The Advance Pricing Agreement (APA) Programme in India has played a significant role in addressing transfer pricing concerns and fostering a non-adversarial tax environment. The introduction of APAs has provided a proactive approach to resolving potential disputes related to cross-border transactions. This article delves into the key aspects of the APA Programme in India, its objectives, operational framework, and its impact on the ease of doing business.
Understanding the APA Programme
An Advance Pricing Agreement is a consequence of a forward-looking pact formed between the tax regulators and an individual taxpayer, primarily aimed at predefining the Arm’s Length Price (ALP), or the method to ascertain it, pertaining to an international transaction. Or, it can involve both aspects. This agreement ensures that the transfer price associated with cross-border transactions among grouped entities is settled in advance, leaving no scope for any subsequent dispute.
For many years, numerous countries have effectively implemented APA schemes within their economies. These initiatives are primarily focused on delivering guaranteed pricing solutions to taxpayers in relation to their cross-border transactions carried out within their respective group enterprises. The main objective of such programs is to eliminate pricing uncertainties that may arise during these transactions.
Addressing Transfer Pricing Disputes
The swift progression of international commerce, propelled by an expanding network of Multinational Enterprises (MNEs), has induced a myriad of tax disputes revolving around the subject of transfer pricing. The APA steps in as a proactive resolution mechanism in this context, aiming to settle any potential transfer pricing conflicts in advance. This either implies preemptively addressing these concerns prior to the execution of cross-border transactions involving related entities, or before discord can emerge in relation to such transactions.
By effectively delineating the transfer price of goods and services exchanged among group entities, the agreement prevents the possibility of future disagreements stemming from such transfer pricing transactions. The tax authorities work in concordance with taxpayers, jointly deciding on these transfer prices to ensure a smooth, conflict-free transactional process.
Origins of the APA Programme in India
Introduced by the Finance Act of 2012, the Advanced Pricing Agreement programme commenced in India, following a legislative amendment in the Income-tax Act, 1961. Notably, sections 92CC and 92CD were added, and these came into effect from 1st July, 2012. They provided the Central Board of Direct Taxes (CBDT) with the legal foundation required to engage in APAs with taxpayers. Spanning a maximum duration of five years, these APAs served a crucial function – they resolved international transactions between Associated Enterprises (AEs), particularly dictating the ALP determination or outlining the method through which ALP should be determined.
Operational Framework and Procedural Aspects
Eventually, on the 30th of August, 2012, Notification 36/2012 initiated the insertion of the APA Scheme [Rules 10F to 10T] into the Income-tax Rules, 1962, thereby solidifying the execution of the APA programme. Consequently, the Indian APA programme, which had been operational since the 1st of July, 2012, was finally operationalised on the 30th of August, 2012, paralleling the notification of relevant rules. These rules encapsulated various procedural components of the APA process such as the procedures for submitting a pre-filing consultation application, processing of APA application, fees payment, and withdrawal of an APA application. Other aspects mentioned in these rules include the terms and conditions of APA, filing of the Annual Compliance Report, Compliance Audit and provision for revision, cancellation, and renewal of APA, among others.
APA with Rollback Provisions
The principle of rollback provisions is in place to enable the Arm’s Length Price or the method of determining the ALP, as agreed upon under the Advance Pricing Agreement, to be applied retrospectively to a time prior to the introduction of the APA. This backward application of APAs, also known as the “roll-back”, was officially launched by the government on July 10, 2014.
The legislation needed for this kind of implementation was actualized via the Finance (No. 2) Act of 2014. Further, amendments were made to the Income-tax Rules, 1962 to set in motion the roll-back provisions. These amendments were officially marked on March 14, 2015, bringing modifications to the pre-existing APA Scheme.
The essence of these rollback provisions is that they could be invoked and used for a span of four years before the first year of the APA period. To elaborate, a taxpayer would then possess the assurance and clarity regarding matters of transfer pricing for a maximum duration of 9 years all at once, simply by lodging a request for an APA that accommodates rollback provisions.
In order to provide better understanding and insight on roll-back issues, Circular 10/2015 was issued by the CBDT on June 10, 2015. The document served to elucidate and clarify critical aspects of the rollback provisions, ultimately cutting through any ambiguity that may surround them.
Dedicated Teams for Processing APA Applications
The applications for Advance Pricing Agreements are meticulously processed and scrutinized by specialized APA units operating under the overarching guidance of the Principal Chief Commissioner of Income-tax in International Taxation, based in New Delhi. Each APA team is steered with utmost diligence by a distinguished Commissioner of Income-tax.
The team is replete with additional and joint Commissioners of Income-tax along with Deputy and Assistant Commissioners of Income-tax, bringing a robust blend of expertise and deep legal understanding to the team. Notably, the APA function is ably supported by four unique teams meticulously working to ensure integrity and accuracy in their work.
These teams have strategically spread their presence over India’s main financial and tech centers, with bases in Delhi, Mumbai, and Bengaluru. Their collaborative efforts ensure a smooth, efficient, and comprehensive APA application analysis, while providing a high standard of service to those they serve.
Bilateral and Unilateral APAs
Within the realm of the Indian Advance Pricing Agreement system, there exist two variants of these agreements: bilateral and unilateral. It is crucial to note that while bilateral APAs encompass the collaborative efforts of the CBDT and the taxation authorities of a secondary country, the unilateral APAs, on the other hand, exclusively involve the CBDT.
The process of formalization of both Unilateral Advance Pricing Agreements (UAPAs) and Bilateral Advance Pricing Agreements (BAPAs) is conducted by either the Joint Secretary, Foreign Tax & Tax Research (FT & TR) – I or FT & TR – II. Together, they represent the two Competent Authorities of India who carry out these negotiations and enter agreements on behalf of the CBDT with taxpayers.
1. Unilateral APAs
Regarding UAPAs, the preparatory documents created by the APA teams receive approval from the Principal Chief Commissioner of Income Tax (International Taxation) located in New Delhi before being forwarded to the CBDT for further examination. Inside the CBDT, members from both the Foreign Tax & Tax Research (FT & TR-I and FT & TR-II) divisions thoroughly review and process these documents.
Subsequently, the Joint Secretary of FT & TR-I and FT & TR-II oversees the work of the subordinate officers and refines the prepared documents before advancing them to the designated CBDT member. This member is responsible for approving the final negotiation strategy to be employed by the APA teams. Following successful negotiations, a preliminary Agreement is submitted to the CBDT for endorsement. Upon approval, the final Agreement is officially established between the CBDT and the respective taxpayer.
As per CBDT Report on APA Program, over the previous decade, India has seen an influx of more than 1400 APA applications. Remarkably, a considerable portion, approximately three-quarters of these submissions, constitute unilateral APAs negotiated between the Indian taxpayer and the CBDT. By the end of March 2022, a total of 421 Agreements had been officially established (comprised of 357 unilateral and 64 bilateral Agreements).
2. Bilateral APAs
Concerning BAPAs, a system is in place which initiates once the Principal Chief Commissioner of Income Tax (International Taxation), or Pr. CCIT, dispatches position papers to the Divisions of Financial Transaction & Transfer Pricing – I & II (FT & TR – I & II).
Following this action, delegated authorities in India (either the Joint Secretary of FT & TR – I or the Joint Secretary of FT & TR – II, contingent upon the partnering nation for BAPA negotiation under the Tax Treaty), commence discussions with their respective equivalents abroad.
Officers attached to the FT & TR Division of the CBDT, collaborating with the Competent Authority, meticulously examine the position paper dispatched from the Pr. CCIT (International Taxation). Consequently, they formulate the stance of the Indian Competent Authority accordingly.
This stance, then, is forwarded to the Competent Authority in the partnering country. Once reciprocal stances have been exchanged, the Competent Authorities of both nations engage in discourse and negotiation pertaining to the terms and conditions of the APA. Upon reaching a consensus, a Mutual Agreement, outlining the provisions of the APA, is formally drafted by the Competent Authorities from both sides.
Subsequent to this, each nation typically enters into a separate agreement with its domestic taxpayers. From the Indian perspective, the Mutual Agreement is shared with the taxpayer, and their agreement to the resolution is sought within a 30 day timeline. Assuming the taxpayer concurs with the resolution in the Mutual Agreement, a primary draft agreement is devised in consultation with the taxpayer; this document is then submitted for the assent of the specified member within the CBDT.
Achievements and Impact
As per CBDT report on APA Program, despite not being its primary intention, the Indian APA programme significantly contributes to revenue mobilization. It’s estimated that the 421 signed APAs offer financial assurance for an income of approximately Rs. 14,000 Crore. This equates to a tax payment and interest of around Rs. 4,000 Crore, circumventing potential litigation or contention.
The success of the APA initiative has not gone unnoticed by the Government, which acknowledges the manifold benefits that the programme continues to provide, particularly to multinational enterprises operating within India’s borders. The programme’s most notable impact is fostering a more conducive business environment in India. Recognizing these achievements, the Government is committed to continually empowering the APA initiative with the requisite human capital and infrastructural resources to ensure its longevity.
The Advance Pricing Agreement initiative in India constitutes a significant portion of the CBDT’s endeavors to upgrade the business ecosystem of the country. Begun in July of 2012, the APA initiative has tackled a multitude of intricate transfer pricing predicaments often leading to drawn-out litigation.
These solutions have yielded gratification for both the government and taxpayers alike. Businesses have gained assurance over transfer pricing matters for a span of five to nine years, contingent upon the applicability of rollback provisions to an Agreement. This has allowed the Government to re-allocate its resources from auditing and litigation to more productive activities.
Simultaneously, APAs have guaranteed the Government a stable income stream from major taxpayers, governed by contractual stipulations. While the generation of revenue has not been the cardinal aim of the APA, it has provided the government with a reliable revenue source, a beneficial byproduct of the initiative.
CBDT Annual Report (2021-22) on Advance Pricing Agreement (APA) Programme of India (August 2023)