FAQs on India APA scheme
Experts in APA team
1. The APA rules provide that APA team would also include experts in economics, statistics, law or any other field as may be nominated by the DGIT (IT).Would such experts be included in each and every APA or would the need be analysed on a case to case basis? Further would such experts be from Government only or could they also be independent professional/industry experts of repute?
Answer: The Director General of Income Tax (International Taxation) has been given power to nominate experts. These experts would be taken from other Government Department and their services would be case specific and need based.
2. Whether application for pre-filing consultation needs to be filed in Delhi or the APA offices in Mumbai Bengaluru are also authorized to accept the applications?
Answer: The office of the DGIT(IT) is in Delhi and all the applications for prefiling will have to be filed in Delhi. However, places of undertaking pre-filing consultations can be either Delhi, Mumbai or Bengaluru as per administrative convenience.
Answer: The understanding reached at the end of the pre-filing consultation would be reduced in writing and also communicated to the taxpayer. This will form the basis of the formal application, as and when the taxpayer decides to enter into a formal APA. The copy of such written understanding may preferably be attached with the formal application.5.Whether the pre-filing understanding would be limited to four items mentioned in rule 10H(5)?Answer: The purpose of pre-filing consultation is to reach an understanding between the applicant and tax administration which will be useful for conclusion of an APA agreement.The items provided in rule 10H(5) are only indicative, the understanding could be on other relevant issues. This understanding could also be on the extent and nature of information that needs to be provided in the formal application.
6. How does a taxpayer achieve anonymity, given the significant level of information (including information on past audits, etc) required to be filed as part of the pre filing consultation?
Answer: In case of anonymous pre-filing consultation, the details that identify the applicant may be omitted. However, the applicant or its representative is encouraged to provide a thorough explanation of the proposed international transaction in order to have a fair understanding of the APA requirement. In addition, the details not filed at the time of pre-filing would have to be filed at the time of formal APA application, in case the applicant decides to go for it.
7. Does the APA Authority have discretion to decline a pre filing meeting / APA application?
Answer: A request for pre-filing consultation cannot be refused. If a request of pre-filing is made, the meeting with taxpayer would be there for purpose of reaching an understanding. The APA application can be declined only on the grounds mentioned in the Rules; like removal of defects in the application or application not being in accordance with the understanding reached at the time of pre-filing meeting.
8. As the pre-filing discussions do not bind the APA team, can the APA team review/ revisit its initial conclusion on approach (assuming there is no change in facts or difference in understanding of facts)?
Answer: Pre-filing is designed to reach a preliminary understanding and it does not bind either the taxpayer/ applicant or the tax administration. The detailed analysis is undertaken only after filing of APA application. The agreement will be reached based on detailed analysis carried out after filing of APA application.
9. The pre-filing application (Form No. 3CEC) requires the applicant to explain reasons for proposing a unilateral APA instead of bi-lateral or multi-lateral. Is this a tacit manner to discourage unilateral APA requests? What could be some potential responses to this question?
Answer: The decision to opt for a unilateral APA or a bilateral APA is to be taken by the applicant. It is a fact that bilateral APA goes a step further than unilateral APA in ensuring tax certainty on both sides and avoiding the risk of double taxation. However, there is no particular preference for the tax administration. The applicant may prefer unilateral for the reason that there is no APA mechanism in the other DTAA country or for the reason that he wants only tax certainty with India or for any other reason.
10. If a taxpayer has more than one international transaction but desires to have an APA for only one of the transactions, can the APA Authority insist that all the transactions should be covered. Can the APA Authority insist that the sale of goods transaction should also be included in the APA as it would need to evaluate whether the pricing of goods already includes value of IP for which royalty is charged?
Answer: There cannot be any compulsion that taxpayer should enter into an APA in respect of all international transactions undertaken by him. However, if one international transaction is intrinsically linked with another international transaction in a manner that one cannot be benchmarked independently, the tax administration can inform the applicant that both the international transactions need to be covered in the application.
11. The APA rules are silent on the time line for the various steps in the APA process. Is there any target/ planned timeline for completion of various steps of APA Process e.g. scheduling of pre-filing meeting, filing of application after pre-filing, conclusion of unilateral and bilateral APA etc.? Would these matters be allowed to be discussed at the pre-filing consultation?
Answer: There is no fixed time line. However, the applicant and tax administration can discuss this during pre-filing consultations.
12. The prescribed form for application for APA (Form No. 3 CED) contains an exhaustive list of information required to be filed by the taxpayer. Would all such information be necessary or need for such information can be discussed during pre-filing meeting?
Answer: The information as listed in the application form are required to be provided. However, in how much detail this information needs to be provided can be discussed during pre-filing consultation.
13. What would be the impact of concluded or pending MAPs/domestic litigation on APA negotiations?
Answer: The past history of a case is one of the several factors which are looked at and discussed in the process of negotiating an APA. It is not, therefore, mandatory that the same position as taken in past shall guide or decide the APA process. If the applicant believes that the facts of his case are different to what have been understood earlier by tax authorities or adjudicating authorities, he may file relevant evidence/information in support of his submission. The APA authorities would look at this evidences/information with open mind.
14. In case of new transactions having no historic transfer pricing issues, would the tax payer be still required to file audit history for transactions not proposed to be covered under the APA application?
Answer: It will be useful to have the full details of audit history so that APA authorities are aware of it. Though APA authorities are not bound by past history, it is necessary that they are aware of it and if the applicant is willing to file information in relation to past history, they are in a better frame of mind to understand and analyse this information.
Amendments to the APA Application
15. Amendment to the APA application can be made before finalization of terms of agreement and it should not alter the nature of application. What is the stage at which terms of the agreement would be treated as finalized? What are the probable amendments that would not have effect of altering the nature of the application?
Answer: The APA process is a consultative process designed to reach an agreement.Since taxpayer is involved in every stage of APA process, the stage of finalization of terms of agreement for APA would be within knowledge of the taxpayer. The APA application can be amended in case of unilateral APA before the draft agreement is sent by DGIT(Intl. Taxation) to the Board and in case of Bilateral Multilateral APA before the MAP arrangement is sent by Competent Authority to the Board.
The request for conversion of unilateral APA application to bilateral or multilateral APA application will not be taken to have the effect of altering the nature of the original application.
16. The filing fee is based on value of international transaction during the period of APA. How does one deal with a situation where the actual value at the end of the period is more (or less) than what was envisaged at the time of application (e.g. applicant makes a bona fide assumption that value of transaction over proposed APA period would be less than INR 100Cr. However, given the business growth, in the last year of the APA period the applicant realizes that the value could be over INR 100 Cr)? Can this also lead to a conclusion by the APA Authorities that taxpayer has failed to meet the critical assumptions forming basis of APA negotiation process?
Answer: The mere fact that the value of international transaction happens to be more than what was earlier projected would have no effect on the quantum of the fee which has already been paid.
17. How would the fee payable for an APA application be calculated if the transaction to be covered is part of a number of inter-linked transactions (and the analysis is undertaken on an aggregated basis i.e. TNMM)?
Answer: If one international transaction is part of many other inter linked international transactions, and it cannot be separately benchmarked, all the international transactions need to be covered in the APA and the fee needs to be calculated accordingly.
18. The APA rules provide for critical assumptions as part of the APA. What are the probable critical assumptions that can be made for an APA?
Answer: The critical assumptions would depend on the facts of each case. As the applicant and the APA authorities discuss any case and project future price, they need to make some assumptions. Some of the assumptions would be critical for arriving at a particular settlement. These assumptions are critical assumptions.
Bilateral/ Multilateral APAs
19. Can a taxpayer file request for a bilateral APA with a country where the treaty entered into by India does not contain specific provision for corresponding adjustment for TP disputes [i.e., Article 9(2) of OECD Model Convention]?
Answer: The practice followed by India in MAP proceedings is that without corresponding model article 9(2), the cases of economic double taxation are not admitted under MAP. The similar position will also apply to APA. Hence, if India’s DTAA/DTAC with a country does not contain model Article 9(2), India would not be able to admit cases of economic double taxation under bilateral APA. These cases would still be eligible to apply for unilateral APA.
Conversion of unilateral into bilateral/multilateral APA and vice-versa
20. Is it possible to convert a concluded/ in-process Unilateral APA into a Bilateral APA/ Multilateral APA?
Answer; A unilateral APA can be converted into bilateral APA before finalization of the terms of the agreement and not thereafter. Therefore, a concluded unilateral APA cannot be converted into a bilateral APA
APA for transactions with Permanent Establishment
23. The APA rules provide for covering international transactions. Can the taxpayers consider APA for profit attribution to permanent establishments?
Answer: Yes, it is possible. If applicant admits having PE, he can file APA request for profit attribution to PE.
Firewalls against Confidential information
24. The taxpayer may file a lot of confidential information (factual/analysis) during the APA application/ negotiation. What are the safeguards to ensure that such information filed by the taxpayer would not be shared with the on field audit officers or used against the taxpayer in regular audits?
Answer: Internationally, most countries allow sharing of APA information with on-field audit officers. The confidentiality provision of the Income-tax Act also allows such sharing within the income tax department.
25. As per the APA rules, mere filing of an application for an agreement under these rules does not prevent the operation of Chapter X of the Act for determination of ALP under that Chapter till the agreement is entered into. Would regular documentation/ Form 3CEB compliances be required during APA negotiation phase, which in case of bilateral APAs may even take 2-3 years?
Answer: Yes, the regular provisions of the Income-tax Act will continue to have application, till APA is concluded and modified return is filed. It is always advisable to start the process earlier so that the APA is concluded early.
26. Does the taxpayer need to maintain prescribed transfer pricing documentation (Rule 10D) after entering into an APA? If not, would the provisions relating to levy of penalty for non-maintenance of such documentation be modified accordingly?
Answer: After entering into an APA, the taxpayer is required to maintain documents in order to satisfy the terms of the APA. Hence, there will be less compliance burden after entering into an APA.
Remedy against cancellation of APA
27. If an APA is cancelled by the Board, would there be any mechanism to appeal against the cancellation of the APA or would the taxpayer have only recourse to constitutional remedies?
Answer: APA is an agreement entered into by two parties one of which is CBDT. The rules, therefore, provide for certain specific circumstances in which CBDT can, after due notice to taxpayer cancel the agreement. No appeal against decision of CBDT to cancel the agreement has been provided in Income-tax Act. However, there is no bar against right of a taxpayer to take recourse to constitutional remedies.
No roll back provision
28. There are no roll back provisions in the APA rules. Would the Transfer Pricing Officers be encouraged by the DGIT(IT) to undertake audits of prior periods consistent with the APA outcome?
Answer: Under the provisions of the Income-tax Act, the DGIT (International Taxation) has no such powers to issue directions of this nature.
29. Section 92CC provides that the manner of determination of ALP in an APA may include the methods referred to in section 92C(1) or any other method. But the reference to ‘any other method’ is missing in the APA rule 10F(g). Would it mean that apart from the 6 methods referred to insection 92C(1) read with rule 10AB, ‘any other method’ would not be allowed under the APA Scheme?
Answer: The sixth method already allows use of any method leading to arm’s length price.
30. The Indian TP regulations require use of arithmetic mean and do not allow inter-quartile range. Can the taxpayers consider use of median and the concept of inter-quartile range in a bilateral APA? This is important as almost all other countries adopt a median/interquartile range and not arithmetic mean. Where the APA determines the ALP (as against methodology), would the ALP be a specific price or a range?
Answer: The Indian tax laws specifically mandates use of arithmetic mean. However, even with this requirement India has been able to resolve a number of cases under MAP with competent authorities of countries where the law mandates use of inter-quartile range. The issue will be handled similarly in bilateral APAs.
Answer: The APA would determine the arm’s length methodology or arm’s length price.The arms length price would be determined according to the APA. Therefore, once ALP is determined in accordance with agreement, there is no provision for allowance of variation of 3 percent.33. During the time that the APA discussions are underway (say for 2-3 years), could there be any impact on ongoing TP audits of the applicant?
Answer: No there will not be any impact until the APA is finalized and modified return is filed by the taxpayer.
34. The APA rules require annual compliance audit by TPO. Would annual compliance audit be as broad based as the regular TP audits? Would the TPO fix hearings for the same?
Answer: No the annual compliance audit is a focused audit with view of ascertaining compliance with terms of APA and would not be as wide ranging or broad based as a regular TP assessment.The rules also clearly state that compliance audit is not a regular TP audit. The purposeof compliance audit is only to ensure that the terms of the APA have been complied with.
35. When would an APA come into force for an existing transaction or a new proposed transaction?
Answer: The APA comes into force from the day it is entered into. However, it has effect in respect of transactions entered into or undertaken during the period for which the APA has been entered into.
Answer: Yes, if facts are same, the renewal process is likely to take less time and efforts.
39. Will retrospective amendments in law having a bearing on the concluded APA annul the APA?
Answer: Only that retrospective law which governs APA can have an impact on APA already concluded.
40. Some countries like US, Canada have Model APA templates which ensure consistency in the language and scope of various APAs. Would India also have its own Model APA template?
Answer: This will be considered at an appropriate time.