Advocate Kishan Bansal
I. Introduction
With the advent of Globalisation, all the major Multi National Enterprises (MNEs) have been involved in transactions consisting of transfer of goods, services, tangibles and intangibles within themselves and their affiliates. According to the World Investment Report 2020 published by the United Nations Conference on Trade and Development (UNCTAD), there has been rapid growth in the international production and the global trade, much of it being “intra-firm trade between affiliates of the same Multinational enterprise and trade within supply chains coordinated by MNEs.”[1] While the MNEs were benefitting significantly from the ease in international trade through the help of their subsidiaries incorporated in other jurisdictions, several speculations on the MNEs being involved in evading their due share of taxes were raised by the tax authorities from all around the world. Thus, in order to curb such practices, a new scheme of Transfer pricing guidelines were launched. The Transfer pricing guidelines monitor and regulate the international transactions conducted between associated enterprise/related parties and ensures if such transactions are determined at Arm’s length price or not.[2] While the Transfer Pricing guidelines promoted the principles of fair market value and helped in minimizing the leakages present in tax jurisdictions, it also lead to a lot of disputes between the enterprises and the tax authorities thereby increasing uncertainty and tax litigation throughout the world. As a result, various tax experts, academicians, investors and industrialists requested for the incorporation of Advance Pricing Agreements in the transfer pricing regime.
II. Advance pricing agreement in the Indian context
In India, the scheme of Advance Pricing Agreement (APA) was incorporated in the Transfer Pricing regime (TP) through the Finance Act, 2012. Section 92CC and 92CD read with Rule 10F to Rule 10T and Rule 44GA were inserted in the Income Tax Act, 1961 (ITA) and Income Tax Rules, 1962 (ITR) respectively by the Central Board of Direct Taxes (CBDT) which became the foundational guidelines governing the scheme of APA along with other operational aspects pertaining to APAs in India.
The Organization for Economic Co-operation and Development (OECD) has defined APA as an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time.[3] Section 92CC of the ITA defines APA as an agreement entered between the CBDT and the taxpayer which pre determines the arm’s length price or specifies the manner in which arm’s length price will be determined for all the future international transaction to be entered into by the concerned taxpayer.[4] In other words, an APA is an agreement between the tax authority and the taxpayer where the transfer pricing methodology such as method of computation, comparables and appropriate adjustments are mutually decided for all the international transaction to be entered by the taxpayer in the upcoming years. Once an APA is successfully entered into force, the arm’s length price of all the international transactions, for a stipulated period of time, is determined in accordance with the APA.
In India, the underlying idea behind the scheme of APA is to make tax administration better and efficient by encouraging taxpayers to provide all the data essential for a comprehensive transfer pricing analysis and to motivate them towards engaging a mutual agreement. With the APAs in place, they significantly reduce the taxpayer’s cost of compliance by offering them more clarity on their ALP computation, highlighting their difficulties and giving them a chance to discuss, negotiate and resolve their issues in advance before the CBDT.[5] The whole scheme, as opposed to the typical examination procedure, is designed in a manner that it helps the concerned taxpayer to voluntarily fix any existing or future disputes in a collaborative and constructive approach.[6] The scheme of APA has been looked upon as a positive approach both from the sides of the CBDT and the taxpayers. It has reduced the cost of administration for the revenue authority since after signing an APA with the taxpayer, they are no longer required to spend time and cost in reporting and evaluating whether each and every international transaction of the taxpayer is done at arm’s length price or not. During an APA, since the computation method along with several other aspects to be followed by the taxpayer are already disclosed to the revenue authority, it reduces the administration requirements need to be upheld by them. Along with the revenue authority, an APA also provides several benefits to the taxpayers itself. Since an APA is binding upon both the taxpayer and the tax authority, once successful completed, it provides greater tax certainty on the transactions involving transfer pricing guidelines. It minimizes the possibility of potential transfer pricing disputes, helps in preparation of documents efficiently since they will be in accordance with the terms of the agreements and facilitates the reporting of prospective tax obligations easier. It reduces the taxpayer’s cost of compliance by mitigation litigation on any future dispute and removing the audit threat.[7]
III. Types of Advance Pricing Agreements
As per the Indian APA regime, it could be either unilateral, bilateral, or multilateral. An unilateral APA involves an agreement between only the taxpayer and the CBDT. Since no other party in involved in the agreement, it is binding on both the parties. Under bilateral APA, the parties involved in the agreement are the taxpayer, the CBDT and the competent authority of the other country. These type of agreements are negotiated/decided through the help of mutual agreement procedure and are binding on all the parties involved in the procedure. Under multilateral APA, the parties involved are the taxpayer, the CBDT and all the competent authorities of the other countries. These type of agreements are also negotiated through the mutual agreement procedure and hence, are binding on all the parties involved in the procedure. In India, in total 1150+ applications have been filed till the year 2019.[8] The vast majority of these applications (more than 80%) are filed for unilateral APAs alone. So far a total of 421 APAs have been entered into up until 31st March, 2022, out of which over 261 were unilateral and over 37 were bilateral.[9]
IV. Procedure
Firstly, an applicant eligible to apply[10] have to make a request for a pre-filing consultation under Form No. 3CEC to the Director General of Income tax.[11] After which under Form No. 3CED, an application has to be made to the Director General of Income tax in case of unilateral APA and to the competent authority in India in case of bilateral or multilateral APA along with the necessary fees.[12] Further, the application is considered for preliminary processing where a proper vetting is conducted to clear it from any discrepancies.[13] In case of no discrepancies found, the applicant is sent for the main processing where the CBDT holds meeting with the applicant, calls for additional documents, if required and make all the necessary inquires required by them.[14] The terms of the APA must cover: (i) international
transactions covered by the agreement; (ii) agreed transfer pricing methodology; (iii) arm’s length price; (iv) definition of relevant term; (v) critical assumptions; (vi) time period and (vii) any other relevant condition.[15] In case of any amendments in the applicant, it is only allowed when the applicant makes a written request before the finalisation of the agreement.[16] Under the APA regime, the applicant is supposed to furnish an annual compliance report[17] and the transfer pricing officer has to carry out an annual compliance audit.[18] Further, the APA rules also lays procedure for rollback[19], withdrawal,[20] revision,[21] cancellation[22] and renewal of the application.[23]
V. Conclusion
Indian APA programme has made significant headway since its inception in July 2012 which can be seen by the increasing growth in number of applications filed and agreements being entered into. Transfer pricing entailed complex issues like long-drawn litigation that acted like a disincentive. APA has accomplished the twin-plank of ensuring both government and taxpayers are content with the outcome, allowing the government to reallocate resources to more meaningful tasks than audits and prolonged litigation and providing the tax payers safeguard and surety for 5-9 years over transfer pricing issues. APA scheme also provides certainty to both resident and non-resident taxpayers acting as an incentive to attract FDI which is a direct support to the increasing efforts of the government to gather support for “Make in India” initiative.
[1] World Investment Report 2020 by UNCTAD. https://unctad.org/system/files/official-document/wir2020_en.pdf.
[2] Pawan Kumar Chugan, “Advance Pricing Arrangements for International Transfer Pricing in India: Implications for MNCs and Taxation Authority” Nirma University Journal of Business and Management Studies, Vol. 4, Nos. 3 & 4, January – June 2010.
[3] OECD (2010), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010, OECD Publishing, Paris, https://doi.org/10.1787/tpg-2010-en.
[4] Section 92CC, Income Tax Act, 1961.
[5] Grant Thornton, Indian Advance Pricing Agreement Regime The Game Changer, 2012, http://gtw3.grantthornton.in/assets/Indian_APA_regime_The_Game_changer.pdf.
[6] Neeraj Bhagat & Co., Advance Pricing Agreements (APA) – A welcome step in transfer pricing disputes, Edition 2016, https://neerajbhagat.com/pdf/Advance%20Pricing%20Agreements.pdf.
[7] Ibid.
[8] Advance Pricing Agreement Programme of India, Annual Report 2018-19, Central Board of Direct Taxes, 2019.
[9] Prabhakar K.S., A Decade of India’s Advance Pricing Agreements, [2022] 137 taxmann.com 129.
[10] Rule 10G, Income Tax Rule, 1962.
[11] Rule 10H, Income Tax Rules, 1962.
[12] Rule 10-I, Income Tax Rules, 1962.
[13] Rule 10K, Income Tax Rules, 1962.
[14] Rule 10L, Income Tax Rules, 1962.
[15] Rule 10M, Income Tax Rules, 1962.
[16] Rule 10N, Income Tax Rules, 1962.
[17] Rule 10-O, Income Tax Rules, 1962.
[18] Rule 10P, Income Tax Rules, 1962.
[19] Rule 10MA, Income Tax Rules, 1962.
[20] Rule 10J, Income Tax Rules, 1962.
[21] Rule 10Q, Income Tax Rules, 1962.
[22] Rule 10R, Income Tax Rules, 1962.
[23] Rules 10S, Income Tax Rules, 1962.
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