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The Finance Act’ 2012 has introduced Section – 92 CD relating to the Advance Pricing Agreement (APA) which came into force w.e.f. 1st July’ 2012. An Advance Pricing Agreement is an agreement between the taxpayer and the tax authority on the pricing of future related party transactions. The Taxpayer and the tax authority agrees on the method to be used for determing the Arm Length Price (ALP) of the International transaction for a certain future period.

Scope and Objective of an Advance Pricing Agreement :-

Advance Pricing Agreement can be applied for various international transactions, like purchase or sale of raw materials, finished goods, providing services, financing arrangements, transfer and use of tangible/ intangible assets, etc. However, considering the time and resources required for concluding an APA, it is generally preferred to enter into an APA in respect of complex/ high value transactions. Certain jurisdictions also exclude routine transactions from scope of the APA.

There are three types of Advance Pricing Agreements mentioned below :-

  1. Unilateral Advance Pricing Agreement – entered into between a taxpayers and the tax authority of the country where it is subject to taxation.
  2. Bilateral Advance Pricing Agreement – entered into between the taxpayers and the tax authority of the host country and the foreign tax authority.
  3. Multilateral Advance Pricing Agreement – entered between the taxpayers and the tax authority of the host country and more than one foreign tax authority.

Salient Features of the Advance Pricing Agreement Scheme:-

  • Choosing a Transfer Pricing Method;
  • Selecting Comparable uncontrolled companies or transactions;
  • Deciding on the years over which comparables’ results are analyzed (the “analysis window”) and related matters;
  • Adjusting the comparables’ results because of differences with the tested party ; constructing a range of Arm’s Length Results (ALP);
  • Critical Assumptions;
  • Testing results during the APA period and consequences of being outside the Arm’s Length range.

Effect of Advance Pricing Agreement u/s 92 CD :-

  • It empowers CBDT, to enter into an advance pricing agreement with any person undertaking an international transaction.
  • Such APAs shall include determination of the Arm’s Length Price (ALP) or specify the manner in which ALP shall be determined, in relation to an international transaction which the person undertake.
  • The manner of determination of ALP in such cases shall be any method including those provided in subsection (1) of Section 92C, with necessary adjustments or variations.
  • The ALP of any international transaction, which is covered under such APA, shall be determined in accordance with the APA so entered and the provisions of section  92C or section 92CA which normally apply for determination of ALP would be modified to this extent and ALP shall be determined in accordance with APA.
  • The APA shall be valid for such previous years as specified in the agreement which in no case shall exceed five consecutive previous years.
  • The APA shall be binding only on the person and the Commissioner (including income-tax authorities subordinate to him) in respect of the transaction in relation to which the agreement has been entered into. The APA shall not be binding if there is any change in law or facts having bearing on such APA.
  • The Board is empowered to declare, with the approval of Central Government, any such agreement to be void-ab-initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts.
  • For the purpose of computing any period of limitation under the Act, the period beginning with the date of such APA and ending on the date of order declaring the agreement void-ab-initio shall be excluded. However, if after the exclusion of the aforesaid period, the period of limitation referred to in any provisions of the Act is than 60 days, such remaining period shall be extended to 60 days.
  • The Board is empowered to prescribe a Scheme providing for the manner, form, procedure and any other matter generally in respect of the APA.

These amendments will take effect from 1st July’ 2012.


The above Article is compiled by Javed Ansari, the Accounting Technician having the Accounting Technician certificate issued by the Institute of Chartered Accountants of India under the Integrated Professional Competence Course. For Any Query feel free to contact:-  EMAIL ID: javedd.ansari@gmail.com, Cell: +91 9650709321


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July 2024