The Finance Act 2012 introduced the Advance Pricing Agreement Programme, to be effective from July 1 — and thus inaugurated a viable controversy management alternative.

Now with the announcement on August 31 of the much awaited APA Rules establishing the operating guidelines, the stage is set for the APA programme to roll.

As per these Rules, any person who has undertaken an international transaction, or is contemplating one, would be eligible to apply for an APA. The APA shall be entered into by the Central Board of Direct Taxes (CBDT) with the taxpayer, after its approval by the Central Government. Unilateral, bilateral and multilateral APAs may be entered into. For unilateral APAs, applications are to be filed with the Director General of Income Tax (International Tax) (DGIT); for bilateral and multilateral APAs, applications are to be filed before the Competent Authority.

Prior to filing an APA application, the Rules require mandatory pre-filing consultations to be done with the APA team. The option to conduct pre-filing consultations anonymously is also provided. Following the pre-filing consultations, and depending on the outcome, an APA application can be filed accompanied by the prescribed fee, which ranges from Rs10 lakh to Rs 20 Lakh (based on the value of transactions). The Rules also provide flexibility to the taxpayer to withdraw an application if desired.

In addition to the Revenue team, the tax administration’s APA team will comprise individuals with experience in economics, statistics, law and other appropriate disciplines — a heartening feature, which should hopefully make the APA negotiation process more objective and balanced.

The APA will be valid for up to five years, and would be binding on both the taxpayer and the CBDT except when there is a change in any of the ‘critical assumptions’, in which event the APA can be revised or even cancelled. Critical assumptions means such factors and assumptions, which are spelt out in the agreement, and are so significant that neither party entering into an agreement will continue to be bound by the agreement if any of the factors or assumptions is changed.

Annual compliance requirements have also been laid out for the taxpayer who has entered into an APA, and a compliance audit will be conducted by tax authorities annually within six months of filing the compliance report.

As the APA program begins to roll, its success would depend on its ability to distinguish itself from the traditional audit process. The present administrative structure of the APA team comprising fresh officers indicates that perhaps the APA process would not replicate previous audit experience. The provision of ‘pre-filing’ conference on an anonymous basis could also provide the much needed opportunity to taxpayers to determine the receptivity of the tax authorities to its APA proposal, without fear of inviting an audit. Hence, it is hoped that confidentiality would be strictly maintained. However, the onerous requirement of filing details of preceding years’ audit and litigation may cause concern to the taxpayer that the previous audit history may prejudice and overshadow amicable negotiations.

Though there are no provisions for roll-back, it is hoped that APAs can exercise persuasive value on existing litigation and disputes, thereby facilitating quick dispute resolution. Going forward, the popularity of APAs and its ability to inaugurate a stable tax regime in India would in some measure be proportional to the ease of negotiation process and the number of successful APAs India is able to conclude in a reasonable time frame.

For the present, with the launch of the APA program, an amicable process is now available for the taxpayer to consult and co-operate with the tax authorities in a non-adversarial spirit, and resolve current transfer pricing issues in a collaborative environment.

(Rohan K. Phatarphekar is Partner and Head, Global Transfer Pricing Services, and Alpana Saksena is Senior Advisor, Tax Disputes Resolution — Transfer Pricing, KPMG in India.)

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