3. ANALYSIS OF THE AMENDMENT OF SECTION 92CC [10]
3.1. The provision is applicable to an international transaction and not to a Specified Domestic Transaction. The provisions do not spell out any threshold for an application. They also do not spell out the nature of transactions in respect of which an application may be made for APA. Hence, on a plain reading all types of international transaction could be referred to the CBDT for an APA. It appears that these aspects may be clarified in the scheme to be prescribed by the CBDT under section 92CC(9).
3.2. The application for APA could be made by any non-resident or a resident, whether a company, firm, LLP, individual or any other person.
To illustrate, the application could be made by any of the following:
i. A foreign company having a subsidiary in India;
ii. A subsidiary of a foreign company;
iii. An Indian holding company having a foreign subsidiary;
iv. A foreign subsidiary of an Indian holding company.
3.3. Section 92CC(1) provides that the CBDT may enter into an APA with any person in relation to an international transaction ˜to be entered into by that person™. Thus, on literal, the APA has to be entered into before the international transaction is entered into by the assessee. At the same time, Section 92CD(1) envisages that a modified return could be required to be filed pursuant to an APA. It is not clear how the computation of income could be affected and how a return could require modification in respect of an international transaction which is not yet entered. Further, Section 92CD(3) also envisages completion of assessment proceeding before the expiry of period allowed for furnishing of modified return. Again, it is difficult to visualize how the assessment could have been completed and could be impacted even before the entering into of an international transaction. A possible explanation to reconcile the provisions is that the assessee can go ahead with an international transaction at least after filing of the application for APA and the financial implications of such international transaction are reflected in the accounts as well as the return of income which would then necessitate a modification if the APA is at a price which varies from the recorded consideration in the transaction.
3.4. The APA would cover the ALP or the manner in which the ALP is to be determined. However, there cannot be an advance agreement as to:
- Whether two parties are associated enterprise or;
- Whether a transaction is international transaction or not or;
- What should be the exact amount of taxable profits in India.
Collateral issues such as whether the transaction involves a Permanent Establishment or whether the nature of income is taxable in India or not cannot be a subject matter of an APA; these aspects would continue o be governed by the Advance Ruling Provisions.
3.5. Even after the APA is entered, it appears that the procedure regarding determination of ALP including reference to Transfer Pricing Officer may not be eliminated. To illustrate, suppose the APA does not determine the ALP but provides for the manner in which ALP is to be determined, including the method. The Assessing Officer may still want to refer the determination of ALP to the Transfer Pricing Officer under Section 92CA[11].
3.6. The agreement may determine the ALP or specify the manner in which the ALP is to be determined. The manner of determination may include the method referred to in Section 92C(1)[12] or any other method with such adjustments or variations as may be ˜necessary™ or ˜expedient™ so to do. Thus, while the transfer pricing provisions cover only the method prescribed in Section 92C(1), the ambit of APA is wider and can cover a) any such method with adjustments or variations or b) any other method with further adjustments or variation as may be necessary or expedient so to do.
To illustrate, Comparable Uncontrolled Transaction method (˜CUT™) is not permitted under Section 92C(1), similarly, ˜unspecified methods™ as permitted by US Regulations are not permitted under Section 92C(1); however such method could be described under the APA.
- Manner of determination of ALP could include use of multiple year data etc.
- The meaning of ˜necessary™ has been explained as follows under the Indian Judicial System.
- In BikhubhaiVithalbhai Patel v. State of Gujarat[13], the word ˜necessary™ must be construed in the connection in which it is used. The word ™necessary™ means Indispensible, requisite, indispensably requisite, useful, incidental or conducive; essential; unavoidable; impossible to be otherwise.
- In State of Punjab v. Khem Chand [14]; J.Jayalalithav. Union of India[15]; Essar Oil Ltd. v. Halar Utkarsh Samiti[16]the word ˜necessary™ has been explained by the Supreme Court as what is indispensable, needful or essential.
- The meaning of ˜expedient™ has been explained as follows under the Indian Judicial System.
- In Dalbir Singh v. State of Haryana[17] the word ˜expedient™ means apt and suitable to end in view.
- In State of Gujarat v. Jamnadas G. Pabri[18], the word ˜expedient™ has several shades of meaning. In one dictionary sense, ˜expedient™ means ˜apt and suitable to the end in view, ˜practical and efficient™, ˜politic™, ˜profitable™, ˜advisable™, fit, proper and suitable to the circumstances of the case. In another shade, it means a device ˜characterized by mere utility rather than principle conducive the special advantage rather than to what is universally right™ it was then that the court must construe the said word in keeping with the context and object of the provision in its widest amplitude.
- In Aztec Software & Technology Services Ltd. v. Asstt. CIT[19] the word ˜expedient™ has been defined as Suitable or appropriate; profitable or convenient rather than fair and just; advisable; expeditious and a means suitable to end; something which serves to promote, etc.
- Blacks Law Dictionary [20] defines ˜expedient™ as Apt and suitable to end in view. Whatever is suitable and appropriate in reason for the accomplishment of a specified object.
- In Om Trading Co. v. ITO [21] it was laid down that the word ˜expedient™ is more comprehensive and would cover a wider range than the word ˜necessary™. The circumstances warranting ˜expediency™ are incapable of precise formulation.
3.7. There is no time limit within which the CBDT and the applicant have to reach an APA.
3.8. There is no express provision for renewal of APA after the expiry of its validity period in case the business model of the taxpayer remains the same. This aspect may be examined at the time of framing of the scheme by the CBDT under Section 92CC(9).
3.9. The APA is binding on the person in whose case the APA is entered into; however, on a plain reading, it would not be binding on the counter-party, or on the income tax authorities in respect of the counter-party. Also, there is no express provision to the effect that an APA would be valid/binding in case of a successor to the business where a successor opts to continue with the same arrangement. This issue may be considered at the time of framing of the scheme by the CBDT under section 92CC(9).
3.10. The APA shall cease to be binding if there is a change in the facts having bearing on it. Thus, if the person modifies the terms of the transaction and if such modification has a bearing on the APA then the APA would cease to be binding.
3.11. The law is silent regarding withdrawal of application or not entering into a transaction after the APA is signed.
3.12. Since the APA is an agreement, there cannot be any appeal against the APA. If after making the application and before the APA, the applicant believes that the CBDT™s approach is not in line with his view, it appears that he can withdraw the application and not enter into the transaction and subject himself to the regular transfer pricing agreement.
3.13. Once an application is made for entering into an APA the proceedings shall be deemed to be pending in his case for purposes of the Act; e.g., enquiries can be made under Section 133(6) of the Act.[22]
3.14. Section 92CC(1) provides that the APA would determine the ALP or specify the manner in which the ALP is to be determined. On a strict reading, the provision does not deal with documentation and records to be maintained, although it appears that the provision may be construed broadly and the APA may also spell out the exact information and records to be kept by an assessee in substitution of the documents and records to be maintained under Section 92CE.
3.15. The APA cannot affect any commercial terms and conditions that the parties may agree. It appears that even actual consideration may vary from the ALP. Further, the book profits for the purpose of minimum alternate tax under Section 115JB shall be computed on the basis of such recorded consideration and the ALP.
3.16. The law envisages a unilateral APA between the CBDT and an assessee. The process does not involve the country of which the assessee is a resident. As such the APA would not guarantee the consent of the other country to the arrangement made and hence double taxation may arise if the other country forms a different view as to the ALP.
3.17. The standing committee has recommended that the mechanism for framing APAs, specifying the manner in which ALP is to be determined in respect of international transactions should be entrusted to an independent agency appointed by the CBDT consisting of technical and judicial members, who will advise the Board on APAs in order to ensure that the APAs reflect the prevalent commercial practices and realities and hence there is no express provision to this effect in the provision.
