India's Advance Pricing Agreement (APA) Programme: The Comprehensive Procedural Framework 

The Advance Pricing Agreement (APA) program in India is an agreement between the tax administration and a taxpayer, which determines the Arm’s Length Price (ALP) or specifies the manner of the determination of ALP (or both), in relation to an “international transaction”, in advance.

This article delves into the intricate procedural aspects of the APA program, highlighting its evolution, key components, and the role of dedicated APA teams in ensuring transparency and efficacy.

EVOLUTION AND LEGISLATIVE FRAMEWORK:

The APA programme in India traces its roots to the Finance Act of 2012, which introduced sections 92CC and 92CD into the Income-tax Act, 1961. These legislative amendments empowered the Central Board of Direct Taxes (CBDT) to enter into APAs with taxpayers, providing a framework for determining the Arm's Length Price (ALP) or specifying ALP determination methodologies for international transactions involving associated enterprises (AEs).

PROCEDURAL COMPONENTS OF APA PROGRAM:

1. Pre-Filing Consultation: Taxpayers have the option to engage in pre-filing consultations with the CBDT to discuss the scope, terms, and conditions of potential APAs before formally submitting their applications. This step allows for early alignment and clarification on APA expectations.
2. Fee Structure: The APA program stipulates a fee structure for processing APA applications, which varies based on the nature and complexity of the transaction. This fee is payable at different stages of the APA process and contributes to the administrative costs incurred by tax authorities.
3. Application Submission: Taxpayers submit detailed APA applications, including comprehensive documentation on the controlled transactions, comparability analysis, financial statements, transfer pricing policies, and any relevant industry-specific information. The application serves as a roadmap for ALP determination discussions.
4. Processing Mechanisms: Upon receiving APA applications, dedicated APA teams within the CBDT undertake thorough reviews and analyses. This includes evaluating the taxpayer's proposed transfer pricing methodologies, conducting benchmarking analyses, and assessing the economic substance of the transactions. It is common to send follow up questionnaires and conduct visit at tax payer´s premises.
5. Negotiation: Once the negotiation is complete, a draft Agreement is sent to the CBDT for approval. Thereafter, the Agreement is entered into between the CBDT and the taxpayer.
6. Compliance Reporting: Once an APA is agreed upon, taxpayers are required to submit annual compliance reports to demonstrate adherence to the agreed-upon transfer pricing methodologies. These reports provide ongoing assurance of compliance with APA terms and conditions.
7. Audit and Monitoring: The APA programme incorporates mechanisms for compliance audits and monitoring to ensure continued adherence to ALP determinations throughout the APA period. This proactive approach mitigates the risk of transfer pricing disputes and promotes tax certainty for taxpayers.
8. Rollback: The Rollback provisions are applicable for a maximum of four years prior to the first year of the APA period. Thus, a taxpayer would be able to have certainty in matters of transfer pricing for a maximum period of 9 years at any one time by applying for an APA with Rollback provisions. Circular No. 10 of 2015 was issued by the CBDT on 10th June, 2015 to provide clarity on Rollback issues in the form of answers to FAQs.
9. Revision, Cancellation, and Renewal: The programme also outlines procedures for revising, canceling, or renewing APAs based on changing business dynamics, regulatory amendments, or emerging transfer pricing trends. These provisions ensure flexibility and adaptability within the APA framework.
10. BAPA: In India's APA program, agreements can be either bilateral (involving both the CBDT and tax authorities from another country) or unilateral (involving only the CBDT). Over the past 11 years, India has received over 1600 APA applications, with approximately 75% of these being unilateral agreements between Indian taxpayers and the CBDT. 
    • The steps on Bilateral Advance Pricing Agreements (BAPAs) are as follows:
      • Initiation of Discussions: The process for BAPAs begins with the initiation of discussions between the Competent Authority of India and the tax authorities of the other country involved in the bilateral transaction. These discussions aim to establish mutual understanding and cooperation in resolving transfer pricing issues.
      • Position Papers and Negotiations: Once discussions are initiated, position papers outlining proposed ALPs and transfer pricing methodologies are developed by the APA teams under the supervision of the Principal Chief Commissioner of Income Tax (International Taxation). These position papers form the basis for negotiations between the Competent Authorities of both countries.
      • Mutual Agreement and Implementation: If mutual understanding is reached during negotiations, a Mutual Agreement containing the terms and conditions of the APA is entered into by the Competent Authorities of both countries. Subsequently, each country enters into an Agreement with its taxpayer based on the Mutual Agreement reached. The Indian taxpayer's concurrence to the Mutual Agreement is sought within a specified timeframe.
      • Approval and Implementation: Once the taxpayer agrees to the terms outlined in the Mutual Agreement, a draft Agreement is prepared in consultation with the taxpayer and submitted for approval to the designated Member of the CBDT. Upon approval, the BAPA is formally entered into between the CBDT and the taxpayer, ensuring alignment with bilateral transfer pricing standards and regulations.
11. Role of APA Teams: Dedicated APA teams, led by Commissioners of Income Tax and comprising Addl./Joint Commissioners and Deputy/Asst. Commissioners, play a pivotal role in the APA process. These teams are strategically located in major cities such as Delhi, Mumbai, Bengaluru, and Gurugram, ensuring nationwide coverage and accessibility for taxpayers.

The teams are responsible for:

• • Reviewing and analyzing APA applications in detail.
  • Developing position papers outlining proposed ALPs and transfer pricing methodologies.
  • Conducting negotiations with taxpayers to reach mutually agreeable APA terms.
  • Monitoring compliance and conducting periodic audits to verify adherence to APA terms.
  • Facilitating discussions on revision, cancellation, or renewal of APAs as needed.

SOURCE:

• APA-Report-Final-2023.pdf (incometaxindia.gov.in)