All about Advance Pricing Agreement (APA)

– DGIT forwards such request to competent authority of India which shall decide the possibility of bilateral in view of DTAA with the particular country and whether MAP is existent in treaty and if APA is allowed in that country

– If request is allowed, then application will be processed as bilateral application

– But, if, once the unilateral agreement is entered into, MAP benefit will not be available to applicant with respect to covered transactions

• Post signing of APA, litigation at any level must be withdrawn by assessee or department for covered transactions; further documentation is required to satisfy the compliance terms (indirectly, no penalty for not maintaining TP study)
• Confidentiality – Most countries allow sharing of APA information with on-field officers, as per dept’s guidance book, India also allows such sharing with tax department, however, there is no such explicit provision in act / rules
• Retrospective laws, only if related to APA, will have impact on concluded APA

Preparation for APA

• The following parameters are important :

– Aligning TP policy with commercial substance

– Having Inter-Co. agreements in place and aligned to TP policy

– Strong back-up documentation

– Availability of financial projections

– Decision on sharing of information with APA team

– Having alternative plan in case APA fails

Considerations while opting for APA

– Expensiveness of audit and litigation,

– Nature of transaction and complexity; facts expected to remain same over APA period

– New transactions proposed or foreseen

Roll-back Provisions

• The Agreement may provide the determination of ALP / manner of calculation of ALP for covered transaction must be same as non-rollback years i.e., ALP can be different but method, comparability analysis, tested party to be same
• The conditions for applicability of rollback are as below :

– International transaction is same as future years in agreement i.e., of same nature with same AE and FAR analysis does not materially different from FAR validated for future years

– Application has been made in Form 3CEDA

– The return of income has been furnished within due date u/s 139(1), revised returns u/s 139(5) are allowed but late returns u/s 139(4) are not allowed

– Form 3CEB must have been filed

– Applicant does not have right to choose the years, rollback must be requested for all years in block of 4 previous AYs in which said transaction undertaken except below situations:

• If there is no transaction in any year
• some disqualification in any rollback year
• Covered transaction non-existent in any year
• Applicant fails the test of rollback conditions in any year
• Rollback provision will not apply if:

– if appeal relating to transaction has been disposed by ITAT before signing of APA

• as FAQs, if ITAT has decided on facts then it is considered as disposed whereas if ITAT has set aside / remanded back then it will be eligible for rollback.
• It is not explicitly clarified whether law based matters if disposed by ITAT and pending in HC are eligible

– if the rollback has effect of reducing the income / increasing the loss declared in return of income

• For example, if the declared income is Rs. 100, the income adjusted by the TPO is Rs. 120, and the application of the rollback results in reducing the income to Rs. 90, then the rollback for that year would be determined in a manner that the declared income Rs.100 would be treated as the final income for that year
• Additional fees for rollback is Rs. 5 Lacs
• The applicant shall file modified returns for rollback years along with the modified returns of non-rollback years with prescribed due date along with additional fees arising as a consequence. In case of concluded APA before incorporating rollback years, the time limit to file modified return for rollback years will start from the date of signing the revised APA incorporating the rollback provisions
• If any appeal is pending before CIT(A)/ITAT/HC for covered issue, it must be withdrawn before filing modified return
• Pending appeal filed by department for covered transaction must be withdrawn within 3 months of filing modified return
• In case effect cannot be given to rollback provisions because of failure of applicant then agreement is liable to be cancelled

– If the applicant does not carry out any of the above actions for any of the rollback years, the entire agreement shall be cancelled. This is because the rollback provision has been introduced for the benefit of the applicant and is applicable at its option. Accordingly, if the rollback provision cannot be given effect to for any of the rollback years on account of the applicant not taking the actions specified, the entire agreement gets vitiated and will have to be cancelled

• If MAP has been already concluded for any of the covered transactions in any of the rollback year, then rollback provisions would not be allowed for those transactions for that year; but allowed for other years or for other transactions for that year. If MAP is pending then applicant have to choose one option MAP/APA for such year
• Pending appeal filed by department for covered transaction must be withdrawn within 3 months of filing modified return
• In case effect cannot be given to rollback provisions because of failure of applicant then agreement is liable to be cancelled
• If MAP has been already concluded for any of the covered transactions in any of the rollback year, then rollback provisions would not be allowed for those transactions for that year; but allowed for other years or for other transactions for that year. If MAP is pending then applicant have to choose one option MAP/APA for such year
• Compliance audit for the rollback years would primarily be to check if the agreed price or methodology has been applied in the modified return
• Applicant can withdraw roll back application while maintaining the APA application for the future years. However, it is not possible to accept the rollback results without accepting the APA for the future years. Fees will not be refunded if a rollback application is withdrawn
• Concluded APA can be revised to provide for rollback provision with additional fees and Form 3CEDA
• In case of Merger /Demerger – Applicant company will only be allowed to enter into agreement and eligible for rollback for transactions undertaken by it. Merged companies will not be allowed to take benefit of rollback

– Illustration : if A, B and C merge to form C and C is the APA applicant, then the agreement can only be entered into with C and only C would be eligible for the rollback provisions. A and B would not be eligible for the rollback provisions.

– Illustration : if A and B merge to form a new company C and C is the APA applicant, then nobody would be eligible for rollback provisions

– Illustration : if A has applied for or entered into an APA and, subsequently, demerges into A and B, then only A will be eligible for rollback as B was not in existence in rollback years

Bilateral / Multilateral APA

• In Bilateral/multilateral APA, applicant has to make application in Form 3CED in triplicate to competent authority (CA) of India i.e., Joint Secretary (FT & TR-I), New Delhi and simultaneously applicant/AE shall apply to CA of other country/countries if APA program is allowed nd the evidence of initiation must be furnished to CA in India; The process for bilateral/multilateral can be initiated only after AE has initiated the APA process with CA of that country
• The request for Bilateral APA will be accepted by India CA only if :

– Tax Treaty exists between India and other country and it must contain article on MAP (India has MAP provisions in all tax treaties where Dorf exists incl. Italy)

– The corresponding APA program exists in that other country

– In case of transaction leading to economic double taxation due to TP adjustments, the tax treay must contain para 2 in article 9 “Associated enterprises” as per OECD guidelines as below :

• “Where a Contracting State includes in the profits of an enterprise of that State and taxes accordingly profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult eachother.”
• Indian CA will decide whether request for bilateral is possible keeping above conditions in mind, if allowed then application will be processed as bilateral APA application
• The CA in India will first ascertain the willingness of CA of other country/countries, if they are willing then negotiation will take place through MAP arrangement to reach a set of terms acceptable to both CA
• On receipt of application for bilateral APA, the CA forward the application to DGIT(Intl. tax) who appoints APA team for inquiry, analysis and preparation of “draft Indian position paper” to be submitted to CA
• On receipt of draft paper, India CA start the negotiation process with CA of other country; during the process, CA of India is free to deviate from draft Indian position paper for arriving at a negotiated settlement
• Indian CA may require further details from applicant and may conduct inquiries
• Applicant will not be part of negotiation process but it may be consulted by India CA
• After successful completion of negotiation, CA of both countries will formalize the MAP arrangement
• Applicant must revert whether the agreement reached between CAs is acceptable with 30 days of communication to it; If the arrangement is acceptable, a mutually agreed draft agreement enumerating the result and effect of the arrangement with CA of other country which is accepted by applicant, post this a bilateral APA will be signed
• In case the agreement is not acceptable to applicant, it can choose to either continue the APA without benefit of MAP i.e., without bilateral or can withdraw the application
• In case of failure to reach an agreement, applicant will be informed – In this case, applicant will have option to convert its bilateral application into unilateral without payment of additional fees informing authorities in writing – once this option is opted, CA will forward all documents except related to CA of other country to DGIT to process it further
• In case of Multilateral APA, if negotiation with any one country fails, the applicant can choose to either go for bilateral/multilateral without involving that country or opt for unilateral
• Revision can happen only if CA of other country requests
• For cancellation, CA in India will communicate with CA of other country with reasons
• APA is transaction specific, hence there is no bar on making separate applications for unilateral / bilateral/multilateral APA for different transactions
• All other procedures timelines remain same as unilateral, only change being instead of DGIT, it will be CA of India