DIRECT TAXATION TRANSFER PRICING -

The Finance Act, 2012 introduced sections 92CC and 92CD to provide for a framework for Advance Pricing Agreement (APA) with effect from July 1, 2012. The salient features of the APA mechanism inter alia include the following :-

• CBDT can enter into any APA with any person undertaking an international transaction.
• Such APAs includes determination of the arm’s length price or specify the manner in which arm’s length price to be determined, in relation to an international transaction.
• The manner of determination of arm’s length price in such cases shall be any method as prescribed under Rule 10C with necessary adjustments or variations.
• The arm’s length price of any international transaction, which is covered under such APA, be determined in accordance with the APA
• The APA will be valid for such previous years as specified in the agreement but not exceeding five consecutive previous years.
• The APA will be binding only on the person 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 will not be binding if there is any change in law or facts having bearing on such APA.
• CBDT can declare with the approval of Central Government, any APA as void ab initio, if it finds that the APA has been obtained by the person by fraud or misrepresentation of facts.
• For the purpose of computing any limitation period the period beginning with the date of such APA and ending on the date of order declaring the agreement void ab initio to be excluded. However, if after the exclusion of the aforesaid period, the period of limitation referred to in any provision of the Act is less than sixty days, such remaining period to be extended to sixty days.
• The CBDT will prescribe a scheme which will provide for the manner, form, procedure and any other matter generally in respect of the APA.
• If an application is made by a person for entering into such an APA, all assessment proceedings shall be deemed to be pending in case of such a person.
• Where a person who has entered into an APA and prior to entering into an APA has furnished a return of income for the previous year to which the APA applies, such person is 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.
• If the assessment or reassessment proceedings for an assessment year to which the APA applies are pending on the date of filing of modified return, the Assessing Officer shall proceed to complete the assessment or reassessment proceedings in accordance with the APA taking into consideration the modified return so filed. The period of limitation of completion of proceedings in such case to be extended by one year.
• If the assessment or reassessment proceedings for an assessment year to which the APA applies has been completed before the expiry of period allowed for furnishing of modified return, and a modified return is filed, the Assessing Officer can assess or reassess or recompute the total income in accordance with the APA. The period of limitation for completion of such assessment or reassessment to be one year from the end of the financial year in which the modified return is furnished.
• The Finance No. 2 Act, 2014 has introduced a roll-back mechanism. It has been provided that the APA may provide for determining the arm’s length price or specify the manner in which the arm’s length price is to be determined in relation to the international transaction during any period not exceeding 4 previous years preceding the first previous year for which the APA applies. The CBDT has prescribed detailed rules vide Notification No. 23/2015 dated 14th day of March, 2015 for rollback mechanism. Some of the salient features of the mechanism are:-
  • Definition of “rollback year” to mean any previous year, falling within the period not exceeding four previous years, preceding the first of the previous year covered by APA.
  • The Agreement shall contain rollback provision subject to:-
    • The international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies.
    • The return of income along with Form 3CEB for the relevant rollback years have been furnished by the applicant before the due date.
    • The applicant has requested for applicability of rollback provision for all rollback years in which said international transaction has been undertaken.
    • The applicant has made an application seeking rollback in Form 3CEDA.
  • The rollback provision shall not be provided for a rollback year if:
    • The determination of arm’s length price of the said international transaction for the said year has been subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time before signing of the agreement;
  • The application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year. The fee for applying for roll back is an additional amount of ₹ 0.5 million along with the application in prescribed in Form No. 3 CEDA.
  • Time limit for making the application for roll back:-
    • Where an application has been filed prior to the 1st day of January, 2015, Form No. 3CEDA may be filed at any time on or before the 31st day of March, 2015 or the date of entering into the agreement whichever is earlier.
    • Where an agreement has already been entered into before the 1st day of January, 2015, Form No. 3CEDA may be filed at any time on or before the 31st day of March, 2015 and the agreement may be revised to provide for rollback provision in the said agreement.

The aforesaid period has been extended to June 30, 2015 vide CBDT Notification No. 33/2015 dated April 1, 2015.
The Central Board of Direct Taxes vide notification No. 36 of 2012 dated August 30, 2012 notified the APA Scheme. Rules 10F to 10T and Rule 44GA deal with the APA scheme.
Some of the salient features of the APA Scheme are as under:

• Any person who has undertaken or is contemplating to undertake a international transaction shall be eligible to enter into an APA.
• Unilateral, bilateral and multilateral APAs may be entered into.
• For unilateral APA, application will have to be filed with the Director General of Income Tax (International Taxation), for bilateral and multilateral APA, application to be filed with the Competent Authority.
• Pre-filing consultation is available in Form 3CEC to the DGIT at New Delhi. An anonymous pre-filing can be done where the name of the applicant assessee need not be given. However, the name of the authorised representative appearing on behalf of the assessee will have to be given.
• After conclusion of the hearing of pre-filing application, the assessee if it so desires may file the final APA application. The final APA application is to be filed in Form 3CED with the DGIT, New Delhi on payment of the fees.
• The hearing of the APA is a continuous process and involves site visit i.e. (at the premises of the applicant).
• In respect of one time transaction cases, APA can be filed before undertaking the transaction. However, in case of international transaction of a continuing nature it shall be made before the first day of the previous year relevant to the first assessment year for which the application is made.
• The applicant may withdraw the application of the APA in Form 3CEE at any time before the finalisation of terms of the APA. No refund of the fees will be granted in such cases.
• The APA will be entered into by the CBDT with the assessee after approval from the Central Government.
• The APA may be revised if –
  • There is a change in the critical assumptions or failure to meet the conditions contained in the APA;
  • There is a change in law that modifies any matter covered in the APA but is not of a nature which renders the APA to be non-binding;
• The term “critical assumptions” is defined in the Rule 10F(f) to mean factors and assumptions that are so critical and significant that neither party entering into any agreement will continue to be bound by the agreement, if any factors or assumptions are changed.
• The assessee who has entered into an APA is required to file an annual compliance report to the DGIT in Form 3CEF within 30 days of the due date of filing the income tax return for that year or within 90 days of entering into the APA whichever is later. The DGIT shall forward the copy to the CIT and the TPO having jurisdiction over the assessee.
• The TPO will carry out a compliance audit for each year covered in the agreement. The time limit for completion of the same is 6 months from the end of the month in which the annual compliance report is filed.
• The APA may be cancelled if –
  • The compliance audit has resulted in finding of failure on part of the assessee to comply with the terms of the APA
  • Failure to file the annual compliance report in time
  • Annual compliance report contains material errors
  • Assessee does not agree to the revision of the APA
• For bilateral and multilateral APAs, the AE would be required to initiate the APA process in the other country.