Whereas as advance ruling could be sought from Authority for Advance Rulings with regard to the interpretation of the transfer pricing law, or in respect of factual matters, such as whether a transaction will be covered by transfer pricing regulations, the Authority for Advance Rulings will not entertain applications which seek determination of Arm’s Length Price (ALP).
Finance Act 2012 has introduced a mechanism to determine the methodology of ALP in advance through ‘Advance Pricing Agreements’ (APA). APAs are common in other developed nations.
Features of APAs
- The Board, with the approval of central government, may enter into an advance pricing agreement with any person, determining the ALP or specifying the manner in which ALP is to be determined.
- Such APAs include determination of the arm’s length price or specify the manner in which arm’s length price shall be determined, in relation to an international transaction proposed to be undertaken by the assessee.
- The APA shall be valid for such previous years as specified in the agreement, which in no case shall exceed five consecutive previous years.
- The APA shall be binding only on the person (i.e. the assessee) and the Commissioner (including income-tax authorities’ subordinate to him) in respect of the transaction in relation to which the agreement has been entered into.
- The APA shall not be binding if there is any change in law or facts having bearing on such APA.
- The person entering into such APA shall be required to furnish a ‘modified return’ within a period of three months from the end of the month in which the said APA was entered.
The CBDT has now notified the Rules called The Income-tax (10th Amendment) Rules, 2012 in respect of APAs vide notification dated 30/08/2012. The Rules provide for procedure to be followed for making application for APA, processing of application, procedure to be followed, broad terms of APA, etc., etc.
Rules apply with immediate effect of publication. Accordingly, now application for APAs can be made at any time before the first day of the previous year relevant to the first assessment year for which application is made, in respect of the transactions which are of a continuing nature and which are already occurring. In respect of other transactions, application is to be filed before undertaking the transaction. A hefty fee of Rs 10 Lac to Rs 20 Lac has been prescribed depending on the amount of international transaction. But if the efforts to make APA does not succeed, there is no provision for refund of fee. Even withdrawal of application fees is non-refundable.
Rule 10H is a very interesting Rule which deals with pre-filing consultation. Every applicant is required to apply for pre-filing consultation. Pre-filing consultation shall, among other things, (i) determine the scope of the agreement (ii) identify transfer pricing issues (iii) determine the suitability of international transaction for the agreement (iv) discuss broad terms of the agreement.
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Further, the said pre-filing consultation shall not (i) bind the Board or the person to enter into an agreement or initiate the agreement process (ii) deemed to mean that the person has applied for entering into an agreement.
Thus, in other words, an assessee may decide not to go in for APA after pre-filing consultation. At this stage, no fee is payable. This kind of provision is an extremely welcome proposition which will certainly encourage foreign companies to enter into APAs rather than take the risk of litigation in India.
However, the Rule relating to ‘annual compliance report’ and corresponding ‘compliance audit’ by the Transfer Pricing Officer (TPO) does not appear to appropriately fit into the scheme of APAs.
As per these provisions, while the assessee is obliged to furnish an annual compliance report every year, the TPOs have been authorized to carry out the compliance audit of the APA for each year of the agreement. Rule 10R empowers the Board to cancel an APA if compliance audit results in finding of failure on the part of the assessee to comply with the terms of the agreement.
It is felt that giving such sweeping powers to the Board to cancel APAs only on the basis of a compliance report is not a judicially impartial provision.
It also needs to be mentioned that there is no provision to file any appeal against rejection of application for APAs or against cancellation of APAs on the basis of compliance report. The Rules, therefore, need a re-look by the Board so that the good work done by the Board is not tarnished.
Email: hp.agrawal@sskmin.com