7. SUGGESTED RECOMMENADTIONS FOR APAs IN INDIA [26]
India™s APA scheme may generally follow a five-step process, each of those steps being as follows:
1. Pre-lodgment/filing
2. Formal lodgment/filing
3. Review and Evaluation
4. Finalization/formal agreement
5. Monitoring/annual reporting.
However, the following recommendations should be incorporated in the regime of APA process in the following fields-
7.1. Involvement of Tax Payer in APA Process
7.1.1. The tax authorities should welcome the involvement of the taxpayer throughout the APA process. It should be noted, however, in the case of a Mutual Agreement Procedure (MAP) APA, the taxpayer may not be involved in any discussions or correspondence between the Indian tax authorities and the relevant foreign tax authority.
7.1.2. At the same time, the tax authorities should undertake to keep the taxpayer informed on progress of any discussions or dialogue with the foreign tax authority subject of course to ensuring that confidentiality is retained in respect of any information to which the taxpayer would not be entitled to receive under the confidentiality and/or secrecy provisions of the relevant tax laws.
7.2. Forms and Information Requirements
The tax authorities may consider not to specify any particular forms for use with an APA application. Rather, the information required would be specified and advised to the taxpayer during the course of the APA process.
7.3. Critical Assumptions
The tax authorities may clarify that, when applying for an APA, a taxpayer should identify any factors that would have a significant impact on the viability of the proposed TPM or the outcomes of the proposed TPM. These factors to be referred to as critical assumptions should be incorporated into the APA application. The tax authorities may consider these critical assumptions in the course of its review and evaluation of the APA application and, where considered appropriate, the tax authorities may also suggest other critical assumptions to the taxpayer for inclusion in the APA.
During the course of the APA process, that is, prior to conclusion of a formal agreement between the parties, either party (i.e., taxpayer or the tax authority) may withdraw from the process at any time. It may be clarified that if the tax authorities decide to withdraw from an APA it should provide at the time of withdrawal a written explanation to the taxpayer setting out its reasons for withdrawing from the process.
A critical assumption is any fact (whether or not within the control of the taxpayer) related to the taxpayer, a third party, an industry, or business and economic conditions. While entering into an APA it should be remembered that the business activities, functions, risks, assets, accounting methods and estimates of the taxpayer shall remain materially the same for the period of the APA. The critical assumptions could be broadly categorized as operational, legal, tax, financial, accounting and economic conditions.
Where a critical assumption is breached, either party to the APA may cancel the APA with effect from the income year in which the breach occurs. Before cancelling an APA following a breach of a critical assumption, the tax authorities may first discuss the breach with the taxpayer (and with the foreign tax authority, in the case of a MAP APA) with a view to establishing whether the APA may be continued, albeit in a revised form.
Where the taxpayer becomes aware of a breach of a critical assumption, it must report that breach in a timely manner.
7.4. Confidentiality
Apart from the confidentiality/secrecy provisions that India already has in existence, the tax authorities may incorporate additional specific assurances in respect of confidentiality of information in an APA.
7.5. Withdrawal from the APA Process
During the course of the APA process, that is, prior to conclusion of a formal agreement between the parties, either party (i.e., taxpayer or the tax authority) may withdraw from the process at any time. It may be clarified that if the tax authorities decide to withdraw from an APA it should provide at the time of withdrawal a written explanation to the taxpayer setting out its reasons for withdrawing from the process.
7.6. Compensating Adjustments
Where a taxpayer™s review of its actual results against those outcomes agreed in the APA shows that an adjustment would be required to bring the actual results into line with the APA™s agreed outcomes, any such compensating adjustment should be reflected in either the taxpayer™s assessable income or deducted expenditures (as the case may be) when lodging/filing the taxpayer™s income tax return for the applicable income year. Any such compensating adjustment should also be reported in the taxpayer™s APA annual report.
In a case where the item requiring adjustment is a payment that was subjected to a withholding tax (e.g., interest or royalty), any further payment of withholding tax should be effected prior to lodging/filing the taxpayer™s income tax return for the applicable year.
Where the adjustment requires a refund of withholding tax, an application for the refund of that withholding tax should be made within the taxpayer™s APA annual report.
7.7. Fees
The tax authorities may not charge a fee for the formal application of an APA. However, in the case of MAP APAs, the tax authorities may agree on an administrative fee depending on the complexity of transactions involved, time spent in the case, materiality of the amounts involved, costs incurred in discussing and negotiating a MAP APA with another tax authority.
7.8. Time Frames for APA Process
Though the tax authorities might be unable to provide assurances to taxpayers as to the time it may take to finalize an APA following the formal application, they may, however, undertake to discuss and agree a proposed timetable with the taxpayer at the time of any pre-lodgment/filing discussions.
7.9. Consequences of an APA
The taxpayer shall not be required to maintain or submit annual transfer pricing documentation in respect of the transactions covered by the APA and during the term of the APA. Further, the tax authorities would not undertake an audit or other lines of enquiry in respect of transactions covered by the APA and during the term of the APA. Such assurances can be subject to the taxpayer™s ongoing compliance with the terms of the APA, through the APA annual reporting requirement.
The taxpayer would also be required to furnish an annual certificate, in the prescribed format, duly attested by a chartered accountant, confirming that the conditions agreed in the APA are being adhered to in the relevant year of reporting.
7.10. Renewal of an APA
The taxpayers should be encouraged to consider the renewal of an APA, particularly where an APA has proved to deliver the benefits that both parties sought from the APA. To ensure continuity from one APA period to the next, taxpayers should make representations for a renewal well before the expiration of the existing APA.
7.11. Roll Back of an APA
Where the process of negotiating an APA results in the APA being concluded after the proposed commencement date of the APA, the tax authorities should be prepared to accept that the APA may apply from that original commencement date. Further, the tax authorities should be prepared to consider representations from a taxpayer to the effect that the TPM and/or outcomes agreed in the APA may be applicable to transactions that occurred in a period or periods prior to the commencement date of the APA. Clearly, sufficient similarity needs to be present between the APA arrangements and the arrangements in the prior period(s).
7.12. Public Reporting
The tax authorities may consider the production of annual reports on the activities of India™s APA scheme. This report may contain information such as the number of APA applications filed, number of APAs taken into the scheme and executed, types of APAs (unilateral, bilateral), methodologies used, etc. The tax authorities may entertain a request from a taxpayer for the taxpayer™s APA to be publicized by the taxpayer. The tax authorities may not agree, however, to any publication of information that breaches the confidentiality requirements of India™s tax laws.
8. RECOMMENDATIONS
The combined view of the Authors is that it is way too early to make any concluding recommendation as to whether the expansions of such agreements should be encouraged; it looks like that in certain case to case studies such arrangements will aid and be helpful in resolving transfer pricing disputes. In a dispute between unilateral or bilateral/multilateral arrangements whenever possible, the APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant party.
Bilateral APAs come with less risk towards taxpayers who are compelled to enter into an APA ot to accept non-arms length agreement in order to avoid costly and delayed enquiries and possible entries. A bilateral APA also appreciably reduces the probability of any profits either escaping tax altogether or being double taxed.
Moreover, concluding an APA through mutual agreement procedure may be the only form that can be adopted by a tax administration which lacks domestic legislation to conclude binding agreements directly with the taxpayer.
[1]Inserted under Clause 39 of the Finance Bill, 2012 coming into effect from 01.07.12
[2] Hereinafter referred as ˜the rules™
[3]Hereinafter referred as ˜the Act™
[4]Hereinafter referred as ˜APA™
[5]http://www.pwc.in/en_IN/in/assets/pdfs/india-services/transfer-pricing/answering-queries-indian-advance-pricing-agreement-scheme.pdf visited on 29th July, 2013
[6] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2010; Para 4.123
[7] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2010; Para 4.161
[8]Taxmann™s, Law of Transfer Pricing in India, by Mittal, D.P.; 3rdEdn, 2009, p.54
[9]Supra n.7
[10]Taxmann™s, Master Guide to Income Tax Act, by Shah, Pradeep S., Kadakia, Rajesh S, 22ndEdn, 2012, p.1.339
[11]Section 92CA – Reference to Transfer Pricing Officer – (1) Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm’s length price in relation to the said [international transaction or specified domestic transaction] under section 92C to the Transfer Pricing Officer.
(2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm™s length price in relation to the [international transaction or specified domestic transaction] referred to in sub-section (1).
(2A) Where any other international transaction [other than an international transaction referred under sub-section (1), comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1).
(2B) Where in respect of an international transaction, the assessee has not furnished the report under section 92E and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction referred to him under sub-section (1).
(2C) Nothing contained in sub-section (2B) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year, proceedings for which have been completed before the 1st day of July, 2012.]
(3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm’s length price in relation to the [international transaction or specified domestic transaction] in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee.
(3A) Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the order under sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires.
(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm™s length price as so determined by the Transfer Pricing Officer.
(5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be, apply accordingly.
(6) Where any amendment is made by the Transfer Pricing Officer under subsection (5), he shall send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with such order of the Transfer Pricing Officer.
(7) The Transfer Pricing Officer may, for the purposes of determining the arm’s length price under this section, exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133 [or section 133A].
Explanation : For the purposes of this section, Transfer Pricing Officer means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner, authorised by the Board to perform all or any of the functions of an Assessing Officer specified insections 92C and 92D in respect of any person or class of persons.
[12] Section 92C(1) – The arm™s length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :
(a) comparable uncontrolled price method ;
(b) resale price method ;
(c) cost plus method ;
(d) profit split method ;
(e) transactional net margin method ;
(f) such other method as may be prescribed by the Board.
[13] AIR 2008 SC 1771
[14][1974] 1 SCC 549
[15] AIR 1999 SC 1912
[16] [2004] 2 SCC 392
[17] AIR 2007 SC 1677
[18] AIR 1974 SC 2233
[19] [2007] 162 TAXMAN 119/107 ITD 141/15 SOT 49 (Bang. Trib) (SB)
[20] 5thEdn, 1979
[21][1991] 59 TAXMAN 10 (Kar).
[22] Require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act :
Provided that the powers referred to in clause (6), may also be exercised by the Director-General, the Chief Commissioner, the Director and the Commissioner
Provided further that the power in respect of an inquiry, in a case where no proceeding is pending, shall not be exercised by any income-tax authority below the rank of Director or Commissioner without the prior approval of the Director or, as the case may be, the Commissioner.
[23] White Paper on Recommendations for a model Advance Pricing Agreement scheme in India, by Deloitte India on June 2011 available at http://www.moneycontrol.com/news_html_files/news_attachment/2011/Advanced%20Pricing%20Agreement%20Scheme%20in%20India.pdf visited on 28th August 2013.
[24] Transfer Pricing in Nigeria The utility of Advance Pricing Agreements, Olaminde Akinla, available at http://www.academia.edu/3642100/transfer_pricing_in_nigeria_the_utility_of_advance_pricing_agreements visted on 28th August 28, 2013
[25] EU Joint Transfer Pricing Forum Secretariat Discussion Paper On Alternative Dispute Avoidance And Resolution Procedures; Wolfgang Büttner and Jean-Marc van Leeuw; European Commission Directorate-General Taxation And Customs Union; DOC: JTPF/003/REV2/2005/EN; Brussels, 30 May 2005
[26] Supra n.25
