SP Singh, Senior Director, Deloitte Haskins & Sells
In 2001 India introduced transfer pricing regulations to achieve two purposes – to protecterosion of tax base of India through pricing of intra-group transactions; and at the same time provide a statutory framework to ensure fair, reasonable and equitable income is brought to taxation in India. After initial 3-4 years of reasonable approach, in the recent years the approach of the transfer pricing authorities has become very aggressive resulting in huge adjustments leading to litigations. However, these have not been yielding corresponding gain to revenue but have been creating an atmosphere of uncertainty in the minds of multinationals about doing business in and from India. Appreciating these, government introduced Advance Pricing Agreement mechanism to proactively preventlikely disputes between tax authorities and taxpayers. Detailed guidelines were introduced in mid-2012. In the very first year, ending 31 March 2013, approximately 146 applications were filed, by far largest number received by any country in the first year of APA. This year approximately 250 applications are reportedly filed.
It goes to the credit of the CBDT and their APA team that the first batch of five APAs is being signed on 31 March 2014. They have taken just one year to achieve this milestone, which by international standard quite fast. It has been made possible by reasonable approach of the authorities and maturity shown by taxpayers.
There is a note of caution, the APA team has approximately 400 applications pending now and this number may go up in the next year, unless either Safe Harbour rules are made reasonable or the approach of the transfer pricing authorities becomes reasonable during audits. With the present workforce, the APA team will have very uphill task in maintaining the high standard they have set in the first year and at the same time reach agreements for the pending applications within a short time framework.
CBDT Press Release in Regard to Above is as follows :-
Government of India,Ministry of Finance,Department of Revenue
No.402/92/2006-MC Dated : 31st March, 2014
Central Board of Direct Taxes
The CBDT has signed the first batch of 5 unilateral Advance Pricing Agreements (APA) on 31st March 2014. The agreements cover a period of 5 years from AY 2014-15 to AY 2018-19 and specify the arm’s length price for the covered international transactions entered into by the taxpayers. These agreements cover a range of international transactions, including interest payments, corporate guarantees, non -binding investment advisory services and contract manufacturing. The agreements pertain to different industrial sectors including pharmaceuticals, telecom, exploration and financial services.
The agreements provide a complete certainty to the taxpayers for 5 years with regard to the covered international transactions. The APA programme came into effect on 1st July 2012 and the first batch of 146 APA applications was received in March 2013. The CBDT has been able to conclude the first set of agreements within a period of 1 year as against the internationally accepted norm of at least 2 years.
The whole scheme of APA has been designed with the intention of creating a taxpayer friendly environment in transfer pricing matters and to minimise the transfer pricing disputes. Before filing the APA applications, taxpayers are given the opportunity to share their expectations from the APA process during the pre-filing consultations and the APA team shares a broader understanding of the forthcoming APA procedure.
Having received an APA application, the APA team works towards establishing the appropriate economic analysis of the covered international transactions which also involves a site visit i.e. physical verification of the business of the applicant with regard to the said transactions. It is this detailed fact finding exercise which lends credibility to the determination of arm’s length price under the APA. The APA team furnishes a report incorporating functions, assets and risk (FAR) analysis which is further examined at length by the CBDT before its submission for the final approval of the Central Government.
Commissioner of Income Tax
(Media & Technical Policy)
Official Spokesperson, CBDT