The much awaited detailed scheme on the recently enacted dispute resolution mechanism – Advance Pricing Agreement (“APA”) has been finally notified by the government.
The Central Board of Direct Taxes has now notified the detailed Scheme by way of amending the Income-tax Rules, 1962 (‘Principal Rules’) and inserting Rules 10F to 10T and 44GA in the Principal Rules.
Salient features of the APA Scheme
Applicability: Applicable to all “persons” undertaking international transactions or contemplating to undertake international transactions. No threshold limit prescribed.
Pre Filing Consultation: This is a mandatory requirement in the process and not an option provided to the tax payer. Additionally it involves a mandate of providing a lot of detailed information, with an option to keep the name of the tax payer and its related entities ‘anonymous’. Companies/ representatives can request for a pre-filing consultation with the Director General of Income Tax (International Taxation). While the pre-filing consultation is not binding on the Board or the Taxpayer to enter into an APA, it, among other things, shall:
- Determine the scope of the agreement
- Identify transfer pricing issues
- Determine the suitability of international transaction for the agreement
- Discuss broad terms of the agreement
Types of APAs available: APA Scheme has enabled companies to not only opt for Unilateral APA, but also for Bilateral and Multilateral APAs.
Application for APA: Companies desirous of entering into an APA need to file an application with the Director General of Income Tax (International Taxation) (DGIT) for Unilateral APA and with Competent Authority of India for Bilateral and Multilateral APAs.
It is to be noted that the process for Bilateral or Multilateral APA cannot be initiated unless the associated enterprise, situated outside India, has initiated the process of APA with the Competent Authority in the other country
Though the number of years can be proposed by the applicant, it cannot exceed 5 years as suggested in the Finance Act, 2012
Fee payable: The prescribed application filing fee thresholds are as follows:
|Amount of International transactions entered into or proposed to be undertaken in respect of which APA is proposed||Fees(Rs)|
|Amount not exceeding Rs 100 crores||10 lakhs|
|Amount not exceeding Rs 200 crores||15 lakhs|
|Amount exceeding Rs 200 crores||20 lakhs|
Forms prescribed: The following forms and the guidance notes are prescribed for the APA Scheme:
|Application for a pre-filing meeting||3CEC|
|Application for an APA||3CED|
|Application for withdrawal of APA request||3CEE|
|Annual Compliance Report on APA||3CEF|
Timing of application: Applicants desirous of entering into an APA should file their applications within the following timelines:
In case of continuing / existing transactions since the application is to be filed before the first day of the relevant previous year, the first year for which a tax payer may be able to apply for an APA would be FY 2013-14
In case of remaining transactions (i.e. new or proposed) any time before undertaking the transactions
Withdrawal: Applicants could withdraw their applications any time before the finalization of the terms of the APA. However, the fee which has been paid would not be refunded. If the tax authorities reject the APA application, the fee which has been paid shall be refunded.
Procedure: Prior to the main processing of the application there is step of preliminary processing of application which includes vetting the application for any deficiencies (defect in application, relevant document not attached or application not in accordance with understanding reached in the pre-filing consultation). If the application is allowed in the preliminary processing phase, the main processing of applications would be conducted by the APA team in the following manner:
- Holding meetings with applicant
- Calling for additional documents/ information/material from the applicant
- Visiting applicant’s business premises
- Making inquiries as may deems fit in the circumstances of the case
In case of a Bilateral or Multilateral APA, the applicant shall not be entitled to be part of the discussion between the competent authority of India and the competent authority of the other country/ countries. Also the applicant shall convey acceptance or otherwise of the agreement within 30 days of it being communicated. If the agreement is not acceptable the applicant could continue with the unilateral option or withdraw the application.
APA team: Would comprise of not only the designated income-tax officers under this regime but also include experts in economic, statistics, law or any other field as may be nominated by the DGIT.
APA agreement and terms: The APA would be entered into by the Board and the taxpayer after getting approval from the Central Government. An APA agreement would cover the following points:
- International transactions covered
- Agreed transfer pricing methodology, if any
- Determination of arm’s length price, if any
- Definition of relevant terms
- Critical assumptions
- Other conditions, if any, not covered in the Income Tax Act or in the Income Tax Rules
Critical assumptions: Means critical and significant factors and assumptions that if would change would annul the APA. This is the most crucial aspect in an APA and is very vaguely defined, which could lead to interpretation issues.
Binding effect of APA: APA would not be binding in case of any changes in critical assumptions or failure in meeting conditions set under APA. Also, the binding effect of APA would cease in the following cases:
- Due notice given by any party of the APA to the concerned other party/parties
- Notice in writing of changes in critical assumptions or failure to meet conditions by the applicant or by the Board
Annual Compliance Report: An annual compliance report has to be furnished which is as follows:
in quadruplicate for each of the years covered in the agreement needs to be filed within thirty days of the due date of filing the income tax return for that year, or within ninety days of entering into an agreement, whichever is later
Compliance Audit of the APA: The Transfer Pricing Officer having jurisdiction over the applicant is authorized to carry out the compliance audit of the APA for each of the year covered in the agreement and is required to furnish his report within six months from the end of the month in which the annual compliance report is received by him. It is provided that such cases would not be audited by the TPOs under the routine transfer pricing assessment procedure.
Amendments/ Revising/ Cancellation/ Renewing options for APA: APAs can be amended, revised, cancelled or renewed for which conditions/ circumstances are prescribed.
Crucial aspects not covered under the regime
While the overall regime is made available to the taxpayers, the following crucial aspects are not part of this:
No timeframe to conclude
Lack of firewall provisions to protect tax payer information
No exemption from maintaining detailed documentation until APA is concluded â€“in other words though all the information and documentation would be part of the application, the regular study would still need to be maintained by the tax payer until the APA is entered into
Who should access the APA scheme and how?
The APA scheme is ideal for taxpayers:
- Who wish to have tax certainty and elimination of double taxation?
- Who have complex transactions where differing views are likely to arise in respect of transfer pricing?
- Who wish to avoid the possibility of dedicating significant resources to an extensive transfer pricing audit
The APA process is applicable to multiple years and therefore the taxpayer can avoid prolonged audit and litigation time and cost. This definitely is an opportune time to discuss and evaluate as to the relevance of this scheme to your business.
Transfer pricing until now was applicable to companies having cross border transactions with their ASSOCIATED ENTERPRISE. However, Finance Bill 2012, honoring the supreme court ruling in case of CIT vs. M/S Glaxo Smithkline Asia (P) Ltd. (Special Leave to Appeal (Civil) No(s).18121/2007), expanded the ambit of transfer pricing to specified domestic transactions w.e.f 01 April 2013.
Transactions covered under the ambit of domestic transfer pricing:
a. Any expenditure in respect of which payment is made or is to be made to a person referred to in Section 40A(2)(b) of the IT Act;
b. Any transaction that is referred to in Section 80A;
c. Any transfer of goods or services referred to in Section 80-IA (8) i.e. applicable to companies operating as industrial undertaking or enterprises engaged in infrastructure development;
d. Any business transacted between the assessee and other person as referred to in section 80-IA (10);
e. Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable;
f. Any other transaction, as may be prescribed by the board.
Provided that the aggregate value of the transaction entered into by the assessee with its domestic associated enterprise exceeds ` 5 crore.
Implication of such amendment by Finance Act, 2012:
All the transactions entered into by the taxpayers operating in Special Economic Zones (‘SEZs’); taxpayers entering into transactions with certain related parties specified under section 40A(2) and all the taxpayers claiming profit based deductions for undertaking specified business activities (under section 80A, 80-IA, etc.) will be covered.
The most likely affected industries are industries operating in SEZs, infrastructure developers and / or infrastructure operators, telecom services industries, industrial park developers, power generations or transmission, etc. Apart from these industries, the business conglomerates having significant intra-group transactions would be impacted.
Most likely transactions under the scanner of the transfer pricing authorities would be:
a. Interest Free Loans to group companies;
b. Granting of Corporate Guarantees / Performance Guarantees by Parent Company to its subsidiaries;
c. Intra-group purchase / sell / service transactions;
d. Payment made to key personnel of the assessee, e.g. transactions with the directors / CFO / CEO, etc;
e. Payment made to key personnel of the group companies;
f. Payment made to relatives of key personnel of the assessee / group companies.
Area’s of Concern for Certain Domestic Companies:
There is no clarification with regards to Indian companies having both international transactions as well as domestic transactions. Since the company has to comply with transfer pricing regulations owing to their international transaction, the question remains whether the specified domestic transactions are required to be reported in following scenario.
a. When the value of aggregate of international transaction and specified domestic transaction is less than Rs. 5 crore;
b. When the value of aggregate of international transaction and specified domestic transaction is more than Rs. 5 crore but the value of specified domestic transactions is less than Rs. 5 crore.
The company who has the aggregate value of domestic transaction more than Rs. 5 crore anyways have to comply with the transfer pricing regulations.
In view of the above, the author is of the view that once the company has to comply with the transfer pricing regulation by virtue of the international transaction, specified domestic transaction should also be reported by way of abundant caution in order to avoid future litigation.
Further, in order to avoid litigation at the future date, companies who have domestic transaction with its related parties equal to or more than Rs. 5 crore or companies whose present domestic transaction less than Rs. 5 crore but is likely to increase beyond Rs. 5 crore in the financial year 2013-14 are advised to validate their present business model and pricing methodology from a transfer pricing perspective which will enable them to take corrective actions, if necessary.
Compiled by:- Ankur Mathur Semi Qualified CA, B.Com (Hons)