If you are a company that has entered into international transactions with associated enterprises (AEs) outside India and are unsure whether to file an Advance Pricing Agreement (APA) application, this article will help you understand the process and decide whether opting for an APA suits your requirements.
Section 92CC of the Income Tax Act, 1961 empowers the CBDT to enter into an APA with any taxpayer for determining the arm’s length price (ALP) or specifying the manner in which ALP is to be determined in relation to international transaction.
Why you can consider to enter into APA
- Provide Certainty with regard to determination of ALP of the international transaction
- Impart flexibility in developing practical approaches for complex transfer pricing issues
- Reduce the risk of potential double taxation through APA
- Reduce litigation costs by eliminating risk of AP audit.
There are three types of APA that can be entered into:
1) Unilateral APA
It is an agreement between the CBDT and the taxpayer/applicant and does not involve any corresponding agreement with AEs. In this case, applicant does not engage the competent authority of any other country, therefore risk of double taxation is not mitigated.
2) Bilateral APA
Under this agreement, agreement is entered between CBDT, applicant & competent authority of India & competent authority of the foreign country with the country with which transaction is being entered into.
In this case, applicant is required to make an application with competent authority of India & simultaneously the applicant/or its AE should apply to competent authority of other country. A consensus is required to be reached between both the competent authorities through negotiations.
3) Multi-lateral APA
Under this agreement, agreement is entered between CBDT, applicant & competent authority of more than 2 countries in regard to choosing the most appropriate method to determine the ALP of the transactions entered into between the countries.
Note: Request for Bilateral APA & Multi-lateral APA can be accepted by the Indian Competent authority where:
- Tax treaty exists between India & other contracting state and,
- The corresponding APA program exists in other country
How you can apply for Advance Pricing agreement (APA)
APA Process
It involves the following process:
1) Pre filing Consultation (optional)
2) Filing of APA application
3) Acceptance/ rejection of APA application
4) Actions by applicant, the AO & TPO while the APA is negotiated
5) Amendment to an APA application
6) Examination & analysis of an APA application
7) Conversion of unilateral APA into bilateral APA ( if applicant chooses)
8) Negotiations between applicant & CBDT
9) Entering into Unilateral APA or in case of Multi-lateral APA, negotiation between competent authorities
10) Action by applicant & AO on entering into APA
11) Furnishing of Annual Compliance report
12) Compliance audit of the agreement
13) Cancellation & revision of APA
Frequently asked Questions (FAQs)
Q.1 Is APA binding on all the Income Tax authorities
Answer: An APA is binding on the applicant & on CIT & other income tax authorities subordinate to him An APA is not binding on ITAT, High Court or Supreme Court.
Q.2 Does APA needs to be filed every year if transaction is of continuing nature
Answer: If international transaction is of Continuing nature, from dealings that have already occurred, the application must be filed before the first day of the PY relevant to first AY which the application seeks to cover. Application is not required to be filed each year, you can mention the number of years which the application will cover.
Q. 3 Does previous years which have already been passed can also be covered in APA Application
Answer: Yes, previous years can also be covered in APA application. This is known as APA roll-back.. Application for roll-back has to be made alongwith main APA application. Further, if application of roll back results in reduction of income offered to tax or increasing the loss as declared in return of Income for particular year, roll back provisions will not be applicable for that year.
Q.4 Can APA application be renewed after expiry of the APA term
Answer: Yes, APA application can be renewed after expiry of the term. Renewal application would be treated as a fresh application & procedure & fee would apply accordingly.
Conclusion: In conclusion, APAs provide certainty and clarity in transfer pricing by binding taxpayers and tax authorities, covering multiple years, and allowing roll-back for past transactions. They reduce disputes and can be renewed for continued benefits, making them an effective tool in international taxation.
