All about Advance Pricing Agreement (APA)

Section 92CC and 92CD of Income Tax Act, 1961
Rule 10F to 10T of Income Tax Rules, 1962
FAQs and Guide issued by tax department

PPT prepared on 23 June 2017
CA Nisha Jhawar

Section 92CC – APA

• The CBDT, with Central Government’s approval, enter into APA with the applicant assesse determining the ALP and/or methods for determining ALP which is to be followed notwithstanding anything contained in section 92C / 92CA of the Act.
• The maximum term of an APA is 5 years and 4 years rollback
• APA is binding on applicant assesse and Pr. CIT / CIT and sub-ordinate income tax authorities; APA is not binding if there is change in law or facts having bearing on the agreement
• If the agreement is entered into by fraud/misrepresentation of facts, then government can declare it as void-ab-initio post which all the provisions of act will apply as if no agreement had been entered
• In case of above, period of entering into agreement and passing of order declaring it void shall be excluded from the period of limitation and if it is less than sixty days, the limitation period will be extended to 60 days

Section 92CD – Effect to advance pricing agreement

• If the agreement is entered into and if any return of income has been filed prior to agreement date, the applicant is required to furnish a modified return of income in accordance and limited to agreement, within a period of three months from the end of the month in which the agreement was entered for all the years to which agreement applies
• The modified return will be treated as return filed u/s 139 for all purpose
• If assessment / reassessment completed (where the order is passed / period of issuing notice u/s 143(2) is time barred) before filing modified return, the AO shall assess/reassess/re-compute the total income in accordance with agreement; the said order must be passed within 1 year from the end of the FY in which Modified return is filed
• In cases where the assessment/reassessment is pending, it shall be done taking into consideration modified return of income filed; the period of limitation u/s 153, 153B and 144C of the Act shall be increased by 12 months for completion

Basics

• Type of APA

– Unilateral – APA between CBDT and applicant which is not a bilateral / multilateral APA

– Bilateral – APA based on agreement between India and Foreign country on MAM/ALP

– Multilateral – APA based on agreement between India and Foreign countries on MAM/ALP

• Eligibility – Any person who has

– has undertaken an international transaction

– is contemplating to undertake an international transaction

– Thus, there are no monetary or any other criteria and any type of international transaction can be covered by APA

– From above it is noticed that only “international” transaction can be covered, thus, transaction between SEZ and non-SEZ unit i.e., SDT cannot be covered by APA

Pre- filing consultation

• 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 DGIT(Intl. Tax), Delhi but consultation can take place in Mumbai (KG Mittal Hospital, Charni Road), Bangalore or Delhi
• The below is determined among other things in Pre- filing consultation:

– the nature and scope of the agreement

– identify transfer pricing issues like FAR analysis / Method / ALP

– the suitability of international transaction for the agreement

– broad terms of the agreement and manner of adjustments/variations

– Extent and nature of information needed in formal application

• The consultation is not binding either on applicant or authorities to enter into agreement
• The understanding reached will be documented and shared with applicant and it will form the basis of APA (final conclusion may not necessarily in line) and a copy shall be attached with Form 3CED
• Pre- filing can also be done on anonymous basis in which the identity of authorized representative will have to be disclosed with other necessary transaction and business operation details
• Information which discloses the identity can be left blank but same have to be provided when application for APA is made

Application for APA

• Eligible person has to make application in Form 3CED along with proof of requisite fees in triplicate for entering into APA to DGIT(Intl. Tax) for unilateral and to competent authority i.e., Joint Secretary – FT & TR-I in Ministry of Finance, Delhi for bilateral / multilateral APA
• Application has to be made before 1st day of FY of first relevant AY i.e., if APA is applicable for AY 2019-20 then application must be made before 1st April 2018, for transactions already occurred/continuing nature; in case of new transaction, before undertaking the transaction
• Even in one application, applicant can choose unilateral for some and bilateral for some transactions; application will be submitted to JS(FT & TR-I), Delhi
• If applicant admits having a PE, request can be made for PE profit attribution
• The fees is based on value/proposed value of covered transactions over the period of APA – up-to 100 cr – 10Lacs; up to 200cr – 15lacs; above 200cr – 20 lacs; fact that actual value is higher than proposed may not effect the fees
• The intrinsically linked transactions will have to be covered and fees calculated accordingly; The fees paid is non-refundable except when application is not allowed to be proceeded with due to defects in application
• Application can be withdrawn in Form 3CEE anytime before finalization but fees will not be refunded

Preliminary processing of application

• Form 3CED must be complete in all respect.. The extent of information to be provided can be negotiated during pre- filing consultation. After filing of application, a soft copy of application may have to be provided in the first meeting
• Applicant can decide which transactions to be covered. However, if authorities feel that any other transaction is intrinsically linked and cannot be bench marked independently, then they will inform applicant the need to include such other transaction as well
• There is no timeline for any stage. This can also be discussed during pre- filing
• Litigation history is referred but not mandatory to conclude APA on that basis
• Mere filing of application will not impact application of Chapter X i.e, section 92 to section 94B relating to avoidance of tax till agreement is entered into and all requisite documentation is required to be maintained
• The uncovered transactions’ assessment will not be affected by signing of APA
• In case application Form is defective / any information/document is missing / not in accordance with understanding reached in pre- filing, then a deficiency notice will be served on applicant within 30 days from application
• The applicant must remove deficiency / modify application within 15 days of service of notice or the maximum 30 days if extended by authorities
• If defects are not removed, authority can pass an order, after giving applicant an opportunity of being heard, that application can not be proceeded with and fees must be refunded to applicant
• The application cannot be rejected for any other reason

Procedure

• The APA team appointed by DGIT(Intl. tax) may :

– hold meetings with the applicant on such time and date as it deem fit

– call for additional document or information or material from the applicant

– visit the applicant’s business premises at pre- agreed date and time with sufficient notice to applicant purpose shall be only to understand the business model and to understand functional profile

– make such inquiries as it deems fit in the circumstances of the case

• Applicant may furnish additional detail/document/information
• APA team and applicant try to arrive at a negotiated settlement
• In case a mutual agreement is arrived, APA team will send a mutually agreed draft agreement to DGIT(Intl. tax), who after satisfaction will send to CBDT for consideration
• APA can be signed after approval from Central government
• Post signing, the copy of signed APA must be forwarded to jurisdictional CIT of the applicant/assessee

Terms of the Agreement

• The agreement will include, among other things, details of international transactions covered, methodology, ALP, definitions of various terms, critical assumptions (even which are not in applicant’s control- may include operational, legal, tax, financial, accounting and economic
  conditions and/or assumptions), rollback provisions etc.
• The agreement will cease to be binding in case of change in critical assumption / failure to meet conditions of agreement only if any one party has given notice to other party for cessation of binding nature
• The agreement can be revised / cancelled in above case; applicant / Board is required to give notice to other party as soon as it comes to it’s notice

Amendments to Agreement

• Applicant can request for amendment before finalization of agreement and it ill be incorporated only if the same does not alter the nature of originally filed agreement
• Amendment, if agreed to, will be given effect only if additional fees, if necessary, is paid.
• Request for conversion of unilateral into bilateral / multilateral is considered as amendment request

Revision of Agreement

• After signing of agreement, it can be revised under below circumstances:

– There is change in critical assumptions

– Failure to meet the conditions of agreement

– Change in law which modifies any covered matter but does not render it non-binding

• The agreement can be revised suo moto by CBDT only after giving applicant an opportunity of being heard and applicant agrees with revision, else the agreement will be cancelled under intimation to applicant
• If the revision request is made by applicant and the same is not acceptable to authorities, they reject the revision request by giving reasons in writing
• The procedure to be followed for revision will be same as done before finalizing the agreement i.e., applicant will have to file modified return for the period after revision within 3 months and other procedure to follow
• The revised agreement to include the date till which the original agreement is to apply and the date from which the revised agreement is to apply

Cancellation of Agreement

• The agreement can be cancelled under below circumstances :

– If compliance audit has a finding of non-compliance

– If annual compliance report is not filed in time

– If annual compliance report contains material errors

• The order of cancellation must be in writing and after giving opportunity to applicant for cancellation / non-acceptance of submissions
• The agreement can be cancelled as void ab initio for fraud / misrepresentation of facts, order shall be passed with reasons
• The order of cancellation of agreement will be intimated to AO and TPO
• Currently, no appeal procedure is available in tax act against cancellation of APA by CBDT; however, as per FAQs there is no bar on opting for constitutional remedies i.e., go to HC / SC

Renewal of Agreement

• Request for renewal can be made as new application followed with same procedure except pre- filing consultation

Annual Compliance Report and Compliance Audit

• The applicant has to submit an annual compliance report in Form 3CEF to DGIT(Intl. tax) in quadruplicate for each of the years covered by APA
• Timeline – later of : within 30 days of due date of filing of return of that year or within 90 days of entering into agreement
• TPO will carry out compliance audit of each year and submit the report to DGIT(Intl. Tax) within 6 months from the end of the month in which Annual compliance report is submitted by applicant
• TPO may require assesse to submit any data/information/ document to substantiate the compliance with agreement and critical assumptions, correctness of data and consistency of method applied
• It is specifically provided that compliance audit is not TP audit but a focuses audit to ensure compliance with terms of APA
• If there is any finding of non-compliance, then DGIT have to forward the report to CBDT for cancellation of agreement
• The regular TP audit shall not be undertaken for covered transactions
• Once APA has decided on ALP, there is no provision for acceptable variation range hence, the Alp will have to be complied as per APA

Important Points

• Unilateral agreement can be converted into bilateral / multilateral before the mutually agreed draft agreement is forwarded by DGIT to CBDT

– In that case, applicant or AE makes APA request to competent authority of other country, as the case may be

– DGIT forwards such request to competent authority of India which shall decide the possibility of bilateral in view of DTAA with the particular country and whether MAP is existent in treaty and if APA is allowed in that country

– If request is allowed, then application will be processed as bilateral application

– But, if, once the unilateral agreement is entered into, MAP benefit will not be available to applicant with respect to covered transactions

• Post signing of APA, litigation at any level must be withdrawn by assessee or department for covered transactions; further documentation is required to satisfy the compliance terms (indirectly, no penalty for not maintaining TP study)
• Confidentiality – Most countries allow sharing of APA information with on-field officers, as per dept’s guidance book, India also allows such sharing with tax department, however, there is no such explicit provision in act / rules
• Retrospective laws, only if related to APA, will have impact on concluded APA

Preparation for APA

• The following parameters are important :

– Preparation of robust transfer pricing policies

– Aligning TP policy with commercial substance

– Having Inter-Co. agreements in place and aligned to TP policy

– Strong back-up documentation

– Availability of financial projections

– Decision on sharing of information with APA team

– Having alternative plan in case APA fails

Considerations while opting for APA

– Expensiveness of audit and litigation,

– Nature of transaction and complexity; facts expected to remain same over APA period

– New transactions proposed or foreseen

Roll-back Provisions

• The Agreement may provide the determination of ALP / manner of calculation of ALP for covered transaction must be same as non-rollback years i.e., ALP can be different but method, comparability analysis, tested party to be same
• The conditions for applicability of rollback are as below :

– International transaction is same as future years in agreement i.e., of same nature with same AE and FAR analysis does not materially different from FAR validated for future years

– Application has been made in Form 3CEDA

– The return of income has been furnished within due date u/s 139(1), revised returns u/s 139(5) are allowed but late returns u/s 139(4) are not allowed

– Form 3CEB must have been filed

– Applicant does not have right to choose the years, rollback must be requested for all years in block of 4 previous AYs in which said transaction undertaken except below situations:

• If there is no transaction in any year
• some disqualification in any rollback year
• Covered transaction non-existent in any year
• Applicant fails the test of rollback conditions in any year
• Rollback provision will not apply if:

– if appeal relating to transaction has been disposed by ITAT before signing of APA

• as FAQs, if ITAT has decided on facts then it is considered as disposed whereas if ITAT has set aside / remanded back then it will be eligible for rollback.
• It is not explicitly clarified whether law based matters if disposed by ITAT and pending in HC are eligible

– if the rollback has effect of reducing the income / increasing the loss declared in return of income

• For example, if the declared income is Rs. 100, the income adjusted by the TPO is Rs. 120, and the application of the rollback results in reducing the income to Rs. 90, then the rollback for that year would be determined in a manner that the declared income Rs.100 would be treated as the final income for that year
• Additional fees for rollback is Rs. 5 Lacs
• The applicant shall file modified returns for rollback years along with the modified returns of non-rollback years with prescribed due date along with additional fees arising as a consequence. In case of concluded APA before incorporating rollback years, the time limit to file modified return for rollback years will start from the date of signing the revised APA incorporating the rollback provisions
• If any appeal is pending before CIT(A)/ITAT/HC for covered issue, it must be withdrawn before filing modified return
• Pending appeal filed by department for covered transaction must be withdrawn within 3 months of filing modified return
• In case effect cannot be given to rollback provisions because of failure of applicant then agreement is liable to be cancelled

– If the applicant does not carry out any of the above actions for any of the rollback years, the entire agreement shall be cancelled. This is because the rollback provision has been introduced for the benefit of the applicant and is applicable at its option. Accordingly, if the rollback provision cannot be given effect to for any of the rollback years on account of the applicant not taking the actions specified, the entire agreement gets vitiated and will have to be cancelled

• If MAP has been already concluded for any of the covered transactions in any of the rollback year, then rollback provisions would not be allowed for those transactions for that year; but allowed for other years or for other transactions for that year. If MAP is pending then applicant have to choose one option MAP/APA for such year
• Pending appeal filed by department for covered transaction must be withdrawn within 3 months of filing modified return
• In case effect cannot be given to rollback provisions because of failure of applicant then agreement is liable to be cancelled
• If MAP has been already concluded for any of the covered transactions in any of the rollback year, then rollback provisions would not be allowed for those transactions for that year; but allowed for other years or for other transactions for that year. If MAP is pending then applicant have to choose one option MAP/APA for such year
• Compliance audit for the rollback years would primarily be to check if the agreed price or methodology has been applied in the modified return
• Applicant can withdraw roll back application while maintaining the APA application for the future years. However, it is not possible to accept the rollback results without accepting the APA for the future years. Fees will not be refunded if a rollback application is withdrawn
• Concluded APA can be revised to provide for rollback provision with additional fees and Form 3CEDA
• In case of Merger /Demerger – Applicant company will only be allowed to enter into agreement and eligible for rollback for transactions undertaken by it. Merged companies will not be allowed to take benefit of rollback

– Illustration : if A, B and C merge to form C and C is the APA applicant, then the agreement can only be entered into with C and only C would be eligible for the rollback provisions. A and B would not be eligible for the rollback provisions.

– Illustration : if A and B merge to form a new company C and C is the APA applicant, then nobody would be eligible for rollback provisions

– Illustration : if A has applied for or entered into an APA and, subsequently, demerges into A and B, then only A will be eligible for rollback as B was not in existence in rollback years

Bilateral / Multilateral APA

• In Bilateral/multilateral APA, applicant has to make application in Form 3CED in triplicate to competent authority (CA) of India i.e., Joint Secretary (FT & TR-I), New Delhi and simultaneously applicant/AE shall apply to CA of other country/countries if APA program is allowed nd the evidence of initiation must be furnished to CA in India; The process for bilateral/multilateral can be initiated only after AE has initiated the APA process with CA of that country
• The request for Bilateral APA will be accepted by India CA only if :

– Tax Treaty exists between India and other country and it must contain article on MAP (India has MAP provisions in all tax treaties where Dorf exists incl. Italy)

– The corresponding APA program exists in that other country

– In case of transaction leading to economic double taxation due to TP adjustments, the tax treay must contain para 2 in article 9 “Associated enterprises” as per OECD guidelines as below :

• “Where a Contracting State includes in the profits of an enterprise of that State and taxes accordingly profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.”
• Indian CA will decide whether request for bilateral is possible keeping above conditions in mind, if allowed then application will be processed as bilateral APA application
• The CA in India will first ascertain the willingness of CA of other country/countries, if they are willing then negotiation will take place through MAP arrangement to reach a set of terms acceptable to both CA
• On receipt of application for bilateral APA, the CA forward the application to DGIT(Intl. tax) who appoints APA team for inquiry, analysis and preparation of “draft Indian position paper” to be submitted to CA
• On receipt of draft paper, India CA start the negotiation process with CA of other country; during the process, CA of India is free to deviate from draft Indian position paper for arriving at a negotiated settlement
• Indian CA may require further details from applicant and may conduct inquiries
• Applicant will not be part of negotiation process but it may be consulted by India CA
• After successful completion of negotiation, CA of both countries will formalize the MAP  arrangement
• Applicant must revert whether the agreement reached between CAs is acceptable with 30 days of communication to it; If the arrangement is acceptable, a mutually agreed draft agreement enumerating the result and effect of the arrangement with CA of other country which is accepted by applicant, post this a bilateral APA will be signed
• In case the agreement is not acceptable to applicant, it can choose to either continue the APA without benefit of MAP i.e., without bilateral or can withdraw the application
• In case of failure to reach an agreement, applicant will be informed – In this case, applicant will have option to convert its bilateral application into unilateral without payment of additional fees informing authorities in writing – once this option is opted, CA will forward all documents except related to CA of other country to DGIT to process it further
• In case of Multilateral APA, if negotiation with any one country fails, the applicant can choose to either go for bilateral/multilateral without involving that country or opt for unilateral
• Revision can happen only if CA of other country requests
• For cancellation, CA in India will communicate with CA of other country with reasons
• APA is transaction specific, hence there is no bar on making separate applications for unilateral / bilateral/multilateral APA for different transactions
• All other procedures timelines remain same as unilateral, only change being instead of DGIT, it will be CA of India