Advance Pricing Agreement (APA) Provisions under I.T. Act

APA provisions have been introduced under the Income Tax Act, 1961 through Finance Act 2012. This provision was initially under the Direct tax Code but now has been incorporated under I.T. Act. This was one of the steps taken by the ministry to incorporate some of the provisions of Direct Tax Code under the Income Tax Act 1961.  

APA is nothing but the determination of arms length price between the assesse and the income tax authority in advance for a specified period of time. This scheme was first introduced in Japan and was then followed by various other countries including United States. Currently transfer prices are determined by the associated parties though various given methods which lead to large number of litigations. Entering into APA will certainly reduce the number of transfer pricing litigations. There will be three forms of APA –

A Unilateral APA is the one which is entered into between the tax assesse and government of a country with respect to taxability of particular cross-border transfer pricing transaction(s) in that country.

A Bilateral APA is the agreement entered into between two countries having a Double Tax Avoidance Agreement (‘DTAA’) between them, in accordance with article of Mutual Agreement Procedure therein; with respect to taxability of transfer pricing transactions affecting both.

A Multilateral APA is an extension of Bilateral APA, whereby more than two countries involved in certain transfer pricing transaction(s)  – under their respective DTAA with each other – decide on the tax sharing thereof.

The key difference between the APA in India and the other parts of the world is that APA is applicable to all persons and is not restricted to legal entity, business, etc as specified in APA provisions in other parts of the world.

The provisions, contained in the proposed section 92CC of the Income-tax Act, 1961, (‘the Act’) provide that the CBDT, with the approval of Central Government, may enter into an APA with any person, determining the arm’s length price or specifying the manner (including the TP Method to be applied) in which the same would be determined, with respect to an international transaction to be entered into by that person

Government has also secured the power to declare any APA to be void ab initio if it is found that the agreement was obtained by fraud, misrepresentations, etc.

The most sophisticated APA provisions is said to be in Australia where the authority set to deal in these matters are working efficiently and this is one of the key draw back which is argued by many learned people. It is argued that whether bring such provisions with no adequate infrastructure will serve its purpose.