In the realm of international taxation, Advance Pricing Agreements (APAs) have emerged as a vital tool to ensure that cross-border transactions between related entities are conducted at arm’s length, thereby minimizing the risks of tax disputes. Sections 92CC and 92CD of the Income Tax Act outline the framework for APAs, ensuring both the taxpayer and the tax authorities agree on the pricing of international transactions in advance.
This blog delves deep into the provisions of Sections 92CC and 92CD, exploring the importance of APAs, their application, and the benefits they offer to taxpayers engaged in international transactions.
What is an Advance Pricing Agreement (APA)?
An Advance Pricing Agreement (APA) is an agreement between a taxpayer and the Central Board of Direct Taxes (CBDT) regarding the determination of arm’s length price for international transactions. This agreement ensures that cross-border transactions are priced fairly, minimizing the risk of transfer pricing disputes.
The primary goal of an APA is to provide certainty to multinational enterprises (MNEs) by agreeing in advance to a method for determining the arm’s length price of international transactions. APAs can be unilateral (involving only the taxpayer and the tax authority) or bilateral/multilateral (involving two or more tax jurisdictions).
Key Provisions of Section 92CC: Agreement for Advance Pricing
Section 92CC of the Income Tax Act lays down the detailed process for entering into an APA. Below are the key aspects of this section:
1. Authority to Enter into an APA (Section 92CC(1))
The CBDT, with approval from the Central Government, can enter into an APA with any person to determine:
- The arm’s length price (ALP) of an international transaction, or
- The manner in which the ALP is to be determined.
The agreement can also determine the income attributable to a non-resident’s operations in India (w.e.f. 1-4-2020), specifying the manner of computation.
2. Methods for Determining Arm’s Length Price (Section 92CC(2))
The APA will prescribe the method to be used for determining the arm’s length price, which can include:
- The methods provided under Section 92C(1), or
- Other methods as specified by rules made under the Income Tax Act (w.e.f. 1-4-2020).
3. Binding Nature of the APA (Section 92CC(3) & 92CC(5))
Once an APA is executed, it becomes binding on:
- The person entering into the agreement, and
- The tax authorities, including the Principal Commissioner or Commissioner.
The agreement is valid for a maximum period of five consecutive financial years and ensures that the tax authorities must adhere to the pricing determined under the APA, reducing the scope for future disputes.
4. Rollback Provision in APAs
A significant feature of APAs is the rollback provision, which allows the agreed-upon arm’s length price or methodology to apply to four previous financial years if the facts and circumstances are consistent. This ensures that any adjustments made under the APA can also provide certainty for past years.
Section 92CD: The Effect of an Advance Pricing Agreement
Section 92CD governs the compliance requirements and the consequences of entering into an APA. Key highlights of this section include:
1. Modified Return Requirement (Section 92CD(1))
After entering into an APA, the taxpayer must file a modified return for the relevant assessment years within three months from the end of the month in which the APA is signed. This modified return must reflect the adjustments as per the APA.
2. Reassessment or Re-computation of Income (Section 92CD(3))
If an assessment or reassessment for the relevant year has already been completed before the filing of the modified return, the Assessing Officer must recompute the total income based on the APA. In cases where assessments are pending, they must be completed in accordance with the APA, taking into account the modified return filed.
3. Extension of Limitation Period (Section 92CD(5))
The period of limitation for completing assessments or reassessments is extended by 12 months to accommodate the impact of the APA. This ensures that the tax authorities have sufficient time to incorporate the APA adjustments into their assessments.
Void Ab Initio Agreements: Protecting the Integrity of APAs
Section 92CC(7) empowers the CBDT to declare an APA void ab initio if it finds that the agreement was obtained through fraud or misrepresentation. In such cases, the agreement is treated as if it never existed, and the normal provisions of the Act will apply. This safeguard protects the integrity of the APA process and ensures that taxpayers provide accurate information when applying for an APA.
Benefits of APAs
APAs offer several benefits to taxpayers engaged in international transactions, including:
- Certainty: APAs provide clarity and certainty on how transfer pricing regulations will be applied to specific transactions, reducing the risk of future disputes.
- Reduced Litigation: By agreeing on the arm’s length price in advance, APAs help reduce the burden of transfer pricing litigation.
- Rollback Provisions: The option to apply the agreed methodology to previous financial years ensures consistency and fairness in tax assessments.
- Cost Savings: Avoiding lengthy and costly litigation provides significant financial and operational benefits for multinational enterprises.
Recent Developments in APAs: India-Korea DTAA
A notable development in the application of APAs relates to the India-Korea Double Taxation Avoidance Agreement (DTAA). In a press release dated 17th March 2017, the CBDT clarified that bilateral APAs involving international transactions with associated enterprises in Korea, starting from FY 2017-18, could include rollback provisions, subject to the Income Tax Rules and regulations of both countries.
This demonstrates India’s commitment to expanding the APA framework and providing greater certainty to multinational enterprises engaged in cross-border transactions.
FAQs: Advance Pricing Agreements (APAs)
Q1: What is the duration of an Advance Pricing Agreement?
An APA can be valid for a maximum of five consecutive financial years. In addition, the rollback provision allows the APA to apply to four preceding financial years, provided the facts and circumstances remain consistent.
Q2: Can an APA be declared void?
Yes, an APA can be declared void ab initio if it is found that the agreement was obtained through fraud or misrepresentation.
Q3: What happens if an APA is declared void?
If an APA is declared void, all provisions of the Income Tax Act will apply as if the APA never existed. The period between the signing of the agreement and its annulment is excluded from the limitation period for assessments.
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Conclusion
Sections 92CC and 92CD of the Income Tax Act play a crucial role in providing certainty to taxpayers involved in international transactions by allowing them to enter into Advance Pricing Agreements (APAs). These agreements not only mitigate the risks of transfer pricing disputes but also provide a structured approach for determining arm’s length pricing, ensuring compliance with the law.
By entering into an APA, businesses can secure long-term stability in their tax affairs, minimize litigation risks, and focus on their core operations without the constant concern of transfer pricing adjustments.
