Advance Pricing Agreements

• CBDT has signed 20 unilateral advance pricing agreements (APAs) with Indian taxpayers as it looks to reduce litigation by providing certainty in transfer pricing.
• The 20 APAs signed pertain to various sectors of the economy like Information Technology, Banking & Finance, Insurance, Human Resources, Pharmaceutical, Solar Energy, Oil & Gas, Foods & Beverages, Telecommunications and NGO.
• The international transactions covered in these agreements include Software Development Services, IT enabled services, Investment Advisory Services, KPO services, Contract manufacture, Contract R&D services and Import of components etc.
• With these signings, the total number of APAs entered into by the CBDT has reached 98. This includes 4 bilateral APAs and 94 unilateral APAs.

About APA(Advance Pricing Agreement):

• An APA is an agreement between a tax payer and tax authority determining the transfer pricing methodology for pricing the tax payer’s transactions for future years. The methodology is to be applied for a certain period of time based on the fulfillment of certain terms and conditions (called critical assumptions).
• An APA can be unilateral, bilateral, or multilateral.
• Unilateral APA: An APA that involves only the tax payer and the tax authority of the country where the tax payer is located.
• Bilateral APA (BAPA): An APA that involves the tax payer, associated enterprise (AE) of the tax payer in the foreign country, tax authority of the country where the tax payer is located, and the foreign tax authority.
• Multilateral APA (MAPA): An APA that involves the tax payer, two or more AEs of the tax payer in different foreign countries, tax authority of the country where the tax payer is located, and the tax authorities of AEs.
• The APA provisions were introduced in India with effect from July 1, 2012 vide the Finance Act, 2012. The detailed rules (APA Rules) for the implementation of the APAs were introduced by the Central Board of Direct Taxes (CBDT) by way of a notification in the official gazette on 31st August 2012. The APA Rules provide detailed guidelines on the process along with information, data, fee details and forms that need to be filed.
• The APA regime in India is widely seen as a step towards eliminating dispute and uncertainty on transfer pricing matters by creating a conduciveness environment for negotiation to arrive at a unanimous approach.

Analysis:

• Transfer pricing(TP ) is viewed as a major tool to raise tax revenue. Over the past few years, the number of TP audits has increased and aggressive positions have been adopted by the Indian Revenue, which has contributed to long drawn and protracted litigation. While Courts have provided guidance on some contentious issues, TP continues to dominate the tax litigation scenario for MNCs in India.
• The domestic appeal and dispute resolution process in India is slow and very time consuming. Therefore, the need for an alternative dispute resolution mechanism such as the Advance Pricing Agreement (APA) program, which provides a proactive opportunity for taxpayers to not only prevent future tax controversies but also to provide a rational basis for settling past disputes where an APA outcome may have a significant persuasive value.
• The APA program is designed to avoid the confrontation inherent in an examination or an audit and foster more effective communication between taxpayers and the Indian Revenue Authority, by helping both the parties to focus on relevant facts and circumstances in advance.
• A pre-emptive approach through APAs to managing global transfer pricing disputes can enhance both efficiency and effectiveness. Many countries are therefore, adopting APA programs to address evolving TP issues worldwide. In this ever evolving TP controversy’s dynamic environment, the Indian APA program has been perceived as a “Sign of Relief” for MNCs to bring tax certainty in their business.

By: Vishal