Advance Pricing Agreements and its Latest Developments

This article is about Advance Pricing Agreements (APA) provisions. Mainly it will cover the basic meaning of Advance Pricing Agreement, types of Advance Pricing Agreement, objectives of Advance Pricing Agreement and number of Advance Pricing Agreement signed by India.

What is an Advance Pricing Agreement (APAs)?

According to Indian Tax Laws, it is an agreement between the Central Board of Direct Taxes (CBDT) and any person, which determines, in advance, the arm’s length price or specifies the manner of the determination of arm’s length price (or both), in relation to an international transaction.

The Organization for Economic Co-operation and Development (OECD) in its transfer pricing guidelines, defines an APAs in the following words –

“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”. 

Once an APA has been entered into with respect to an international transaction, the arm’s length price with respect to that international transaction, for the period specified in the APA, will be determined only in accordance with the APA.

Objective of APAs 

APAs can be applied for various international transactions:

• To purchase or sale of raw materials, finished goods,
• To provide services,
• To extend financial assistance,
• To transfer and use of tangible/intangible assets, etc.

Types of Advance Pricing Agreement (As per Rule 10F)

1. Bilateral agreement –

It 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 authority in the other country regarding the most appropriate transfer pricing method or the arms’ length price.

2. Multilateral agreement –

It 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

3. Unilateral agreement –

It means an agreement between the Board and the applicant which is neither a bilateral nor multilateral agreement

Who is Eligible to apply for Advance Pricing Agreement?

Any person who has satisfied the following conditions will be eligible to apply for APA as per Rule 10G:

(i) He has undertaken an international transaction or

(ii) He is contemplating to undertake an international transaction

What is Pre- filing consultation for Advance Pricing Agreement?

• This is covered under Rule 10H
• It is done before filing formal application for APA for assessing the possibility
• It is mandatory and without any fees applied in Form 3CEC to Director General of Income-tax (International Taxation).
• On receipt of the request in Form No. 3CEC, the team shall hold pre-filing consultation with the person.
• 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 determine following things:

(i) The scope of the agreement;

(ii) Identify transfer pricing issues;

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

(iv) Broad terms of the agreement.

• The pre-filing consultation will:

(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.

Some Important Points regarding Advance Pricing Agreement:

• The agreement shall be valid for period not exceeding five consecutive previous years as may be specified in the agreement.
• The advance pricing agreement entered into shall be binding—

(a) on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into and

(b) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

• The agreement shall not be binding if there is a change in law or facts having bearing on the agreement so entered.
• The Board may with the approval of the Central Government by an order declare an agreement to be void ab initio if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts.

Latest Developments in Advance Pricing Agreement

The Central Board of Direct Taxes (CBDT) entered into 300^th  Advance Pricing Agreements (APAs) with Indian taxpayers in the month of September, 2019. Some of the APAs signed had rollback provisions also.

The 300th APAs signed in the month of September, 2019 pertain to diverse sectors of the economy.

The CBDT expects more APAs to be signed in the near future.

Source: CBDT 

(Republished with Amendments)