• The Central Board of Direct Taxes (CBDT) has entered into a record 125 Advance Pricing Agreements (APAs) with Indian taxpayers in 2023-24.

• This includes 86 Unilateral APAs (UAPAs) and 39 Bilateral APAs (BAPAs).

• This marks the highest ever APA signings in any financial year since the launch of the APA programme in 2012.

• The number of APAs signed in 2023-24 also represents a 31 per cent increase compared to the 95 APAs signed during the preceding financial year.

• The BAPAs were signed as a consequence of entering into mutual agreements with India’s treaty partners namely Australia, Canada, Denmark, Japan, Singapore, the UK and the US.

What is Advance Pricing Agreement?

• The transfer pricing provisions were introduced in India in 2001, which provided for determination of ‘arm’s length prices’ in cases of international transactions between associated enterprises.

• Unprecedented growth in international trade involving cross-border transactions within group entities has given rise to numerous tax disputes on the issue of transfer pricing. 

• Price between unrelated parties in uncontrolled conditions is known as the ‘arm’s length price (ALP)’. 

• In order to provide tax certainty and unanimity in approach in international transactions between associated enterprises, the Advance Pricing Agreement (APA) programme was introduced in 2012.  

• The APA programme of CBDT is one of its foremost initiatives for promoting an investor-friendly and non-adversarial tax regime in India.

• An APA is a mechanism to resolve transfer pricing disputes in advance, that is, before the cross-border related party transaction actually takes place or, at least, before a dispute arises in respect of such cross-border transaction. 

• The transfer price of goods and services transacted between group entities is decided in advance by the tax authorities and the taxpayers, so as to prevent any dispute arising from such transfer pricing.

• The Finance Act, 2012 inserted sections 92CC and 92CD in the Income Tax Act, 1961 introducing the provisions of the APA.

• These statutory provisions, effective from July 1, 2012, lent the legal backing to the CBDT to enter into APAs with taxpayers for a maximum period of five years in respect of international transactions between associated enterprises to determine the arm’s length price or to specify the manner in which the arm’s length price is to be determined.

Types of APA

There are three types of APA: unilateral, bilateral and multilateral. 

i) Unilateral APA is an agreement between the Board and the applicant and this process does not involve any agreement with the treaty partner. 

ii) In bilateral APA, the applicant is required to make an application with the competent authority of India as well as the competent authority of the other country. The two competent authorities are required to reach an agreement through mutual agreement procedure negotiation. This arrangement is required to be accepted by the applicant before a bilateral APA can be entered into.

iii) In multilateral APA, the applicant is required to make an application with the competent authority of India as well as the competent authority of other countries which are relevant for such an agreement. 

• APA is designed to reduce compliance cost by eliminating the risk of transfer pricing audit and resolving long drawn and time consuming litigation. 

• Further, the taxpayer has the option to rollback the APA for four preceding years, as a result of which, tax certainty is provided for nine years.

• The APA programme has contributed significantly to the government of India’s mission of promoting ease of doing business, especially for multinational enterprises which have a large number of cross-border transactions within their group entities.

Central Board of Direct Taxes

• The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. CBDT functions as a division of the ministry of finance under the department of revenue. 

• Its functions include formulation of policies, dealing with matters relating to levy and collection of direct taxes, and supervision of the functioning of the entire Income Tax department. 

• CBDT also proposes legislative changes in direct tax enactments and changes in rates and structure of taxation in tune with the policies of the government.

• The Board comprises the chairman and six members. The chairman and other members have been assigned territorial zones for the purpose of supervising and monitoring the work of field formations.

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