The Ministry of Finance has notified an “Advance Pricing
Agreement Scheme” (Rules 10F to 10T of Income Tax Rules, 1962) vide notification
No. 36/2012 dated 30-8-2012. The Finance Act, 2012 had inserted sections 92CC
and 92CD in the Income Tax Act 1961 introducing the provisions of Advance
Pricing Agreement (APA). The APA Scheme shall come into effect from the date of
its publication in the Official Gazette, i.e. from 30.08.2012.
An APA is an agreement between the Central Board of Direct Taxes and any person, which determines, in advance, the arm’s length price or specifies the manner of the determination of arm’s length price (or both), in relation to an international transaction. Hence, once APA has been entered into with respect to an international transaction, the arm’s length price with respect to that international transaction, for the period specified in the APA, will be determined only in accordance with the APA. The APA process is voluntary and will supplement appeal and other Double Taxation Avoidance Agreement (DTAA) mechanism for resolving transfer pricing dispute. The term of APA can be a maximum of five years.
The APA scheme notifies three types of APA:
unilateral, bilateral and multilateral. The choice is on the applicant to choose
a particular type of APA at the time of making the application. Unilateral APA
is an agreement between the Board and the applicant and this process does not
involve any agreement with the treaty partner. In bilateral and multilateral APA
request, the applicant is required to make an application with the Competent
Authority of India as well as the Competent Authority of the other country.
As is the international practice, before formally applying for the APA
there will be a pre-filing consultation between the taxpayer and the Government
to enable the applicant and the APA team to assess the possibility of entering
into an APA.
The formal APA application can be filed after the
pre-filing consultation accompanied by the payment of fees as notified. In case
of unilateral APA, the application is required to be furnished with the Director
General of Income Tax (International Taxation), New Delhi and in case of
bilateral/multilateral APA, the application is required to be furnished with the
Competent Authority of India, i.e. Joint Secretary (FT&TR-I) in the Ministry
of Finance. In case of bilateral/multilateral APA, the applicant must initiate
the procedure for entering into APA with the other country as well and furnish
evidence to the Competent Authority of India regarding the same.
The APA
scheme has many advantages. It will provide tax certainty with regard to
determination of arm’s length price of the international transaction with
respect to which the APA has been entered into, reduce the risk of potential
double taxation through bilateral or multilateral APA, reduce compliance cost by
eliminating the risk of transfer pricing audit and resolving long drawn and time
consuming litigation and other dispute resolution process and alleviate the
burden of record keeping as the taxpayer knows in advance the required
documentation to be maintained to substantiate the agreed terms and conditions
of the agreement.
The aforesaid Notification relating to “Advance
Pricing Agreement Scheme” gives details regarding the process and relevant
forms. It also contains information regarding the annual compliance report and
provisions regarding cancellation and revision of APA.
Courtesy: PIB
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