Advance Pricing Agreements [APA] - I

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.