Understanding APAs: Under Transfer Pricing Regulation in India

 Indian tax authorities have implemented unilateral, bilateral, and multilateral Advance Pricing Agreements (APAs) since July 1, 2012. An APA is an accord between a taxpayer and the tax authority regarding the pricing of future intercompany transactions, which may also include past years if a roll-back provision is invoked. Under this agreement, both parties mutually decide on the Transfer Pricing Methodology (TPM) to be employed and its application for a specified period, subject to meeting critical assumptions.

Eligibility and Types of APAs:

There are no specific monetary or other prerequisites outlined in the Indian APA regulations for eligibility. However, the APA mechanism is not extended to specified domestic transactions. Although the filing fees for APAs are relatively high, there haven't been many instances of application rejections during pre-filing consultations. The government appears to encourage the use of the program for complex and significant transactions.

Covered Transactions:

APAs can encompass any international transaction, including those involving the transfer of tangible and intangible properties, cost-sharing arrangements, provision and receipt of services, and supply of goods. Additionally, APAs are applicable to international transactions involving permanent establishments. Taxpayers have the flexibility to selectively apply for APAs for specific transactions while disclosing all other international transactions to the APA team.

Phases of APA:

The APA process consists of four phases:

• Pre-filing Phase: Begins with a pre-filing consultation meeting to define the agreement's scope and assess the suitability of the international transaction. No fees are required at this stage.
• Formal Submission Phase: Involves the submission of an application in the prescribed format along with the APA filing fee. Critical assumptions, crucial for supporting the position concluded under an APA, must be described in the application.
• Negotiation Phase: Follows the acceptance of the application, where the APA team engages in discussions, inquiries, and prepares a draft report for submission to the competent authority.
• Finalization Phase: Includes the exchange of comments on the draft APA, finalization of the agreement, and implementation for the initial years covered.

Withdrawal, Validity, and Binding Effect of APA:

Taxpayers can withdraw APA applications before the finalization of the agreement, but fees paid during filing are non-refundable. The APA's validity is for a specified period, not exceeding five consecutive previous years. Once entered into, the APA is binding on the taxpayer and tax authorities, except in cases of law or factual changes or if obtained through fraud or misrepresentation.

Compliance and Audit:

Annual compliance reports and compliance audits are mandatory, with the taxpayer required to submit reports to the Director General of Income Tax (International Taxation). Compliance audits are conducted based on the taxpayer's submitted compliance audit report.

Revision and Cancellation:

The APA agreement can be revised by the board under certain circumstances, such as changes in critical assumptions or laws. The agreement can be canceled if the taxpayer fails to comply with its terms or if material errors are found in the annual compliance report.

Roll-Back Provisions:

To mitigate pending litigations, the Income Tax Act provides for roll-back mechanisms, allowing the application of APA terms to preceding years. Conditions for applying for roll-back provisions include timely filing of income tax returns and audit reports for the relevant years.

Effect to APA:

Taxpayers must furnish modified tax returns within three months of entering into the APA if they've already filed returns for covered assessment years. Assessing Officers (AOs) must modify total income based on the APA within one year if assessments are pending. If assessments are completed, AO proceeds with assessment considering the modified return furnished by the taxpayer, with an extended time limit for completion.

FAQ

3. What is an Advance Pricing Agreement (APA)?

An APA is an agreement between a taxpayer and tax authority regarding the pricing of future intercompany transactions, ensuring compliance with transfer pricing regulations. It provides certainty and clarity on transfer pricing methodologies for a specified period.

2. What are the different types of APAs available in India?

There are three types of APAs: Unilateral, Bilateral, and Multilateral. Unilateral APAs involve only the taxpayer and the tax administration of the country where it is subject to taxation. Bilateral APAs involve the taxpayers, the tax administration of the host country, and the foreign tax administration. Multilateral APAs involve taxpayers, the host country's tax administration, and more than one foreign tax administration.

3. Who is eligible to apply for an APA in India?

There are no specific eligibility criteria outlined, but typically the APA mechanism is not available for domestic controlled transactions. The Indian government seems to encourage its use for complex and high-stake transactions.

4. What transactions can be covered under an APA?

Any international transaction can be covered under an APA, including transfer of tangible and intangible properties, cost-sharing arrangements, provision and receipt of services, and supply of goods.