Presentation on Economics of APA

ECONOMICS OF ‘ADVANCE PRICING
AGREEMENTS’ (APAS)
Bhopal | 16 January 2016
SANJAY SANGHVI

Copyright © Khaitan & Co 2016 | 2
CONTENTS
1. Background of APAs
2. Genesis of APAs
 Objective of APA scheme
 Meaning of APA
2. Types of APA
3. Key Features of APAs
 Eligibility to enter into APA
 Scope
 Binding Effect
 Validity Period
 Rollback Provisions
4. Stages of APA
5. Changes to an APA
6. International Perspective
7. Implications/Some Comments

BACKGROUND
 Transfer Pricing
• Specific regime for tax on transactions between ‘associated enterprises’ (AEs)
• AEs
o A Co. participating directly or indirectly or through one or more intermediaries in the management,
control, or capital of B Co.
o A Co. & B. Co have common parent
o A Co. holds directly or indirectly 26% or more of voting power of B Co
o A Co. guaranteeing 10% or more of borrowed capital of B Co.
o A Co. appoints 50% or more of Board of directors of B Co., or 1 or more executive directors of B Co.
• Legal fiction- transaction between AEs as if they are independent parties.
• Income from ‘international transaction’ to be computed on ‘Arm’s Length Price’ (ALP) basis
• ‘International Transaction’ means a transaction between two or more enterprises either or both of whom are
non-residents
• ALP means price applied/ proposed to be applied between persons other than ‘associated enterprises’ in
uncontrolled conditions
 Significance
• Huge tax litigation on account of Transfer Pricing (TP) (ALP or manner of determination of ALP)
• Approximately 60% of tax disputes globally are on account of TP
APA regime intends to attack root cause of TP disputes to provide ‘tax
certainty’

GENESIS
 Purpose of introducing APA scheme
• FM’s Budget Speech 2012- APA introduced to bring down tax litigation significantly and provide
tax certainty to foreign investors
• To provide ‘certainty’ and ‘unanimity’ of approach in determining ALP of ‘international
transactions’
• Thus, to reduce tax litigation on account of TP
 APA
• An agreement between ‘tax payer’ (resident/non-resident) and CBDT determining ALP or
manner of determination of ALP.
 Change in Tax Law
• Finance Act 2012 introduced section 92CC & section 92CD in IT Act to enable CBDT to enter
into APAs.
• Key features contained in section 92CC & section 92CD of the IT Act lays out eligibility, scope,
binding effect, validity period of APAs
• Power delegated to CBDT to prescribe form, manner, and procedure for entering into APA.

Types of
APA
Unilateral
- Involves ‘taxpayer’ and
CBDT
-With the approval of
Central Government
Bilateral
- Involves ‘taxpayer’ its
‘associated enterprise’,
CBDT and foreign tax
authorities
- Competent Authorities of
India and foreign state
involved
Multilateral
- Involves Multiple Parties:
‘taxpayer’, two or more
‘associated enterprise’ and
relevant tax authorities in
different countries.
- Multiple authorities
including CBDT and foreign
authorities (where
associated enterprises are
located) e.g. Internal
Revenue Service (IRS) in
US.
 Statistics
As on December 11, 2015 31 APA’s signed of which 30 Unilateral, and 1 bilateral.
(Source: Press Information Bureau)

KEY FEATURES
 Eligibility for APA [Section 92CC & Rule 10F]
• Person who has entered into an international transaction
• Person proposing to undertake international transaction
 Scope of APA
• APAs include determination of ALP or specifies the manner in which ALP is to be
determined;
• ALP can be determined as per any method prescribed under section 92C for determination
of ALP along with necessary adjustments and variations. [section 92CC(2)]
 Binding effect of APA
• APA is binding on the person entering into international transaction (taxpayer) and the CIT
(including income-tax authorities subordinate to him)
• Binding only in respect of transaction in relation to which the APA has been entered into
• Not binding if there is change in law or facts having a bearing on such APA. [section
92CC(6)]

KEY FEATURES…
• CBDT empowered to declare an APA as void ab initio if APA has been obtained by fraud or
misrepresentation of facts. [section 92 CC(7)]
• Non-compliance with terms of APA including ‘critical assumptions’ may lead to cancellation
of the APA.
• Transactions covered under APA not subject to regular audit by Transfer Pricing Officer (i.e
TP assessment proceedings).
 Validity Period
• Valid for a period specified in APA, but not to exceed 5 consecutive financial years [Section
92CC(4)]
• APA can be extended/renewed for further period of upto 5 years
Application for APA can be withdrawn anytime before finalisation of
terms of APA

…KEY FEATURES
 Rollback of APA [Section 92CC (9A)]
• Rollback of APA can be for applying APA to ‘international transaction’ already undertaken 4 preceding
financial years[Rule 10MA and Rule 10RA]
• Procedure contained in Rule 10RA
o Pending Appeal (to the extent, it covers APA) to be withdrawn both by applicant and tax
department
• Rollback available only -
o In respect of ‘same’ international transaction to which APA applies
o If return for rollback year has been furnished by the applicant before due date
o If Rollback requested for all the years in which said international transaction has been
undertaken by the applicant.
o TP Report in respect of such international transaction furnished in accordance with section
92E
• Rollback not available if-
o Determination of ALP for said year (for which rollback is sought) has been subject matter of
appeal before ITAT and such appeal has been disposed of before signing of APA; or
o Rollback has effect of reducing taxable income or increasing loss declared in the tax return
for that year.

STAGES OF APA
APA Process
Key to success of APA Program
• Proper functional analysis
• Determination of TP methodology,
• Examination of ‘critical assumptions’
• Specify manner in which ALP is to be determined
Pre-filing
consultation
Application
Preliminary
processing of
application
Amendment to
application
Finalisation of
terms of the APA

…STAGES OF APA
 Pre filing Consultation [Rule10H]
• Any person proposing to enter into APA to apply for pre filing consultation with Director General of
Income Tax (IT) [Form 3CEC]
o To assess the possibility of entering into an APA
• Mandatory to have a Pre filing consultation before filing APA application
• APA team of CBDT to hold Pre-filing consultation to-
o Determine nature & scope of APA
o Identify transfer pricing issues like FAR analysis
o Discuss broad terms of APA
o International transaction to be covered
o Proposed TP method (CUP/TNMM etc.)
• Understanding reached in pre filing consultation to be reduced in writing
• Pre filing consultation not to obligate CBDT or taxpayer to enter into APA
• Pre filing consultation not to deem that taxpayer has applied for APA

CHANGES TO AN APA
 Revision of APA [Rule 10Q]
• An APA may be revised by CBDT either suo moto or on request of assessee or competent authority or
DGIT (IT)
• APA may be revised on account of-
o Change in critical assumptions
o Change in law that modifies matter covered by an APA (change in law governing non binding
nature not covered)
o Request from competent authority of foreign country to revise APA in case of bilateral or
multilateral APA
• Revision at the request of assessee may be rejected by CBDT, reasons to be provided in writing.
• Revised APA to include date till which original APA is to apply and date from which revised is to apply.
 Renewal of APA [Rule 10S]
• Request for renewal to be made as new application
• Procedure for new application apply except pre filing consultation

…CHANGES TO AN APA
 Cancellation of APA [Rule 10R]
• An APA could be cancelled on account of-
o Failure to comply with terms of APA
o Failure to file annual compliance report
o Material errors in annual compliance report
o No consensus on the terms of the revised APA
o Effect cannot be given to rollback provision of an APA due to failure on the
part of applicant.
• Cancellation order should-
o Record reasons for cancellation
o Follow principles of natural justice
o Specify effective date of cancellation
• Order of cancellation of APA to be communicated to-
o Assessing Officer, Transfer Pricing Officer
o Foreign tax authorities in case of bilateral or multilateral APA

INTERNATIONAL PERSPECTIVE
 USA
• APA regime since 1991, specific APA team in IRS.
• APA Program merged with U.S. Competent Authority (USCA) that resolves transfer pricing cases
under the mutual agreement procedures of the United States’ bilateral tax treaties.
• Information collected in APA process deemed as “tax return information” thus no loss of any
confidential information.
• Annual reports disclosing various details relating to APA and MAP for general information to the
public.
 United Kingdom
• ‘Rollback’ facility available
• Her Majesty Revenue and Customs (HMRC) recommends having bilateral APA
• Even on receipt of unilateral APA, HMRC may communicate with the other Administration (where tax
treaty exists) to ascertain entering into a bilateral APA process unless
- Unnecessary delay caused due to bilateral process
- No APA process in other jurisdiction
• Alternatively, HMRC’s ability to give effect to a mutual agreement reached with a treaty partner to
eliminate double taxation under the terms of a treaty will not be restricted by the terms of a unilateral
APA.

IMPLICATIONS/SOME COMMENTS
 Efficiency in reducing transfer pricing related disputes
 MAP versus APA
• MAP wider recourse covering all issues under tax treaty
• No rollback of APA for an year for which MAP is concluded
• For pending MAP request for any year under rollback of APA- either MAP or rollback to
be chosen by taxpayer
• Cases of economic taxation cannot be admitted under bilateral APA unless MAP Article
exists in a tax treaty.
 Some Concern
• Business Information shared with APA team during APA procedure can be shared with
field officers

www.khaitanco.com
Khaitan & Co asserts its copyright as the author of this presentation.
The contents of this presentation are for informational purposes only. Khaitan & Co disclaims all liability to any person for any loss or
damage caused by reliance on any part of this presentation.

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