Advance Pricing Agreement

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Advance Pricing Agreement (“APA”) – Meaning and Types

Advance Pricing Agreement (APA) is an agreement between a taxpayer/applicant and the CBDT,

  1. which determines the arm’s length price of future intercompany transactions; or
  2. determines the manner in which ALP is to be computed.

APA can also be used for existing intercompany transactions (i.e., under roll back provisions of Advance Pricing Agreement).

APA provisions are contained in Section 92CC and Section 92CD of the Income-tax Act, 1961 and Rules 10F to 10T of the Income-tax Rules, 1962.

 

Advance Pricing Agreement

 

APPLICATION OF “APA” – BINDING NATURE

Once an APA has been entered into with respect to an international transaction,

the arm’s length price with respect to that international transaction, will be determined only in accordance with the APAfor the period specified in the APA.

 

TYPES OF “APA ” – UNILATERAL, BILATERAL AND MULTILATERAL

Types of Advance Pricing Agreement

UNILATERAL ADVANCE PRICING AGREEMENT

UNILATERAL ADVANCE PRICING AGREEMENT

  • Unilateral Advance Pricing Agreement is an Agreement between the assessee (applicant) and CBDT;
  • It does not involve any Treaty Partner (i.e., foreign authority);
  • It does not guarantee that the Arm’s Length Price/ Transfer Pricing method determined under Advance Pricing Agreement shall be accepted by the country of residence of foreign AE. Accordingly, it does not completely eliminate double taxation risk.

BILATERAL ADVANCE PRICING AGREEMENT

Bilateral Advance Pricing Agreement is an agreement between
Applicant (i.e., assessee),
Foreign AE,
Foreign authority, and
CBDT

BILATERAL ADVANCE PRICING AGREEMENT

NOTE :

  • In bilateral Advance Pricing Agreement, applicant is required to make an application with competent authority of India and simultaneously the applicant or its AE should also apply to Competent Authority of other Country.
  • The two competent authorities are required to reach an arrangement through Mutual Agreement Procedure (to be discussed later), which has to be accepted by applicant before bilateral APA can be entered into.

 

MULTILATERAL ADVANCE PRICING AGREEMENT

involves
Applicant (i.e., the taxpayer),
Two or more AEs,
Two or more foreign tax authorities, and
CBDT

MULTILATERAL ADVANCE PRICING AGREEMENT

NOTE :

  • In Multilateral Advance Pricing Agreement, applicant is required to make an application with competent authority of India and simultaneously the applicant or its AE  should apply to competent authorities of the other Countries.
  • CBDT has to reach an arrangement through MAP with competent authorities of more than one Country. Mutual Agreement Procedure has to be accepted by applicant before multilateral APA can be entered into.

REQUIREMENTS TO REQUEST FOR BILATERAL OR Multilateral ADVANCE PRICING AGREEMENT

Request for bilateral or multilateral APA can be accepted by the Indian competent authority on satisfaction of following conditions:

  1. India has a tax treaty (i.e., DTAA) with the Other Contracting State, and such treaty has an Article on ‘Mutual Agreement Procedure’ (MAP);
  2. Corresponding APA program is also there in the other country.

 

ADVANTAGES OF ADVANCE PRICING AGREEMENT PROGRAM

The APA program is designed to provide following advantages :  –

  1. Certainty over determination of ALP of covered international transaction;
  2. Flexibility in developing practical approaches for complex transfer pricing issues;
  3. Reduce risk of potential double taxation via Bilateral and Multi-lateral Advance Pricing Agreement;
  4. Reduce compliance costs by eliminating the risk of transfer pricing audit and resolving time consuming litigation;
  5. Reduce the burden of record keeping, as required documentation of the Advance Pricing Agreement are known in advance.

PURPOSE OF ADVANCE PRICING AGREEMENT – SECTION 92CC

PURPOSE OF ADVANCE PRICING AGREEMENT

The APA shall be entered into
for the purpose of determination of
the arm’s length price or
specifying the manner (i.e., method of determining arm’s length price)
in which arm’s length price shall be determined,
in relation to international transaction.

 

MANNER OF DETERMINATION OF ALP IN ADVANCE PRICING AGREEMENT – SECTION 92CC

The manner for determination of arm’s length price in the APA, may include CUP, TNMM, RPM, etc. [as defined in section 92C(1)] or any other method, with necessary adjustments or variations as may be decided in APA.

ALP OF INTERNATIONAL TRANSACTION IN CASE OF ADVANCE PRICING AGREEMENT – SECTION 92CC

In case an APA has been entered into in respect of any international transaction, the arm’s length price of that transaction shall be determined in accordance with that APA.

EXAMPLE : –

ICO (Indian company) , which avails consulting services from its foreign AE, has entered into an APA with CBDT and ALP under APA was determined at Rs. 10 lakh under APA.

  1. Whether Assessing officer can challenge such arm’s length price and make reference to transfer pricing officer (u/s 92CA) to determine arm’s length price of such transaction ?
  2. Whether Assessing officer can challenge arm’s length price determined under APA on the ground that arithmetic mean method under Section 92C is not used, where more than one price is available ?

SOLUTION : –

APPLICABILITY OF ADVANCE PRICING AGREEMENT – SECTION 92CC

The provisions of theAPA shall override the provisions of section 92C or section 92CA, which are normally applicable for the determination of arm’s length price. Thus, the Assessing officer cannot challenge arm’s length price determined under APA on aforesaid grounds.

 

VALIDITY PERIOD OF ADVANCE PRICING AGREEMENT – SECTION 92CC

The APA shall be valid for the period specified therein subject to a maximum period of more than 5 consecutive previous years.

 

BINDING NATURE OF ADVANCE PRICING AGREEMENT – SECTION 92CC

BINDING NATURE OF ADVANCE PRICING AGREEMENT

The APA shall be binding on : –

  1. The person who has entered into an APA,
    in respect of the transaction specified in APA; and
  2. The Principal Commissioner or Commissioner and
    the income-tax authorities subordinate to him,
    in respect of the said person and the said transaction.

EXAMPLE : –

ICO (Indian Company) entered into APA with CBDT to determine arm’s length price of Silk Cotton,  to be imported from Foreign Company (UK). ICO 1 (another Indian company) wants to import same silk cotton from its Foreign Company (UK). ICO 1 wants to adopt same method as determined under APA of ICO with CBDT.

Analyse the followings situations :

  1. Whether ICO1 can adopt method specified in APA ?
  2. What would be your answer if ICO1 is a subsidiary of ICO ?

SOLUTION : –

APPLICABILITY OF ADVANCE PRICING AGREEMENT – SECTION 92CC

  1. APA is binding only on the applicant who has entered into an APA and not on any other person. Thus, ICO1 cannot adopt method specified in APA entered by ICO.
  2. APA is binding only on the applicant who has entered into an APA and not on any other person. Therefore, answer will remain same even if ICO1 is a subsidiary of ICO.

 

APPLICABILITY OF ADVANCE PRICING AGREEMENT in case of change in law or facts – SECTION 92CC

The APA shall not be binding on the applicant or income-tax authorities if there is

  • any change in the law; or
  • any change facts

which have an impact on such APA.

 

CONDITIONS TO DECLARE ADVANCE PRICING AGREEMENT AS VOID AB INITIO – SECTION 92CC

If the CBDT finds that the APA has been obtained by the person by way of fraud or
misrepresentation of facts, the CBDT may declare such APA to be void ab initio,
with the approval of Central Government.

 

CONSEQUENCES OF DECLARATION OF AN ADVANCE PRICING AGREEMENT AS VOID AB INITIO – SECTION 92CC

Declaration of an APA as void ab initio has following repercussions :

  •  IT Act provisions would be applicable to applicant, assuming the APA was never entered.

EXAMPLE : –

ICO has entered into an APA with CBDT for international transactions on 31.12.2016, during PY 2016-17. Such APA was declared as void ab initio by CBDT during PY 2017-18 on September 30, 2017 . Whether ICO can adopt the transfer pricing method declared in APA while computing its taxable income of AY 2017-18 ?

SOLUTION : –

When APA is declared as void-ab-initio then, all the provisions of the Act shall apply to such person, as if such APA had never been entered into. Thus, such APA would be void from the beginning when such APA was entered into (i.e., from PY 2016-17). Accordingly, the ICO cannot adopt the transfer pricing method arrived at in the APA while computing its taxable income of AY 2017-18.

  • The period beginning with the date of such APA and ending on the date of order declaring the APA as void ab initio, shall be excluded for the purpose of computation of the period of limitation under the Act (viz., period of limitation specified in the Section 153, 153B, etc).
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