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Advance Pricing Agreement

Date posted: Saturday 8 August 2015
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Introduction

Transfer pricing has been the bone of contention between the tax department and MNCs as the two sides have divergent views on the pricing structure of the Indian subsidiaries. The issue of transfer pricing has generated much heat in India involving MNCs operating here such as Cairn, WNS and Nokia. Disputes relating to transfer pricing between Multinational Companies (“MNCs”) and Revenue Department is a major area of litigation for resident and non-resident taxpayers. The concept of Advance Pricing Agreement was introduced in July, 2012 with the introduction of Section 92CC in the Income Tax Act, 1961 (“IT Act”). Under Section 92CC, companies could enter into an Advance Pricing Agreement (“APA”) with tax authorities for determining the arm’s length price or specifying the manner in which the arm’s length price will be determined for the next five years. Seeking to further reduce litigations related to transfer pricing, the ‘roll back’ provision under the APA was notified in October, 2014 that enabled companies to enter into APA with tax authorities for the previous four years. However the rollback provisions could not be implemented because of absence of rules. In March, 2015, the CBDT introduced rules for rollback provisions of APA. Four months after the rollback norms were notified, the Central Board of Direct Taxes (“CBDT”) signed first rollback unilateral advance pricing agreement (APA) on 3rd of August, 2015. This article will take you through the rules for rollback provisions of APA and the details of the press release regarding the signing of the first rollback APA.

What is APA?

An advanced pricing agreement or APA determines the transfer pricing methodology and taxation rate on an international transaction for the next 5 years in advance. While under the APA introduced in 2012, companies could enter into an agreement with tax authorities for the next five years, the roll-back norms give protection for the previous four years as well – a total of nine years.

Types of APA

APAs are mainly unilateral, bilateral and multilateral.

  1. Unilateral APAs is signed with multinationals that belong to countries with which it doesn’t have tax treaties. Unilateral APA is an agreement between CBDT and the applicant. It does not involve any other party.
  2. Bilateral APAs involve the taxpayer, its local subsidiary, CBDT and the tax authority of the country in which the company is headquartered.
  3. Multilateral APAs involve the taxpayer, two or more of its subsidiaries or associated enterprises in different foreign countries, CBDT, tax authority of the country in which the tax payer is located and the tax authorities of the subsidiaries or associated enterprise.

Advantages of APA

  1. APA provides certainty with regards to the calculation of the Arm’s length Price for international transactions
  2. It provides clarity to foreign investors on tax issues
  3. It removes the need for costly, time consuming litigation
  4. It reduces compliance cost by eliminating the risk involved in transfer pricing audit

Roll Back of the APA

  1. According to the rules issued with relation to the rollback provision in APA, the companies which have entered into an APA for future transaction will be able to apply the same agreement for the previous four years (“Rollback Year”) as well, subject to certain conditions.
  2. The APA may contain rollback provision in respect of an international transaction subject to the following:
    • The international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies
    • The return of income for the relevant Rollback Year has been or is furnished by the applicant before the due date as per Section 139(1) of the IT Act.
    • The report in respect of the international transaction had been furnished in accordance with section 92E of the IT Act
    • The applicability of rollback provision has been requested by the applicant for all the Rollback Years in which the said international transaction has been undertaken by the applicant
    • The applicant has made an application seeking rollback in Form 3CEDA, along with proof of payment of an additional fee of Rs 5 lakhs.
  3. The rollback provision shall not be provided in the APA in respect of an international transaction for a Rollback Year, if
    • The matter is the subject of appeal before the income tax appellate tribunal (ITAT) or if any other tribunal has passed an order disposing off such an appeal at any time before the signing of the APA.
    • The application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year.
  4. Where the rollback provision specifies the manner in which arm’s length price shall be determined then such manner shall be the same as the manner provided for determination of arm’s length price of the same international transaction of any previous year to which the agreement applies, not being a rollback year.
  5. Once the rollback provisions are effective in the APA, the applicant can furnish a modified return in respect of the Rollback Years.
  6. If any appeal is filed by the applicant is pending before Commissioner (Appeals), Appellate 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 applicant shall withdraw the said appeal to the extent of the subject covered under the APA before furnishing the modified return
  7. If any appeal filed by the Assessing Officer or the Principal Commissioner or Commissioner is pending before the Appellate Tribunal or the High Court for a rollback year, on the issue which is subject matter of the rollback provision for that year, the Assessing Officer or the Principal Commissioner or the Commissioner, as the case may be, shall withdraw such appeal to the extent of the subject matter covered under the APA, within three months of filing of modified return by the applicant.

Signing of APAs by CBDT

  1. The CBDT has entered into two unilateral Advance Pricing Agreements (APAs) on 3rd August, 2015 with two MNCs which includes the first APA with a “Rollback” provision. The Rollback APA was signed between a US multinational and the tax department and is aimed at resolving knotty, tax disputes by listing rules and rates under which intra-group transactions will be taxed. With the conclusion of this APA, it will become clear to multinational companies (MNCs) in India that they can achieve certainty around transfer-pricing for a nine-year period.
  2. So far, the CBDT has signed 14 APAs, of which 13 are unilateral APAs and one is a bilateral APA.
  3. The Government is committed to conclude a large number of APAs to foster an environment of tax cooperation and certainty.
  4. Currently a number of unilateral as well as bilateral APAs with Competent Authorities of UK, Japan etc. are at advanced stage of negotiations.
  5. A Framework Agreement was also recently signed with US under the Mutual Agreement Procedure (MAP) provision of the India-US Double Taxation Avoidance Convention. About 200 past transfer pricing disputes between the two countries in Information Technology Services and Information Technology enabled Services segments are expected to be resolved under this Agreement during the current year. So far, 35 disputes have been resolved and another 100 are likely to be resolved in the next three months. The Framework Agreement with the US opens the door for signing of bilateral APA with the US.

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