CBDT issues Advance Pricing Agreement Guidance with FAQs

 

APA (Advance Pricing Agreement) provisions were introduced in India in the 2012 Budget. Subsequently, the CBDT (Central Board of Direct Taxes) had issued a notification on August 30, 2012 detailing the rules for the functioning of APA scheme.

Click here to view the details on The Indian Advance Pricing Agreement regime

It has been reported that in the first year, around 150 APA applications have been filed.

CBDT has now issued detailed guidance including a section on FAQs (Frequently Asked Questions) regarding the APA scheme. The document issued by the CBDT provides guidance regarding various aspects of the APA scheme by explaining the process from commencement to the end. Further, the guidance provides useful insight into the approach CBDT proposes to follow in the APA process.

The following paragraphs summarise the guidance provided through response to the FAQs:

· CBDT can use the services of experts in economics, statistics, law and other field from other government departments on need basis. This is a positive move and hopefully will add value to the APA discussions.

· Application for pre-filing can be done only in Delhi, even though the pre-filing consultations may take place in Delhi, Mumbai or Bengaluru.

· Pre-filing consultation is mandatory with no fees to be charged for pre-filing consultation.

· Understanding reached in pre-filing consultation will be communicated to the taxpayer in writing and this shall form the basis for formal APA application. This should reduce any mis-communication in relation to what was agreed in the pre-filing vis-à-vis the APA application.

· Pre-filing consultation can cover all aspects of the APA and need not be restricted to the four items mentioned in Rule 10H(5) of the Income Tax Rules, 1962 (“the Rules”). The items mentioned in Rule 10H(5) are the scope of APA, TP issues involved, suitability of the international transaction and broad terms of the APA.

· In case of pre-filing application, any information which identifies the taxpayer can be deleted from the pre-filing form (Form 3CEC) (where the taxpayer intends to be anonymous). This information would however be required to be filed at the time of formal APA application. While the Form 3CEC mentioned that the pre-filing can be done on an anonymous basis, considering the details of the taxpayer and the associated enterprises required under this form, there was uncertainty regarding how the anonymity of the taxpayer could be maintained. The CBDT has now expressly mentioned that any details which disclose the identity of the taxpayer in Form 3CEC may be deleted.

· APA authorities will have no discretion to decline a request for a pre-filing meeting/ APA application except in specific circumstances mentioned in the Rules.

· Conclusions reached in pre-filing consultation may be changed based on detailed analysis in the APA process.

· CBDT does not have any preference for a Unilateral APA or a Bi-lateral APA. Since the Form 3CEC requires a taxpayer to explain reasons for choosing a Unilateral APA instead of a Bi-lateral/ Multilateral APA, there were concerns that the CBDT may be more inclined towards the Bi-lateral/ Multilateral APA. The guidance seeks to allay those concerns.

· There is no compulsion on the taxpayer to cover all the international transactions under the APA. However, in case of closely-linked transactions, which cannot be benchmarked independently, all such transactions would have to be covered. Filing fees would have to be determined accordingly based on the cumulative value of such transactions.

· CBDT has not committed to any timelines for various steps in the APA process and ultimate closure of the APA. While providing a clear time-frame for conclusion of APA is very difficult, an indicative benchmark would have been useful.

· Information mentioned in the APA application (Form 3CED) is required to be mandatorily provided. However, in how much detail this information needs to be provided can be discussed during pre-filing consultation.

· Prior litigation cases or settlements through Mutual Agreement Procedure (MAP) will not be binding on the APA authorities.

· Taxpayers are required to submit audit history even though the same is not related to the transactions proposed to be covered under the APA.

· Unilateral APA application can be amended before the draft agreement is sent by DGIT (Intl. Taxation) to the CBDT. Bi-lateral/ Multilateral APA application can be amended before the MAP arrangement is sent by the competent authority to the CBDT.

· Mere fact that the value of international transactions covered under an APA is more than what was earlier projected will not have any effect on the quantum of filing fees which has already been paid.

· No further guidance is provided on the concept of “Critical Assumptions”. Critical assumptions represent the foundation of an APA and hence further guidance on this concept would have been useful.

· Bi-lateral/ Multilateral APA can be entered only with countries whose tax-treaty with India has an article for corresponding TP adjustments (similar to Article 9(2) of the OECD Model Tax Convention). While this view has been expressed by APA authorities at various public forums, the guidance now makes it an official position of the CBDT.

· An application for a Unilateral APA may be converted into an application for a Bi-lateral/ Multilateral APA and vice-versa before the conclusion of the APA. Further, the taxpayer has been given the freedom to file Unilateral APA for some transactions and Bi-lateral/ Multilateral for others. Taxpayer can either file separate or combined application for Unilateral and Bi-lateral/ Multilateral APAs. In case of a combined application, the same needs to be filed with the Competent Authority of India.

· APA can also be requested for profit attribution to a Permanent Establishment (PE), provided the taxpayer admits the existence on a PE. By including profit attribution to a PE under the APA scheme, the CBDT appears to be aligning itself to the globally accepted philosophy of applying arm’s length principle to resolve PE disputes.

· Information filed by the taxpayers during the APA process can be shared with the on-field audit officers. This has been a matter of concern for many taxpayers contemplating APA route. With clarity on this issue, the taxpayers can make an informed choice regarding the APA process.

· Regular TP compliance (TP Documentation/ Form 3CEB) shall continue to be applicable to the taxpayer till the APA is concluded and modified returns are filed. TP compliance burden post signing of APA will be restricted to demonstrating compliance with the APA terms.

· No remedy is provided under the Income Tax Act, 1961 against cancellation of APA by the CBDT. The taxpayers can take recourse to other constitutional remedies (like writ petition).

· In the absence of roll-back provisions in the Indian APA program, the results of an APA shall not impact the litigation for earlier years.

· The “Other method” prescribed in Rule 10AB of the Rules may be used for determination of arm’s length price under the APA.

· APA negotiations in India would be guided by the Indian regulations. Even in case of Bi-lateral/ Multilateral APA, the CBDT shall rely on the concept of “arithmetic mean” while computing the arm’s length price, irrespective of statistical measures used in the other jurisdiction.

· Benefit of tolerance range (1% in the case of wholesale traders and 3% for other taxpayers) will not be available in an APA.

· Merely filing an APA application for a tax year will not have any impact on the TP audit for that year.

· Annual compliance audit by the Transfer Pricing Officer (TPO) in respect of tax years covered under an APA shall not be detailed but will only ensure compliance with the APA terms.

· APA shall come into force on the day when it is entered into. However, it shall apply in respect of transactions undertaken during the period for which the APA has been entered into.

· Where there is a change in facts resulting in failure of critical assumptions, the APA would have to be revised or cancelled. However, in case there is change in facts prior to finalization of an APA, the revised facts would have to be considered before executing the APA.

· The visit by the APA authorities to the taxpayer’s premises would be in consultation with the taxpayer and on pre-agreed dates and time with sufficient notice to the taxpayer.

· In case the factual matrix underlying an APA remains the same, the renewal of an APA should be less time-consuming.

· Retrospective amendments in law which govern an APA can have an impact on the APA already concluded.

· No specific guidance is provided whether the CBDT is contemplating issuance of a model agreement listing down typical terms of a concluded APA.

Further, the CBDT has provided the following guidance regarding the APA process:

· APA is to be signed by the person competent to sign return of income of the taxpayer.

· MAP benefit is not available to the taxpayer in respect of transactions covered under a Unilateral APA.

· Post conclusion of an APA, the tax officer and the taxpayer shall withdraw the appeals/ objections filed before the Commissioner (Appeals)/ Dispute Resolution Panel/ Tax Tribunal/ High Court/ Supreme Court in respect of covered transactions (for the covered period).