APA Roll Back: Key Clarifications

The Advance Pricing Agreement (‘APA’) program was introduced in August 2012. APA helps a tax payer to ascertain the transfer pricing between related party transactions upfront to avoid any litigation. The APA program has been a success and there has been a rise in the number of applications filed year on year. Further, in line with the Indian Government’s objective of achieving India as an approachable business destination by reducing litigations and aligning the Indian TP regulations with the International practices, the APA roll back provision was introduced earlier this year. The Rollback rules have positive implications for the tax payer, where the Government gives an option to roll-back the APA terms to previous 4 years to all taxpayers including those who have already filed for APAs in the past and to taxpayers who have already signed APAs with the Government. However, on bare reading of the Rules, there was some ambiguity on certain aspects which required clarifications for the effective implementation of APA Roll backs. CBDT has released a Circular on 10th of June with clarifications to fourteen such FAQ’s.

Clarifications working to the Advantage of the Tax Payer

There were no specific provisions for withdrawal of roll backs in the Rules. CBDT clarified that the applicant has the option to withdraw the roll back while maintaining the APA application for future years. However, roll back would not be accepted without accepting the APA for future years. This is the most important clarification as the tax payer would never want to jeopardize the main APA merely because the roll back years are not working out.

The CBDT clarified that the Arm’s Length Pricing would get modified to the extent that it does not result in reducing the total income or increasing the losses. The income declared by the tax payer for a year would not change even if the income reduces after the application of the roll back. Effectively it means no refund positions allowed.

CBDT further clarified that ALP can be different for different years provided the manner in which the ALP is computed is consistent and same. For example, if for a past year, the TPO has agreed on comparable uncontrolled price method (CUP) and transfer price of Rs 100 for a particular transaction and during the APA period, the CUP works out to 102, in such cases, as long as the manner of computation of the CUP is the same, the 100 should stand. This would be applicable where only a method based APA is sought.

In cases where MAP request is pending, the applicant has the option to proceed with either the Mutual Agreement procedure (MAP) or the roll back. However, APA Roll backs are not available for tax payers where MAP has concluded, unless for different years or different transactions.

Further, APA’s that have been concluded can be revised to include roll back provision. Further, in cases where the modified return has been filed for the first term APA, the time limit for the roll back years will start from the date of signing the revised APA incorporating the roll backs.

Stringent Clarifications that do not work to the advantage of the Tax Payer

APA roll back rules has been provided for a period of 4 years. CBDT clarified that the tax payer does not have an option to choose the years for which it wants a roll back. The roll back would be applicable for a block of 4 years. It also provides clarity to tax payers that if the international traction did not exist or there is any disqualification, in such cases, roll back can be obtained for the remaining years.

The biggest advantage the tax payers initially perceived was the roll-back years can include the years where TP adjustments have taken place and the ITAT has not given a ruling. CBDT provided clarifications that roll backs will not be allowed in cases where the Tribunal has passed an order disposing an appeal. However, if the ITAT has set aside the order for fresh considerations by lower authorities by full discretion, in such cases the benefit of roll back can be exercised by the tax payer. In practice, even though the ITAT passes an order disposing an appeal they may have some specific directions, which may permit the TPO’s to partially allow relief to the tax payer based on their interpretation of the order, leading to further litigation. In such cases, CDBT needs to provide the application of roll back benefits for that year.

The Rule states that if in case the application fails to carry out any specific action, the roll back agreement shall stand cancelled. CBDT clarified that in such cases the entire agreement would stand cancelled and will not be applicable only for the year on which the roll back fails.

Procedural Clarifications

CBDT clarified that APA roll backs can be filed only when a return has been filed before the due date or where a valid revised return has been filed u/s 139(5). However roll back will not be allowed for belated returns. CBDT further clarified that there will be compliance audits for the roll back to check on the agreed price and methodology as these relate to past years. In cases of mergers and demergers, CBDT clarified that only the person (company) that makes the APA application is eligible for roll back provisions. Other persons (company) which have merged or demerged will not be eligible.

Grey areas

As per the Rules published in March, the rollback provisions apply in respect of the ‘same’ international transaction covered under the main APA. CBDT has clarified that the transactions in the rollback year has to be with the same Associate Enterprise and with the same nature as proposed as per the APA agreement. Roll backs can be applied only if the FAR analysis does not differ “materially” from the FAR validated for the main APA for future years. This means that a slight variation in the international transaction without any change in the FAR analysis for the earlier years may not qualify for rollback purposes and is impractical. For e.g similar nature of transactions but with different AEs will not get covered in the roll back provisions.

Conclusion

These FAQ’s are explicit in most cases and do not leave much scope for doubt. However, there are a few stringent provisions and therefore for tax payers who have already filed for the roll back, the CBDT must consider allowing them the option to withdraw.

Overall the theme of the Roll back provisions seem to be to take the program as a package deal for all the 4 years. This may not be an unfair ask, considering that CBDT has provided a very balanced offering where both the Tax payer and the Tax Authorities stand to gain and reduce litigation.