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The magnitude of cross-border trade and the growing complexity of international transactions and intra-group activity have intensified transfer pricing (TP) audits in India. Consequently, the Indian TP jurisdiction is considered among the most litigious, accounting for about 70 per cent of all global TP disputes by volume. The recently announced Advance Pricing Agreement (APA) programme is expected to bring greater certainty for taxpayers and foreign investors, and avert litigation. APA programmes have been successfully implemented in many countries, including the US, the UK, Australia and Japan. More countries are adopting them, given the enormous advantages for tax authorities and taxpayers alike.
Under an APA, tax authorities and the taxpayer determine in advance the most appropriate TP methodology or the arm’s length price (ALP) for intercompany international transactions.
In India, the taxpayer can enter into a unilateral/ bilateral/ multilateral APA with the Central Board of Direct Taxes for up to five consecutive years, and can renew it for another five years.
The APA programme also offers flexibility in determining ALP either through the most appropriate method prescribed in the Income-tax Act, 1961 or other suitable method. The taxpayer can commence negotiations for an APA by applying for a pre-filing consultation, which is mandatory under the APA programme.
Taxpayers can file an APA application for either existing or new transactions.
For an existing transaction, the application should be filed by March 31, 2013, for transactions commencing April 1, 2013 — which effectively means that the pre-filing process (application and pre-filing consultation) should be completed well ahead. For new international transactions, application can be filed any time during the previous year and before entering into the new transaction.
The taxpayer can withdraw the APA application at any stage before the finalisation of terms.
After entering into an APA, the taxpayer has to file a compliance report, followed by an annual compliance audit by the Transfer Pricing Officer (TPO). However, the compliance audit is expected to be much simpler than the regular TP audit. A focused APA team, including independent experts, has been deputed for the APA programme and negotiations.
The mandatory pre-filing consultation should be filed in the prescribed format (Form 3CEC). An ‘anonymous’ pre-filing option is available too.
The pre-filing consultation will not bind CBDT or the taxpayer to an agreement, nor would it imply that the taxpayer has applied for an agreement. The main objective is to determine the scope of the agreement, identify TP issues, determine the suitability of the international transaction for the agreement and discuss broad terms of the agreement. Revenue officers have clarified that pre-filing is mandatory to facilitate better understanding of the issues under discussion and for an early resolution.
The option of an anonymous pre-filing meeting through a representative is a positive step that will bolster taxpayers’ confidence in exploring APAs for TP dispute resolution. However, there is anxiety over the extent of information required at the pre-filing stage, which might impinge on taxpayers’ efforts to maintain anonymity. Tax authorities should address these concerns over confidentiality of taxpayer information.
Under APA rules, the application should be in accordance with the understanding reached during pre-filing consultation. In fact, after the pre-filing consultation, there will be a written communication to the taxpayer containing details of the preliminary understanding reached.
The APA programme has several clear advantages — it gives certainty for five years together with the prospect of renewal for five more years. After an APA, the simplified compliance would reduce documentation and save on time, cost and resources. APAs could also have persuasive value in litigation for open audit years.
The success of the APA programme in India would depend on a collaborative approach between taxpayers and revenue authorities, the overall ease of the negotiation process, and the availability of an adequate number of qualified APA professionals.
The APA team has been proactive and upbeat about the programme, as it looks forward to conducting negotiations with an open mind in a non-adversarial environment.
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