Advance pricing agreements: the Indian situation outlined

The introduction of advance pricing agreements (APAs) in the Union Budget 2012-13, which is now part of the Finance Act, 2012, was a significant development in the Indian transfer pricing (TP) administration. An APA is basically an agreement signed between a taxpayer and a taxing authority on an appropriate TP methodology for a set of transactions over a fixed period in the future.

Mechanism & administration

The APA scheme has been introduced as part of the existing TP regulations. The Central Board of Direct Taxes (CBDT) will be responsible for entering into an APA with any person for determining the arm’s length price of an international transaction. Such an agreement would remain in force for a period not exceeding five consecutive years.

To demonstrate its intent to seriously implement a programme aimed at reducing taxpayer grievances, the Department of Revenue under the Ministry of Finance, through a CBDT order issued in February, announced the posting of a TP officer as Director-APA for a period of five years. Further, the APA teams in Delhi, Mumbai and Bangalore have been ramped up through a CBDT order in June. Officers with TP skill-sets/experience from varied backgrounds in the Revenue Department have been allotted added responsibilities under the APA programme.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ajit Tolani is a partner at the firm and Ashish Bhatnagar is a senior associate.