APA roll back rules announced

Transcription

1 from India Tax & Regulatory Services APA roll back rules announced March 17, 2015 In brief Provisions relating to Advance Pricing Agreements (APAs) were introduced in the Indian Income-tax Act, 1961 (the Act), with effect from 1 July 2012, vide Finance Act, These provisions did not then include roll back provisions. The provision to provide for a roll back mechanism was brought into the Act vide Finance Act 2014, with effect from 1 October However, detailed rules were awaited since then. The Central Board of Direct Taxes (CBDT) has now announced detailed rules explaining the roll back provisions and the procedure for giving effect to them. Apart from that, the CBDT has made another key amendment, wherein pre-filing consultation has been made optional for the taxpayer. In detail The key roll back provisions 1 are as follows: Roll back of the agreement Roll back is available for the roll back years, and a roll back year has been defined to mean any previous year falling within the period of four previous years, preceding the first previous year covered in the APA (i.e. the regular APA). For example - If the applicant files an APA application on or before 31 March 2015 covering a period of upto 5 years from financial year (FY) to FY and applies for a roll back, the roll back years can cover the period from FY to FY Similarly, if the applicant has filed an APA application covering a 1 CBDT Notification No.23/2015 dated 14 March 2015 period of 5 years from FY to FY and applies for a roll back, the roll back years can cover the period from FY to FY For the roll back years, the agreement may: - provide for determining the arm s length price (ALP); or - specify the manner in which ALP shall be determined. Necessary conditions for availing roll back: - The international transaction is same as the international transaction to which the regular APA applies; Observation: In cases where an applicant does not believe a transaction to be an international transaction as defined under section 92B of the Act, but the Revenue contends it to be so - then, in such cases, going by this condition, it appears that the applicant may not be able to avail of the roll back provisions for such transactions. - Return of income (ROI) and Form 3CEB for the relevant roll back years have been filed before due date. - Roll back application should cover all the roll back years (i.e., the years falling with the block of four years) in which the international transaction has taken place. Observation: This provision suggests that if the block of 4 years is Y1, Y2, Y3 and Y4, and if a transaction has been entered into in Y1 and Y2 only, then the roll back would

2 need to be applied for Y1 and Y2 and it may not be possible for the applicant to be selective in this regard. It may, however, be noted that a somewhat contrary position seems to be possible from the prescribed Form 2 which allows an applicant to select out of Y1 and Y2, as long as reasons for the same are furnished. Accordingly, from a joint reading, it is not entirely clear whether roll back can be selectively applied for. Roll back provisions shall not be provided, in respect of an international transaction, if: - the Income-tax Appellate Tribunal (Tribunal) has passed an order disposing off an appeal relating to determination of ALP of the international transaction, at any time before signing of the APA agreement; or Observation: This implies that even if the applicant s appeal for any roll back year is pending disposition by the Tribunal or any lower tax authority thereof, as of the date of the agreement, the applicant will be entitled to the roll back provisions. However, it may be noted that the condition is that of disposition of appeal, which apart from being a positive outcome, could also be a set aside of the matter or an adverse decision. In a case where there is a set aside, although the Tribunal would have technically disposed off the case, it appears that the applicant may not be able to benefit from the roll back provisions. Even in a case where there is an adverse decision, it seems that the applicant may still not be able to benefit from the roll back provisions. However, in this regard, there seems to be a conflict in the Rules 3 itself, which require the applicant to withdraw an appeal pending before the High Court before furnishing a modified ROI in respect of a roll back year following the signing of the APA this in effect implies that the applicant can avail of roll back even after the Tribunal has disposed off the matter and the same is pending before the High Court or for that matter even ruled upon by the High Court. - application of roll back has the effect of reducing total income or increasing loss as declared in the ROI. Observation: For example, an Indian company (I Co.) has a cost plus arrangement in the roll back years with its associated enterprise (AE) for cost plus 20%. Then a roll back would not be available for a mark-up of say 18% (or any mark-up of less than 20%) as that will have an impact of reducing total income of the I Co. As a corollary, it follows that an applicant should be able to seek a roll-back to agree a mark-up of 20%, in order to mitigate the risk of the said mark-up being potentially increased by the Revenue authorities in transfer pricing audits. The manner of determining ALP in the roll back years with respect to any particular international transaction will be same as the manner agreed in the regular APA. Observation: The elements to a roll back agreement could be first, the determination of ALP, or second, the manner in which ALP shall be determined. The roll back rules provide for consistency in the latter. However, the roll back rules are silent in respect of the former. For example - If an Indian company is a distributor, the manner of determining ALP could be agreed on the basis of say the resale price method. However, the appropriate margin to be achieved by the applicant may differ for the roll back years vis-à-vis the period covered by the regular APA. The fee for applying for a roll back is an additional amount of INR 0.5 million (approximately USD 8,000), which is to be accompanied by an application in the prescribed Form 3CEDA. Timelines for applying for roll back: - Where the regular APA application has been filed before 1 January 2015, the application for roll back can be filed on or before 31 March 2015, or the date of entering into agreement, whichever is earlier. For example - If an APA application was filed on 31 March 2013, then roll back could be applied for by 31 March However, if the regular APA agreement is being entered into on 20 March 2015, roll back may be 2 Point 8 of Form 3CEDA 3 Sub-rule (4) to Rule 10RA of the Rules 2 pwc

3 applied for on or before 20 March In case the regular APA has already been entered into before 1 January 2015, the last date of filing Form 3CEDA will be 31 March 2015, and the regular APA may be revised accordingly. - In case regular APA application is to be filed by the applicant in future, Form 3CEDA has to be filed along with Form 3CED. Observation: From the above, it is not clear as to what would be the deadline for applying for roll back in case of applicants who have filed APA applications during the period from 1 January 2015 to date. However, given that the deadline for filing an APA application for FY is 31 March 2015, it seems reasonable to assume that the deadline for applying for roll back in the above situation ideally ought to be 31 March Procedure for giving effect to a rollback Modified ROI for all roll back years would need to be filed by the applicant along with the proof of payment of any additional tax liability arising as a consequence of the roll back agreement. If for a roll back year, there is any appeal pending before the Commissioner of Incometax (Appeals), or the Tribunal or the High Court on the issue which is the subject matter of the roll back provision, then such an appeal would need to be withdrawn by the applicant before furnishing the modified ROI. Similarly, pending appeals filed by the assessing officer or the principal commissioner or commissioner would need to be withdrawn within three months of filing of the modified ROI by the applicant. In case effect cannot be given to the roll back provision of an agreement for any roll back year, on account of failure on the part of the applicant, then the agreement shall stand cancelled. Observation: A reading of this provision suggests that if the roll back cannot be given effect to owing to any failure on part of an applicant, then the regular APA could also stand cancelled. Applicants therefore would need to think through potential impediments to give effect to the roll back (for example - need to obtain regulatory approvals, providing details of cost incurred/ margin earned by overseas tested parties, etc.) before entering into the agreement for roll back years. The Form 3CED has been revised and the applicant would now need to mention therein whether it is requesting for a roll back or not and attach Form 3CEDA (i.e., roll back application form). The takeaway Largely, the provisions seem to be in line with roll back rules existing internationally. However, there are some creases which require ironing, so as to make the roll back provisions workable, and they are as follows: It will be important to have some guidance on how the roll back due-diligence would be conducted, i.e., whether the APA authorities would draw reference from the analysis undertaken for the regular APA, or would they analyse the roll back years on a standalone basis. The period of 15 days (i.e., the date of pronouncement of the roll back provisions, i.e., 16 March 2015 to 31 March 2015) is too lean a time frame for companies to decide and apply for roll back. An extension of the time frame in this regard would be welcome. The provision which suggests that if the roll back cannot be given effect to owing to any failure on part of an applicant, then the regular APA would also stand cancelled, seems like a very stringent provision and a relaxation on this front would be required in order to not deter companies from applying for a roll back. whether or not roll back can be selectively applied for within the block of four years. whether or not an applicant can avail of roll back even after the Tribunal has disposed off the matter, especially in cases where the applicant has preferred an appeal to the High Court or in set aside cases. whether or not roll back provisions would be available in cases where an applicant does not believe a transaction to be an international transaction as defined under section 92B, but the Revenue contends it to be so (as in such cases the condition of filing the Form 3CEB for that transaction would not be fulfilled). whether an applicant would be given relief from penalties/ interest arising from a higher than actual return agreed in the APA for roll back years. For example, if the applicant has actually earned returns of PwC Page 3

4 say 15% in roll back years, and has agreed a higher return of say 20% vide the APA roll back provisions -- then, clarity would be required on whether in such cases, penalties/ interest would be levied/ charged in respect of the additional tax liability arising on account of the higher than actual return. Having said the above, the much awaited roll back rules will provide certainty to the applicants for a period of 9 years, which was earlier available for 5 years. Further, by making prefiling optional for the applicant, the APA process has also been simplified. These steps quite apparently evidence the Government s intention towards curbing, controlling and resolving the growing transfer pricing disputes in India and providing tax certainty to corporates. Let s talk For a deeper discussion of how this issue might affect your business, please contact: Tax & Regulatory Services Transfer Pricing Gautam Mehra, Mumbai gautam.mehra@in.pwc.com Indraneel R Chaudhury, Bangalore indraneel.r.chaudhury@in.pwc.com PwC Page 4

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