Indian tax regime is on its way to certainty. Indian APA programme is welcomed by the taxpayers since it gives a certainty in the arm's length pricing. This article provides glimpse of India APA programme so far. http://thefirm.moneycontrol.com/story_page.php?more_category=by_invitation&autono=3706701

1. 11/7/2015 India’s APA Programme: Stirring Certainty
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India’s APA Programme: Stirring Certainty
Published on Tue, Oct 20,2015 | 22:51, Updated at Tue, Oct 20 at 22:51Source : Moneycontrol.com
By: Utpal Doshi, Senior Manager, Deloitte and Ajit Kumar
Jain, Manager, Deloitte
Background
The transfer pricing debate between the taxpayers and the
Indian tax authorities has been a never­ending story. The
taxpayers in India have faced eleven rounds of transfer pricing
audits so far. Each round of transfer pricing audit has seen
new controversies in areas such as marketing intangibles,
share valuation, corporate guarantees, business restructuring
and location savings, in addition to litigation on selection of comparables and attribution of high
markups for routine activities.
With close to INR 46,465 crore of adjustments made in the eleventh round of transfer pricing
audits, transfer pricing has gained paramount importance for both taxpayers and the tax
authorities. With such huge adjustments, India has been reckoned as a jurisdiction with high
litigation in transfer pricing matters. This impacted Indian Government’s efforts to project India
as an investor friendly jurisdiction and business destination for multinational companies.
In order to regain confidence of the business community across the globe and put Indian back
on the investors map, introduction of a program with an objective of providing stability and
certainty to tax payers on transfer pricing matters was the call of the hour. With this intention in
mind, the Indian Government introduced advance pricing agreement (‘APA’) program in 2012.
The APA program is a major initiative of the government which essentially aims at a negotiated
arrangement between a taxpayer and the tax authorities that sets out in advance the method
and arm’s length price for the transactions between affiliated entities.
The India APA programe offers three types of APAs, namely unilateral APAs, bilateral APAs and
multilateral APAs. While a unilateral APA is an agreement between the taxpayer and the CBDT,
bilateral / multilateral APA involves an agreement between the competent authorities of India
and the competent authorities of the country of the taxpayer’s associated enterprise. The APA
entered into by a taxpayer and the CBDT may include the agreed transfer pricing methodology
and the determination of the arm’s length price related to the covered international transaction
for the APA. There is no time limit prescribed for concluding an APA.
The Story So Far
The APA program was welcomed by the tax payers which is evident from the fact that a large
number of APA applications have been filed with the APA authorities in three rounds of filings
completed in March 2015. According to sources, approximately 580 APA applications have been
filed till date since its introduction in July 2012. The icing on the cake was introduction of roll­
back provisions early this year, giving an opportunity to the tax payers to obtain certainty for
their existing transfer pricing disputes for past 4 years. In essence, the APA program now
provides certainty to a tax payer for a period of 9 years i.e. certainty on arm’s length price for
future 5 years and past 4 years. It is expected that this will further accelerate this process
whereby it is expected that even those tax payers who have been waiting and watching the
progress and outcome of APA from sidelines will also join the move.
The Indian Government has demonstrated its commitment to make the APA program a big
success, which is evident from the fact that in the very first year of the program, it signed the first
batch of five unilateral APAs covering a varied range of international transactions. The signed
APAs covered variety of international transactions such as interest payments, corporate
guarantees, non­binding investment advisory services and contract manufacturing from diverse
sectors, including pharmaceuticals, telecom, natural resources exploration and financial
services.
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In June 2015, the CBDT signed first APA with a taxpayer engaged in the Information Technology
Enabled Services (‘ITES’) industry. The ITES industry has always been a soft target with the
transfer pricing authorities expecting high margins resulting in transfer pricing adjustments. This
development is likely to encourage many other ITES players in industry to follow the APA route.
The process received a momentum with CBDT signing the first bilateral APA with Japan.
Further, in a significant development, within a period of four months post notification of roll­back
rules in March 2015, the CBDT signed a unilateral roll­back APA in August 2015. The signing of
an APA roll­back in such a short span is expected to boost taxpayer’s confidence greatly and
can go a long way in more and more taxpayers to opt for APAs with roll­back rather than
following the litigation route.
In its ongoing drive to close the pending APA applications, on 13 October 2015, CBDT further
signed four unilateral APAs including India's second APA with a rollback provision marking an
important step in the country's attempts to provide a predictable transfer pricing regime. The
nature of the transactions covered under these agreements varied from software development
to share price valuation. According to government sources, the total number of APAs signed till
date is 20.
India is the first country in the world to achieve this success in the very first year. The
Government believe that the APA program will go a long way in creating a framework for
avoiding litigation arising from the aggressive transfer pricing environment and providing an
environment to the business community whereby they can focus on business rather than
litigation.
The Approach
The success of any APA depends on the intention of the Government and approach of the APA
authorities as well as the taxpayers. The key aspect of the entire APA process is that the
taxpayers should be transparent and proactive in sharing relevant information and documents
with the APA authorities. Similarly, the APA authorities need to analyses each case by looking at
the business realities and economic factors and should not be driven by a biased approach,
which will help in reaching an acceptable arrangement with the taxpayer.
India has a dedicated APA team which ensures consistency in interpretation of critical
assumptions of the APA and thus enhances effectiveness of APA negotiation. The positive
response of the APA team during pre­filing discussions as well as post­filing
meetings/discussions has been a driving factor in successful conclusion of the APAs so far. The
professional approach adopted by the APA team in maintaining balance between the business
realities and interest of the revenue has been appreciated by transfer pricing specialists and
foreign investors.
Way Forward
Introduction of the APA regime and its success are evidence of the Indian Government’s
commitment to create a tax friendly environment in India. Towards this, APA authority’s
approach in distinguishing the APA process from the traditional audits and acting as a facilitator
to the negotiation process is quite commendable. It is certainly a positive step towards a more
certain economy.
With the experience so far, it is now expected that the APA program will evolve and develop a
collaborative mechanism that can lead to win­win situations for both tax payers as well as tax
authority. This is all the more critical at this stage as safe­ harbor rules have failed to attract
most taxpayers and hence achieving certainty through an APA will surely be an effective
solution.
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