Advance pricing agreement.

168(1)

The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the—

• (a) arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person;
• (b) income referred to in section 9(2), or specifying the manner in which the said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident.

168(2)

The manner of determination of the arm’s length price referred to in sub-section (1)(a) or (b) may include, respectively,––

• (a) the methods referred to in section 165(1); or
• (b) the methods provided by rules made under this Act, with such adjustments or variations, as may be necessary or expedient so to do.

168(3)

Irrespective of anything contained in section 165 or 166 or the methods provided by rules made under this Act,––

• (a) the arm’s length price of any international transaction; or
• (b) the income referred to in sub-section (1)(b), in respect of which the advance pricing agreement has been entered into, shall be determined as per the advance pricing agreement so entered.

168(4)

The agreement referred to in sub-section (1) shall be valid for such period not exceeding five consecutive tax years as specified in the agreement.

168(5)

The advance pricing agreement entered into shall be binding—

• (a) on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and
• (b) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

168(6)

The agreement referred to in sub-section (1) shall not be binding if there is a change in law or facts having bearing on the agreement so entered

168(7)

The Board may, with the approval of the Central Government, by an order, declare an agreement to be void ab initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts.

168(8)

Upon declaring the agreement void ab initio,—

• (a) all the provisions of the Act shall apply to the person as if such agreement had never been entered into;
• (b) irrespective of anything contained in the Act, the period beginning with the date of such agreement and ending on the date of order under sub-section (7) shall be excluded for the purpose of computing any period of limitation under this Act; and
• (c) if immediately after the exclusion of the aforesaid period, the period of limitation, referred to in any provision of this Act, is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.

168(9)

For the purposes of this section, the Board may prescribe a scheme specifying therein the manner, form, procedure and any other matter in respect of the advance pricing agreement.

168(10)

The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as prescribed, provide for determining the––

• (a) arm’s length price or specify the manner in which the arm’s length price shall be determined in relation to the international transaction entered into by the person;
• (b) income referred to in section 9(2), or specifying the manner in which the said income is to be determined, as is reasonably attributable to the operations, transactions and activities carried out in India by or on behalf of that non-resident person, during any period not exceeding four tax years preceding the first of the tax years referred to in sub-section (4).

168(11)

Where an application is made by a person for entering into an agreement referred to in sub-section (1), the proceedings shall be deemed to be pending in the case of the person for the purposes of this Act till such agreement is entered into, or such proceedings are closed as per rules prescribed.

Explanation

Section Summary:

Section 168 of the Income Tax Act introduces the concept of Advance Pricing Agreements (APAs). An APA is a formal agreement between a taxpayer and the tax authorities (the Board, with Central Government approval) to determine in advance the arm’s length price (ALP) for international transactions or the income attributable to operations in India by non-residents. This section aims to provide certainty and reduce disputes related to transfer pricing by pre-determining the pricing methodology for cross-border transactions.

Key Changes:

1. Introduction of APAs: This section formalizes the process of entering into APAs, which was not explicitly detailed in the prior Income Tax Act.
2. Binding Nature: Once an APA is entered into, it is binding on both the taxpayer and the tax authorities for the specified period (up to 5 years).
3. Retrospective Application: APAs can cover up to 4 preceding tax years, providing retrospective certainty.
4. Voiding Agreements: The Board can declare an APA void if it was obtained through fraud or misrepresentation, with specific consequences for the taxpayer.

Practical Implications:

1. Taxpayers: Businesses engaged in international transactions can proactively seek certainty on transfer pricing, reducing the risk of disputes and penalties.
2. Non-Residents: Non-residents with operations in India can use APAs to determine income attributable to India, ensuring compliance and avoiding double taxation.
3. Tax Authorities: APAs streamline the transfer pricing process, reducing the administrative burden of audits and disputes.
4. Compliance Burden: Taxpayers must ensure accurate documentation and adherence to the agreed terms to avoid the APA being declared void.

Critical Concepts:

1. Arm’s Length Price (ALP): The price at which unrelated parties would transact under similar circumstances. Methods for determining ALP are outlined in Section 165(1) and related rules.
2. International Transaction: Cross-border transactions between associated enterprises, such as transfer of goods, services, or intangibles.
3. Void Ab Initio: If an APA is declared void, it is treated as if it never existed, and all tax provisions apply retroactively.
4. Limitation Period: The time limit for tax authorities to take action, which may be extended if an APA is declared void.

Compliance Steps:

1. Application: Taxpayers must apply to the Board for an APA, providing detailed information about their international transactions and proposed pricing methodology.
2. Negotiation: Engage with tax authorities to agree on the ALP or income attribution method.
3. Documentation: Maintain accurate records and documentation to support the agreed terms.
4. Adherence: Follow the terms of the APA during its validity period (up to 5 years).
5. Monitoring: Stay alert to changes in law or facts that could impact the APA’s validity.

Examples:

1. Scenario 1: A multinational company (MNC) in India sells software licenses to its subsidiary in the US. The MNC applies for an APA to determine the ALP for these transactions. The APA specifies that the ALP will be calculated using the Comparable Uncontrolled Price (CUP) method. For the next 5 years, the MNC and the tax authorities agree to this method, avoiding disputes.
2. Scenario 2: A non-resident company provides marketing services to its Indian subsidiary. The APA determines that 20% of the global income from these services is attributable to India. This provides clarity and avoids double taxation for the non-resident.
3. Scenario 3: An APA is declared void because the taxpayer misrepresented facts. The tax authorities reassess the taxpayer’s returns for the APA period, and the limitation period is extended to allow for this reassessment.

This section provides a structured framework for APAs, offering taxpayers and authorities a mechanism to resolve transfer pricing issues proactively.