Advanced pricing agreement is an agreement between one or more tax
authorities and one or more taxpayers specifying transfer pricing methodology
for pricing the tapers transaction in the future years. An advance pricing
agreement aims to avoid the disputes by determining an advance set of criteria
to apply which are related to transfer pricing disputes within a specified time
for specific cross border controlled transactions.
An advance pricing agreement also ensures compliance with the arm length
principle. The main objective of the Advance Pricing Agreement is to provide tax
certainty to the intragroup transactions and the process of multinational
enterprises operating in India, enhance the tax revenue, and reduce disputes.
There are no monetary limits or other prescribed criteria for a taxpayer to be
eligible for applying for an Advance Pricing Agreement but only those persons
can be eligible for an Advance Pricing Agreement who has entered into
international transactions and who has proposed to undertake intentional
transactions. The advance pricing agreement is valid not exceeding 5 consecutive
financial years. And it can be extended or renewed for a further period of up to
The board may enter into an Advance Pricing Agreement with any person to
determine the Arms's Length Principle or the manner of determining ALP in
connection to foreign transactions under Section 92CC of the Income Tax Act of
Advantages of Advance Pricing Agreement
- Elimination of potential transfer pricing adjustments and avoiding the
tax audit for the transaction covered by the advance pricing agreement
(reduction of related costs and efforts
- The advance Pricing Agreement avoids double taxation.
- Elimination of penalties for the potential transfer pricing agreement
and the interest of late payment.
- The cost incurred with the preparation of the transfer pricing file for
the transaction which is covered by the Advance Pricing Agreement also
- An advance pricing agreement makes the country an attractive destination
for foreign investments.
- The advance Pricing Agreement programme also strengthens the
government's resolve to foster a non-adversarial tax regime.
- For tax authorities, an Advance Pricing Agreement reduces the cost of
administration and also frees scarce resources.
- Consequently, Advance Pricing Agreement provides a win-win situation for
all the stakeholders involved
Purpose of Advance Pricing Agreement.
The Advance Pricing Agreement process is legally binding on both the parties for
a period of five consecutive years or less as agreed between the taxpayer and
the Central Board of Direct Tax. The regular transfer pricing audit is carried
out on a year on year basis. Advance Pricing Agreement provides certainty and
reduces litigation. Transparency and an open-minded approach during negotiation,
both by tax authorities and taxpayer is the key to a successful Advance Pricing
Agreement. No negotiation process is involved in the regular transfer pricing
APA provide tax certainty to the investors (foreign) and reduces tax litigation
by a large amount.
It also provides the certainty of approach to determine the Arm's Length Price(
ALP) of the international transactions. Arm's Length Price means a price which
is applied in a transaction between persons other than associated enterprises in
Terms of Advance Pricing Agreement.
These are the things which are included in the Advance Pricing Agreement.
- International transactions are covered by APA.
- Agreed transfer pricing methodology.
- Determination of the Arms' length price.
- Critical assumption.
Types of Advance Pricing Agreement:
- Unilateral Advance Pricing Agreement
- Bilateral Advance Pricing Agreement.
- Multilateral Advance Pricing Agreement.
In a unilateral advance pricing agreement only the tax authority ( CBDT) of
the country where the taxpayer is located and the taxpayer is involved.
In Bilateral Advance Pricing Agreement involves the taxpayer, associated
enterprise i.e. AE of the taxpayer in the foreign countries where the taxpayer
is located and foreign tax authorities.
In Multilateral Advance Pricing Agreement involves the taxpayers, and two or
more associated enterprises of the taxpayer in different foreign countries, the
tax authorities of the country where the taxpayer is located and the tax
authority of the associated enterprise.
There is no time limit specified in the rules for the conclusion and negotiation
of the advance pricing agreement. But the tax authorities indicate that they
will endeavour to enter into unilateral advance pricing agreements within one
year and bilateral advance pricing agreements / multilateral advance pricing
agreements within two to three years.
Consultation for Advance Pricing Agreement
The person who proposed to enter into an advance pricing agreement has to make
an application in writing to the Director-General of Income Tax.
When the request is received then on the receipt of the request pre-filing
consultation will hold by the team. In pre-filling consultations involving
bilateral or multilateral agreements, the component authority in India or its
representative will be involved.
However pre-filing consultation would not bind the CBDT or the taxpayers to
initiate the APA process or to enter into the APA process. However, it may be
possible that in pre-filing meetings the authorities may indicate their
reluctance to accept the proposed methodology which could influence the
negotiation process. It is expected that the understanding reached at this stage
will be communicated in writing.
Advance Pricing Agreement Application Procedure
Taxpayers who want to enter into an advance pricing agreement then he has to
furnish an application in the prescribed format with the required fee.
In the unilateral agreement, the application for the advance pricing agreement
has to be filed before the Director-General of Income-tax (International
In the case of multilateral and bilateral agreements, the application has to be
filed to the competent authority in India.
In the advance pricing agreement, the taxpayers have to furnish the following
- International transaction details
- Type of Advance Pricing Agreement applied.
- Proposing transfer pricing methodology.
- Why not opt for a bilateral or multilateral Advance Pricing Agreement.
- Detailed functional analysis.
- Five years consolidated financial statement.
However, Taxpayers can enter into the pre-filing consultation process on a
no-name basis. However, considering the extent of detailed information to be
furnished, one needs to evaluate whether and to what extent anonymity can be
Regarding transactions which are of continuing nature already happening
dealings, the application has to be filed before the first day of the previous
year relevant to the first assessment year for which the Advance Pricing
Agreement application is made. In the case of the remaining transactions, the
application has to be filed before proceeding with the international
transaction. Advance Pricing Agreement authorities can get the additional
documents or additional information from the taxpayers after the verification of
the application and the authorities can visit the business premises of the
The team of Advance Pricing Agreement prepare the draft and carry the enquiry.
Advance Pricing Agreement applications prescribed feesAn Advance Pricing Agreement application is required to be accompanied by the
filing fees as below:
- If the Amount is not exceeding Rs. 100 Crores then the fee for filing
advance pricing agreement is 10 lakhs
- If the Amount is not exceeding Rs. 200 Crores then the fee for filing an
advance pricing agreement is 15 lakhs.
- If the Amount is exceeding Rs. 200 Crores then the fee for filing an
advance pricing agreement is 20 lakhs.
Advance Pricing Agreement: cancellation
If any defect is noticed in the application filed by the applicant following a
successful pre-filing consultation and if the application is withdrawn at this
stage, then the fee paid by the applicant shall be refunded.
Advance Pricing Agreement can be cancelled on the following grounds:
- If the person fails to comply with the terms and conditions of the
Advance Pricing Agreement and fails to file an annual compliance report.
- If there are any errors in an annual compliance report.
- If there is no consensus on the terms of the revised Advance Pricing
- The effects can not be given to the provision of an Advance Pricing
Agreement due to failure on part of the applicant.
- If an agreement is cancelled based on the discovery of fraud or
misrepresentation of facts on the part of the applicant the same shall be
deemed cancelled ab-initio and an audit will take place accordingly.
Renewal of Advance Pricing Agreement
The Advance Pricing Agreement can be renewed by the taxpayers by making an
application. Taxpayers have to follow the same procedure to renew the Advance
Pricing Agreement as we discussed above except for pre-filing consultation.
Decision Matrix for Advance Pricing Agreement
The following key points should be considered by a taxpayer while deciding
whether to go or not to go for the advance pricing agreement process:
- ongoing and expensive audit history
- nature of transactions being complex;
- facts are expected to remain stable over a period of the next few years;
- New transactions, proposed to be entered, which may give rise to
- Transactions entailing business restructuring, intangibles, financial
In the aforementioned cases, APA may be preferred to achieve certainty in the
pricing of transactions.