Advance Pricing Agreement

Advance Pricing Agreement (APA) is an agreement between a taxpayer and the tax authority specifying the Transfer pricing methodology (TPM) for pricing the tax payer’s transactions for future years. The objective of the Advance Pricing Agreement is to provide much-needed tax certainty to multinational enterprises (MNEs) operating in India, particularly on their intra-group transaction and in the process, adopt global best practices. APAs gives certainty to taxpayers, reduce disputes, enhance tax revenues and make the country an attractive destination for foreign investments. In this article, we will look at the Advance Pricing Agreement in detail.

Note on Transfer pricing methodology

The transfer pricing can be stated as the price which is paid for goods or services transferred from one economic unit of an organization to its other units situated in different countries. Any individual who has entered into an international transaction during a previous year is needed to obtain an Accountant’s Report and furnish report before filing the income tax return Know more about Transfer Pricing

Purpose of the Advance Pricing Agreement

The purpose of the Advance Pricing Agreement is explained in detail below:

To bring down tax litigation significantly and provide tax certainty to foreign investors
To provide certainty and unanimity of approach in determining Arm’s Length Price (ALP) of international transactions
To reduce tax litigation on account of transfer pricing

Scope of Advance Pricing Agreement

Advance Pricing Agreement includes determination of Arm's Length Price (ALP) or specifies the manner in which Arm’s Length Price is to be determined. The Arm’s length can be determined as per any method prescribed under section 92C of Income Tax Act for determination of ALP along with the necessary adjustments and variation.

Benefits of Advance Pricing Agreement

The benefits Advance Pricing Agreement is explained in detail below:

APA is designed to help taxpayers by resolving actual or potential transfer pricing disputes cooperatively, as an alternative to the traditional examination process.
Advance Pricing Agreement programme strengthens the Government’s resolve to fostering a non-adversarial tax regime.
An Advance Pricing Agreement provides certainty concerning the tax outcome of the tax payer’s international transactions
The Indian Advance Pricing Agreement scheme has been appreciated nationally and internationally for being able to address complex transfer pricing issues fairly and transparently.

Terms of Advance Pricing Agreement

The Advance Pricing Agreement includes the following things:

The international transactions covered by the APA
The agreed transfer pricing methodology
Determination of Arm’s length price
Definition of any relevant terms
Critical assumption

Types of Advance Pricing Agreement (APA):

Advance Pricing Agreement or APA is further classified into various types based on the number of related parties involved

Unilateral APA

Unilateral Advance Pricing Agreement involves only the taxpayer and the tax authority (CBDT) of the country where the taxpayer is located.

Bilateral APA

Bilateral Advance Pricing Agreement involves the taxpayer, associated enterprise (AE) of the taxpayer in the foreign country, the tax authority of the country where the taxpayer is located and the foreign tax authority.

Multilateral APA

Multilateral Advance Pricing Agreement involves the taxpayer, two or more associated enterprise of the taxpayer in different foreign countries, tax authority of the country where the taxpayer is located and the tax authorities of associated enterprise.

Eligibility for Advance Pricing Agreement

The following persons are eligible to apply for the Advance Pricing Agreement:

The person who has entered into an international transaction
The person proposing to undertake an international transaction

The validity of Advance Pricing Agreement

The Advance Pricing Agreement (APA) is valid for a period specified in APA, but not exceeding 5 consecutive financial years. APA can be extended or renewed for a further period of up to 5 years

Fee for filing an Advance Pricing Agreement

The fee for filing the advance pricing agreement is based on the amount of international transaction.

Sl.No	Amount of international transaction	Fee Details
1	Amount not exceeding Rs. 100 Crores	Rs.10 Lakhs
2	Amount not exceeding Rs. 200 Crores	Rs.15 Lakhs
3	Amount exceeding Rs. 200 Crores	Rs.20 Lakhs

Pre-Filing Consultation for APA

The person proposing to enter into an APA have to make an application in writing for a pre-filing consultation to the Director-General of Income Tax. On receipt of the request, the team will hold pre-filling consultation with the person. The component authority in India or his representative will be associated in pre-filling consultation involving bilateral or multilateral agreement The pre-filing consultation includes the following things:

Determine the scope of the agreement
Identify the transfer pricing issues
Determine the suitability of international transaction for the agreement
Discuss broad terms of the agreement

Advance Pricing Agreement Application Procedure

The taxpayer who desires to enter into an Advance Pricing Agreement has to furnish an application in a prescribed format along with the requisite fee. The application form for Advance Pricing Agreement is attached here: For Unilateral Agreement

The application has to be furnished to Director General of Income-tax (International Taxation) in case of unilateral agreement

For Bilateral or Multilateral agreement

The application has to be furnished to the competent authority in India in case of bilateral or multilateral agreement.

Provide Details The taxpayer has to provide the following details in the Advance Pricing Agreement:

Details of international transaction
Type of APA applied
Reason for not applying for bilateral or multilateral APA
Proposed transfer pricing methodology
Detailed functional analyses
Consolidated financial statement for five years

Note: The application has to file before the first day of the previous year relevant to the first assessment year for which the APA application is made, in respect of transactions which are of a continuing nature from dealings that are already occurring. The application has to file before undertaking the international transaction in respect of remaining transactions.

The APA authority after the verification of the application, get additional document or information from the taxpayer. The authority may visit the applicant’s business premises.
The APA team will carry out the enquiry and prepare a draft report. The DGIT (international taxation) for unilateral agreement or the Component authority of India for bilateral or multilateral agreement and the applicant will prepare a proposed mutually agreed draft agreement.

Cancellation of the Advance Pricing Agreement

An Advance Pricing Agreement can be cancelled on account of the following:

Failure to comply with terms of APA
Failure to file an annual compliance report
Material errors in an annual compliance report
No consensus on the terms of the revised Advance Pricing Agreement
The effect cannot be given to rollback provision of an APA due to failure on the part of the applicant

Renewal of APA

The request for renewal of Advance Pricing Agreement can be made by the taxpayer using the same procedure as outlined above except pre-filing consultation.