Types & Applicability of Advance Pricing Agreement (APA)

Posted by Arjun Kaushik
10
Finance & Investment
Dec 23, 2022
139 Views
International transactions are often under the scanner of the revenue department. This is largely because they are often susceptible to profit shifting to reduce tax burdens. The transfer pricing regulations have laid down broad methodologies to determine the arm’s length price. If the revenue department finds any irregularity, then it can lead to assessments. To avoid this, the taxpayers are provided an option to enter into an agreement with the revenue authorities to determine an appropriate transfer pricing method for certain transactions. These are known as advance pricing agreements.

What is the meaning of an advance pricing agreement and its applicability? Further, what are the types of advance pricing agreements? Let’s find out!

What is an Advance Pricing Agreement? 

Advance pricing agreements are agreements entered into between taxpayers and revenue authorities to determine the transfer pricing methods for certain transactions that will occur for a fixed time in the future. It helps in determining either the arm’s length price or income or specifies the methodology for determining the arm’s length price or income for international transactions.

Applicability of Advance Pricing Agreement

The applicability of the advance pricing agreement covers both the taxpayer and the revenue authorities. Further, the provisions of this agreement shall override Section 92C or Section 92CA. It shall be valid for the period as specified in the agreement which shall not exceed 5 previous consecutive years. The advance pricing agreement shall have a binding effect on the person and on the transaction in relation to which it was entered into. Further, it shall also be binding on the Principal Commissioner or Commissioner and the subordinate income tax authorities in respect of the said person and the said transactions.

Types of Advance Pricing Agreement

Rule 10F of the Income Tax Rules, 1962 specifies different types of advance pricing agreements that can be entered into by taxpayers and authorities. This includes: 

  1. Unilateral Agreement: It is the agreement entered into between the CBDT and the taxpayer that is neither a bilateral agreement nor a multi-lateral agreement.
  2. Bilateral Agreement: It can happen that the competent authority in India and the competent authority in another country enter into any mutual agreement procedure arrangement as per Rule 44GA of the Income Tax Rules, 1962. Based on this arrangement, the advance pricing agreement between CBDT and the taxpayer may be entered into for determining the most appropriate transfer pricing method or the arm’s length price. This is known as a bilateral agreement.
  3. Multi-lateral Agreement: The mutual agreement procedure arrangement as per Rule 44GA may be entered into between competent authorities in India and competent authorities in other countries (i.e., more than one country). If the advance pricing agreement between CBDT and the taxpayer is based on such an arrangement, it should be regarded as a multi-lateral agreement.

Following were the meaning, applicability, and types of advance pricing agreements. These agreements can help avoid a lot of litigation and other issues that may arise in the future due to differences of opinion between the taxpayer and the revenue department. In case you need any assistance in relation to the advance pricing agreement, please feel free to contact the ASC Group.

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