An Advance Pricing Agreement (APA) is an agreement between a taxpayer and the revenue authority for a fixed period relating to pricing of international transaction with associated enterprises.

The different types of APA are Unilateral, Bilateral and Multilateral APA. The processes involved in APA are:

1) Pre-filing conference on APA between tax authority and taxpayer.

2).Evaluation by the tax authority of the APA proposed by tax payer.

3) Negotiation of the APA between tax authority and tax payer.

4) Execution/Rejection of APA.

5) Renewal of APA and rollback of APA.

Currently there is no provision for APA in the Income Tax Act. The Government has brought up a proposal to introduce APAs in the Direct Taxes Code. Given the surge in litigation in transfer pricing in India, APA seems to be a welcome move to resolve disputes.

Getting friendly with treaty partners

The tax treaty between India and Australia has been amended on December 16, 2011, but it is still to come into effect. The scope of source country taxation has been restricted by increasing the threshold limits for creation of a Permanent Establishment in source country and by removing the “force of attraction rule”, which widens tax incidence for taxing the business profits. An article on non-discrimination has been introduced in the treaty, which provides for same tax compliance requirements irrespective of residential status.

The tax treaty between India and Switzerland has been amended effective from April 1, 2012. A Most Favoured Nation clause has also been included in the treaty to invoke beneficial provisions of the treaties signed in future. Also, an anti-abuse provision has been introduced in respect of some of the income streams.

Will it rain money in Infra Debt Fund?

Given the growing importance of developing infrastructure in India, a lot of foreign companies have shown interest in investing into this sector. As a means of facilitating such investment, the Government has announced the creation of special vehicles called Infrastructure Debt Funds (IDF) during the 2011 Budget. The primary objective for such an initiative is to attract foreign funds for infrastructure financing.

While a broad framework has been notified by the Government, the other regulatory bodies ( viz RBI and SEBI) have issued separate notifications for enabling implementation of the framework. Additionally, the RBI has issued guidelines for banks to sponsor IDFs which could ease the fund-raising. RBI has also issued a circular (dated November 22, 2011) permitting investment by eligible non-resident investors in IDFs set-up as NBFCs (IDF-NBFCs) and IDFs set-up as MFs (IDF-MFs).

Software payments, a thorny issue

Characterisation of software payments as “royalty” or “business profits” has been a contentious issue in India. While royalty is subject to withholding tax, “business profits” are taxable only if a business presence/permanent establishment of the foreign enterprise exists in India.

The Karnataka HC recently in the case of Samsung held that payment for packaged computer software program is taxable as royalty as the end-users of the computer software program were granted a license to make copies of the computer software program. On the contrary, the Delhi HC in the case of Ericsson held that consideration paid for telecommunication equipment in which software was embedded should not be classified as royalty as there was no transfer of copyright rights of the software embedded in the equipment.

Contrary judicial precedents on the characterisation of technology-related payment have left MNCs confused on the position to be adopted for withholding taxes on such payments.

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