APA is an arrangement/agreement
between the Department and the Tax payer wherein the tax payer files its tax
returns in accordance with the agreed APA conditions for the period covered by
the APA.
This involves agreeing upon
certain rules in advance which should be applied to an international
transaction so as to arrive at arm’s length price [ALP].
The APA
framework for India is laid out in the proposed new Section 118 of the Direct
Tax Code [DTC]. APAs as understood in the west can be unilateral, bilateral or
multilateral and are between the tax payer and the taxation authority, or
authorities. Section 118 of the DTC provides for a unilateral APA between the
assessee and the tax authorities, which will be binding on the transaction, the
respective assessee and the Commissioner and his subordinates.
The CBDT is
required to obtain approval from the central Government for entering into an
APA.
An APA is to
be applied in respect of transactions to be entered into by the taxpayer.
However, in the west, the APA’s are also being applied to the same transactions
if any entered in the past so as to maintain consistency.
Any method
may be adopted to determine an arm’s length price. This enables the taxpayer
and the tax authorities to think for options beyond the prescribed methods so
as to agree upon a method that delivers an arm’s length price.
Once agreed
upon, the arm’s length price in respect of that transaction will be determined
only in accordance with the agreement so entered.
The agreed
upon method of arriving at the arm’s length price may be applied for a period
of five years as directed by the authority.
The APA so
agreed upon shall be binding:
- On the person in whose case this has been entered into,
- In respect of the transaction in relation to which the agreement has been entered into
- On the Commissioner and the Income Tax authorities subordinate to him in respect of the said person and the said transaction.
This offers
a safety to the tax payer in some situation where the transactions do not fit
into any of the prescribed methods.
Since the Department and the
Tax payer arrives at the methodology to be adopted for a particular
international transaction in advance, the chances of confusions, risk of
subsequent litigations can be eliminated. From the Department’s standpoint, APA
can be a better way of administering assesses coming within the TP purview.
Form the tax payer’s standpoint, the tax risks can be managed properly and reduces
the risk of non-compliance.
