act;

“team” means advance pricing agreement team consisting of income-tax

authorities as constituted by the Board and including such number of experts in

economics, statistics, law or any other field as may be nominated by the Director

General of Income Tax (International Taxation);

“bilateral agreement” means an agreement between the Board and the applicant,

subsequent to, and based on, any agreement referred to in rule 44 GA between

the competent authority in India with the competent authority in the other

country regarding the most appropriate transfer pricing method or the arms‟

length price;

“multilateral agreement” means an agreement between the Board and the

applicant, subsequent to, and based on, any agreement referred to in rule 44GA

between the competent authority in India with the competent authorities in the

other countries regarding the most appropriate transfer pricing method or the

arms‟ length price;

“unilateral agreement” means an agreement between the Board and the

applicant which is neither a bilateral nor multilateral agreement.

Pre-filing Consultation

Every person proposing to enter into an agreement under these rules shall,

by an application in writing, make a request for a pre-filing consultation to

the Director General of Income Tax (International Taxation).

On receipt of the request , the team shall hold pre-filing consultation with the

person referred to in rule.

The Competent Authority in India or his representative shall be associated in

pre-filing consultation involving bilateral or multilateral agreement.

The pre-filing consultation shall, among other things,-

(i) etermine the scope of the agreement;

(ii) identify transfer pricing issues;

(iii) determine the suitability of international transaction for the agreement;

(iv) discuss broad terms of the agreement.

The pre-filing consultation shall–

(i) not bind the Board or the person to enter into an agreement or initiate

the agreement process;

(ii) not be deemed to mean that the person has applied for entering into an

agreement.

Application for APA

After the pre-filing meeting,if the Taxpayer is desirous of applying for the APA, an

application would be required to be made in specified form.For continuing

transaction ,the APA can be applied for the period starting from 1st

April,2013

and for the proposed transaction,the APA can be applied at any time before

undertaking the actual transaction.

Apart from the basic details, the Taxpayer would be required to provide the

details in respect of the international transactions to be covered,type of the APA

applied for,reason for not applying for bilaterial/multinateral APA,proposed

transfer pricing methodology,detailed functional analyses,standalone and

consolidated financial statement for prior five years,etc.

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 agreement is proposed:

Amount of international transaction

entered into or proposed to be

undertaken in respect of which

agreement is proposed during the

proposed period of agreement.

Fee

Amount not exceeding Rs. 100 crores 10 lacs

Amount not exceeding Rs. 200 crores 15 lacs

Amount exceeding Rs. 200 crores 20 lacs

What documents/information are required to be provided?

The prescribed forms for the pre-filing consultation and the application for an

APA contain an exhaustive list of information that needs to be provided to the

APA Authority. Broadly, the information can be characterized as follows:

• Details of the international transactions proposed to be covered in the APA.

• Functional analysis of the Applicant and all the relevant entities with respect

to the covered transactions including a description of the business strategies

– current and future including strategies relating to R&D, production and

marketing, budget statements, projections and business plans for the future

period covered by the proposed APA, general business and industry trends.

• Choice of the transfer pricing method

• Proposed terms and conditions, and critical assumptions, for an APA

including analysis of potential influence of the proposed transfer pricing

method/ APA terms and conditions on prior years’ operation and existing tax

liabilities of the parties to the transaction

Withdrawal of application for agreement

The applicant may withdraw the application for agreement at any time

before the finalisation of the terms of the agreement.

The application for withdrawal shall be in Form No. 3CEE.

The fee paid shall not be refunded on withdrawal of application by the

applicant.

Defective application

If there is any defect in the application,the Taxpayer shall be served a deficiency

letter within one month from the date of receipt of application.The Taxpayer

shall be provided a time of fifteen days( extendable to thirty days) would be

rejected,in which case the filling fee shall be refunded to the taxpayer.

Procedure

The APA Authority after verification of the application may either decide to

proceed with the application or require the applicant to correct the

deficiencies.

The team shall process the application by way of consultation and discussion

with the applicant,by holding meetings with the applicant on such time and

date as it deem fit; call for additional document or information or material

from the applicant;visit the applicant’s business premises; or make such

inquiries as it deems fit in the circumstances of the case.

For bilateral or multilateral agreement, the authority shall forward the

application to DGIT(International Taxation) who shall assign it to one of the

teams. However, the APA agreement shall not be initiated unless the

associated enterprise situated outside India has initiated the process of an

APA with the CA in the other country.

That team shall carry out the enquiry and prepare a draft report. The DGIT

(International Taxation) (for unilateral agreement) or the Competent

Authority in India (for bilateral or multilateral agreement) and the Applicant

shall prepare a proposed mutually agreed draft agreement in terms of the

international transactions covered, the agreed methodology,determination

of arm’s length price and critical assumptions for the agreement.

The agreement shall be entered into by the Board with the applicant after

its approval by the Central Government. Once an agreement has been

entered into the DGIT (International Taxation) or the Competent Authority

in India, as the case may be, shall cause a copy of the agreement to be sent

to the CIT having jurisdiction over the assessee.

Terms of the APA

An agreement may among other things, include:

• the international transactions covered by the APA

• the agreed transfer pricing methodology, if any

• determination of arm’s length price, if any

• definition of any relevant term

• critical assumptions

Any other conditions, as may be required

Compliance post APA

The Taxpayer shall be required to file an Annual Complaince Report (ACR) to the

DGIT within 30 days of filing the return of income or 90days of entering into

APA,whichever is later.In the ACR, apart from the basic details,the Taxpayer shall

provide information such as detail of changes in the business model ,changes in

functional or risk profile,change in critical assumption vis-à-vis those agreed in

the APA.The TPO shall conduct the complainece audit based on the details

provided in ACR to ensure that the terms as agreed in the APA have been met by

the Taxpayer.The TPO shall furnish its report within six months from the end of

the month in which the ACR was submitted,to the DGIT/Competent authority.

Revision, cancellation and renewal of an APA

An APA can be revised or cancelled under any of the following circumstances:

• There is a change in any of critical assumptions or failure to meet conditions

subject to which the agreement has been entered into.

• There is a change in the law that modifies any matter covered by the

agreement.

• There is a request from the CA in the other country for revision of the APA, in

the case of a bilateral or multilateral APA.

• an APA may be cancelled where the Taxpayer has failed to file the ACR in

time, or the ACR has material errors or the Taxpayer is not in agreement with

the proposed revision to an APA.

• An APA may be revised or cancelled by the Board either suo moto after

providing an opportunity of being heard to the taxpayer or on request of the

taxpayer.

• A request for renewal of an APA may be made by the taxpayer using the

same procedure as outlined above except pre-filing consultation.

Renewing an agreement

Request for renewal of an agreement may be made as a new application for

agreement, using the same procedure as outlined in these rules except pre filing

consultation.

Contact details:

S.P.Nagrath & Co.,

A-380 , Defence colony , New Delhi -110024

Email - nandita@spnagrath.com