In what would be among the first few instances, the Central Board of Direct Taxes (CBDT) has signed a Unilateral Advance Pricing Agreement (UAPA) with a US-headquartered company involved in distribution of sports equipment wherein the CBDT has allowed Covid-19 relief while agreeing on the Arms Length Pricing (ALP), sources said. The name of the US firm has, however, not been made public due to confidentiality reasons.
The APA prescribes different arm’s length margin for years impacted by Covid-19 and years that haven’t been impacted due to the pandemic. The APA also provides certainty on the issue of marketing intangibles.
An APA is an agreement between a taxpayer and tax authorities on the transfer pricing method and the rate applicable to taxpayers’ inter-company transactions. India had introduced APA provisions in the income tax law from July 1. A Unilateral APA is an APA that involves only the tax payer and the tax authority of the country where the tax payer is located.
Tax experts hailed the CBDT move stating that this APA reflected the Government’s willingness to appreciate how the pandemic has impacted the industry and the arm’s margins, as well as the need to distinguish Covid-19 years from the regular years.
Many taxpayers who are in the process of APA negotiations or have concluded their APA are evaluating the impact of Covid-19 on their APA. The recently signed APA is expected to encourage other taxpayers to explore the APA route for seeking certainty for the years impacted by the pandemic.
Amit Maheshwari, Tax Partner at AKM Global, a consulting firm told BusinessLine , “It is a good move on the part of the Government to grant transfer pricing adjustment on account of Covid-19. This is a very pragmatic approach as businesses and consequently, the margins have indeed been impacted. Now, taxpayers who have already signed APAs can file revision applications before the authority, seeking Covid adjustment in the margin. Although, we are not privy to the the detailed reasoning based on which the adjustment in this particular APA was granted, the taxpayers will nevertheless be encouraged to take this as a defence even in the assessment proceeding as well as with pending APAs.”