Advance Pricing Agreements(APA)

Advance Pricing Agreements(APA)

Advance Pricing Agreements(APA)

(Direct Taxes)

An APA is an “arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time”.

Once APA has been entered into with respect to an international transaction, the arm's length price with respect to that international transaction, for the period specified in the APA, will be determined only in accordance with the APA. The APA process is voluntary and will supplement appeal and other Double Taxation Avoidance Agreement (DTAA) mechanism for resolving transfer pricing dispute.

The term of APA can be a maximum of 09 years (Including five years prospective and 04 years of retrospective if the tax payer has opted for roll back mechanism).

The APA scheme of India envisages three types of APA: unilateral, bilateral and multilateral. The choice is on the applicant to choose a particular type of APA at the time of making the application. Unilateral APA is an agreement between the Board and the applicant and this process does not involve any agreement with the treaty partner. In bilateral and multilateral APA request, the applicant is required to make an application with the Competent Authority of India as well as the Competent Authority of the other country where the AE’s are located.

The APA scheme has many advantages. It will-

provide tax certainty with regard to determination of arm's length price of the international transaction with respect to which the APA has been entered into-

  • reduce the risk of potential double taxation through bilateral or multilateral APA,
  • reduce compliance cost by eliminating the risk of transfer pricing audit and resolving long drawn and time consuming litigation and other dispute resolution process
  • alleviate the burden of record keeping as the taxpayer knows in advance the required documentation to be maintained to substantiate the agreed terms and conditions of the agreement.
  • Below are some of the useful links in relation to the scheme.

Handbook on APA with guidance and FAQ’s. *