The recently notified advance pricing agreement aligns India’s tax regime for international transactions with global norms, but it is far from being fair and transparent.

With the notification of Advance Pricing Agreement (APA) Scheme on August 30, the Finance Ministry has operationalised Section 92CC of the Income-tax Act ushered in by the Finance Act, 2012.

By doing this, India might have announced its entry into a club of nations having such a regime for international transactions, but the portents are ominous. The foremost objection to the scheme is that it arms the executive with discretionary powers. It provides the taxpayer the possibility of entering into a sweetheart deal, given the fact that the new section does away with the normal transfer pricing norms.

The scheme is of a piece with the discretionary powers the government has been giving itself by fostering crony capitalism, be it coal allotment, or the invidious first-come-first-served norm of 2G spectrum allotments that the Apex Court was constrained to cancel.


Power corrupts and absolute power corrupts absolutely goes the cliché — but discretionary power, a variant of absolute power, is the most dangerous of them all. Why should the government of the day be armed with the power to enter into advance pricing agreement that can transcend the scheme of arms length pricing enshrined in Section 92C?

That a need could arise for bypassing the law made by Parliament raises several uncomfortable questions. Aren’t the statutory provisions on arms length pricing, transparently codified in the income-tax law and rules, reasonable or resilient enough?

If they aren’t, won’t it be better to amend them transparently in full public view rather than allow a disgruntled taxpayer with deep pockets to cosy up to the government of the day?

The SEBI’s compounding scheme for some of the perceived less serious offences has always invited both derision and suspicion.

Reports of Anil Ambani’s ADAG getting away with a rap on its knuckles by coughing up Rs 50 crore in return for the SEBI not launching prosecution proceedings for allegedly indulging in round-tripping and abusing the participatory note route to FII, raised the hackles of commentators and moralists alike.

Likewise, the nascent advance pricing scheme could be a veritable powder keg waiting to explode.

The government a few years ago gracefully accepted the criticism of the Settlement Commission mechanism, by allowing a taxpayer to knock at its doors but once in his lifetime. One would have thought that in the wake of an avalanche of scams, the government will be circumspect about giving itself discretionary powers. But the notification on advance pricing scheme has belied such hopes.

undermines set-up

The Authority for Advance Ruling (AAR) headed by a former judge of the Supreme Court has been doing splendid work.

Non-residents, including foreign companies, have been making a beeline to it, attracted not only by the laughably low fee of Rs 2,500 (hiked to Rs 10,000 by the Finance Act, 2012, though still leaving it laughably low), but also by its well-thought-out orders, despite knowing that the ruling given by it is binding on the applicant as well as on the department.

Now, the government has undermined this august forum. Anyone, especially with a one-off transaction of a very large magnitude would seek the portals of the competent authority under the advance pricing scheme, rather than the portals of AAR.

For him, the prospect of having to cough up a prohibitive fee of Rs 10 lakh in the minimum and Rs 20 lakh in the maximum is not going to be a deterrent, so long as he smells greater income at the end of the day.

The government ought to have strengthened the AAR mechanism with more benches and resources, rather than belittle it by interposing a new order that is likely to dance to the tune of the government of the day.

Transactions with non-residents in any case have an element of distance, giving them an air of anonymity. Added to that, the new proximity to the powers that be and these transactions become all the more non-transparent.

Ephemeral orders

The advance pricing agreement (craftily?) crafted between the government and the taxpayer would not be cast in stone, because the scheme says the government of the day has the right to rescind it for a variety of reasons.

These could include objections from the transfer pricing officer, when he sees the operation of the agreement on the ground, evaporation of critical assumptions that underpinned the agreement, unsatisfactory annual return of compliance with the agreement filed by the taxpayer, etc.

Given the fragile nature of the polity and the animosity between the ruling party and the opposition, one can expect a new government to latch on with alacrity to these instruments of vendetta, thus exposing taxpayers to crossfire.

The same government can, in fact, harass the taxpayer with these instruments of vendetta.


Advance Pricing Agreement, or APA, may be in vogue in advanced countries but that does not ipso facto mean we should borrow the idea, given its potential deleterious impact on the nation.

The people of this country, by and large, have a healthy respect for its judiciary and are cynical about the executive and political parties of all hues. That is why AAR, with its chairman an ex-Supreme Court judge, inspires confidence, even though it admittedly is not a judicial forum.

However, APA could become the forum of choice for the well-heeled among non-residents and AAR could be consigned to the role of addressing the queries of lesser mortals.

There is a view that AAR cannot deal with pricing agreements. This is erroneous. It is enjoined to reject applications only if they involve determination of fair market value of any property; pricing of transactions is a different kettle of fish, and therefore it comes within its remit.

(The author is a New Delhi-based chartered accountant)

(This article was published on September 2, 2012)
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