Introduction
Simply put, an Advanced Pricing Agreement (“APA”) is an agreement between a taxpayer (either an individual or a corporate entity) and the tax authority/authorities. The APA determines the transfer pricing methodology for pricing an enterprises’[2] future international transactions[3] or certain specified domestic transactions. The idea of signing APAs is to avoid protracted Transfer Pricing[4] (“TP”) litigation on ascertaining what would be the appropriate criteria for determining the Arm’s Length Price[5] for an international transaction. APAs are a dispute prevention mechanism, as opposed to a dispute resolution mechanism. They provide a taxpayer with tax certainty by ensuring that the transactions will not be challenged by the competent authority, provided the transactions stay within the parameters of what was negotiated upon in the APA.
Current APA Regime in India
Currently, if an entity transacts with its associated enterprise (“AE”), domiciled outside India, the information of that transaction must be documented[6], and the details of the transaction must be verified by an accountant. The monetary threshold for a transaction was initially set at 50 million rupees, which currently stands revised at 150 million rupees. In FY 2021 – 2022, India (through CBDT[7]) had entered 62 APAs, taking the total number of APAs to 421[8]. These have been signed with the intent of fostering a non-adversarial tax regime[9]. With the Indian APA regime, the taxpayer has the option to roll back the APA for four preceding years, i.e., nine years of tax certainty is potentially provided to a taxpayer[10]. While several nations and sectors have joined the league to negotiate for APAs with India, the fact remains that the processing time for such APAs must be reduced in India. In this paper, the author will analyze the current APA regime to assess how an expensive TP litigation can (potentially) be avoided by taxpayers. Further, the author aims to address how can the APA program be re-worked to bring about more certainty to the taxpayers. It is pertinent to note that India is the host to one of the largest TP litigation cases in the world. Moreover, TP litigation remains an expensive affair, and APAs seem to offer more clarity to a taxpayer and its AEs, in comparison to the normal adjudication route via TP litigation which involves multiple appeals.
Roughly, there are three different types of APA programs in India; Unilateral APA (“UAPA”) which involves a taxpayer and the government, Bilateral (“BAPA”) which involves the taxpayer along with its AE domiciled in a foreign jurisdiction, and the relevant revenue authorities, and the Multilateral APA (“MAPA”) which involves a taxpayer along with two or more AEs alongside the revenue authorities of the respective jurisdictions. One of the key areas where the Indian APA regime must focus on is the time taken to conclude the APAs. For instance, the average time taken to conclude a UAPA was 45.22 months (in FY 2018-19)[11]. As per the department’s own documents, the average time to conclude UAPAs has increased to 32.50 months from 31.75 months[12]. In FY 2018-19, most UAPAs were signed in the service sector and industrially, information technology (“IT”) sector was the most active to sign UAPAs (among 14 different industrial sectors)[13]. The 41 UAPAs signed in FY 2018-19 covered just 164 international transactions. The picture remains similar for BAPAs. In FY 2018-19, just 11 BAPAs were signed, an increase by 2 from FY 2017-18 which only saw 9 BAPAs signed. The average time to conclude a BAPA stands at 44.32 months. Most BAPAs were signed with Japan, with service sector and the IT industry taking the lead in BAPAs as well. Data regarding MAPAs is yet to be released by the CDBT, but I reckon it would remain in the same ballpark as UAPAs and BAPAs. The three challenges which are currently being faced by enterprises are that the negotiation process is extremely rigid, lack of support, and the disadvantage of the unilateral model[14]. While the Indian APA program does have an option for BAPAs, however, they are not as common[15].
Possible steps to Enhance the APA Regime
The focus for the India revenue department should be on two fronts; to ensure that the processing times for APAs are reduced, and that more experts, like in the field of technology and other relevant industrial experts, are hired alongside the revenue officials, given that IT companies are choosing to sign APAs. For instance, Japan’s APA program has seen a rise of 600% in the last decade[16]. The government of Japan has over 40 officers in their APA program. Even India was able to conclude its APAs with Japan swiftly[17]. While the Indian authorities have learnt significantly by concluding APAs with countries like Japan, Australia, USA etc., it appears that they can’t see the wood for the trees. As per India’s Principal Chief Commissioner of Income Tax (International), delays are due to the shortage of resources and due to the increase of complexity of issues[18]. Yet, no solid policy is being formulated to ensure that relevant experts can be hired, and not necessarily through the employment/exam route. A parallel could be drawn to how hon’ble judges in India, both at the High Court and the Supreme Court level, have access to Judicial Clerks/Law Researchers. These individuals are not hired via an exam route, rather applications are floated and from the pool of these applications candidates are hired. Further, most, if not all, such positions are based on a contract which is revised yearly. On the topic of hiring experts, pertinently, the most favored Arm’s Length Price method for benchmarking, till FY 2018-19, was Transactional Net Margin Method (“TNMM”). Since the department knows that TNMM is preferred by the taxpayers, it can formalize a mechanism wherein at least the TNMM applications are processed in a quicker manner by deploying appropriate resources and hiring sufficient technical experts. This methodology can subsequently be used for other forms of mechanisms as well. Alongside TNMM, “other method” was the most preferred choice while signing APAs. This reverberates the conception of hiring more technical experts to ensure applications are processed quickly regardless of the Arm’s Length Price method. It would be amiss to state that the tax officials should make careful assessment before sending a matter to the Transfer Pricing Officer, especially for entities which have signed an APA. For instance, in the case of First Source Solutions v. DCIT[19] the Hon’ble Income Tax Appellate Tribunal, while observing that the taxpayer had entered into an APA, was inter alia of the view that the TP adjustment made will not survive as the taxpayer had offered the tax to the authorities in tandem with the APA agreement. If disputes are sent to the Transfer Pricing Officer by revenue officials despite signing an APA and without due consideration, the certainty aspect which the APA offers would be rendered nugatory. It must be remembered that APAs are a dispute prevention mechanism, a dispute, if referred to the Transfer Pricing Officer, should be disposed of within a particular time limit. This would allow the foreign investors to take a sigh of relief and would also prevent APAs from becoming another dispute resolution body like the Authority on Advance Rulings. The idea of an elaborate appeal mechanism must not creep into the realm of APAs, particularly in the Indian context. Since the taxpayer waits for a period of over two years for an APA to conclude, a further hinderance, in the form of an adjustment from the Transfer Pricing Officer and a subsequent appeal, would adversely affect India’s APA program.
[1] The Author is currently pursuing an LL.M. in Tax from Jindal Global Law School.
[2] Defined u/S. 92F (iii) of the Income Tax Act, 1961.
[3] Defined u/S. 92B of the Income Tax Act, 1961.
[4] Inserted via the Finance Act of 2001. S. 92A-92F of the Income Tax Act, r/w Rule(s) 10 A-E of the income tax rules, 1962.
[5] Defined u/S. 92F (ii) of the Income Tax Act, 1961.
[6] Form 3CEB
[7] Central Board of Direct Taxes
[8] Press Release | Central Board of Direct Taxes dt. 31st March 2022 CBDT signs 62 Advance Pricing Agreements in FY 2021-22
[9] ibid.
[10] Prabhkar KS, ‘India Entered Into 62 APAs In 2021-2022’ (MNE Tax, 2022)
[11] Income Tax Department, ‘Advance Pricing Agreement (APA) Programme of India’ (Central Board of Direct Taxes 2019).
[12] ibid.
[13] ibid.
[14] Josh White, ‘India’S APA Programme A Possible Substitute For A Dispute Resolution Mechanism’ [2019] International Tax Review
[15] ibid.
[16] Rapid Rise in Japanese APAs [2019] International Tax Review
[17] Indian Advance Pricing Agreement Programme Evaluation and Way Forward [2018] Deloitte Tax Policy Paper 2
[18] Supra at 13.
[19] ITA No. 2258/Mum/2017
11th May 2022
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