Advance Pricing Agreement (APA) Programme of India
Annual Report (2016-17)
Central Board of Direct Taxes April 2017
ANNUAL REPORT ON INDIA’S ADVANCE PRICING AGREEMENT (APA) PROGRAMME – 2016-17
Advance Pricing Agreement (APA) programmes are operational in a number of countries since long. Many more countries are in the process of establishing such programmes. The primary goal of such programmes is to provide certainty to taxpayers in respect of the transfer price of the cross-border transactions undertaken by such taxpayers with their group entities. Rapid growth in international trade through an increasing number of Multi National Enterprises (MNEs) has given rise to numerous tax disputes on the issue of transfer pricing. An APA is a mechanism to resolve transfer pricing disputes in advance, i.e., before the cross-border related party transaction actually takes place. The transfer price of goods and services transacted between group entities is decided in advance by the tax authorities and the taxpayers, so as to prevent any dispute arising from such transfer pricing.
The Advance Pricing Agreement (APA) programme in India was launched in 2012 vide the Finance Act, 2012 through the insertion of Sections 92CC and 92CD in the Income-tax Act, 1961. These statutory provisions, effective from 1st July, 2012, lent the legal backing to the CBDT to enter into Advance Pricing Agreements (APAs) with taxpayers for a maximum period of 5 years in respect of international transactions between Associated Enterprises (AEs) to determine the Arm’s Length Price (ALP) or to specify the manner in which the ALP is to be determined. It was stipulated that the detailed scheme of the APA would be separately notified by the CBDT.
Vide notification no. 36/2012 [F. No. 133/5/2012-SO(TPL)]/SO 2005 (E), dated 30th August, 2012, the APA Scheme [Rules 10F to 10T] was inserted in the Income-tax Rules to operationalize the APA programme. Thus, the Indian APA programme, which commenced from 1st July, 2012, actually became functional and operational from 30th August, 2012 with the notification of the rules. The rules lay down the detailed procedures for filing of pre-filing consultation application; pre-filing consultation; payments of fees; filing of APA application; processing of APA application; withdrawal of APA application; terms and conditions of APA; filing of Annual Compliance Report; Compliance Audit; revision, cancellation and renewal of APA; etc.
To provide clarity to taxpayers on a number of issues concerning the APA programme, the CBDT issued a booklet containing guidance on the APA programme and answers to Frequently Asked Questions (FAQs) as part of its Taxpayers’ Information series.
Roll-back of APAs was announced by the Government on 10th July, 2014. The necessary legislative changes in this regard were carried out through the Finance (No. 2) Act, 2014. The Income-tax Rules for implementing the Roll-back provisions were notified on 14th March, 2015 and the existing APA Scheme got amended accordingly. The Rollback provisions are applicable for a maximum of four years prior to the first year of the APA period. Thus, a taxpayer would be able to have certainty in matters of transfer pricing for a maximum period of 9 years by applying for an APA with Rollback provisions. Circular No. 10 of 2015 was issued by the CBDT on 10th June, 2015 to provide clarity on Rollback issues in the form of answers to FAQs.
Under our APA programme, APAs can be multilateral or bilateral (involving CBDT and the tax authorities of one or more countries) or unilateral (involving the CBDT only). Over the last 5 years, more than 800 applications have been filed in India. Majority of these applications (about 85%) are for unilateral APAs between the Indian taxpayer and the CBDT. Till 31 st March, 2017, 152 agreements have been entered into (141 unilateral and 11 bilateral).
The APA applications are processed and analysed by dedicated APA teams working under the overall supervision of Pr. CCIT (International Taxation & Transfer Pricing). Each APA team is headed by a Commissioner of Income-tax and the team also comprises Addl./Joint Commissioners of Income-tax and Deputy/Asst. Commissioners of Income-tax. Presently, there are two APA teams and the APA offices are located at Delhi, Mumbai and Bengaluru.
In respect of unilateral APAs, the position papers developed by the APA teams are approved by the Pr. CCIT (International Taxation & Transfer Pricing) and sent to the Central Board of Direct Taxes [CBDT] for approval. In the CBDT, officers working in the Foreign Tax & Tax Research (FT & TR-I and II) Divisions of the CBDT examine and process the position papers. Joint Secretary, FT & TR-I and FT & TR-II further process the position papers and send it for final approval of the designated Member of the CBDT. The Member approves the final negotiating position to be adopted by the APA teams. Once the negotiation is complete, a draft Agreement is sent to the CBDT for approval before the Agreement is entered into between the Board and the taxpayer. On behalf of the Board, the Agreements are entered into by either Joint Secretary, FT & TR-I or Joint Secretary, FT & TR-II.
In respect of bilateral APAs, once the position papers are sent to the FT & TR-I & II Divisions by the Pr. CCIT (International Taxation & Transfer Pricing), the Competent Authority of India (either Joint Secretary, FT & TR-I or Joint Secretary, FT & TR-II depending on the country with which the bilateral APA is to be negotiated under the Tax Treaty) has to initiate discussions with his/her
counterpart in the other country. The officers in the FT & TR-I & II Divisions of the CBDT working with the Competent Authority examine the position papers and prepare the position of the Indian Competent Authority. The same is shared with the Competent Authority of the other country. Once positions have been exchanged, the Competent Authorities of both the concerned countries discuss and negotiate the terms and conditions of the APA. If they reach an understanding, then a Mutual Agreement, containing the terms and conditions of the APA, is entered into by the Competent Authorities of both countries. Thereafter, each country has to enter into an Agreement with its own taxpayer. On the Indian side, a draft Agreement is prepared in consultation with the Indian taxpayer and the same is submitted for the approval of the designated Member in the CBDT. After approval, the APA is entered into by either Joint Secretary, FT & TR-I or Joint Secretary, FT & TR-II (the concerned Competent Authority of India) with the taxpayer on behalf of the CBDT.
This Annual Report is an initiative of the CBDT to bring into the public domain various statistical and qualitative aspects of India’s APA programme, with a view to encouraging discussion and debate amongst taxpayers, policy makers, media, economists, etc. on the strengths and weaknesses of the programme. This is the first such Annual Report by CBDT on one of its programmes and that lends uniqueness to the report. The first Annual Report on the APA programme could not have been published for a year better than 2016-17, a year in which the CBDT managed to enter into 88 APAs. This is a phenomenal achievement by the CBDT and its officers working in the Foreign Tax & Tax Research Division and in the APA teams at the field level [comprising the Principal CCIT (IT & TP), APA Commissioners, Additional/Joint Commissioners and Deputy/Assistant Commissioners]. The CBDT acknowledges the cooperation and efforts of the applicants and their consultants in making the APA programme a success.
This Annual Report is also unique because it actually condenses the first five years of the programme (1st July, 2012 to 31st March, 2017) into one report. This was necessary to lend proper perspective to the programme and also to cover all the years in one document. It would be the CBDT’s endeavour to come out with regular Annual Reports every year henceforth.