1) Advance Pricing Agreements (APAs) allow taxpayers to determine transfer pricing methods and arm's length prices for future international transactions in a cooperative manner to avoid potential disputes. 2) Taxpayers can apply unilaterally, bilaterally, or multilaterally for APAs. Bilateral and multilateral APAs require coordination between Indian and foreign tax authorities. 3) Extensive documentation must be provided including financials, functional analyses, critical assumptions, and proposed transfer pricing methodology.

1. Transfer Pricing
Advance Pricing Agreement
By: Nandita Naruka.

2. Advance Pricing Agreement (“APA”) Person eligible to apply
The Advance Pricing Agreement is an arrangment between the Taxpayer and the Any person who –
Tax Authority covering the future transactions,with a view to solve the potential
(i) has undertaken an international transaction; or
transfer pricing disputes in a cooperative manner.The Finace Act 2012
(ii) is contemplating to undertake an international transaction,
introduced provisions to enable Advance Pricing Agreements in the Indian tax
st
law with effect from 1 July 2012.On 31 August,2012 the Central Board of Direct
Definations/ Expression used in the document:
Tax isseud a notification introducing the rule for implementing APA.
competent authority in India” means an officer authorised by the Central
The rule enable a Taxpayer to file an application for a unilateral,bilateral or a
Government for the purpose of discharging the functions as such for matters in
multilateral APA.This is a welcome step since a unilateral APA may not be able to
respect of any agreement entered into under section 90 or 90A of the Act;
assure relief from double taxation to the Multinational Enterprises. The
government has shown an inclination towards bilateral APAs by questioning the “team” means advance pricing agreement team consisting of income-tax
Taxpayers on the reasons for filling a unilateral APA application where Double authorities as constituted by the Board and including such number of experts in
Taxation Avoidance Agreement exists.However, in case the bilaterial APA as economics, statistics, law or any other field as may be nominated by the Director
decided by the Competant Authorities is not acceptable to the Tax payer,the General of Income Tax (International Taxation);
Taxpayer may at its option continue with process of entering into a unilaterial
“bilateral agreement” means an agreement between the Board and the applicant,
APA without benefit of mutual agreement process.
subsequent to, and based on, any agreement referred to in rule 44 GA between
The Rules contain procedure for APA applications, information, data, and forms the competent authority in India with the competent authority in the other
that need to be filled,circumstances under which the board discontinue an APA country regarding the most appropriate transfer pricing method or the arms‟
and compliance procedures for monitoring a concluded APA. length price;
“multilateral agreement” means an agreement between the Board and the
applicant, subsequent to, and based on, any agreement referred to in rule 44GA
between the competent authority in India with the competent authorities in the

3. other countries regarding the most appropriate transfer pricing method or the
arms‟ length price;  The pre-filing consultation shall–
“unilateral agreement” means an agreement between the Board and the
(i) not bind the Board or the person to enter into an agreement or initiate
applicant which is neither a bilateral nor multilateral agreement.
the agreement process;
Pre-filing Consultation
(ii) not be deemed to mean that the person has applied for entering into an
 Every person proposing to enter into an agreement under these rules shall, agreement.
by an application in writing, make a request for a pre-filing consultation to
the Director General of Income Tax (International Taxation). Application for APA
 On receipt of the request , the team shall hold pre-filing consultation with the After the pre-filing meeting,if the Taxpayer is desirous of applying for the APA, an
person referred to in rule. application would be required to be made in specified form.For continuing
st
transaction ,the APA can be applied for the period starting from 1 April,2013
 The Competent Authority in India or his representative shall be associated in and for the proposed transaction,the APA can be applied at any time before
pre-filing consultation involving bilateral or multilateral agreement. undertaking the actual transaction.
Apart from the basic details, the Taxpayer would be required to provide the
 The pre-filing consultation shall, among other things,-
details in respect of the international transactions to be covered,type of the APA
(i) etermine the scope of the agreement;
applied for,reason for not applying for bilaterial/multinateral APA,proposed
transfer pricing methodology,detailed functional analyses,standalone and
(ii) identify transfer pricing issues;
consolidated financial statement for prior five years,etc.
(iii) determine the suitability of international transaction for the agreement; The fees payable shall be in accordance with following table based on the
amount of international transaction entered into or proposed to be undertaken
(iv) discuss broad terms of the agreement. in respect of which the agreement is proposed:

4. • Proposed terms and conditions, and critical assumptions, for an APA
Amount of international transaction Fee including analysis of potential influence of the proposed transfer pricing
entered into or proposed to be method/ APA terms and conditions on prior years’ operation and existing tax
undertaken in respect of which liabilities of the parties to the transaction
agreement is proposed during the
proposed period of agreement.
Withdrawal of application for agreement
Amount not exceeding Rs. 100 crores 10 lacs
 The applicant may withdraw the application for agreement at any time
Amount not exceeding Rs. 200 crores 15 lacs before the finalisation of the terms of the agreement.
Amount exceeding Rs. 200 crores 20 lacs  The application for withdrawal shall be in Form No. 3CEE.
 The fee paid shall not be refunded on withdrawal of application by the
applicant.
What documents/information are required to be provided?
Defective application
The prescribed forms for the pre-filing consultation and the application for an
APA contain an exhaustive list of information that needs to be provided to the If there is any defect in the application,the Taxpayer shall be served a deficiency
APA Authority. Broadly, the information can be characterized as follows: letter within one month from the date of receipt of application.The Taxpayer
shall be provided a time of fifteen days( extendable to thirty days) would be
• Details of the international transactions proposed to be covered in the APA. rejected,in which case the filling fee shall be refunded to the taxpayer.
• Functional analysis of the Applicant and all the relevant entities with respect
to the covered transactions including a description of the business strategies
– current and future including strategies relating to R&D, production and
marketing, budget statements, projections and business plans for the future
period covered by the proposed APA, general business and industry trends.
• Choice of the transfer pricing method

5. Procedure  The agreement shall be entered into by the Board with the applicant after
its approval by the Central Government. Once an agreement has been
 The APA Authority after verification of the application may either decide to entered into the DGIT (International Taxation) or the Competent Authority
proceed with the application or require the applicant to correct the in India, as the case may be, shall cause a copy of the agreement to be sent
deficiencies. to the CIT having jurisdiction over the assessee.
 The team shall process the application by way of consultation and discussion
with the applicant,by holding meetings with the applicant on such time and Terms of the APA
date as it deem fit; call for additional document or information or material
from the applicant;visit the applicant’s business premises; or make such An agreement may among other things, include:
inquiries as it deems fit in the circumstances of the case. • the international transactions covered by the APA
• the agreed transfer pricing methodology, if any
 For bilateral or multilateral agreement, the authority shall forward the
• determination of arm’s length price, if any
application to DGIT(International Taxation) who shall assign it to one of the
• definition of any relevant term
teams. However, the APA agreement shall not be initiated unless the
• critical assumptions
associated enterprise situated outside India has initiated the process of an
 Any other conditions, as may be required
APA with the CA in the other country.
Compliance post APA
 That team shall carry out the enquiry and prepare a draft report. The DGIT
The Taxpayer shall be required to file an Annual Complaince Report (ACR) to the
(International Taxation) (for unilateral agreement) or the Competent
DGIT within 30 days of filing the return of income or 90days of entering into
Authority in India (for bilateral or multilateral agreement) and the Applicant
APA,whichever is later.In the ACR, apart from the basic details,the Taxpayer shall
shall prepare a proposed mutually agreed draft agreement in terms of the
provide information such as detail of changes in the business model ,changes in
international transactions covered, the agreed methodology,determination
functional or risk profile,change in critical assumption vis-à-vis those agreed in
of arm’s length price and critical assumptions for the agreement.
the APA.The TPO shall conduct the complainece audit based on the details
provided in ACR to ensure that the terms as agreed in the APA have been met by

6. the Taxpayer.The TPO shall furnish its report within six months from the end of Renewing an agreement
the month in which the ACR was submitted,to the DGIT/Competent authority.
Request for renewal of an agreement may be made as a new application for
agreement, using the same procedure as outlined in these rules except pre filing
Revision, cancellation and renewal of an APA
consultation.
An APA can be revised or cancelled under any of the following circumstances:
• There is a change in any of critical assumptions or failure to meet conditions
subject to which the agreement has been entered into.
• There is a change in the law that modifies any matter covered by the
agreement.
• There is a request from the CA in the other country for revision of the APA, in
the case of a bilateral or multilateral APA.
• an APA may be cancelled where the Taxpayer has failed to file the ACR in
time, or the ACR has material errors or the Taxpayer is not in agreement with
Contact details:
the proposed revision to an APA.
S.P.Nagrath & Co.,
• An APA may be revised or cancelled by the Board either suo moto after
A-380 , Defence colony , New Delhi -110024
providing an opportunity of being heard to the taxpayer or on request of the
taxpayer. Email - nandita@spnagrath.com
• A request for renewal of an APA may be made by the taxpayer using the
same procedure as outlined above except pre-filing consultation.