Rule 114 of the Draft Income-tax Rules, 2026 establishes the framework for conducting a compliance audit of an Advance Pricing Agreement (APA). The Transfer Pricing Officer (TPO) having jurisdiction over the assessee is required to carry out a compliance audit for each year covered under the agreement. For this purpose, the TPO may call upon the assessee to substantiate compliance with the agreement’s terms, including satisfaction of critical assumptions, correctness of supporting data, and consistent application of the agreed transfer pricing methodology. The assessee may also be required to furnish relevant documents and information to demonstrate compliance. After examination, the TPO must submit a compliance audit report for each covered year to the Principal Chief Commissioner of Income-tax (International Taxation) in unilateral cases, or to the competent authority of India in bilateral or multilateral cases. If non-compliance is found requiring cancellation, the report is forwarded to the Board. The compliance audit report must be completed within six months from the end of the month in which the Annual Compliance Report is received. Notably, once an APA is in force, regular audit of covered transactions is not undertaken unless the agreement is cancelled.
Extract of Rule No. 114 of Draft Income-tax Rules, 2026
Rule 114
Compliance Audit of the agreement.
(1) The Transfer Pricing Officer in respect of arms’ length price and having the jurisdiction over the assessee shall carry out the compliance audit of the agreement for each of the year covered in the agreement.
(2) For the purposes of sub-rule (1), the Transfer Pricing Officer may require—
(i) the assessee to substantiate compliance with the terms of the agreement, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method;
(ii) the assessee to submit any information, or document, to establish that the terms of the agreement has been complied with.
(3) The Transfer Pricing Officer shall submit the compliance audit report, for each year covered in the agreement, to the Principal Chief Commissioner of Income-tax (International Taxation) in case of unilateral agreement and to the competent authority of India, in case of bilateral or multilateral agreement, mentioning therein his findings as regards compliance by the assessee with terms of the agreement.
(4) The Principal Chief Commissioner of Income-tax (International Taxation) shall forward the report to the Board in a case where there is finding of failure on part of assessee to comply with terms of agreement and cancellation of the agreement is required.
(5) The compliance audit report shall be furnished by the Transfer Pricing Officer within six months from the end of the month in which the Annual Compliance Report referred to in rule 113 is received by such Officers.
(6) The regular audit of the covered transactions shall not be undertaken by the Transfer Pricing Officer if an agreement has been entered into under rule 109 except where the agreement has been cancelled under rule 116.
