Evolution of advance pricing agreement concept in India
The transfer pricing framework in India has been introduced through Finance Act, 2001 which requires determination of Arm Length Price (ALP) for all the international transaction between associated enterprises. Since then, the ALP determination has been the matter of long aged and numerous disputes between department of revenue and taxpayer. To minimise these disputes, the concept of advance pricing agreement has been introduced in India by Finance Act, 2012 through insertion of section 92CC and 92CD read with rule 10F to 10G and 44GA.
What is Advance Pricing Agreement?
As per OECD transfer pricing guidelines, APA (or arrangements) is 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. In other words, an APA is an agreement between board and taxpayer/ any person for determining ALP for specifying the manner of determining ALP in relation to international transaction.
Section 92CC of income tax act, 1961 enables the board to enter into APA with any person for determining ALP or manner of determining ALP in relation to international transaction.
Procedure for application of APA: (Rule 10I)
1. Person (who has undertaken international transaction or who is expected to undertake international transaction) may furnish an application in form 3CED to Director General of Income Tax (International Taxation) in case of unilateral agreement and to Competent Authority of India in case of bilateral or multilateral agreement.
2. Timing for filing of application:
a) Before undertaking the international transaction (in case of non-recurring transaction)
b) Before first day of previous year (in case of recurring transactions).
3. Pre-filing Consultation: Since the application of advance pricing agreement involves huge amount of fees, law contains a provision whereby a person anticipating to enter into APA with board has an option to make a request in form 3CEC to Director General of Income Tax (International Taxation) for determining scope of agreement, identifying TP issues, discuss broad terms of agreement, determining suitability of international transaction for agreement. This will enable the person to decide whether to file application for APA or not and for which type of transactions, APA to be filed. This will neither bind the person/ board to enter into any kind of agreement nor will be considered as an application for APA.
4. Board shall obtain approval of Central Government to make this agreement a valid APA as per the requirements of section 92CC(1).
Fees for Application of APA
|Value to transaction for which APA is proposed||Fees Amount|
|Less than INR 100 Crores||INR 10 Lakhs|
|More than INR 100 Crores but upto INR 200 Crores||INR 15 Lakhs|
|More than INR 200 Crores||INR 20 Lakhs|
Withdrawal of APA application
Application can be withdrawn by the applicant at any time before the finalisation of agreement (i.e. signed by CBDT). However, fees paid during filing of application shall not be refunded.
Validity of APA [section 92CC(4)]
The APA can be entered for the period mentioned in the agreement. However, it shall not exceed 5 consecutive previous years.
Binding effect of APA [section 92CC(5)]
APA, once entered (i.e. signed by CBDT) shall be binding on the person in whose case agreement has been entered and income tax authorities in respect of the international transaction undertaken by the said person.
However, the APA shall not have binding effect if:
a. There is a change in law or facts having effect on the agreement.
b. The APA has been obtained by the person (if board finds so) by way of fraud or misrepresentation of facts. In this case, board is having the power to declare the agreement as void ab initio (with the approval of central government). All provisions of the act shall apply as if there were no APA entered from starting. Period of limitation for assessment/ reassessment by Assessing officer will be extended by the period starting from date of entering into agreement and ending on date on which agreement is declared void ab initio.
Annual compliance report and Compliance audit [Rule 10-O and 10-P]
1. Assessee is required to furnish annual compliance report (in form 3CEF) to Director General of Income Tax (International Taxation) within 30 days of the due date of filing of income tax return or within 90 days of entering into the agreement, whichever is later, for each year covered under the agreement.
2. Compliance Audit of agreement: Transfer pricing officer is obliged to carry out compliance audit of the agreement for each year (covered under the agreement) on the basis of compliance audit report submitted by the assessee. The compliance audit report shall be submitted within 6 months from the end of the month in which annual compliance report is submitted by assessee.
Revision and Cancellation of APA
1. Revision of agreement [Rule 10-Q]: Agreement can be revised by board (either Suo moto or on request of the assessee or DGIT or competent authority) in the following circumstances:
a. Change in critical assumptions or failure to meet ant condition of agreement.
b. Change in law that modifies any matter which renders the agreement non-binding.
c. Request from competent authority from other country (in case of bilateral or multilateral agreement).
2. Cancellation of agreement: Agreement can be cancelled by board in the following circumstances:
a. Failure by assessee to comply with terms of agreement (ascertained by compliance audit report).
b. Assessee has failed to furnish annual compliance report.
c. Annual compliance report furnished by assessee contains material errors.
d. Assessee is not in agreement with the revision proposed.
Roll Back Provisions [section 92CC(9A)]
In order to reduce current pending litigations, income tax law provides provision for roll back mechanism under the APA scheme. Roll back provisions means application of APA terms and conditions from the years prior the year of application. Income tax act allows application of APA terms from 4 years prior to the year in which application for APA is made by filing form 3CEDA along with application of APA. In case applicant applies for roll back provisions, he has to compulsory opt it for all 4 previous years (preceding the first year for which APA applies).
Applicant has to pay a fees of INR 5 Lakhs along with application in form 3CEDA.
Conditions for applying for Roll back provisions
1. Income tax return for roll back year has been furnished before due date specified in section 139(1) (i.e. return should not be belated)
2. Audit report under section 92E has been furnished in respect of international transactions.
Non-Applicability of Roll back provisions
Roll back provisions cannot be opted in case determination of ALP for a particular roll back year is under appeal before Appellate tribunal and order has been passed before signing of agreement. Further, application for roll back provision should not have an effect of decrease in income/ increase of loss as declared in return of income of the said year.
Effect to APA [section 92CD]
1. In case taxpayer has furnished the income tax return (for any assessment year to which APA applies) before the date of entering into the agreement, then to comply with APA, he has to furnish a modified return within 3 months from the end of the month in which the APA has been entered into.
2. In case the assessment for the period covered by APA is completed, then AO will pass an order modifying total income as per APA within 1 year from the end of the financial year in which modified return is furnished.
3. In case the assessment is for the period covered by APA is pending with AO, then AO need to proceed with assessment taking into consideration the modified return furnished by assessee. The period of limitation for completion of assessment in this case will be extended by 12 months.
Maturity of APA over the years
1. Total 1165 applications have been filed since its launch.
2. Out of these, 320 applications have been signed till FY 19-20 (updated data till Dec 2019)
3. Key transactions mostly include softwares, royality, intra-group financing, automotive sector among others.
Key amendment by Finance Act 2020 [in section 92CC(1)]
Going forward, APA can also be applied for determining business connection in India (under section 9(1)(i)) or specifying the manner in which said income is attributable to operations carried out in India.