Indian Advance Pricing Agreement Regime The Game Changer

Transcription

1 Indian Advance Pricing Agreement Regime The Game Changer 2012

2 Disclaimer: The information contained in this document has been compiled or arrived at from discussions with various stakeholders, industry experts and other sources believed to be reliable, but no representation or warranty is made to its accuracy, completeness or correctness. The information contained in this document is published for the knowledge of the recipient but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This document is not intended to be a substitute for professional, technical or legal advice or opinion and the contents in this document are subject to change without notice. Whilst due care has been taken in the preparation of this report and information contained herein, Grant Thornton does not take ownership of or endorse any findings or personal views expressed herein or accept any liability whatsoever, for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith

3 Contents 1 Foreword 2 Backdrop 3 Introduction 4 APA Framework and Rules in India 5 Types of APAs 6 Practical Considerations for Implementing an APA 7 APA Process 8 Critical Analysis of an APA 9 Global Comparison 10 Our Expert Advisors 11 Abbreviations 12 Annexures- Rules & Forms

4 Foreword Advance Pricing Agreement ( APA ) was showcased as a part of the proposed Direct Taxes Code ( DTC ) way back in 2009 and was again mentioned in the DTC However, with the uncertainty surrounding the introduction of DTC, APA introduction also got deferred. For a highly litigious transfer pricing regime of India, this uncertainty regarding the fate of APA raised a lot of concern amongst large taxpayers. In a much appreciated move, the Ministry of Finance introduced the APAs in the Finance Act The APA program finally became a reality in India. The APA rules have heralded the beginning of the much awaited dispute avoidance mechanism in the Indian transfer pricing environment. Given the recent Indian transfer pricing audit scenario, the introduction of APAs is a much needed regime against the aggressive industry wide positions adopted by the tax authorities. The Indian APA Rules are indeed at par with the Global APA Rules. The rules fairly touch upon most of the issues that warrant consideration in an APA regime. It is indeed heartening to note that bi-lateral and multi-lateral agreements are provided for. Pre-filing consultations have been provided for and are mandatory in nature. I believe that the pre-filing consultations will help the APA authorities to gauge the basic issues involved, time frame needed to conclude the APA, the kind of expert APA team (experts in economic, statistics, law etc) required for concluding the APA, any additional information required etc. With all such per hand information with the APA authorities, we expect the APA process to be smooth and not very time consuming. To screen out the non so serious players a graded fee depending on the value of the international transaction has been prescribed. The process and application has been clearly laid out and also allows for onsite visits by the tax authorities to the business premises of the taxpayer to get a better practical insight into the function asset and risk analysis. The rules also provide for option of renewal, amendment and withdrawal. Though roll backs are not explicitly enabled once the APA is concluded it will definitely have a precedence value in case of pending litigation. Karishma R Phatarphekar The introduction of Indian APA Rules is a silver lining to the aggressive transfer pricing audit regime in India and may indeed be the game changer in the Indian transfer pricing landscape. It aims to reduce a lot of litigation time and cost of the taxpayer and tax authorities if adopted in the right spirit. I believe that the APA regime should stand the test of time since the APA authorities has been assertive on implementing this in a fair, pragmatic and positive manner. Page 1 Partner & Practice Leader Transfer Pricing Service Grant Thornton India LLP

5 APA Backdrop Transfer pricing, in simple parlance, is an art of pricing (i.e. arm s length price) cross-border transactions entered into between two or more companies of the same multinational group (referred to as related parties/associated enterprises). Since its inception, transfer pricing has emerged as the biggest area of tax dispute for Multinational Corporations ( MNCs ). Therefore, it is important to understand and acknowledge that the practice of transfer pricing has direct and significant impact on the tax revenue of a country. For the revenue authorities around the world, transfer pricing is considered as a very important issue which requires detailed examination, documentation requirements and thorough understanding of tax rules prevailing in different countries and international organisations like OECD. The Indian scenario of transfer pricing is also not much different. The transfer pricing adjustments in the recent sixth audit cycle in India alone amounted to INR 44,000 crore (approximately USD 9.78 billion) which is more than the aggregate income adjustments by tax authorities in audits of previous four years. India has the highest number of litigations over transfer pricing, where MNCs have been charged of reducing their tax liability by transferring profits to group companies abroad. Under the current transfer pricing provisions a taxpayer has the following transfer pricing litigation process: Assessing Officer Transfer Pricing Officer (TPO) DRP CIT(A) ITAT High Court Supreme Court Presently the concept of APA is being perceived as a panacea for the evergrowing transfer pricing litigations. If implemented fairly it would surely provide a conducive business environment and help bridge the trust deficit currently prevailing between the tax payer and tax authorities. Pallavi Bakhru - Partner and Practice Leader Tax and Regulatory Services Walker Chandiok & Co Page 2

6 Additionally, in order to avoid double taxation, Mutual Agreement Procedure ( MAP ) is proved to be an effective method where the Revenue Authorities of two separate nations together try to resolve a dispute. Under MAP an agreement would be reached between the tax authorities that reduce double taxation or conflicting taxation. Here disputes are resolved through Competent Authorities ( CA ) of contracting state. MAP is an important argument decree mechanism that exists regardless of remedies offered in domestic tax laws. Though there are number of inherent advantages under MAP but it is just an optional method in India and often argued as a lengthy procedure which on an average takes 2-3 years to resolve disputes. Again MAP is a mechanism available subsequent to audits and transfer pricing TP adjustments when compared to an APA, which is more progressive and proactive. To overcome all these bottlenecks of transfer pricing audits, APA and its provisions in India is a positive development and welcome move by the government. As per the Indian APA Rules, the regular audit of the covered transactions under the APA shall not be undertaken by the TPO once an APA is concluded. TPO having the jurisdiction over the assessee shall carry out the compliance audit of the agreement for each of the year covered in the agreement. The TPO shall submit the compliance audit report, for each year covered in the agreement, to the Director General of Income Tax ( DGIT ) (International Taxation) in case of unilateral agreement and to the competent authority in India, in case of bilateral or multilateral agreement, mentioning therein his findings as regards compliance by the assesseeassesse with terms of the agreement. Against such backdrop, APAs have globally served as an effective mechanism to address transfer pricing issues all over the world. Many countries have implemented APAs in order to provide certainty to taxpayers, thereby reducing transfer pricing audits and litigation. This paper is in support of the introduction of the APA Rules by the Government of India. Accordingly, we believe that this paper will provide useful and practical insights and prove helpful for the taxpayers to understand the APA regime and if it is appropriate for them to consider it for their related party transactions. Page 3

7 Introduction What is an APA As per the Indian Rules, APA is an agreement between the Central Board of Direct Taxes and any person, which determines, in advance, the arm s length price or specifies the manner of the determination of arm s length price (or both), in relation to an international transaction. Once an APA has been entered into with respect to an international transaction, the arm s length price with respect to that international transaction, for the period specified in the APA, will be determined only in accordance with the APA. An (APA) (or arrangements ) as referred to by the OECD in its 2010 transfer pricing guidelines is An arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time. The Internal Revenue Service ( IRS ) defines an APA as: An APA is an agreement between a taxpayer and the Service in which the parties set forth, in advance of controlled transactions, the best Transfer Pricing Method ( TPM ) within the meaning of Sec. 482 of the Code and the regulations. The agreement specifies the controlled transactions or transfers (covered transactions), TPM, APA term, operational and compliance provisions, appropriate adjustments, critical assumptions regarding future events, required APA records, and annual reporting responsibilities. The IRS which has collectively more APA experience than any other taxing authority further describes the APA Programme as: The Advance Pricing Agreement (APA) Program is designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the traditional adversarial process. An APA is a binding contract between the IRS and a taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method. The inherent idea of an APA is to increase the efficiency of tax administration by encouraging taxpayers to present before the tax authorities all the facts relevant to a proper transfer pricing analysis and to work towards a mutual agreement. APA reduces the burden of compliance by giving taxpayers greater certainty regarding their transfer pricing methods, promoting their issues and by allowing them for discussion and resolution in advance before the tax authorities. Creativity and flexibility often are important to reach an agreement. The regulations which vary in different countries often do not provide clear guidance for special circumstances and under the best method rule one should require special provisions if needed to reach a fair and reliable result. Further, often two or more approaches to certain issues are possible, and there is no clear basis for preferring one approach over another. In this case, the tax authorities can give the taxpayer its preferred treatment of some issues in return for getting its own preferred treatment of other issues. Also, in this case the tax authorities might (in the interest of efficient tax administration) works with a reasonable approach proposed by the taxpayer rather than independently develop another approach that might be equally reasonable. Page 4

8 Characteristics of an APA An APA normally requires agreement on these major items: choosing a transfer pricing method selecting comparable uncontrolled companies or transactions (comparables) deciding on the years over which comparables results are analyzed (the analysis window ) and related matters; adjusting the comparables results because of differences with the tested party; constructing a range of arm s length results critical assumptions testing results during the APA period and consequences of being outside the arm s length range. Scope and objective of an APA APA can be applied for various international transactions, like purchase or sale of raw materials, finished goods, providing services, financing arrangements, transfer and use of tangible/intangible assets, etc. However, considering the time and resources required for concluding an APA, it is generally preferred to enter into an APA in respect of complex/high value transactions. Certain jurisdictions also exclude routine transactions from the scope of the APA. Also, applying for an APA for transactions is generally left to the discretion of the taxpayer. Though it is not the statutory obligation for a taxpayer to cover all the related party or inter-company transaction in an APA, however, considering the scope of APA it is generally recommended to disclose all the inter-company transactions proposed to be entered into by the taxpayer to the relevant tax authorities so that both the parties may discuss and come to a consensus to include such transactions. This is more due to the fact that the APA proposals are independent in nature and binding only on the person in whose case the agreement has been entered into and only in respect of the transaction in relation to which the agreement has been entered into. The scope of an APA also states the time period for which the APA shall remain in force. Generally an APA is entered into for duration of three to five years and may be renewed/re-negotiated upon completion of the originally agreed term. Under the Indian APA Rules, the APA term could be up to a period of five years with an option for renewal. At this point it is important to mention that since APA is a type of agreement between the taxpayer and the tax authorities with a futuristic point of view i.e., it is to be applied for controlled transactions over a future period of time, however, the negotiated position under an executed APA can be applied to prior years which are not covered by the terms of an APA. This is known as roll-back of an APA. The Indian APA Rules do not enable roll back of APAs. Since the rules are issued the APA authorities have been discussing this in general with the taxpayers and may consider issuing a guidance paper in the form of FAQ s shortly. Hence, an APA is an agreement that sets transfer price of the covered transactions prospectively between the taxpayer and tax authorities. APA process follows a consultative and collaborative approach between the taxpayer and the tax authorities. The taxpayer and tax authority also mutually agree on the transfer pricing method to be applied and its application for a certain period of time. Page 5

9 APA programs are designed so taxpayers can willingly determine real or possible transfer pricing disputes in an honourable, supportive manner, against the traditional audit process. APAs have been introduced with an objective of lessening the burden of compliance by giving taxpayers greater certainty regarding their transfer pricing approaches. Further, the tax outcomes of the international transactions are also brought out, hence, giving an effective tool for management of the tax risks for both the taxpayer and the tax authorities. Given the above, we hope that the advent of the APA rules bring a level of certainty on basic transfer pricing disputes on issues such as use of data not available in the public domain, selection of comparables and noncontemporaneous data. Further, we hope that APAs will also be useful for highly litigious issues such as valuation of shares, corporate guarantees, inter-corporate loans, royalty, intangibles, etc, on which at present there is no statutory guidance. The APA scheme is ideal for taxpayers: who wish to have tax and financial reporting certainty and elimination of double taxation who have complex transactions where differing views are likely to arise in respect of transfer pricing who wish to avoid the possibility of dedicating significant resources to an extensive transfer pricing audit The ensuing chapters provide a holistic understanding of APA s which includes: APA framework and rules in India types of APAs 27 practical considerations for implementing an APA critical analysis of an APA APA Process when is the right time to consider APA; and a comparative overview of APA regimes in major jurisdictions where an APA scheme exists APA Rules could be the game changer in the decade long Indian transfer pricing regulations. It is definitely an opportune time for the taxpayer to discuss and evaluate whether APA is suitable for its business. Page 6

10 APA Framework and Rules in India While the Finance Act had put the bare-shell structure of the APA regime in place, the detailed rules were awaited. The much awaited APA scheme has been finally notified by the government by amending the Income-tax Rules, 1962 ( Principal Rules ) and inserting Rules 10F to 10T and 44GA in the Principal Rules. (The relevant legislation and the detailed APA Rules in this regard have been enclosed as Annexure I to this report) The key characteristic features of APA as proposed in India are as under: Applicability: The APA Rules are applicable to all persons undertaking international transactions or contemplating to undertake international transactions. Threshold: No threshold limit has been prescribed in the APA Rules. All the taxpayers entering or proposing to enter into an international transaction have an option to enter into an APA. Pre Filing Consultation: This is a mandatory requirement in the process and not an option provided to the taxpayer. Additionally it involves a mandate of providing a lot of detailed information, with an option to keep the name of the taxpayer and its related entities anonymous. Taxpayers/ representatives can request for a pre-filing consultation with the DGIT. While the pre-filing consultation is neither binding on the Board nor the taxpayer to enter into an APA. The objective of pre-filing consultation is to enable amongst other things, both parties to: 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 Timeframe to conclude an APA, broadly can also be mutually agreed upon during the pre-filing consultation. Types of APAs available: The APA Scheme has enabled companies to not only opt for Unilateral APA, but also for Bilateral and Multilateral APAs. However, in case of a unilateral APA, the APA rules require the taxpayers to explicitly mention in the application the reasons for entering into a unilateral APA instead of a bilateral or a multilateral agreement. Bilateral and multilateral APAs would be routed through the Competent Authority ( CA ) and it is imperative that the Associated Enterprises ( AE ) have initiated APA in their own country. APA team: As rolled out by the APA Rules, the APA team in India would comprise of not only the designated income-tax officers under this regime but also include experts in economic, statistics, law or any other field as may be nominated by the DGIT. This is a positive and welcome step taken by the revenue to deal with the complex transfer pricing issues being faced globally which require an overall insight into the global business practices. Page 7

11 Application for APA: Companies desirous of entering into an APA need to file an application with the DGIT for Unilateral APA and with Competent Authority ( CA ) of India for bilateral and multilateral APAs. Also, though the number of years can be proposed by the applicant, it cannot exceed 5 years as suggested in the Finance Act, 2012 The above mechanism can be illustrated with the help of the figure below: Board Approval DG International Taxation Competent Authority Discussion Competent Authority Agreement Unilateral APA Team (APA director and APA officers) Discussion Taxpayer Bilateral/ Multiiateral Tax authorities including experts from economics, statistics, law etc. India Outside India Agreement Associated Enterprise (AE) Page 8

12 Fee payable: In order, to screen out the non serious players a graded fee from INR 1 million to 2 million depending on the value of the international transaction has been prescribed. The prescribed application filing fee thresholds are as follows: Amount of international transaction entered into or proposed to be undertaken in respect of which APA is proposed Fee (INR million) Fee (USD) Transaction amount INR 1000 mn (USD 20mn) 1 20,000 Transaction amount between INR 1000 & INR 2000 mn (USA 20mn TO USD 40mn) ,000 Transaction amount exceeding INR 200 mn (USD 40mn) ,000 Timing of application: Applicants desirous of entering into an APA are required to file their applications within the following timelines: in case of continuing / existing transactions since the application is to be filed before the first day of the relevant previous year, the first year for which a taxpayer may be able to apply for an APA would be FY in case of remaining transactions (i.e. new or proposed) any time before undertaking the transactions Procedure: Prior to the main processing of the application there is step of preliminary processing of application which includes vetting the application for any deficiencies (defect in application, relevant document not attached or application not in accordance with understanding reached in the pre-filing consultation). In case there is any defect in the proposed application, the DGIT or CA would require the taxpayer to remove such deficiency within stipulated time, barring which the application would be rejected and correspondingly the fee received would also be refunded. If the application is allowed in the preliminary processing phase, the main processing of applications would be conducted by the APA team in the following manner: holding meetings with applicant calling for additional documents/ information/material from the applicant visiting applicant s business premises making inquiries as may deems fit in the circumstances of the case Tax authorities visit to business premise needs to be looked at positively, as this will help gain full business understanding on a practical basis and ensure effective resolution this has been a global experience. In case of a bilateral or multilateral APA, the applicant shall not be entitled to be part of the discussion between the competent authority of India and the competent authority of the other country/ countries. Also the applicant shall convey acceptance or otherwise of the agreement within 30 days of it being communicated. If the agreement is not acceptable the applicant could continue with the unilateral option or withdraw the application. 1 USD has been converted at 54 INR Page 9

13 Withdrawal: Applicants can withdraw their applications any time before the finalisation of the terms of the APA. However, the fee which has been paid would not be refunded if the APA is withdrawn at the discretion of the applicant himself. Forms prescribed: The following forms are prescribed for the APA Scheme: Particulars Form No. Application for a pre-filing meeting 3CEC Application for an APA 3CED Application for withdrawal of APA request 3CEE Annual Compliance Report on APA 3CEF The prescribed forms in this regard have been enclosed as Annexure II to this report. APA, agreement and terms: The APA would be entered into by the Board and the taxpayer after getting approval from the Central Government. An APA would cover the following points: international transactions covered agreed transfer pricing methodology, if any determination of arm s length price, if any definition of relevant terms critical assumptions time period of APA other conditions, if any, not covered in the Income Tax Act or in the Income Tax Rules Critical assumptions: Means critical and significant factors and assumptions that if changed would annul the APA. This is the most crucial aspect in an APA and needs to be carefully agreed and drafted. Binding effect of APA: APA would not be binding in case of any changes in critical assumptions or failure in meeting conditions set under APA. Also, the binding effect of APA would cease in the following cases: change in law changes in critical assumptions or failure to meet conditions by the applicant or by the Board Annual Compliance Report: An annual compliance report has to be: furnished in quadruplicate to DGIT for each of the years covered in the agreement. One copy each would be sent by the DGIT to the CA India, to the Commissioner of Income Tax who has the jurisdiction over the income-tax assessment of the taxpayer and one copy to the TPO having the jurisdiction over the taxpayer. filed within thirty days of the due date of filing the income tax return for that year, or within ninety days of entering into an agreement, whichever is later. Page 10

14 Compliance Audit of the APA: The TPO having jurisdiction over the applicant is authorized to carry out the compliance audit of the APA for each of the year covered in the agreement and is required to furnish his report within six months from the end of the month in which the annual compliance report is received by him. It is provided that such covered transactions under the APA scheme would not be audited by the TPOs under the routine transfer pricing assessment procedure. The compliance audit under the APA scheme is not a general feature seen globally and should be restricted to purely a monitoring procedure than a verification audit procedure. The rules do mention that the annual compliance audit is not meant to be a regular TP audit Amendments to Application: The APA scheme provides for the amendment of the application by the taxpayer at any time before the finalization of the agreement, in case allowed by the DGIT / CA on account of non-changing of material facts and payment of additional fees if required. Revision of APA: An APA can be revised under any of the following circumstances: change in critical underlying assumptions change in such law other than that which renders it non-binding request from CA in the other country The revision order is required to be in writing citing reasons of revision required and the following additional noteworthy features: revisions can be initiated by the Board / DGIT/ CA/ taxpayer opportunity of being heard to be provided non-agreement by the taxpayer on the proposed revisions may result in cancellation of the APA Cancellation of APA: An APA can be cancelled in case of the following: negative findings of the compliance audit by the TPO failure in timely filing of annual compliance report or filing with material errors non-agreement by the taxpayer on the proposed revisions may result in cancellation of the APA on account of fraud or misrepresentation of facts The order of cancellation is required to have the following essential features: in writing with reasons opportunity of being heard to be provided formal communication to the concerned Assessing Officer and the TPO Renewal of APA: The renewal of APA is permitted under the new APA rules requiring all other listed processes of fees, application, etc. other the pre-filing consultation required in case of the original filing. Certain aspects not covered under the regime: While the overall regime adapts most of the global best practices, the following are concerns are expressed by tax payers: Rollbacks not explicitly enabled: Roll back of APA is also a concept which is in application in most of the jurisdictions. It refers to the use of the methodology agreed in the APA in the years where audit for prior years are open. Methodology agreed in the APA can be used as guidance in the open years. By providing that APAs for on-going transactions need to be filed in advance of relevant previous years, it is implied that there are no roll backs provided in the scheme. In India although roll back of APA is not formally enabled, we understand that if facts are similar it may have persuasive value in courts. Page 11

15 No time frame to conclude: Although no time lines have been clearly given in the APA Rules, a time-line should also be proposed internally for completion of an APA to be effective for the taxpayer. We understand that during the pre-filing consultations this is one aspect the applicant can gain mutual understanding with the team. Of course in case of bilateral or multilateral APAs it is not in the complete control of the Indian CA & APA team. Lack of firewall provisions to protect taxpayer information: Confidentiality of the tax-payers information is also a critical issue. The information shared by a tax-payer while negotiating an APA may contain the group policy, pricing policy, future business predictions, revenue model which are of strategic importance to the MNE group. The income tax act does protect taxpayer information from being shared in the public domain. However, if an APA is not concluded then whether the information would be shared with the regular audit team is a concern to be addressed. We understand that details sought in an APA application are anyway called for during documentation compliance or transfer pricing audits. If there is something non-routine and confidential taxpayers can discuss this during the PFC and obtain some comfort. I expect the Tax Authorities to adopt a realistic, business minded approach and arrive at an optimum Advance Pricing Agreement (APA) in reasonable time an approach where more and more companies will be encouraged to enter into APA and pay predictable taxes. This will definitely lead to higher economic activity in the country, generating more employment and wealth, and thus boost the overall tax revenue. M K Narayanaswamy Senior Director Accounting and Taxation, Sanofi India Limited Page 12

16 Types of APA Some countries allow for only unilateral APAs while some others allow for bilateral and multilateral APAs. Taxpayers generally wish to enter into bilateral or multilateral APAs to ensure avoidance of double taxation. Indian APA rules cover all three types of APA s i.e. unilateral APA, bilateral APA and multilateral APA. This chapter aims to give a brief analytical heads up on the types of APAs. Unilateral APAs Solely between a taxpayer and a tax authority Types of APAS Bilateral APAs single mutual agreement between the CA of tax administrations and taxpayers Multilateral APAs More than one bilateral mutual agreement Unilateral APAs The arrangement solely between a taxpayer and a home country tax administration is referred to as unilateral APA. The Indian APA Rules define uunilateral APAs as agreement between the Board and the applicant which is neither a bilateral nor multilateral agreement. A unilateral APA is an one sided APA i.e the pricing is agreed with tax administration of home country while in the related parties jurisdiction, the related party will still have to undergo the routine litigation process. If associated enterprises ( AE ) jurisdiction raises a transfer pricing adjustment with respect to a transaction or issue covered by the unilateral APA, then the unilateral APA can be treated as the taxpayer s filing and therefore eligible for MAP and adjustable, as opposed to an irreversible settlement. Considering the above, it is evident that the unilateral APAs do not reliably eliminate double taxation issue or might even create taxation gaps and therefore are less preferred by the taxpayers. The below figure encapsulates the unilateral APA process. Page 13

17 Board Apporval DG International Taxation Agreement APA Team Tax Payer Bilateral / Multilateral APAs A bilateral APA is an agreement between two tax authorities whereas a multilateral APA is between more than two tax authorities in respect of transactions involving taxpayers in various jurisdictions. These APAs ensure that the arrangements will reduce the risk of double taxation, will be equitable to all tax administrations and taxpayers involved, and will provide greater certainty to the taxpayers concerned. These APAs offer greater tax certainty and address the full scope of a transaction and are therefore are favoured over unilateral APAs. When such agreements are possible, revenue authorities generally avoid entering into multiple unilateral agreements. However, the only downside of these APAs is that, there is high time-cost involved in concluding such type of APAs. This needs to be weighed against the benefits a taxpayer may achieve in his case. Page 14

18 The below picture provides for an elaborate description about the arrangement which could be undertaken for a bilateral APA: Board Approval Board Approval Competent Authority of India Discussion & Understanding Competent Authority of the of other India country Agreement APA Team (APA director and APA officers) Discussion Taxpayer Tax authorities including experts from economics, statistics, law etc. India Associated Enterprise (AE) Outside India Agreement Tax payers can also consider synthetic bi-lateral APA s i.e two different unilateral APA s one in India and the other outside India. MAP-APA MAP APAs are governed by the mutual agreement procedure of the applicable double tax agreement, Article 25 of the OECD Model Tax Convention, and are administered at the discretion of the relevant tax administrations. The guidelines provide that if a taxpayer does not request a MAP APA, then the reason should be reviewed, and wherever possible, tax authorities should encourage the taxpayer to request a MAP APA if the circumstances are suitable. The negotiation of MAP APAs requires the consent of the relevant competent authorities. In some cases the taxpayer might voluntarily take the initiative by making simultaneous requests to the affected competent authorities. The willingness to enter into MAP APAs will depend on the particular policy of a country and how it interprets the mutual agreement article of its bilateral treaties. The desire of the taxpayer for certainty of treatment is therefore not, in isolation, sufficient to execute MAP APAs. The fact that a taxpayer may be under audit or examination should not prevent the taxpayer from requesting a MAP APA in respect of prospective transactions. The audit or examination and the mutual agreement procedure are separate processes and generally can be resolved separately. Audit or examination activities would not normally be suspended by a tax administration whilst the MAP APA is being considered, unless it is agreed by all parties that the audit or examination should be held in abeyance because the obtaining of the MAP APA would assist with the completion of the audit or examination. Though the MAP process may provide more certainty and entail cost savings to the taxpayer, it is to be noted that it might not always be possible to apply a single transfer pricing methodology to a wide variety of facts and circumstances, transactions and countries likely to be the subject of a multilateral MAP APA. Therefore, care needs to be taken by all the participating jurisdictions to ensure that the methodology, even after such adaptation, represents a proper application of the arm s length principle in the conditions found in their country. Page 15

19 Choice of APA s Across the globe in some tax jurisdictions, multiple provisions and rules exist for choice of APA and its applicability. In certain countries unilateral APAs are only available when the bilateral treaty network is not available. In such cases, the regional tax authority may issue a unilateral decision with future effect. In some regions bilateral APAs are the rule and unilateral APAs are the exception only in special cases: where there is no treaty, where a large number of countries are involved, thus making a multilateral APA impractical, or where small businesses are involved. In the interest of sound tax administration and the elimination of any double taxation potential, taxpayers as well as the tax administrations prefer bilateral/multilateral APAs over unilateral APAs. However, bilateral/multilateral APAs tend to take a longer time to conclude as more than one tax administration is engaged in the process. In such cases, the tax administrations may choose to provide a unilateral APA to the taxpayer. While there can be situations where a unilateral APA might be preferable over a bilateral/multilateral APA, such situations are limited. More often than not, it would be in the interest of the tax authorities as well as the taxpayers to enter into bilateral/multilateral APAs for the reasons discussed above. Though unilateral APAs may be useful in certain circumstances, such as covering issues or transactions where no applicable tax convention exists, they may prove to have limited utility where both tax administrations actively review the type of transactions being covered. Also in certain jurisdictions a unilateral APA is granted if the taxpayer shows sufficient justification. In cases where global trading is conducted on a fully integrated basis (i.e. the trading and risk management of a book of financial products takes place in a number of different locations, usually at least three), a multilateral, and not a bilateral, APA has becomes necessary. However, in some cases where a bilateral APA has been sought and the treaty is not appropriate, or where a treaty is not applicable, the competent authorities of some countries may nevertheless conclude an arrangement using the executive power conferred on the heads of tax authorities. Considering the above, the choice of APA s proves significance wherein critical and complex transactions are involved. Indian APA Rules offer all three options i.e unilateral APA, bilateral APA and multilateral APA. The rules provided for taxpayers to provide reasons in writing if a unilateral APA is opted for. It may also be possible to convert a unilateral APA application that is not yet concluded into a bilateral APA. Conversion of bilateral to unilateral is anyway provided for in the rules. Advance pricing agreement is a welcome move by the Government as it promises certainty of transfer prices and likely eliminates/reduce litigation. This would significantly free up the time of CFOs/ Tax Directors for business instead of tax matters. The mutual agreement procedure (MAP) under the Tax Treaties has been a rather prolonged and convoluted process going upto 3 years for a closure. As against this, although APA is also expected to initially take a long time, it would be a one-time investment and companies cap reap benefits on renewals after the expiry of the 5 year period. Renewals are generally understood to happen at a much faster pace thus crunching the overall time spent on the APA process. Madhusoodhana Y R Head - Global Tax and Trade, Intel India Page 16

20 Practical Considerations for Implementing an APA Type of transactions to be considered: Covered Transactions As per Section 92CC(1) of the Income-tax Act, 1961, The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the arm s length price or specifying the manner in which arm s length price is to be determined, in relation to an international transaction to be entered into by that person. As such, all the international intercompany transactions entered with Associated Enterprises ( AEs ) are covered within the purview of an APA. The APA rules define covered transactions as the international transaction or transactions for which agreement has been entered into. The taxpayer could decide the intercompany transactions in respect of which they would like to negotiate and enter into an APA. There is no requirement that all AEs or all intercompany transactions must be covered under an APA. However, it is important to fully disclose all the intercompany transactions proposed to be entered into by the taxpayer to the tax authorities APA team. In certain cases, if tax authorities are of the view that it would be important to include certain other intercompany transactions (originally proposed by the taxpayer to be excluded) for various reasons, the tax authorities may discuss with the taxpayer and mutually agree to include such transactions. An APA should ideally cover complex / high value transactions considering the time and cost linked in concluding an APA. When is it right to enter into an APA There are numerous aspects that the taxpayer should consider while deciding upon entering into an APA. The key determining aspects are highlighted below: Certainty vs. Flexibility Transfer pricing in India is heavily litigated in the last six concluded audits and taxpayers have been looking forward to clear answers to their arm s length woes. In this regard, one of the benefits that the taxpayer can achieve through an APA is certainty. While an APA provides a high degree of certainty over the APA term (a maximum of 5 years), there is a trade-off one has to accept vis-a-vis flexibility. Once a taxpayer enters into an APA, it does take away the ability to make fundamental changes to the transfer pricing method. Making any material changes on the key assumptions underlying the APA would make the APA subject to annulment by the Board. Time & Cost The APA process is a time consuming process and can take significantly longer time and resources as compared to a transfer pricing audit through the regular channel. Mature APA jurisdictions like Japan and USA also take a minimum of 14 months going all the way up to 3 years in some cases to conclude a unilateral APA. Bilateral / Multilateral APAs, would take even longer given the level of complexity just by virtue of having more than two tax administrations involved. Page 17

21 As such, the taxpayer should consider the time frames bearing in mind that an APA is a one-time process that can cover up to five years (another factor to consider is that roll backs are not permitted in India). While on one hand it can take a long time to conclude an APA, on the other, it might be a better option considering the timelines involved in pursuing normal channels of dispute resolution (litigation) in India. Information Control While negotiating an APA, one of the requirements would be to share a lot of information / documentation which could at times be confidential / trade secret. This involves not only the past positions of taxpayer, but also future plans and forecasts. On the other hand, if the taxpayer opts to go with the regular tax audit cycle, the information requirements are limited to the issues involved for the year under audit. Taxpayer should accordingly evaluate its option to go for an APA. In an APA situation the taxpayer is in control of information as compared to in a defense situation where information is demanded. Eligibility Criteria Various jurisdictions follow different practices for admission of an APA request. Some adopt a monetary threshold for accepting an APA while some focus on the degree of complexity involved in the transfer pricing issues proposed to be covered through APAs. For example, China requires the annual amount of related party transactions proposed to be covered under the APA should be over RMB 40 million. On the other hand, United Kingdom focuses on the degree of complexity involved in the transfer pricing issues proposed to be covered (however, there have been some recent changes in this regard; this criteria has been relaxed in the latest revised draft APA manual of the HMRC). From an Indian perspective, the APA Rules define persons eligible to apply for APA rules as any person who has undertaken an international transaction; or is contemplating to undertake an international transaction. The Rules have not prescribed any monetary limit with respect to the related party transaction value. However, there is pre-filing consultation and preliminary screening process involved prior to determining whether a formal application needs to be made. Involvement of the taxpayer in the APA process A taxpayer is exhaustively and significantly involved during an APA process. This may include, and is not limited to, taxpayers discussions with tax authorities, assisting tax authorities in onsite inspections of taxpayer s premises which enables a deeper insight into the taxpayer s business and accordingly the pricing of the transactions proposed to be covered under an APA. Importantly, the taxpayer is expected to be effectively involved in regular communication with its associated enterprises, ensuring effective information flow to tax authorities. Further, the taxpayer should not expect to be involved in any internal discussions of tax authorities or correspondence. Where requested, the taxpayer should be prepared to attend meetings between officials and to provide any requested information or explanations in a timely manner. From an Indian perspective too, the Rules do not permit taxpayers to be part of internal discussion of tax authorities It is important for revenue authorities to encourage the involvement of taxpayer in the entire APA process. In case of bilateral / multilateral APAs, it would be advisable that the revenue authorities keep the taxpayer updated and informed about the progress of any discussion with any foreign tax authority and ensure confidentiality in respect of any information obtained from the taxpayer. It is also important that taxpayer and its associated enterprises in the other country provide consistent position to their respective competent authorities. Page 18

22 Forms and information requirements Jurisdictions which have an APA scheme in place have different approaches relating to forms and information requirements with respect to filing an APA application. The APA rules have prescribed the following forms to be submitted during each stage of APA application: Form No. 3 CEC: Request for pre-filing consultation Form No. 3 CED: Application for advance pricing agreement Form No. 3CEE: Application for withdrawal of APA Form No. 3 CEF: Annual Compliance Report on APA Confidentiality An APA program is generally designed in such a way that ensures confidentiality to the taxpayer. While entering into an APA, the taxpayer may have to make certain prospective disclosures like prospective new technology, future business projections, marketing strategies etc. Usually, most of the mature APA jurisdictions have provisions relating to confidentiality of the information provided by the taxpayers in their APA programme. This ensures that taxpayer information is not shared/ released to other persons/ any other government department who are not authorised to receive that information, especially with the revenue officers auditing open tax years. Confidentiality is generally ensured regardless of the outcome of the APA negotiations. The Indian Rules do not have any firewall provisions to protect taxpayer information. Withdrawal from the APA process APA regimes in other countries generally allow taxpayers a flexibility to withdraw an APA application at any stage of the process. Such regimes typically enable the taxpayers to withdraw from an APA application if the negotiated position is not acceptable or the taxpayer does not see a point in agreeing to an APA because of a change in business circumstances. In case the taxpayer withdraws from an APA process, it should seek an assurance from the APA authorities that disclosures made during APA discussions should not be shared to regular revenue authorities responsible for transfer pricing audits and tax audits. The Indian APA rules also allow withdrawal of APA application at any time before the finalisation of the terms of the agreement. The fee paid during the time of application shall not be refunded on withdrawal of the application. Compensating Adjustments Generally a compensating adjustment is made after the end of the particular year of income. The extent of compensating adjustments could be reduced if APA review is done in mid-year and any adjustment is identified at that time. But all year-end compensating adjustments should be disclosed in the tax results for the income year to which the compensating adjustment relates. Page 19

23 Compensating adjustments are not recognised by most OECD member countries, on the grounds that the tax return should reflect the actual transactions. Where compensating adjustments are permitted (or required) in the country of one associated enterprise but not permitted in the country of the other associated enterprise, double taxation may result as corresponding adjustment relief may not be available if no primary adjustment is made. The mutual agreement procedure is available to resolve difficulties presented by compensating adjustments, and revenue authorities are encouraged to use their best efforts to resolve any double taxation which may arise from different country approaches to such year-end adjustments.the above issue of double taxation is eliminated in the case of bilateral/multilateral APAs where the tax authorities provide an upfront buy-in to the covered international transactions. Fees Out of all the countries which have APA scheme in place, only few countries have some form of APA fee requirement. The main purpose of charging a fee is to effectively conclude an APA within a reasonable period of time. The APA fee arrangements may vary from fixed fees payable at the time of application to an APA scheme, or variable fee arrangements based on certain actual costs like travel and accommodation costs incurred by the revenue authorities in processing an APA application. In India a graded fee is prescribed. Time frame for an APA Process The time frame for an APA process depends on the type of APA entered into, i.e., whether it is a unilateral APA or bilateral/multilateral APA. Further, the time frame varies on a case-to-case basis depending on the complexities involved and needs significant amount of time and analysis before an APA is agreed and concluded between the taxpayer and revenue authorities. Generally a unilateral APA may take upwards of 14 months and bilateral/multilateral APA may take up to months for completion. There would be need for the taxpayer and revenue authorities to discuss and agree a proposed time frame for completion of APA at the initial stage of filing an APA application. Regular monitoring of the progress against the agreed time frame by both, the taxpayer, and, by revenue authorities, may help in ensuring timely conclusion of an APA process. There are specific countries like UK, Israel, Lithuania which provide for time frame to conclude an APA. India Rules do not provide for a time frame to conclude an APA. Renewal of an APA When an APA arrangement nears completion, tax authorities may agree (on the request of the taxpayer) to extend the APA beyond the period for which it was originally agreed upon. Such an extended arrangement is termed as a renewal of an APA. A request to renew an APA should be made bearing in mind the need for sufficient lead time required by the taxpayer and by revenue authorities to review and evaluate the renewal request and to reach an agreement. It may be helpful to commence the renewal process well before the existing APA completion date. Page 20

24 Indian Rules do not provide for a time frame to conclude an APA The processing and evaluation of renewal application is generally similar to an initial APA application process. However, the necessary level of details may be reduced; particularly if there have not been material changes in the facts and circumstances of the case. Renewal of an APA is not automatic and depends on the consent of all the parties concerned and subject to the taxpayer demonstrating, among other things, compliance with the terms and conditions of the existing APA. The methodology and terms and conditions of the renewed APA may differ from those of the previous APA. The Indian APA Rules provide for renewing of an APA. The request for renewal of an APA has to be made as a new application, using the same procedure as outlined for in the APA rules except for pre filing consultation. Roll-back of an APA An APA is generally prospective in nature, that is, it addresses the transactions which occur in future. But, APA may address the prior year issues/transactions that are either in the course of dispute between the taxpayer and the competent revenue authorities or which are under audit review. The final agreement discussed and agreed in an APA may be applied or rolled back to the transaction(s) in the prior period. Taxpayers may request the revenue authorities to consider for rollback, along with the initial filing of an APA application. However, the revenue authorities may also propose that similar transfer pricing method as agreed under an APA should be rolled back to prior years. Approval of other country's revenue authorities is required if the roll back is for a bilateral APA. The Indian APA Rules does not enable for roll back of APA, but a concluded APA could have precedence value for open litigation issues for most taxpayers. Though rollbacks for APA are not formally enabled, it seems that a successfully concluded APA will have high precedence value for pending litigation cases or pending mutual agreement proceedings if the facts are similar for these cases as well. Vaishali Mane Client Service Director Transfer Pricing Services Grant Thornton India LLP Page 21

25 Public Reporting Some countries like Japan, Australia and USA which are mature APA jurisdictions prepare and publish APA annual reports of their APA schemes which include statistics as to the types of APA applications received & processed and also inventory of work-in-progress. Taxpayers, on the other hand, are also required to submit, within a specified period of time, all reports demonstrating compliance with the rules of APA on a yearly basis called APA Annual Report. The APA Annual Report substitutes the formal transfer pricing documentation which the taxpayer is required to comply with under regular transfer pricing legislation and thereby reduces the taxpayer's cost and time involved in maintaining the annual mandatory transfer pricing documentation for the international transactions required under the Indian transfer pricing legislation. Indian government can also consider some form of public reporting. Kudos to the Indian Government for introducing the APA scheme, a beacon of hope for corporate India and MNCs to arrest the thousands of crores of Rupees locked up in transfer pricing controversies. An open and cooperative approach from Revenue as well as the taxpayers in implementing the APA process shall be the defining corner stones of success which would be a departure from the defensive approach in vogue for decades in India. Fatema Hunaid Client Service Director Transfer Pricing Service Grant Thornton India LLP Page 22

26 APA Process The below diagram depicts the lucid stages involved in an APA process. The APA process is exhaustive in nature. The below APA process would usually be adopted by a taxpayer, however it should not be considered as a yardstick approach. The taxpayer will have to dedicate copious amount of time and resources in the entire APA process for a successful outcome. Phase 1 : Feasibility study Determine suitability of an APA Phase 2 : Pre-filing Consultation Understand the perspective of the department on basic issues Phase 3 : APA Application File a written APA application and preliminary screening Phase 4 : Negotiation Negotiations between the taxpayer and tax administrator Phase 5 : Execute APA formal agreement of APA executed which is binding on taxpayer and tax administrator Phase 6 : Annual APA Compliance Report File and annual compliance report in relation to the implementation of the APA Phase 7 : Compliance Audit TPO to carry compliance Audit for each covered year Phase 8 : APA Renewal Extending the APA beyond the period originally provided (new APA) We expect the APA regime to layout clear criteria s or ground rules for admitting APA application, time bound decisions and transparency in decision making from the authorities. Priya Murli Bayer Cropscience India Limited Head of Taxation Page 23

27 Feasibility Study An APA may not be suitable for everyone and in every situation. Thus, a feasibility study needs be undertaken. A feasibility study aims to objectively and rationally uncover, the strengths and weaknesses of the existing business model or proposed venture, evaluate the opportunities and threats and ultimately draw up the prospects for success. The feasibility study should also aim to analyse which transaction or group of transaction the taxpayer should cover while entering into an APA. In its simplest terms, the feasibility study should encapsulate the objective, type of transaction to be covered, cost-benefit (economic) analysis and the risk threshold. This will enable a company to decide if an APA is feasible or not. As mentioned above, the feasibility study should detail the primary objective for entering into an APA. The objective could be to determine certainty in case of high risk / high value transfer pricing issue or ensure certainty before starting a new line of business; expansion etc. or another objective could be to eliminate risk of double taxation (bilateral/multilateral APA). Once the objective is decided, the next step would be to determine the economic benefit for entering into an APA vis-à-vis the current litigation options available. The economic analysis would entail undertaking a costbenefit-risk analysis. The taxpayer will have to determine an appropriate threshold limit in terms of time, resource and money that it would want to invest in an APA process. In case where the taxpayer has gamut of international transaction, the taxpayer will also need to analyse the economic feasibility in terms of which transaction or group of transaction should be covered. Analysing all these factors, would help the taxpayer to determine the benefits and savings that are expected from an APA as compared to the time-cost and effort involved in procuring an APA and the acceptable risk tolerance benchmarks. One more important factor one needs to consider is the outcome of the APA may not always be the same as expected. In the process of filing for an APA one will have to disclose a lot of confidential information. Therefore, while undertaking the feasibility study; an evaluation of this risk also should not be ignored. Once it makes economic sense for entering into an APA, one has to also determine which transactions should be covered and also undertake a detailed transfer pricing analysis for the covered transaction. This would enable in anticipating the transfer pricing methodology and benchmarks for the covered transactions. Thus a feasibility study should analyse the pros and cons and simultaneously with the help of the transfer pricing analysis determine the economic benefit for entering into an APA. If the economic benefit outweigh costs and the acceptable risks, then it is feasible to enter in to an APA. Pre-filing Consultation (PFC) PFC allows taxpayers to discuss the suitability of an APA before deciding to pursue it. The PFC would be fruitful if the taxpayer is given a chance to discuss the case directly with the Board personnel who would be processing the case. It is understood that, the pre-filing conferences can be held on a named or anonymous basis also. An anonymous pre-filing conference provides the taxpayers the opportunity to discuss the facts and issues of the case with the board. During the discussion, the taxpayer can determine the openness of the Board to the issues of the taxpayer, without the fear of inviting an audit if the taxpayer decides not to proceed with an APA. It is pertinent to note that the taxpayer should file the pre-filing submission to the APA office one week prior to the meeting. This would enable the APA team and the taxpayer to be equally prepared for a productive meeting. Page 24

28 The pre filing discussions however do not bind a taxpayer or the tax administration to the APA process. Usually like other countries, it is expected that the taxpayer would get only one chance for the pre-filing meeting. However, if the level of complexities is high then there can be more than one pre-filing meeting. The tax authorities can also suggest in the pre-filing meeting what further information may be required to be filed while submitting the formal APA application. As per the Indian APA Rules the pre filing consultation aims to achieve the following: 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. Thus a pre-filing meeting would give the taxpayer a fair perspective on the receptivity of the APA Board. The taxpayer can then decide whether it would want to formally apply for an APA. Also based on the pre filing discussion, the taxpayer can accordingly strategise its submission approach, transfer pricing methodology to be adopted etc. to ensure smooth processing of APA. There is no fee for the PFC. As per the Indian APA rules; the pre filing submission should include the following (details provided in annexure) Pre filing application to contain Brief profile of the business Define RPT to be covered Value of IT Prior 3 yrs TP audit Brief profile of the business Specify the type of APA FAR profile Proposed TPM Proposed Why other TPM TPM not suitable Type of any 3rd party benchmark Define profit level indicators Define critical assumptions Brief profile of the business The PFC may conclude with a written understanding as the APA application needs to adhere to broad terms agreed during the PFC. Page 25

29 APA application An APA application should contain enough information to properly evaluate the arm s length nature of the proposed transactions. The APA Rules prescribe that the APA application should be made in Form CED. The information to be submitted in this form includes the following (details provided in annexure): General Information Name of applicant Profile of group, business, AEs, Group / organization structure Pre-filing Details, Type of APA application, Fee details, Period of APA proposed History, background and description of business and products of both the parties International transaction proposed to be covered, other transaction which have impact on covered transaction Functional analysis of the applicant and all relevant entities with respect to the Transaction FAR covered transactions Current and future business strategies and forecasts Industry Analysis Relevant marketing and financial studies Detailed industry analysis and the market analysis for all countries involved Agreements Copies of all relevant intercompany agreements TP Methodology TP background and discussion of TPM, policies, and practices used by the applicant and AE for the for past Discussion and analysis of each TPM, applied or rejected, for each covered transaction. In particular provide details on accepted or rejected internal comparables. Method, terms and conditions, and critical assumptions Details Primary and Secondary Transfer Pricing Methodology Impact of proposed TPMs Financial Information Financial, operating information, corporate annual reports & financial statement for the prior five years Accounting and costing system, policies, procedures, and practices, including any significant financial and tax accounting differences Segment financials Income tax returns and related supporting schedules for the prior three years including Form 3CEB Litigation Related Documents Relevant legal considerations and requirements Discussion of relevant ruling, APAs, MAPs with the foreign tax administrator other tax matters Discussion of relevant foreign income tax audit, appeals, judicial and competent authority history Discussion of un-assessed taxation years (Indian and foreign) and related outstanding tax, legal, and other pertinent issues Though the broad guidelines would be same for all taxpayers but the information and documents will vary on a case to case basis depending on the type of industry, type of transactions and business model/business strategy of the taxpayer. Page 26

30 The APA application should be filed 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. For a bilateral, similar submission must also be filed simultaneously with the other tax administration involved. A well drafted APA documentation pack would ensure smooth processing of the application. It would also give the tax administration upfront clarity on the issue and thereby reduce the time and effort involved in processing of the APA. Preliminary Screening This step is unique compared to APA regimes of other mature tax administrations. As per the Indian APA Rules, every application filed by the taxpayer should be complete respects and accompanied by requisite documents. The DGIT or Competent Authority in India shall issue a deficiency letter if: any defect is noticed in the application, or any relevant document is not attached, or application is not in accordance with understanding reached in pre-filing consultation The deficiency letter shall be served to the taxpayer before the expiry of one month from the date of receipt of the application. On receipt of the deficiency letter the taxpayer will have to remove the deficiency or modify the application within a period of fifteen days (maximum 30 days) from the date of service of the deficiency letter. Based on the modified application, the DGIT or the competent authority in India, as the case may be, if satisfied with the modified application may pass an order for the application to be further processed. In case they are not satisfied then the application shall not be allowed to be proceeded. However, no order will be passed without providing an opportunity of being heard to the applicant and if an application is not allowed to be proceeded with, the fee paid by the applicant shall be refunded. Negotiations between taxpayer and tax administration Once the APA application is received by the tax administration, it would study and evaluate the application in detail. If the tax administration requires any additional information or documents then it would send a notice to the taxpayer to provide the same. In addition to the written information requests, the tax administration could also request for onsite visits. After understanding and gathering all the required information the tax administration would then arrange for negotiation meetings with the taxpayer. In case of unilateral APAs, the tax administration will arrange negotiations and discussions with the taxpayer. For bilateral APAs, the tax administration will first arrange negotiations with the taxpayer and then enter into discussion rounds with the relevant competent authorities. In the negotiation phase the tax administration and the taxpayer would mutually reach to a conclusion on the transfer pricing of the covered transactions. In complex transactions, the negotiation meetings could be more than one meeting. The tax administrator should share with the taxpayer its findings/conclusion after the negotiations. Once the negotiation proceedings are done the next step in the APA process would be drafting of an APA. Page 27

31 Draft and Execute APA The formal agreement is based on the negotiation carried out between the taxpayer and the tax authorities. In the case of a unilateral APA, the tax authorities and the taxpayer in the course of negotiation may have agreed on a methodology or outcome, and it is then up to the tax authorities to draft an appropriate agreement that recognizes this particular outcome. However, in the case of a bilateral/multilateral APA, a similar process would be followed where the relevant tax authorities agree on a TPM or outcomes. While drafting the APA the tax authorities may take into account many basic assumptions like: corporate shareholding structure; constant conditions regarding market conditions, market shares, revenue volumes, and sales prices (e.g. no significant changes due to new technology); constant conditions regarding regulatory law, customs, import and export restrictions, and international payment transactions; constant function and risk allocation; constant business model; constant conditions regarding exchange rates and interest rates; no material changes in the tax framework of the other state; and any other critical assumptions The tax authorities will draft the formal agreement in a manner consistent with the laws of that country relating to contractual arrangements and having regard to provisions in the tax law. It is imperative that the taxpayer should consult with its advisers as to the appropriateness of the agreement proposed by the tax authorities. This formal agreement will be binding on both the taxpayers and tax authorities. If any tax demand is raised as a result of the normal TP audit process on any subject matter of the APA, the same should not be enforced till the execution of the APA. The APA authorities could consider using a standard template of an APA agreement like the US IRS. Annual APA Compliance Report The taxpayer is also required to prepare and file an annual compliance report in relation to the implementation of the APA to the tax authority for each year of the APA. The Indian APA Rules require the following information to be furnished in the annual compliance report: details of the taxpayer type of APA entered into name(s) of the associated enterprise(s) with which international transactions have been undertaken during the year. details of Covered Transactions including nature, amount, agreed TPM, agreed PLI, actual result achieved, adjustment required details of any changes in the business model details of any changes in the Functional and Risk Profile of the taxpayer and the associated enterprises transfer pricing methodology agreed upon in the APA details of Critical assumptions agreed upon in the APA and changes thereof, if any: details of any changes in the organisational structure of the taxpayer / group details of other terms and conditions agreed upon in the APA Compliance Audit The TPO having the jurisdiction over the taxpayer will carry out the compliance audit of the agreement for each of the year covered in the agreement. The TPO will have to furnish the compliance audit report within six months from the end of the month in which the annual compliance report is referred to him. While undertaking the compliance audit, the TPO may require the assessee to substantiate compliance with the terms of the agreement, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method. The TPO may also ask the assessee to submit any information, or document, to establish that the terms of the agreement has been complied with. Page 28

32 The TPO shall submit the compliance audit report, for each year covered in the agreement, to the DGIT in case of unilateral agreement and to the competent authority in India, in case of bilateral or multilateral agreement, mentioning therein his findings as regards compliance by the assesse with terms of the agreement. The DGIT shall forward the report to the Board in a case where there is finding of failure on part of assesse to comply with terms of agreement and cancellation of the agreement is required. The compliance audit is not expected to be in the name of a regular TP audit. APA Renewal When an existing APA is drawing to a close of its term, the parties agree to enter into further discussions or negotiations with a view to extending the APA beyond the period originally provided. Any such extended arrangement is concluded as a new APA. The taxpayer may have to file an application along with supporting evidence to confirm that there have not been any major changes to the facts and conditions in the existing APA, and that the taxpayer has been in full compliance with the provisions and requirements of the APA. After receiving the application, tax authorities will review and evaluate the application documents, and negotiate with the taxpayer to draft the new APA. The renewal of APA would result in benefits to all parties involved in the negotiation process. In particular, the tax certainty is extended for the agreed further term and, therefore, the voluntary compliance objectives are enhanced. Also far less time and resources are required to renew an APA than were required for the initial APA, this will result in reduced cost for the taxpayer. As per the Indian Rules, similar procedure for renewal is to be followed excluding pre-filing consultation. Page 29

33 Critical Analysis of an APA The APA process as per the Indian APA Rules is consistent with the process adopted by other countries with the only difference that the Indian Rules do not enable for Roll back of APAs Presently the concept of APA is being perceived as a vaccine for the ever-growing transfer pricing litigations. APA provides a reasonable degree of certainty relating to tax outcome of the international transaction(s) entered into by the taxpayer by determining in advance the transfer pricing methodology to be applied in respect of the international transaction(s) covered by an APA. An APA may thus be helpful in minimising transfer pricing audits, delivering a particular tax outcome based on the terms of the agreement, and often substantially reducing compliance costs over the duration of the APA. This enables a more efficient and effective management of transfer pricing compliance requirements by bringing fairness, simplicity and efficiency which may otherwise lead to become litigation issues. Thus, from the perspective of a taxpayer, an APA can be a mechanism for efficient handling of tax risks associated with international transactions. And from the perspective of tax authorities, an APA can similarly be a mechanism for quality administration of the transfer pricing legislation. Hence, APA results in win-win situation for both the parties involved i.e. taxpayer and tax administrator. APA, in particular a bilateral or a multilateral, can be an effective tool in potentially eliminating double taxation. A pre-determined pricing strategy which is acceptable to all the tax jurisdictions will result into optimal allocation of income among the jurisdictions involved with-out the risk on an income being double taxed. The following is illustrated with the help of a simple illustration. Illustration I XYZ Ltd. (US Parent) Remunerate on cost plus mark-up Provide Business support services Indian Subsidiar y Now suppose India tax authorities determine that the price charged by the Indian subsidiary is not at arms length and proceed to make an adjustment, it will lead to double taxation of the income in respect of which adjustment is made. The adjusted income was already offered for tax in US and will now be also taxed by Indian tax authorities. Similar situation occurs if US tax authorities do not accept the transfer price and make an adjustment. If there is certainty about the transfer price being accepted in both the jurisdictions, the risk of double taxation is eliminated. This is precisely what APA aims for. APA entered between both the jurisdictions and tax-payers provide certainty to a great extent that the transfer price will be accepted and thus the risk of double taxation is eliminated. However, in these regards Indian tax authorities have come with the provisions of unilateral, bilateral as well as multilateral APAs. This is a welcome step and possibly will lead to enlarged interest towards APA. Page 30

34 Bilateral APAs also results in fewer documentation requirements for the MNE groups. An APA may reduce the litigation on transfer pricing issues which is a costly and time-consuming affair for taxpayers and administrations. After an APA has been concluded subsequent examination of the taxpayer s return will require less resources and time, because most of the relevant information about the taxpayer is known. APA provides an opportunity to the taxpayer and tax authorities to discuss the transfer pricing issues in a nonadversarial spirit and environment. APA can facilitate free flow of information, in a less confrontational atmosphere, between the taxpayer and tax authority(s) for the purpose of agreeing on a methodology which is legally correct and practically workable. Thus, the interaction between the taxpayer and tax authorities during the APA negotiation helps in a more objective review of the issues involved. From the angle of tax jurisdictions APA may pave the way for increased foreign direct investment as it will help in boosting the confidence of the foreign investors by bringing certainty in the transfer pricing issues. Also transfer pricing issues addressed by APA shall enable the jurisdictions to deal with similar issues in open years. Also experiences gained from APA will be instrumental in future improvement of the law. However, it is pertinent to note that there are no specific provisions regarding the roll backs in the Indian context. So it will be critical to see whether tax authorities practically use the methodology adopted during the APA process to deal with the issues in the open years. Another benefit of resorting to an APA is that the taxpayer and tax authority may agree to a methodology other than the prescribed methods for determining the arm s length price, depending upon the commercial nature of the international transaction. This may be quite useful in scenarios where transfer price is set with pure commercial rationale. Tax-payer can negotiate an economic method to justify the set transfer price. APA may be particularly helpful in case of start-up enterprises. Start-up enterprises require set up time in initial phase of business. So in the initial years it may end up in making very low profit or even losses. So it will be hardship for the tax-payer if a transfer pricing adjustment is imposed on the enterprise on the criteria that the transaction is not at arm s length. APA can address this situation by including a provision of term-test. Term test refers to testing of an international transaction over a period of time rather than examining it on year to year basis. This relieves the tax-payer from the hassles of transfer pricing compliance for every year and from potential litigations. All the advantages discussed in the above paragraphs are being summarised herein: certainty on the transfer pricing issues avoidance of possible audit along with penalty and ligation costs efficient management of transfer pricing issues potential elimination of double taxation fewer compliance costs for MNE groups free flow of information between taxpayers and revenue authorities. favourable environment for FDI ability to deal with the contentious issues in open years provides with critical analysis of law by all the parties, hence scope for future improvements in the law All said and done in the praise of the APA it must be kept in mind that no good things come without sweat. APA if not implemented in the right manner dilute the advantages associated to it. The fulcrum of the entire mechanism lies on the critical assumptions regarding the future market conditions in determination of the price. If the assumptions are not precise it may result into much hassle for both the tax-payers and the tax authorities. For instance in the event of an economic slowdown the determination of arm s length prices by the methods determined by the APA may not show proper results. Consider a situation where there is significant change in the economic characterisation of the taxpayer. This may render the methods agreed in APA redundant. Either APA needs to be revised or a new APA needs to be entered. This lead to additional hassles for the tax-payer as it results in outflow of substantial time and money. Page 31

35 The APA scheme in the Indian context has come out with the revision procedures but does not specify any time limit for the completion of the revision. Instead the scheme rolls out similar procedures for revision as in the time of entering into the original agreement. This leads to the consumption of additional time and efforts of the taxpayers. Besides the initial costs and time involved in the initial stages of APA is huge. Only the large taxpayers can afford to enter into an APA. Experiences in most countries show that time for completion of an APA may range from months. The time is on the higher side in completion of a bilateral APA. So the tax authorities have to divert a large number of resources otherwise earmarked for other purposes. Also in between the APA period tax administration may also have to divert a lot of resources to monitor whether taxpayers are complying with APA. Further, in case of non- compliance with the terms of an APA the entire costs and efforts in agreeing an APA may go into vain and the basic purpose behind an APA gets vitiated. Besides unilateral APA suffer from some characteristic weaknesses. A unilateral APA does not eliminate the risk of double taxation. It only brings certainty in the jurisdiction to which unilateral APA is agreed onto. Also the foreign competent authority is not likely to allow a corresponding adjustment arising out of an APA that is inconsistent, in its view with the arm s length principle. This is illustrated herein. The single most attribute of a good investment and business climate is certainty. The APA scheme has the potential to bring certainty in tax impact of transactions for potential investors and taxpayers in India. For the litigious Indian transfer pricing regime, this is a welcome step which can create an environment of trust between tax authorities and taxpayer. What is required now is that both sides adopt a positive approach and make this a success. Illustration II Arun Chhabra Partner Transfer Pricing Services Walker, Chandiok & Co For instance in the illustration 1 the US parent enters into a unilateral APA with US tax authorities. A degree of certainty is achieved in respect of the transfer price but only in United States. However Indian tax authorities are not bound by this APA and can still question the price charged and proceed to make an adjustment to the income of the Indian entity. Thus still this income in respect of which adjustment is made is being double taxed in both the jurisdictions. Another drawback of an APA is that it does not completely eliminate examination of the international transactions covered by an APA. Further, the taxpayer is also required to demonstrate that it has adhered to the terms and conditions of the APA that material representations made during the APA hold true, that data used in applying the methodology is correct and that the critical assumptions underlying an APA are valid. Therefore, tax authority should endeavour to make procedures of APA less cumbersome and not demand from taxpayer anything outside the scope of APA application. The Indian APA scheme contains provisions for annual compliance to the APA which will be filling of an annual compliance report before the authorities. Furthermore, the annual report shall be audited by the transfer pricing officer. Page 32

36 Also APA guarantees certainty only in respect of the acceptance of the pricing policy and methods. The dispute over compliance with legal provisions can still continue in an APA regime. One possible instance is the dispute over use of data for comparability analysis. The period for which the comparative data is to be used has been an issue of litigation under Indian domestic laws. Unless agreed in advance APA will not guarantee remedy to these issues. Confidentiality is also an important concern as important group policies and trade secrets are disclosed by the taxpayers to the tax authorities while entering into APA. The information shared with the tax authorities during the course of finalising an APA needs to be handled with great amount of diligence. The information shared by a tax-payer while negotiating an APA may contain the group policy, pricing policy, future business predictions, revenue model which are of strategic importance to the MNE group. Sharing of these with the competitors can adversely affect the tax-payers market position. There is a great concern among the industry about the possibility of ill-use of the data by the tax authorities. Tax authorities may use the information as potential comparable information against the tax-payers who have not entered into APA. With the Indian APA scheme comprising of no provisions regarding the confidentiality of tax-payers information, it remains a matter of serious concern for the taxpayers. Besides there may come across a situation where tax authorities and tax-payers don t reach a unanimous conclusion. This may lead to a waste of resources from both the ends. After going through the above the potential disadvantages of APA are summarised here-under: precision is required on the assumptions about future economic circumstances; any error can distort the whole process. closure of APA requires substantial time. APA demands huge resources both in terms of costs and personnel. unilateral APA does not eliminate the risk of double taxation. cumbersome APA procedures can multiply the tax compliances. potential misuse of the secret information shared by the taxpayer to the tax authorities wastage of resources in case an APA cannot be finalised. APA does not altogether eliminate the transfer pricing audit After consideration of the above factors conclusion can be reached that diligence is required on the part of both the taxpayers and tax authorities to achieve the objectives for which APA are entered. Page 33

37 Global Comparison Sr No Countries Pre-filing When APAs were introduced Type of APA Filing Fee Time frame to Conclude Term of Agreement 1 Australia Mandatory 1992 Unilateral, Bilateral & No fees Not specified 3-5 years Multilateral 2 Canada Mandatory 1992 Unilateral, Bilateral & Multilateral Out-of-pocket costs for normal APA and a flat fee of CAN $ 5000/- small business APA's Not specified Three to five years, but that may vary depending on the facts of the case 3 China Mandatory 2004 Unilateral, Bilateral & No fees Not specified 3-5 years Multilateral 4 France Optional 2005 Unilateral & Bilateral (Multilateral may be possible) No fees Not specified 3-5 years 5 Germany Optional 2006 Bilateral & Multilateralm ay be possible) No fees Not specified 3-5 years 6 Israel Optional 2006 Unilateral, Bilateral & Multilateral Not Specified Within 120 days of filing of application or automatically accepted Not Specified 7 Italy Optional 2004 Unilateral Not specified The maximum time allowed is 180 days 3 years 8 Japan Optional 1987 Unilateral & Bilateral No fees Not specified 3-5 years 9 Korea Optional 1996 Unilateral, Bilateral & Multilateral No fees Not specified The taxpayer shall specify the fiscal years for which the APA would apply. 10 Lithuania Optional 2012 Unilateral Not specified days 11 Malaysia Mandatory 2009 Unilateral & Bilateral Not fixed as of today Not specified 3-5 years Page 34

38 Sr No Countries Pre-filing When APAs were introduced Type of APA Filing Fee Time frame to Conclude Term of Agreement 12 Mexico Optional 1995 Unilateral & Bilateral Not specified Not specified Up to three years forward, one year back, and the issuing year. 13 Netherlands Mandatory 2001 Unilateral, Bilateral & Multilateral Not fixed as of today Not specified 3-5 years 14 Russia Mandatory 2012 Unilateral & Not specified Not specified Bilateral 3 years and possible extension of 2 years 15 Singapore Mandatory 2006 Unilateral, Bilateral & Multilateral No fees Not specified 3-5 years 16 United States Mandatory 1991 Unilateral, of America Bilateral & Multilateral APA filing - $50,000, small businesses - $22,500 Not specified 3-5 years 17 United Kingdom ( UK ) Optional 1999 Unilateral & Bilateral (there is no distinction a bilateral and multilateral agreement) No fees Not specified No fee 18 to 21 months from the date of the formal submission. 18 India Mandatory 2012 Unilateral, Bilateral & Multilateral < Rs. 100 crores Rs. 10 Lacs < Rs. 200 crores Rs. 15 Lacs < Rs. 100 crores Rs. 20 Lacs Not specified 3-5 years Page 35

39 Expert Advisors The APA regime may pave the way for increased foreign direct investment as it will help in boosting the confidence of the foreign investors by bringing certainty in the transfer pricing issues. It would enable achieving a win-win situation for both the parties involved i.e. tax payer and tax administrator. Karishma R. Phatarphekar Partner & Practice Leader Transfer Pricing Services Our Strategic APA Advisor: Grant Thornton India LLP Just as the U.S. APA Program ushered an era of best practices for addressing TP issues, so does the India APA Act usher an entirely new era. APA programs, when properly designed and administered, allow both taxpayers and tax administrators to achieve certainty for current and future tax years, often on a bilateral basis. Whereas the up-front investment in time and resources can be significant (particularly for first-time users) that up-front investment pays continuing long-term dividends by reducing (and often eliminating) the financial and economic opportunity costs of compliance and continued uncertainty over the appropriate TP for intercompany transactions. David Bowen LL.M (Dispute Resolution), LL.M (Taxation), J.D., B.S. (Accounting) Principal & National Transfer Pricing Practice Leader, Grant Thornton LLP, Washington, D.C. Karishma R Phatarphekar Mumbai E: Karishma.rp@in.gt.com Arun Chhabra Delhi E:Arun.Chhabra@in.gt.com Vaishali Mane Mumbai E:Vaishali.Mane@in.gt.com Fatema Hunaid Bangalore E:Fatema.Hunaid@in.gt.com Page 36

40 Abbreviations AEs Associated Enterprises APAs Advance Pricing Agreements CAs Competent Authorities CBDT/Board Central Board of Direct Taxes CIT (A) Commissioner of Income-Tax (Appeals) DGIT Director General of Income Tax DRP Dispute Resolution Panel DTC Direct Tax Code FDI Foreign Direct Investment HMRC Her Majesty Revenue and Customs IRS Internal Revenue Service ITAT Income Tax Appellate Tribunal MAM Most Appropriate Method MAP Mutual Agreement Procedure MNCs Multinational Corporations OECD Organisation for Economic Co-operation and Development PAN Permanent Account Number PLI Profit Level Indicator TPM Transfer Pricing Methods TPO Transfer Pricing Officer Page 37

41 Annexure I Advance Pricing Agreement Scheme Relevant sections covering the APA framework in the Income Tax Act, 1961 The Finance Act 2012 introduced the APA program. The provisions for the same are contained in Section 92CC and 92 CD of the act. The relevant sections are reiterated in the following paragraphs for ready reference. 92CC. (1) The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the arm's length price or specifying the manner in which arm's length price is to be determined, in relation to an international transaction to be entered into by that person. (2) The manner of determination of arm's length price referred to in sub-section (1), may include the methods referred to in sub-section (2) of section 92C or any other method, with such adjustments or variations, as may be necessary or expedient so to do. (3) Notwithstanding anything contained in section 92C or section 92CA, the arm's length price of any international transaction, in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered. (4) The agreement referred to in sub-section (1) shall be valid for such period not exceeding five consecutive previous years as may be specified in the agreement (5) The advance pricing agreement entered into shall be binding a)on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and b)on the Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction. (6) The agreement referred to in sub-section (1) shall not be binding if there is a change in law or facts having bearing on the agreement so entered. (7) The Board may, with the approval of the Central Government, by an order, declare an agreement to be void ab initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts. (8) Upon declaring the agreement void ab initio, a)all the provisions of the Act shall apply to the person as if such agreement had never been entered into; and b)notwithstanding anything contained in the Act, for the purpose of computing any period of limitation under this Act, the period beginning with the date of such agreement and ending on the date of order under sub-section (7) shall be excluded; Page 38

42 Provided that where immediately after the exclusion of the aforesaid period, the period of limitation, referred to in any provision of this Act, is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly. (9) The Board may, for the purposes of this section, prescribe a scheme specifying therein the manner, form, procedure and any other matter generally in respect of the advance pricing agreement. (10) Where an application is made by a person for entering into an agreement referred to in sub-section (1), the proceeding shall be deemed to be pending in the case of the person for the purposes of the Act. Effect to Advanced Pricing Agreement 92CD- (1) Notwithstanding anything to the contrary contained in section 139, where any person has entered into an agreement and prior to the date of entering into the agreement, any return of income has been furnished under the provisions of section 139 for any assessment year relevant to a previous year to which such agreement applies, such person shall furnish, within a period of three months from the end of the month in which the said agreement was entered into, a modified return in accordance with and limited to the agreement. (2) Save as otherwise provided in this section, all other provisions of this Act shall apply accordingly as if the modified return is a return furnished under section 139. (3) If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the agreement applies have been completed before the expiry of period allowed for furnishing of modified return under sub-section (1), the Assessing Officer shall, in a case where modified return is filed in accordance with the provisions of sub-section (1), proceed to assess or reassess or recompute the total income of the relevant assessment year having regard to and in accordance with the agreement. (4) Where the assessment or reassessment proceedings for an assessment year relevant to the previous year to which the agreement applies are pending on the date of filing of modified return in accordance with the provisions of sub-section (1), the Assessing Officer shall proceed to complete the assessment or reassessment proceedings in accordance with the agreement taking into consideration the modified return so furnished. (5) Notwithstanding anything contained in section 153 or section 153B or section 144C, (a) the order of assessment, reassessment or recomputation of total income under sub-section (3) shall be passed within a period of one year from the end of the financial year in which the modified return under sub-section (1) is furnished; (b) the period of limitation as provided in section 153 or section 153B or section 144C for completion of pending assessment or reassessment proceedings referred to in sub-section (4) shall be extended by a period of twelve months. (6) For the purposes of this section, (I) "agreement" means an agreement referred to in sub-section (1) of section 92CC; (ii) the assessment or reassessment proceedings for an assessment year shall be deemed to have been completed where (a) an assessment or reassessment order has been passed ; or (b) no notice has been issued under sub-section (2) of section 143 till the expiry of the limitation period provided under the said section]. Page 39

43 Relevant APA Rules covering the APA program in the Income Tax Rules, 1962 (Issued by the Government of India vide notification No. 36 of 2012 dated August 30, 2012) In exercise of the powers conferred by the Income Tax laws, the CBDT has notified the APA scheme via notification no 36 on 30 August Meaning of expressions used in matters in respect of advance pricing agreement 10F For the purposes of this rule and rules 10G to 10T, (a) agreement means an advance pricing agreement entered into between the Board and the applicant, with the approval of the Central Government, as referred to in sub-section (1) of section 92CC of the Act; (b) application means an application for advance pricing agreement made under rule 10 I ; (c) bilateral agreement means an agreement between the Board and the applicant, subsequent to, and based on, any agreement referred to in rule 44 GA between the competent authority in India with the competent authority in the other country regarding the most appropriate transfer pricing method or the arms length price; (d) competent authority in India means an officer authorised by the Central Government for the purpose of discharging the functions as such for matters in respect of any agreement entered into under section 90 or 90A of the Act; (e) covered transaction means the international transaction or transactions for which agreement has been entered into; (f) 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; (g) most appropriate transfer pricing method means any of the transfer pricing method, referred to in subsection (1) of section 92C of the Act, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or function performed by such persons or such other relevant factors prescribed by the Board under rule 10B and 10C; (h) multilateral agreement means an agreement between the Board and the applicant, subsequent to, and 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 arms length price; (i) tax treaty means an agreement under section 90, or section 90A, of the Act for the avoidance of double taxation; (j) team means advance pricing agreement 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); (k) unilateral agreement means an agreement between the Board and the applicant which is neither a bilateral nor multilateral agreement. Persons eligible to apply 10 G Any person who (i) has undertaken an international transaction; or (ii) is contemplating to undertake an international transaction, (iii) shall be eligible to enter into an agreement under these rules. Page 40

44 Pre-filing Consultation 10H (1) every person proposing to enter into an agreement under these rules shall, by an application in writing, make a request for a pre-filing consultation. (2) the request for pre-filing consultation shall be made in Form No. 3 CEC to the Director General of Income Tax (International Taxation). (3) on receipt of the request in Form No. 3 CEC, the team shall hold pre-filing consultation with the person referred to in rule 10G. (4) the competent authority in India or his representative shall be associated in pre-filing consultation involving bilateral or multilateral agreement. (5) the pre-filing consultation shall, among other things,- (i) determine the scope of the agreement; (ii) identify transfer pricing issues; (iii) determine the suitability of international transaction for the agreement; (iv) discuss broad terms of the agreement. (6) the pre-filing consultation shall (I) not bind the Board or the person to enter into an agreement or initiate the agreement process; (ii) not be deemed to mean that the person has applied for entering into an agreement. Application for advance pricing agreement 10 I (1) any person, who has entered into a pre-filing consultation as referred to in rule 10H may, if desires to enter into an agreement furnish an application in Form No. 3 CED alongwith the requisite fee. (2) the application shall be furnished 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. (3) application in Form No. 3 CED may be filed by the person referred to in rule 10G at any time (I) efore 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 (ii) before undertaking the transaction in respect of remaining transactions. (4) every application in Form No. 3 CED shall be accompanied by the proof of payment of fees as specified in sub-rule (5). (5) the fees payable shall be in accordance with following table based on the amount of international transaction entered into or proposed to be undertaken in respect of which the agreement is proposed: Amount of international transaction entered into or proposed to be undertaken in respect of which agreement is proposed during the proposed period of agreement. Fee(INR) Amount not exceeding Rs. 100 crores Amount not exceeding Rs. 200 crores Amount exceeding Rs. 200 crores 10 lacs 15 lacs 20 lacs Withdrawal of application for agreement 10 J (1) the applicant may withdraw the application for agreement at any time before the finalisation of the terms of the agreement. (2) the application for withdrawal shall be in Form No. 3CEE. (3) the fee paid shall not be refunded on withdrawal of application by the applicant. Page 41

45 Preliminary processing of application 10 K (1) every application filed in Form No. 3CED shall be complete in all respects and accompanied by requisite documents. (2) if any defect is noticed in the application in Form No. 3CED or if any relevant document is not attached thereto or the application is not in accordance with understanding reached in pre-filing consultation referred to in rule 10H, 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. (3) the applicant shall remove the deficiency or modify the application within a period of fifteen days from the date of service of the deficiency letter or within such further period which, on an application made in this behalf, may be extended, so however, that the total period of removal of deficiency or modification does not exceed thirty days. (4) 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 in accordance with subrule (3). (5) no order under sub-rule (4) shall be passed without providing an opportunity of being heard to the applicant and if an application is not allowed to be proceeded with, the fee paid by the applicant shall be refunded. Procedure 10 L (1) if the application referred to in rule 10K has been allowed to be proceeded with, the team or the competent authority in India or his representative shall process the same in consultation and discussion with the applicant in accordance with provisions of this rule. (2) for the purpose of sub-rule (1), it shall be competent for the team or the competent authority in India or its representative to (i) hold meetings with the applicant on such time and date as it deem fit; (ii) call for additional document or information or material from the applicant; (iii) visit the applicant s business premises; or (iv) make such inquiries as it deems fit in the circumstances of the case. (3) for the purpose of sub-rule (1), the applicant may, if he considers it necessary, provide further document and information for consideration of the team or the competent authority in India or his representative. (4) for bilateral or multilateral agreement, the competent authority shall forward the application to Director General of Income Tax (International Taxation) who shall assign it to one of the teams. (5) the team, to whom the application has been assigned under sub-rule (4), shall carry out 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. 6) if the Applicant makes a request for bilateral or multilateral agreement in its application, the competent authority in India shall in addition to the procedure provided in this rule invoke the procedure provided in the rule 44 GA. (7) the Director General of Income Tax (International Taxation) (for unilateral agreement) or the competent authority in India (for bilateral or multilateral agreement) and the applicant shall prepare a proposed mutually agreed draft agreement enumerating the result of the process referred to in sub-rule (1) including the effect of the arrangement referred to in sub-rule (5) of rule 44GA which has been accepted by the applicant in accordance with sub-rule (8) of the said rule. Page 42

46 (8) the agreement shall be entered into by the Board with the applicant after its approval by the Central Government. (9) once an agreement has been entered into the Director General of Income Tax (International Taxation) or the competent authority in India, as the case may be, shall cause a copy of the agreement to be sent to the Commissioner of Income Tax having jurisdiction over the assesse. Terms of the agreement 10 M (1) an agreement may among other things, include (I) the international transactions covered by the agreement; (ii) the agreed transfer pricing methodology, if any; (iii) determination of arm s length price, if any; (iv) definition of any relevant term to be used in items (ii) or (iii); (v) critical assumptions; (vi) the conditions if any other than provided in the Act or these rules. (2) the agreement shall not be binding on the Board or the assesse if there is a change in any of critical assumptions or failure to meet conditions subject to which the agreement has been entered into. (3) the binding effect of agreement shall cease only if any party has given due notice of the concerned other party or parties. (4) 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 revised or cancelled, as the case may be. (5) the assesse who has entered into an agreement shall give a notice in writing of such change in any of the critical assumptions or failure to meet conditions to the Director General of Income Tax (International Taxation) as soon as it is practicable to do so. (6) the Board shall give a notice in writing of such change in critical assumptions or failure to meet conditions to the assesse, as soon as it comes to the knowledge of the Board. (7) the revision or the cancellation of the agreement shall be in accordance with rules 10Q and 10R respectively. Amendments to Application 10 N (1) an applicant may request in writing for an amendment to an application at any stage, before the finalisation of the terms of the agreement. (2) the Director General of Income Tax (International Taxation) (for unilateral agreement) or the competent authority in India (for bilateral or multilateral agreement) may, allow the amendment to the application, if such an amendment does not have effect of altering the nature of the application as originally filed. (3) the amendment shall be given effect only if it is accompanied by the additional fee, if any, necessitated by such amendment in accordance with fee as provided in rule 10 I. Furnishing of Annual Compliance Report 10 O (1) the assesse shall furnish an annual compliance report to Director General of Income Tax (international Taxation) for each year covered in the agreement. (2) the annual compliance report shall be in Form 3CEF. (3) the annual compliance report shall be furnished in quadruplicate, for each of the years covered in the agreement, within thirty days of the due date of filing the income tax return for that year, or within ninety days of entering into an agreement, whichever is later. (4) the Director General of Income Tax (International Taxation) shall send one copy of annual compliance report to the competent authority in India, one copy to the Commissioner of Income Tax who has the jurisdiction over the income-tax assessment of the assesse and one copy to the TPO having the jurisdiction over the assesse. Page 43

47 Compliance Audit of the agreement 10 P (1) the TPO having the jurisdiction over the assesse shall carry out the compliance audit of the agreement for each of the year covered in the agreement. (2) for the purposes of sub-rule(1), the TPO may require (i) the assesse to substantiate compliance with the terms of the agreement, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method; (ii) the assesse to submit any information, or document, to establish that the terms of the agreement has been complied with. (3) the TPO shall submit the compliance audit report, for each year covered in the agreement, to the 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, mentioning therein his findings as regards compliance by the assesse with terms of the agreement. (4) the Director General of Income Tax (International Taxation) shall forward the report to the Board in a case where there is finding of failure on part of assesse to comply with terms of agreement and cancellation of the agreement is required. (5) the compliance audit report shall be furnished by the TPO within six months from the end of the month in which the Annual Compliance Report referred to in rule 10 O is received by the TPO. (6) the regular audit of the covered transactions shall not be undertaken by the TPOif an agreement has been entered into under rule 10L except where the agreement has been cancelled under rule 10R. Revision of an agreement 10 Q (1) an agreement, subsequent to it having been entered into, may be revised by the Board, if.- (a) there is a change in critical assumptions or failure to meet a condition subject to which the agreement has been entered into; (b) 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 (c) there is a request from competent authority in the other country requesting revision of agreement, in case of bilateral or multilateral agreement. (2) an agreement may be revised by the Board either suo-moto or on request of the assesse or the competent authority in India or the Director General of Income Tax (International Taxation). (3) except when the agreement is proposed to be revised on the request of the assesse, the agreement shall not be revised unless an opportunity of being heard has been provided to the assesse and the assesse is in agreement with the proposed revision. (4) in case the assesse is not in agreement with the proposed revision the agreement may be cancelled in accordance with rule-10r. (5) in case the Board is not in agreement with the request of the assesse for revision of the agreement, the Board shall reject the request in writing giving reason for such rejection. (6) for the purpose of arriving at the agreement for the proposed revision, the procedure provided in rule 10 L may be followed so far as they apply. (7) 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. Cancellation of an agreement 10 R (1) an agreement shall be cancelled by the Board for any of the following reasons: (i) the compliance audit referred to in rule 10P has resulted in the finding of failure on the part of the assesse to comply with the terms of the agreement; (ii) the assesse has failed to file the annual compliance report in time; (iii) the annual compliance report furnished by the assesse contains material errors; or (iv) the agreement is to be cancelled under sub-rule (4) of rule 10Q. (2) the Board shall give an opportunity of being heard to the assesse, before proceeding to cancel an application. (3) the competent authority in India shall communicate with the competent authority in the other country or countries and provide reason for the proposed cancellation of the agreement in case of bilateral or multilateral agreement. Page 44

48 (4) the order of cancellation of the agreement shall be in writing and shall provide reasons for cancellation and for non-acceptance of assesses submission, if any. (5) the order of cancellation shall also specify the effective date of cancellation of the agreement, where applicable. (6) the order under the Act, 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 nonacceptance of assesses submission, if any. (7) the order of cancellation shall be intimated to the Assessing Officer and thetpo, having jurisdiction over the assesse. Renewing an agreement 10 S request for renewal of an agreement may be made as a new application for agreement, using the same procedure as outlined in these rules except pre filing consultation as referred to in rule 10H. Miscellaneous 10 T (1) mere filing of an application for an agreement under these rules shall not prevent the operation of Chapter X of the Act for determination of arms length price under that Chapter till the agreement is entered into. (2) the negotiation between the competent authority in India and the competent authority in the other country or countries, in case of bilateral or multilateral agreement, shall be carried out in accordance with the provisions of the tax treaty between India and the other country or countries.. Procedure to deal with requests for bilateral or multilateral advance pricing agreements. 44GA (1) where a person has made request for a bilateral or multilateral advance pricing agreement in an application filed in Form No. 3 CED in accordance with rule 10 I, the request shall be dealt with subject to provisions of this rule. (2) the process for bilateral or multilateral advance pricing agreement 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. (3) the competent authority in India shall, on intimation of request of the applicant for a bilateral or multilateral agreement, consult and ascertain willingness of the competent authority in other country or countries, as the case may be, for initiation of negotiation for this purpose. (4) in case of willingness of the competent authority in other country or countries, as the case may be, the competent authority in India shall enter into negotiation in this behalf and endeavour to reach a set of terms which are acceptable to the competent authority in India and the competent authority in the other country or countries, as the case may be. (5) in case of an agreement after consultation, the competent authority in India shall formalise a mutual agreement procedure arrangement with the competent authority in other country or countries, as the case may be, and intimate the same to the applicant. (6) in case of failure to reach agreement on such terms as are mutually acceptable to parties mentioned in subrule 4, the applicant shall be informed of the failure to reach an agreement with the competent authority in other country or countries. (7) the applicant shall not be entitled to be part of discussion between competent authority in India and the competent authority in the other country or countries, as the case may be; however the applicant can communicate or meet the competent authority in India for the purpose of entering into an advance pricing agreement. (8) the applicant shall convey acceptance or otherwise of the agreement within thirty days of it being communicated. (9) the applicant, in case the agreement is not acceptable may at its option continue with process of entering into an advance pricing agreement without benefit of mutual agreement process or withdraw application in accordance with rule 10J.. Page 45

49 Annexure II Prescribed Forms Form No. 3CEC (See sub-rule (2) of rule 10 H) Application for a pre-filing meeting To, The Director General of Income Tax (International Taxation) New Delhi. Sir/Madam, I propose to apply for an Advance Pricing Agreement. In this regard I give below the necessary particulars for a pre-filing meeting: 1. Particulars of the applicant: a. Full name of the applicant: b. Permanent account number: c. Address of the applicant: d. Location(s) of the business enterprises in india: e. Details of applicant authorized representative: f. Address for communication: g. id and the contact numbers of the person with whom correspondence is required to be made: 2. The global structure of the applicant s group and the industry in which it operates: 3. Names of all the associated enterprises (ae s) with which international transactions have been either undertaken or proposed to be undertaken: 4. Name of country(s) in which (ae s) is located: 5. Business model and overview of the applicant s business operations in prior 3 years: 6. Functional and risk profile of the applicant and associated enterprises: 7. A. Details of all the international transactions proposed to be covered in the apa: B. Value of such international transactions covered under transfer pricing audit in prior 3 years: Page 46

50 8. Details of all other international transactions not proposed to be covered in the apa: 9. Type of apa proposed: a. Are you proposing a unilateral apa? Yes/ no b. If yes the reasons for the same: c. Are you proposing a bilateral or Multilateral apa? Yes/ no d. If yes, provide the names of the country (ies) in which the associated enterprises are located: 10. Number of years for which apa is proposed to be applied: 11. Proposed transfer pricing methodology to be used with supporting documentation: 12. Identification of third party comparable: 13. Details of arm s length price or profit level indicator: 14. Details of critical assumptions, that the applicant considers, may affect the business or the transfer pricing methodology: 15. The history of the competent authority issues, requests, and settlements: 16. History of transfer pricing audits, assessments and present status of appeals: 17. Names and designation of the representatives who would be appearing before the authorities for pre-filing discussions: Any other relevant information: I declare that to the best of my knowledge and belief, the information furnished in the application is correct and truly stated. Yours faithfully, Place: Date: Applicant Notes: 1.The application must be filed in triplicate. 2. If the space provided for answering any item in the application is found insufficient, separate enclosures may be used for the purpose. These enclosures should be signed by the person authorised to sign the application. 3. In case the pre-filing meeting is requested on an anonymous basis, no names of the applicant or associated enterprises are to be given. 4. With regard to details of all the international transactions proposed to be covered in the APA, please furnish agreements with associated enterprises, if any, relating to the international transactions along with the reasons for covering these transactions in APA. 5. In case the applicant is applying for a Bilateral or Multilateral APA, the applicant must state whether India has an existing comprehensive DTAA with such country (ies). It may also be verified whether such country (ies) has APA program in place? 6. In case the pre-filing request is on anonymous basis, details of the representatives of the applicant who would be appearing before the authorities for pre-filing discussions must be furnished. Page 47

51 Form No. 3 CED (See sub-rule (1) of rule 10 I) Application for an Advance Pricing Agreement To, The Competent Authority of India or Director General of Income Tax (International Taxation) New Delhi Sir/Madam, This is to state that...(name of the Applicant)...wishes to negotiate an APA with the Central Board of Direct Taxes. I am submitting herewith the necessary particulars hereunder: I. General 1. Particulars of the applicant: a. Full name of the applicant: b. Permanent Account Number: c. Address of the applicant: d. Address for communication: e. Location(s) of the business enterprises in India: f. id and the contact numbers of the person with whom correspondence is required to be made: g. Names and designation of the authorised representatives who would be appearing before the authorities for negotiations of the APA: 2. Whether pre-filing discussions were sought by the applicant? If yes, please furnish: a. Date of application for pre-filing meeting: b. Date of pre-filing meeting(s) with the APA Team: 3. Name(s) of the Associated Enterprises with whom the APA is requested for: 4. Name of the country(ies) in which the associated enterprises mentioned in (3) above are located: 5. a. Are you applying for a Unilateral, Bilateral or Multilateral APA: b. If you are applying for a Bilateral or Multilateral APA, have the Associated Enterprises applied for APA with the Competent Authority in the country of its residence?: Unilateral/Bilateral/Multilateral Yes/ No c. If yes, enclose evidence of furnishing such application with the other Competent Authority: d. If no, by what date the application is proposed to be furnished to the other Competent Authority: e. If the application is for Unilateral APA and it involves international transactions with an entity located in a jurisdiction with which India has an agreement under section 90 or 90A of the Act for avoidance of double taxation, kindly provide explanation for why the request is not for bilateral or multilateral APA. 6. Particulars of Fee paid by the applicant: Amount in Rs. Challan No: Dated: Page 48

52 7. Period of APA proposed along with the date from which APA is sought to be applicable: 8. Details of the international transactions proposed to be covered in the APA (Description of the property or services to which the proposed APA relates): 9. Proposed Transfer pricing Method(s): 10. Proposed terms and conditions, and critical assumptions, for the APA: 11. History and background of the applicant and the associated enterprise: 12. General description of business and products/services: 13. Multinational structure, organizational arrangement, operational set-up, including major transaction flows: 14. Identify all other transaction flows of the multinational enterprise (volumes, directions and amounts) that may have an impact on the pricing of the covered transactions: 15. Functional currency for each entity and the currency which is used for the proposed transactions to be covered under the APA: 16. Accounting and costing system, policies, procedures, and practices, including any significant financial and tax accounting differences that may affect the TPMs: II. Functional analysis 17. Detailed functional analysis of the applicant and all relevant entities with respect to the covered transactions: 18. Business strategies current and future Budget statements, projections and business plans for future period covered by proposed APA, general business and industry trends, future direction/business strategy including R&D, production, and marketing: 19. Financial and operating information, including corporate annual reports: (Please enclose copies) a. Financial statements on a consolidated and unconsolidated basis for the prior five years, or the most recent business cycle as appropriate (Also provide interim statements for the most recent period prior to the date of the submission): b. Income tax returns and related supporting schedules for the prior three years including Form 3CEB: c. Operating data (gross and net) segmented by product line, division, unit, and geographic region for the prior five years, or the most recent business cycle as appropriate: 20. Relevant marketing and financial studies: (Please enclose copies) 21. Copies of all relevant intercompany agreements (pricing, cost sharing, licensing, distributorship etc.): (Please enclose copies) III. Industry and market analyses 22. Detailed industry analysis: a. Comprehensive description of industry as well as generally accepted industrial and commercial practices: b. Identification and general profile of competitors, including respective market shares: c. Industry and general business statistics, financial ratios, and analyses/studies: d. Critical success factors: Page 49

53 23. Detailed analysis of the markets for all countries involved: IV. Transfer pricing background 24. Discussion of relevant legal considerations and requirements as per: a. Indian law b. Foreign law c. Income tax treaty between India and the foreign country 25. Discussion of transfer pricing methodologies, policies, and practices used by the applicant and associated enterprises for the covered transactions during the past three years, or business cycle as appropriate: 26. Discussion of relevant rulings, APAs/BAPAs/MAPAs, and other similar arrangements entered into with foreign tax administrations, for transfer pricing or other valuation bases, or other taxation matters entered into by the applicant (or its associated enterprises) and Indian or foreign tax administrations: 27. Discussion of relevant Indian income tax audit, appeals, judicial and competent authority history: 28. Discussion of relevant foreign income tax audit, appeals, judicial and competent authority history: 29. Discussion of un-assessed taxation years (Indian and foreign) and related outstanding tax, legal, and other pertinent issues: V. Transfer pricing Methodology analysis: 30. Provide all information, including detailed analyses and explanations needed to establish the appropriateness of a proposed TPM, in accordance with transfer pricing regulations as contained in the Indian Income Tax law: 31. Discussion and analysis of each transfer pricing method, applied or rejected, for each covered transaction. In particular provide details on accepted or rejected internal comparables. (Indicate assumptions, strategies, and policies that may have influenced the acceptance or rejection of each TPM): 32. Summary of selected TPMs and secondary TPMs, if used as a sanity check: VI. Impact of proposed TPMs 33. Application of the proposed TPMs to the covered transactions for the three prior years operations or the most recent business cycle, and discuss results: 34. Application of the proposed TPMs to the time period applicant wants the APA to cover and discuss results: 35. Discussion and quantification of the variance, if any, from the methodology applied in section IV: I declare that to the best of my knowledge and belief, the information furnished in the application is correct and truly stated. Place: Date: Applicant Yours faithfully, Page 50

54 Notes: 1.Bilateral or multilateral APA application shall be filed with the Competent Authority i.e. the Joint Secretary FT&TR-I, New Delhi in triplicate. 2. Unilateral APA application shall be filed with the Director General of Income Tax (International Taxation), New Delhi in triplicate. 3. If the space provided for answering any item in the application is found insufficient, separate enclosures may be used for the purpose. These enclosures should be signed by the person authorised to sign the application. 4. The fee shall be computed in accordance with the sub-rule (5) of Rule10 I. 5. The application shall accompany with all the relevant documents. Page 51

55 Form No. 3 CEE (See sub-rule (2) of rule 10 J) Application for withdrawal of APA request To, The Competent Authority of India, or The Director General of Income Tax (International Taxation), New Delhi. Sir/Madam, This is to state that...(name of the Taxpayer) had filed an application for Unilateral/Bilateral/Multilateral APA on dd/mm/yyyy. For the reasons stated below, the application is hereby withdrawn: I declare that to the best of my knowledge and belief, the information furnished with regard to the withdrawal of the application is correct and truly stated and I fully understand that the fee paid by me under Rule 10 I of Income-tax Rules shall not be refunded. Yours faithfully, Place: Date: Applicant Notes: 1. The Withdrawal Application must be filed in triplicate. 2. The Withdrawal Application shall be filed before the authority, before whom the application for APA was made. 3. If the space provided for answering any item in the application is found insufficient, separate enclosures may be used for the purpose. These enclosures should be signed by the person authorised to sign the application. Page 52

56 Form No. 3 CEF (See sub-rule 2 of rule 10 O) Annual Compliance Report on Advance Pricing Agreement To, The Director General of Income Tax (International Taxation) New Delhi Sir/Madam, I am submitting herewith Annual Compliance Report for the period beginning from dd/mm/yyyy to dd/mm/yyyy for Advance Pricing Agreement entered into between...(name of the taxpayer)...and the Central Board of Direct Taxes, vide APA Reference No dated In this regard I give below the necessary information: 1. Particulars of the taxpayer: a. Full name of the Taxpayer: b. Permanent Account Number: c. Address of the Taxpayer: d. Address for communication: e. id and the contact numbers of the person for correspondence: 2. Type of APA entered into: a. Have you entered into a unilateral APA or Bilateral APA or Multilateral APA? Unilateral/Bilateral/Multilateral b. If you have entered into a Bilateral APA or Multilateral APA, provide the names of the country (ies) with which the APA has been entered into. 3. Name(s) of the associated enterprise(s) with which international transactions have been undertaken during the year. 4. Details of Covered Transactions: a. Nature of Covered Transaction: b. Amount of Covered Transaction: c. Country(ies) involved: d. Agreed transfer pricing method: e. Agreed profit level indictor: f. Actual result achieved: g. Adjustment required: h. How the adjustment if any is reflected in the income tax return: 5. Are there any changes in the business model of the taxpayer in the current financial year as compared to: a. Immediately preceding year: b. Year immediately preceding to the first year to which APA is applicable: Page 53

57 Are there any changes in the Functional and Risk Profile of the taxpayer and the associated enterprises in the current financial year as compared to: a.immediately preceding year: b. Year immediately preceding to the first year to which APA is applicable: 7. Transfer pricing methodology: a.agreed upon in the APA: b. Followed during the year to justify the arm s length price of the international transactions covered by APA: c. Variations between (a) and (b) above, if any: d. Reasons for variations: 8. Critical assumptions: a. Agreed upon in the APA: b. Whether the critical assumptions have been met during the year or there has been a change in critical assumptions: c. Reasons for not meeting the critical assumptions or change in critical assumptions: 9. Are there any changes in the organisational structure of the taxpayer group by way of amalgamation, acquisition, merger, demerger or sale of business or by any other methods? If yes, please furnish complete details thereof and show its impact on the critical assumptions agreed upon in the APA: 10. Specify all other terms and conditions agreed upon in the APA and show whether they have been complied with. In case of non-compliance, furnish the reasons thereof: I declare that I have examined the information contained in this APA Annual Compliance Report, including the accompanying documents, and to the best of my knowledge and belief, the facts presented within this report and accompanying documents are true, comprehensive and accurate. Yours faithfully, Place: Date: (Name of the Taxpayer) Notes: 1. The Annual Compliance Report shall be filed quadruplicate. 2. The Annual Compliance Report shall be filed for every year covered in the APA Separate report shall be filed for each year. 3. The information relating to Covered Transaction in item No. 4 above is required to be furnished for each covered transaction separately. 4. Please attach all documents as agreed upon in the APA to justify the transfer pricing methodology and computation of arm s length price.. Page 54

58 About Us About Transfer Pricing Grant Thornton s practical approach to provide transfer pricing solutions identifies beneficial changes to business processes that might result in rationalisation of effective worldwide tax rate and other commercial benefits to your business. We understand the need to approach the transfer pricing norms in a way that is both cost effective and provides valuable inputs to the management so as to facilitate their decision making process. Our Transfer Pricing professionals provide comprehensive solutions tailored to your business objectives after profiling the exact nature and the extent of the transactions. We have been adjudged the Best Transfer Pricing Team in India by World Finance Legal Awards 2009 & 2010, a well renowned UK based business magazine. In addition, we have been nominated as one of the best 5 transfer pricing teams in India by the International Tax Review (ITR) Asia awards consistently for the last few years. Our transfer pricing leader has been nominated by ITR amongst the top ten Transfer Pricing advisors in India. We have a dedicated and focussed team of transfer pricing specialists comprising of professionals such as CAs, MBAs, engineers, analysts etc. with varied skills and background to advise your company on multijurisdictional and complex transfer pricing issues. In addition, our team has been accredited as the Transfer Pricing resource centre by Grant Thornton International. Our collective experience spans industries with more than 300 clients across industry verticals on an all-india basis. We have access to various local and global databases as well as a strong international network of transfer pricing specialists to assist your company across the globe. Know more about our Transfer Pricing Services visit: About Grant Thornton India LLP Grant Thornton India LLP is a member firm within Grant Thornton International Ltd, one of the six largest global accountancy organisations, and the global leader in serving the needs of dynamic privately held businesses. From its origins in 1935, the firm has today grown to be one of the largest accounting and advisory firms in India with over 1,100 professional staff based out of 10 locations in the country. The firm s mission is to be the advisers of choice to dynamic Indian businesses who have global ambitionsraise global capital, expand into global markets or adopt global standards. The firm specialises in providing compliance and advisory services to growth oriented, entrepreneurial companies and adopts best in class international tools, methodologies and risk management standards for all its services About Grant Thornton International Ltd Grant Thornton International is one of the world's leading organisations of independently owned and managed accounting and consulting firms. These firms provide assurance, tax and specialist advisory services to privately held businesses and public interest entities. Clients of member and correspondent firms can access the knowledge and experience of more than 2500 partners in over 96 countries and consistently receive a distinctive, high quality and personalised service wherever they choose to do business. Grant Thornton International strives to speak out issues that matter to business and which are in the wider public interest and to be a bold and positive leader in its chosen markets and within the global accounting profession. Page 55

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