CBDT inks 4 more advance pricing pacts
MUMBAI: The Central Board of Direct Taxes (CBDT) on October 13 signed four unilateral advance pricing agreements (APAs), including India’s second APA with a rollback provision. The nature of the transactions covered under these agreements varied from software development to share price valuation. According to government sources, the total number of APAs signed till date is 20.
APAs settle transfer prices and transfer pricing methods for transactions entered into by an Indian company with its overseas affiliates, in advance and avoid transfer pricing litigation. A rollback provision, which was introduced in October 2014, enables taxpayers to retrospectively apply the APA agreed upon for a period of past four years, thus providing transfer pricing certainty for a nine-year period.
The professional approach adopted by the APA teams in understanding the actual business operations of the Indian companies with their overseas affiliates has been appreciated by transfer pricing specialists and foreign investors. India has in the past faced flak from foreign investors for high-pitched transfer pricing adjustments.
The Indian company, which obtained an APA with a rollback provision, is a logistics service provider for its overseas Danish parent company. The Danish parent is engaged in procuring and distributing pharma products, such as medical kits, mainly to African countries under contracts funded by the World Health Organisation, World Bank and others. The Indian company put together the medical kits at its facilities in India following instructions from its parent company and then dispatched them to the parent company’s customers overseas.
Hitesh Gajaria, transfer pricing specialist who represented this company, says: “The transfer pricing authorities wrongly classified the Indian company as an ‘entrepreneurial entity’ and held that its profits in India should be much higher, akin to that of a pharma distributor. While the company won tax appeals at the tribunal level, it wanted certainty to expand its operations in India. The APA team actually conducted site visits to understand the entire business process and agreed that the transfer pricing assessments were based on an incorrect understanding of facts. During the APA negotiations, while the APA authorities agreed to the transfer pricing method adopted by the Indian company, it in turn conceded to leaving a higher net cost plus margin in India. Buoyed by the professional approach adopted during the APA process, the overseas parent is now considering a new venture in India.”
A spokesperson from Price Waterhouse, which represented the client seeking an APA for share valuation for transfer of shares, confirmed the APA had been signed.
According to EY partner, Anuj Khorana, which represented a technology company: “The APA process has been proactive with a focus on value chain analysis considering business and commercial drivers. The company is extremely satisfied with the outcome and the process that was completed in eighteen months.”
This eighteen-month period is considered as reasonable, given that in the US an average period of 34 months is taken for concluding a new unilateral APA, and in the UK the average time frame is 26 months.
In the recent past, transfer pricing litigation has been a major concern for MNCs operating in India with their subsidiaries or group companies. For the year ended March 31, 2015, the transfer pricing adjustments imposed on India Inc were for Rs 46,465 crore, which – even on the most conservative estimate – would result in a tax demand of at least Rs 14,000 crore. APAs help mitigate transfer pricing litigation. According to industry sources, approximately 580 APA applications have been filed till date since its introduction in July 2012.