An APA is a contract, usually for multiple years, between a
taxpayer and at least one tax authority specifying the pricing method that the
taxpayer will apply to its related-company transactions. These programmes are
designed to help taxpayers voluntarily resolve actual or potential transfer
pricing disputes in a proactive, cooperative manner, as an alternative to the
traditional examination process.
Although styled as "advance" agreements, APAs often involve the resolution of transfer pricing issues pending from prior years—and in some cases can provide an effective means for resolving existing transfer pricing audits or adjustments.
An APA offers a company several other benefits. It provides greater certainty on the transfer pricing method adopted, mitigating the possibility of disputes and facilitating the financial reporting of potential tax liabilities. Importantly, an APA also reduces the incidence of double taxation, and the costs associated with both audit defence and documentation preparation.
Although styled as "advance" agreements, APAs often involve the resolution of transfer pricing issues pending from prior years—and in some cases can provide an effective means for resolving existing transfer pricing audits or adjustments.
An APA offers a company several other benefits. It provides greater certainty on the transfer pricing method adopted, mitigating the possibility of disputes and facilitating the financial reporting of potential tax liabilities. Importantly, an APA also reduces the incidence of double taxation, and the costs associated with both audit defence and documentation preparation.
F.No. 500/7/2015-APA-II Government of
India Ministry of Finance Department of Revenue
Central Board of Direct Taxes
Foreign Tax and Tax Research Division-I
APA-II Section
Circular
No. 10/2015
New
Delhi, dated 10th June, 2015
Subject: Clarifications on Rollback Provisions
of
Advance
Pricing
Agreement
Scheme
The Advance Pricing Agreement provisions
were introduced in 2012
through insertion of sections 92CC and 92CD in the Income-tax Act,
1961 by the Finance Act,
2012. Subsequently, the Advance Pricing Agreement Scheme was notified vide S.O. 2005 (E), dated
30/8/2012, thereby
inserting Rules
10F to 10T and Rule 44GA in
the Income-tax Rules, 1962.
2. Rollback provisions in the APA Scheme were introduced through sub- section (9A) inserted in section 92CC by the Finance (No. 2)
Act,
2014 and the relevant rules, namely, Rules 10MA and 10RA,
have
been notified recently vide S.O. 758(E) dated 14th March, 2015 and S.O. 915(E) dated 1st April, 2015.
Subsequent to the notification
of the rules, requests for clarification regarding certain issues have been received in the Central Board of Direct Taxes. In order to
clarify such issues,
the Board has decided to adopt a Question and Answer
format and the clarifications
are hereby provided as below:
Q.1 Under rule 10 MA(2)(ii) there is a condition that the return of income for the
relevant roll back year has been or is furnished by
the applicant before the due date
specified in Explanation 2 to sub-section (1) of section 139 of the Income- tax Act (hereinafter referred to as the ‘Act’). It is not clear as to whether
applicants who have filed returns under section 139(4)
or 139(5) of the Act would be eligible for roll back.
Answer:
The return of income under section 139(5)
of the Act can be filed only when a
return under section 139(1) has already been filed. Therefore,
the return of income filed under section 139(5)
of the Act, replaces
the original return of income
filed under section 139(1) of the Act.
Hence,
if there is a return which is
filed
under section 139(5)
of the Act to revise the original return filed before the
due date specified in Explanation 2 to sub-section (1)
of section 139, the
applicant would be entitled for rollback on this revised
return of income.
However, rollback provisions will not be available in case of a return of income
filed
under section 139(4) because it is a return which is not filed before the due date.
Q.2 Rule 10MA (2)(i) mandates that the rollback
provision shall apply in respect
of an
international transaction
that is same as the international transaction to
which
the agreement (other than the rollback provision)
applies. It is not clear what
is the meaning of the word “same”. Further, it is not clear whether this restriction also applies to the Functions, Assets, Risks (FAR) analysis.
Answer:
The international transaction for which a rollback
provision is to be allowed should be the same as the one proposed to be undertaken in the future years and in respect of which the agreement has been reached. There cannot be a
situation where rollback
is finalised for a transaction
which is not covered in the agreement for future years.
The term same international transaction
implies that the transaction in the rollback year has to be of same
nature and undertaken with
the same associated enterprise(s), as proposed
to be undertaken in the future years
and in respect of which
agreement has been
reached. In the context
of FAR analysis, the restriction would operate to ensure that rollback
provisions would apply only if the
FAR analysis of the rollback
year does not differ
materially from the FAR validated for the purpose of
reaching an
agreement in respect of international transactions to
be undertaken in the future years for which
the agreement applies.
The word “materially”
is generally being defined in the Advance Pricing
Agreements being entered
into by CBDT. According to this definition, the word
“materially” will be interpreted consistently with its ordinary definition
and in a manner that a material change of facts
and
circumstances would be
understood as a change
which
could reasonably
have
resulted
in an agreement with significantly
different terms and conditions.
Q.3 Rule 10MA (2)(iv) requires that the application for rollback provision, in
respect of an international
transaction, has to be made by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant. Clarification is required as to whether
rollback has to be requested
for all four years or applicant
can choose the years out of the block of four years.
Answer:
The applicant does not have the option to choose the years for which it wants to
apply for rollback.
The applicant has to either apply for all the four years or not apply at all. However, if the covered international transaction(s) did not exist
in a
rollback year or there is some disqualification in a rollback year, then the applicant can apply for rollback for less than four years. Accordingly, if the covered international transaction(s)
were
not in existence during any of the
rollback years, the applicant can apply for rollback
for the remaining years.
Similarly, if
in
any
of
the
rollback years
for
the
covered international transaction(s), the applicant fails the test of the rollback conditions contained in various
provisions, then
it
would
be
denied the benefit
of
rollback
for
that
rollback year. However, for
other rollback years, it can
still apply for rollback.
Q.4 Rule 10 MA(3) states that the rollback provision shall not be provided in respect of an international
transaction for a rollback year if the
determination of arm’s length price of the said international transaction for the said year has been the subject matter of an
appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing
of such appeal at any time
before signing of the agreement. Further, Rule 10 RA(4) provides that if any
appeal filed by the applicant is pending
before the Commissioner (Appeals), Appellate Tribunal or the High Court for a rollback year,
on the issue which is subject matter of the rollback provision for that year, the
said appeal to the extent of the subject covered under the agreement
shall be withdrawn by the
applicant.
There is a need to clarify the phrase “Tribunal has passed an order disposing of such appeal” and on the mismatch, if any, between Rule 10MA(3)
and Rule
10RA(4).
Answer:
The reason for not allowing rollback
for the international transaction
for which Appellate Tribunal has passed an order disposing of an appeal is that the ITAT is the final fact finding authority and hence, on factual issues, the matter has already reached finality in that year. However, if the ITAT has not decided the matter and has only set aside the order for fresh consideration of the matter
by the lower authorities with full discretion at their disposal,
the matter shall not be
treated as one having reached finality and hence, benefit
of rollback can still
be given.
There
is no mismatch between Rule 10MA(3) and Rule
10RA(4).
Q.5 Rule 10MA(3)(ii)
provides that rollback provision shall not be provided in respect of an international
transaction for a rollback year if the application of rollback provision has the effect of reducing the total income or increasing
the loss, as the case may be, of the applicant as declared
in the return of income
of the said year. It may
be clarified
whether the rollback provisions in such situations can be applied in a manner so as to ensure that the returned
income or loss is accepted as the final income or loss after applying the rollback provisions.
Answer:
It is clarified that
in case the terms of
rollback provisions contain specific
agreement between the Board and the
applicant that the agreed determination of ALP or the agreed manner of determination of ALP is subject
to the condition that the ALP would get modified to the extent
that it does not result
in reducing the total income or increasing the total loss,
as the case may be, of the applicant as declared
in the return of income of the said year,
the rollback provisions could be applied. For example,
if the declared income is Rs.
100, the income as adjusted by the TPO is Rs. 120, and the application of the rollback provisions results in reducing the income to Rs. 90,
then
the rollback for that
year would be determined in a manner
that the declared income Rs. 100 would be treated as the final income for that year.
Q.6 Rule 10RA(7)
states that in case effect cannot be given to the rollback provision of an agreement
in accordance with this rule,
for
any rollback year to
which it applies, on account of failure on the part of applicant, the agreement
shall be cancelled. It is to be clarified as to whether
the entire agreement is to
be cancelled or only that year for which roll back fails.
Answer:
The procedure for giving effect to a rollback
provision is laid down in
Rule 10RA. Sub-rules (2), (3), (4) and (6) of the Rule specify the actions to be taken by the applicant in order that effect may be given to the rollback provision. If the applicant does not carry out such actions for any of the rollback
years, the entire agreement shall be cancelled. This is because the rollback provision has been
introduced for the benefit of the applicant and is applicable
at its
option. Accordingly, if the rollback provision cannot be given effect to for any of the rollback years on account of the applicant not taking the actions
specified in sub-rules (2), (3), (4) or (6), the entire agreement
gets vitiated and will have to
be cancelled.
Q.7 If there is a Mutual Agreement
Procedure (MAP) application already
pending for a rollback
year, what would be the stand of the APA authorities?
Further, what would be the view of the APA Authorities if MAP has already been
concluded for a rollback year?
Answer:
If MAP has been already concluded
for any of the international transactions in any of the rollback year under APA,
rollback provisions would not be allowed for
those international transactions for that year but could
be allowed for other
years or for other international transactions for that year,
subject to fulfilment of specified
conditions
in Rules
10MA
and
10RA. However, if MAP request
is pending for any of the rollback
year under APA, upon the option exercised by the
applicant, either MAP or application for roll back shall be proceeded with
for such year.
Q.8 Rule 10MA(1)
provides that the agreement
may provide for determining ALP
or manner of determination
of ALP. However, Rule 10MA(4) only specifies that the
manner of determination of ALP should be the same as in the APA term.
Does that mean the ALP could be different?
Yes, the ALP could be different for different years. However, the
manner of determination of ALP (including choice of Method,
comparability analysis and
Tested Party) would be same.
Q.9 Will there be compliance audit for roll back? Would critical assumptions
have to be validated
during
compliance
audit?
Answer:
Since rollback provisions are for past years, ALP for the rollback years would be
agreed after full examination of all the facts,
including validation of critical
assumptions. Hence, compliance audit for the rollback years would primarily be
to check if the agreed price or
methodology has been applied in
the modified return.
Q.10 Whether applicant has an option to withdraw
its rollback
application?
Can the applicant accept the rollback results
without
accepting the APA for the future
years?
Answer:
The applicant has an option to withdraw its roll back
application even while
maintaining the APA application for the future years. However,
it is not possible to accept the rollback results
without accepting the APA for the future years. It
may also be noted that the fee specified in Rule 10MA(5) shall not be refunded even
where a rollback application
is withdrawn.
Q.11 For already concluded
APAs, will new APAs be signed for rollback
or earlier
APAs could be revised?
Answer:
The second proviso to Rule 10MA(5)
provides for revision of APAs already concluded to include rollback provisions.
Q.12 For already concluded APAs,
where the modified return has already been filed for the first year of the APA term,
how
will the time-limit
for filing modified return
for rollback years be determined?
The time to file modified return for rollback years will start from the date of signing
the revised APA incorporating
the rollback provisions.
Q.13 In case of merger of companies,
where one or more of those companies are APA applicants, how would the rollback provisions be allowed and to which
company or companies would it be allowed?
Answer:
The agreement is between the Board and a person. The principle to be followed in case of merger is that the person (company) who makes the APA application would only be entitled
to enter into the agreement and be
entitled for the rollback provisions in respect of international transactions undertaken by
it in rollback years. Other persons (companies)
who have merged with this person (company) would not be eligible for the rollback provisions.
To illustrate,
if A, B and C merge to form C and C is the APA applicant, then the
agreement can only be entered into with C and
only C would be eligible
for the rollback provisions.
A and
B would not be eligible for the rollback provisions. To illustrate further, if A and B merge to form a new company C and C is the APA
applicant, then nobody would be
eligible
for rollback provisions.
Q.14 In case of a demerger of an APA applicant or signatory
into two or more companies
(persons), who would be eligible
for the rollback provisions?
Answer:
The same principle as mentioned in the previous answer, i.e., the person (company) who makes an APA application or enters into
an APA would only be
entitled for the rollback
provisions, would continue to apply. To illustrate, if A has
applied for or entered
into an APA and, subsequently, demerges into A and B, then only A will be eligible
for rollback for international transactions covered
under the APA. As B was not in existence in rollback years, availing or grant of
rollback to B does not arise.
