ADVANCE PRICING AGREEMENT SCHEME.

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

                        Vide Notification No. 36/2012, dated 30.08.2012, in exercise of powers conferred by Section 92CC (9) of the Income Tax Act, 1961 read with Section 295, the Central Board of Direct Taxes amended the Income Tax Rules.   In this amendment Rule 10F to 10T are inserted and Rule 44GA is also inserted for the purpose of international transactions.   The newly inserted Rules deal with Advance Pricing Agreement Scheme.  In this article the same is discussed in detail.

 

AGREEMENT: 

                        Rule 10(F) (a) defines the term ‘agreement’ as an advance pricing agreement entered into between the Board and the applicant with the approval of the Central Government as provided in Section 92CC (1) which provides that the Board, with the approval of the Central Government, may enter into an advance price agreement with any person, determining the arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to international transaction to be entered into by that person.

                        The Rule deals with 3 types of agreement viz., unilateral agreement, bilateral agreement and multilateral agreement.   Unilateral agreement means an agreement between the Board and the applicant which is neither a bilateral nor multilateral agreement.   Bilateral agreement means an agreement between the Board and the applicant, subsequent to, and based on, any agreement referred to rule 44GA between the competent authority in India with the competent authority in the other country regarding the most appropriate transfer pricing method or the arm’s length price.  Multilateral agreement means an agreement between the Board and the applicant, subsequent to, based on, any agreement referred to in Rule 44GA between the competent authority in India with the competent authorities in the other countries regarding the most appropriate transfer pricing method or the arm’s length price.

                        The terms of the agreement may among the other things, include-

• The international transactions covered by the agreement;
• The agreed transfer pricing methodology, if any;
• Determination of arm’s length price, if any;
• Definition of any relevant term to be used in transfer pricing or arm’s length price;
• Critical assumptions;
• The conditions if any other than provided in the Act or rules.

ELIGIBILITY:

                        Any person who has undertaken an international transaction or is contemplating to undertake an international transaction shall be eligible to enter into an agreement under these rules.

STAGES:

                        The following are the stages in entering to an advance pricing agreement:

• Pre filing consultation;
• Application for advance pricing agreement;
• Withdrawal of application for agreement, if any;
• Preliminary processing of application;
• Procedure for entering into an agreement;

PRE FILING CONSULTATION:

                        The pre filing consultation shall, among other things-

• Determine the scope of the agreement;
• Identify transfer pricing issues;
• Determine the suitability of international transaction for the agreement;
• Discuss broad terms of the agreement;

The following are the steps involving in pre filing consultation:

      Every person proposing to enter into an agreement make a request for a pre-filing consultation by an application in Form No. 3CEC to the Director General of Income Tax (International Transactions);

      On receipt of the application, the team, consisting of Income tax authorities as constituted by the Board and including such number of experts in economics, statistics, law or any other field  as may be nominated by the Director General of Income Tax (International Taxation), shall hold pre filing consultation with the person who applied for the same;

      The competent authority in India or his representative shall be associated in pre-filing consultation involving bilateral or multilateral agreement;

The pre filing consultation shall not bind the board or the person to enter into an agreement or initiate the agreement process.   It shall not be deemed to mean that the person has applied for entering into an agreement.

APPLICATION FOR ADVANCE PRICING AGREEMENT:

                        Any person, who has entered into a pre filing consultation, if desires to enter into an agreement may furnish in Application No. 3CED to Director General of Income Tax (International Taxation) in case of unilateral agreement and to the competent authority in India in case of bilateral or multilateral agreement along with fee as detailed below:

      Amount not exceeding Rs. 100 crores – fee Rs. 10 lakhs;

      Amount not exceeding Rs.200 crores – fee Rs.15 lakhs;

      Amount exceeding Rs.200 crores – fee Rs.20 lakhs.

The application may be filed at any time-

• Before the first day of the previous year relevant to the first assessment year for which the application is made, in respect of transactions which are of a continuing nature from dealings that are already occurring; or
• Before undertaking the transaction in respect of remaining transactions.

WITHDRAWAL OF APPLICATION:

                        The applicant may withdraw the application for agreement at any time before the finalization of the terms of the agreement in Form 3CEE.   The fee paid shall not be refunded on withdrawal of the application by the applicant.

PRELIMINARY PROCESSING OF APPLICATION:

                        On receipt of the application in Form No. 3CED it will be satisfied that the application form is complete in all respects and accompanied by the requisite documents.   If any defect is noticed or if any relevant document is not attached or the application is not in accordance with undertaking reached in pre-filing consultation, the Director General of Income Tax (International Taxation) for unilateral agreement and competent authority in India for bilateral or multilateral agreement, shall serve a deficiency letter on the applicant before the expiry of one month from the date of receipt of the application.  taxmanagementindia.com

                        The applicant shall remove the deficiency or modify the application within a period of 15 days from the date of receipt of the deficiency letter or within such further period which, on application made in this behalf, may be extended, so however, that the total period of removal of deficiency or modification does not exceed 30 days.  The Director General of Income Tax (International Taxation) or the competent authority in India, as the case may be, on being satisfied, may pass an order providing that application shall not be allowed to be proceeded with if the application is defective and defect is not removed by applicant, after giving reasonable opportunity of being heard.   If an application is not allowed to be proceeded with, the fee paid by the applicant shall be refunded.

PROCEDURE:

                        If the application filed is allowed the application will be processed by the team or the competent authority or his representative in consultation and discussion with the applicant.  For bilateral or multilateral agreement, the competent authority shall forward the application to the Director General of Income Tax (International Taxation) who shall assign it one of the teams.  It shall be competent to-

• Hold meetings with the applicant on such time and date as it deems fit;
• Call for additional document or information or material from the applicant;
• Visit the applicant’s business premises; or
• Make such inquiries as it deems fit in the circumstances of the case.

The applicant may, if necessary, provide further document and information for consideration of the team or the competent authority in India or his representative.  The authority shall carry out of the enquiry and prepare a draft report which shall be forwarded by the Director General of Income Tax (International taxation) to the competent authority in India.    If the agreement is bilateral or multilateral, in addition to this procedure, the procedure provided in Rule 44GA is to be invoked.

                        The procedure in respect of bilateral or multilateral agreements under Rule 44GA is as follows:

• This procedure shall not be initiated unless the associated enterprise situated outside India has initiated process of advance pricing agreement with the competent authority in the other country;
• The competent authority in India shall, on receipt of application for a bilateral or multilateral agreement, consult and ascertain willingness of the competent authority in other country or countries for initiation of negotiation;
• In case of willingness of the competent authority in other country or countries, the competent authority in India shall enter into negotiation and try to reach a set of terms which are acceptable to both parties;
• The negotiation between two countries shall be carried out in accordance with the provisions of tax treaty between India and other country or countries;
• In case of an agreement after consultation, the competent authority in India shall formalize a mutual agreement procedure arrangement with the competent authority in other country or countries and intimate the same to the applicant;
• In case of failure to reach agreement the applicant shall be informed about the same;
• The applicant shall not be entitled to be part of discussion between the two competent authorities; however the applicant can communicate or meet the competent authority in India for the purpose of entering into an advance pricing agreement;
• The applicant shall convey acceptance or otherwise of the agreement within 30 days of it being communicated;
• The applicant, in case the agreement is not acceptable may at his option continue with process of entering into an advance pricing agreement without benefit of mutual agreement process or withdraw application;

The Director General of Income Tax (International Taxation) for unilateral agreement or the competent authority for bilateral or multilateral agreement and the applicant shall prepare a proposed mutually agreed draft enumerating the result of the above said process including the effect of the arrangement under Rule 44GA.   The agreement shall be entered into by the Board with the applicant after its approval by the Central Government.   Once the agreement has been entered a copy of the same will be sent to the Commissioner of Income Tax having jurisdiction over the assessee.

BINDING NATURE OF AGREEMENT:

                        The agreement shall not be binding on the board or the assessee if there is a change in any of critical assumption or failure to meet conditions subject to which the agreement has been entered into.  The ‘critical assumptions’ means the factors and assumptions that are so critical and 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.    

                        The binding effect of agreement shall cease only if any party has given the notice of the concerned other party or parties. 

ANNUAL COMPLIANCE REPORT:

                        The assessee shall furnish an Annual Compliance Report to Director General of Income Tax (International Taxation) for each year covered in the agreement in Form 3CEF, in quadruplicate within 30 days of the filing of income tax return for that year or within 90 days of entering into an agreement whichever is later.  One copy of the annual compliance report will be forwarded to competent authority in India; one copy of the Commissioner of Income Tax who has the jurisdiction over the income tax assessment of the assessee and one copy to the Transfer Pricing Officer having jurisdiction over the assessee.

COMPLIANCE AUDIT:

                        The Transfer Pricing Officer shall carry out the compliance audit of the agreement for each of the year covered in the agreement.   He may require the assessee to substantiate compliance including satisfaction of critical assumptions, correctness of the support date or information and consistency of the application of the transfer pricing method.   The assessee is to submit any information or document to establish that the terms of the agreement has been complied with.

                        The Transfer Pricing Officer shall submit the compliance audit report, to the Director General of Income Tax in case of unilateral agreement and to the competent authority in India in case of bilateral or multilateral agreement, mentioning his findings within 6 months from the end of which the compliance report is received.  A copy of the report will be forwarded to the Board where there is finding of failure of assessee to comply with terms of agreement and cancellation of the agreement is required. 

RENEWAL OF CONTRACT:

                        Request for renewal of an agreement may be made as a new application for agreement, using the same procedure as outlined in this article except pre filing consultation process.

REVISION OR CANCELLATION:

                        In case there is a change in any of the critical assumptions or failure to meet the conditions subject to which the agreement has been entered into, the agreement can be review or cancelled.  The assessee shall give a notice in writing of such change in any of the critical assumptions or failure as soon as it is practicable to do so.   The Board shall give a notice in writing in such change in this regards, as soon as it comes to the knowledge of the Board.

                        An agreement may be revised by the Board if,

• There is a change in critical assumptions or failure to meet a condition subject to which the agreement has been entered into;
• There is a change in law that modifies any matter covered by the agreement but is not of the nature which renders the agreement to be non-binding; or
• There is a request from competent authority in the other country requesting revision of agreement, in case of bilateral or multilateral agreement;
• The agreement may be revised suo motu or on request of the assessee or the competent authority in India or the Director General of Income Tax (International Taxation);
• Except when the agreement is proposed to be revised on the request of the assessee, the agreement shall not be revised unless an opportunity of being heard has been provided to the assessee and the assessee is in agreement with the proposed revision;
• In case the assessee is not in agreement with the proposed revision, the agreement may be cancelled;
• In case the Board is not in agreement with the request of the assessee for revision, the Board shall reject the request in writing giving reasons for such rejection;
• The revised agreement shall include the date till which the original agreement is to apply and the date from which the revised agreement is to apply.

An agreement shall be cancelled by the Board if-

• The assessee has failed to file the annual compliance report in time;
• The compliance audit has resulted in the finding of failure on the part of the assessee to comply with the items of agreement;
• The annual compliance report contains material errors; or
• The agreement is to be cancelled under Rule 10Q(4).

The Board shall give an opportunity before cancelling the agreement.  The reason for the cancellation is to be given.   The order of cancellation shall be in writing and shall provide reasons for non acceptance of assessee’s submission, if any and effective date of cancellation of the agreement.   The order declaring the agreement as void ab initio on account of fraud or misrepresentation of facts, shall be in writing and shall provide reason for such declaration and for non acceptance of assessee’s submission, if any.