With a view to bring down Tax litigation and provide Tax certainty to the foreign investors, the government has introduced the Advance Pricing Agreement (APA) in the Finance Bill 2012. While presenting the Budget 2012-13 in Lok Sabha today Shri Mukherjee said that in Globalized Economy with expanding cross border production chains, APA can significantly bring down tax litigation and provide tax certainty to foreign investors. Though APA has been included in the DTC Bill, 2010 the government has brought forward its implementation by introducing it in the Finance Bill 2012.

Advance Pricing Agreement (APA)

Advance Pricing Agreement is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. The APAs offer better assurance on transfer pricing methods and are conducive in providing certainty and unanimity of approach.

It is proposed to insert new sections 92CC and 92CD in the Act to provide a framework for advance pricing agreement under the Act. The proposed sections provide the following. –

1. It empowers Board, to enter into an advance pricing agreement with any person undertaking an international transaction.

2. Such APAs shall include determination of the arm’s length price or specify the manner in which arm’s length price shall be determined, in relation to an international transaction which the person undertake.

3. The manner of determination of arm’s length price in such cases shall be any method including those provided in sub- section (1) of section 92C, with necessary adjustments or variations.

4. The arm’s length price of any international transaction, which is covered under such APA, shall be determined in accordance with the APA so entered and the provisions of section 92C or section 92CA which normally apply for determination of arm’s length price would be modified to this extent and arm’s length price shall be determined in accordance with APA.

5. The APA shall be valid for such previous years as specified in the agreement which in no case shall exceed five consecutive previous years.

6. The APA shall be binding only on the person and the Commissioner (including income-tax authorities subordinate to him) in respect of the transaction in relation to which the agreement has been entered into. The APA shall not be binding if there is any change in law or facts having bearing on such APA.

7. The Board is empowered to declare, with the approval of Central Government, any such agreement to be void ab initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts. Once an agreement is declared void ab-initio, all the provisions of the Act shall apply to the person as if such APA had never been entered into.

8. For the purpose of computing any period of limitation under the Act, the period beginning with the date of such APA and ending on the date of order declaring the agreement void ab-initio shall be excluded. However if after the exclusion of the aforesaid period, the period of limitation referred to in any provision of the Act is less than sixty days, such remaining period shall be extended to sixty days.

9. The Board is empowered to prescribe a Scheme providing for the manner, form, procedure and any other matter generally in respect of the advance pricing agreement.

10. Where an application is made by a person for entering into such an APA, proceedings shall be deemed to be pending in the case of the person for the purposes of the Act like for making enquiries under section 133(6) of the Act.

11. The person entering in to such APA shall necessarily have to furnish a modified return within a period of three months from the end of the month in which the said APA was entered in respect of the return of income already filed for a previous year to which the APA applies. The modified return has to reflect modification to the income only in respect of the issues arising from the APA and in accordance with it.

12. Where the assessment or reassessment proceedings for an assessment year relevant to the previous year to which the agreement applies are pending on the date of filing of modified return, the Assessing Officer shall proceed to complete the assessment or reassessment proceedings in accordance with the agreement taking into consideration the modified return so filed and normal period of limitation of completion of proceedings shall be extended by one year.

13. If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the agreement applies has been completed before the expiry of period allowed for furnishing of modified return ,the Assessing Officer shall, in a case where modified return is filed, proceed to assess or reassess or recompute the total income of the relevant assessment year having regard to and in accordance with the APA and to such assessment, all the provisions relating to assessment shall apply as if the modified return is a return furnished under section 139 of the Act. The period of limitation for completion of such assessment or reassessment is one year from the end of the financial year in which the modified return is furnished.

14. All the other provisions of this Act shall apply accordingly as if the modified return is a return furnished under section 139.

These amendments will take effect from 1st July, 2012.

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September 2021