“Presently the concept of APA is being perceived as a panacea for the ever-growing transfer pricing litigations. If implemented fairly it would surely provide a conducive business environment and help bridge the trust deficit currently prevailing between the tax payer and tax authorities.”

Pallavi Bakhru

– Partner and Practice Leader Tax and Regulatory Services

Walker Chandiok & Co


In India, the area of transfer pricing has been controversial ever since its introduction. It has been a big problem for Multinational, their associated concerns, OECD and several other international agencies concerned with taxation and commerce. The pressing concern of many nations including India is that multinational corporations are shifting profits from their jurisdiction which are legitimately due to them by over-stating or under-stating the prices for goods, services or intangibles in transactions carried either by a parent company with its subsidiary or vice versa or inter se between the subsidiaries.[1]

The Indian tax administration has adopted various mechanisms i.e. high penalties, onerous record-keeping requirements and increase in the audits, to enforce transfer pricing laws. This has resulted in a substantial increase in the confrontation between the Indian Revenue and taxpayers. The traditional mechanisms i.e. audits, dispute resolution panel, appeals etc., are long drawn and have brought about a lot of uncertainty for taxpayers in the pricing of their inter-company transactions. The Indian Government’s white paper on Black Money mentions that transfer pricing adjustment of approximately Rs. 44,500 crores was made in the last round of audit done by the Revenue Authority.[2]

In the backdrop of this adversarial environment, Government showcased Advance Pricing Agreement (“APA”) as a part of the proposed Direct Taxes Code (“DTC”) way back in 2009 and it was again mentioned in the DTC 2010. However, with the uncertainty surrounding the introduction of DTC, APA introduction also got deferred. For a highly litigious transfer pricing regime of India, this uncertainty regarding the fate of APA raised a lot of concern amongst large taxpayers. In a much appreciated move, the Ministry of Finance introduced the APAs in the Finance Act 2012 and on 31 August 2012 the Central Board of Direct Taxes (‘Board’) issued a notification introducing the rules for implementing APAs.[3]

 APA: An Introduction

The term Advance Pricing Arrangement is defined as “an arrangement that determines in advance of the controlled transactions an appropriate set of criteria (for example, method, comparables and appropriate adjustments thereof, critical assumptions as to the future) for determination of transfer pricing for those transactions over a period of time.”[4]

The OECD in its 2010 transfer pricing guidelines refers to APA or “arrangements” as–

An arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time”.

The Internal Revenue Service (“IRS”) defines an APA as: “An APA is an agreement between a taxpayer and the Service in which the parties set forth, in advance of controlled transactions, the best Transfer Pricing Method (“TPM”) within the meaning of Sec. 482 of the Code and the regulations. The agreement specifies the controlled transactions or transfers (covered transactions), TPM, APA term, operational and compliance provisions, appropriate adjustments, critical assumptions regarding future events, required APA records, and annual reporting responsibilities.”

The IRS which has collectively more APA experience than any other taxing authority further describes the APA Programme as:

“The Advance Pricing Agreement (APA) Program is designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the traditional adversarial process. An APA is a binding contract between the IRS and a taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method.”[5]

As per the Indian Law, APA is an agreement between the Central Board of Direct Taxes, with any person, determining the arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.[6] The APA, therefore, is so called because it is entered into in with a person “in relation to an international transaction to be entered into by that person” i.e. in advance of the transaction.[7]

The “arm’s-length principle” of transfer pricing as mentioned in Section 92 CC of Income Tax Act, 1961 states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm’s-length price for a transaction is therefore what the price of that transaction would be on the open market. For commodities, determining the arm’s-length price can sometimes be as simple a matter as looking up comparable pricing from non-related party transactions, but when dealing with proprietary goods and services or intangibles, arriving at an arm’s length price can be a much more complicated matter.[8] The APA brings certainty to the taxpayer that there will be no adjustment to his income if he follows the method of determining the arm’s length price, which has been agreed with the department.[9]

Thus, the APA scheme is ideal for those tax payers who:

  • who wish to have tax and financial reporting certainty and elimination of double taxation
  • who have complex transactions where differing views are likely to arise in respect of transfer pricing
  • who wish to avoid the possibility of dedicating significant resources to an extensive transfer pricing audit[10]


There are two broad categories of APAs:

  • unilateral – that is, an APA that consists of an agreement between the Indian taxpayer and the Indian tax authorities; and
  • bilateral or multilateral – that is, an APA that consists of agreements between the Indian taxpayer and the tax authorities, and between Indian and foreign tax authorities.

A unilateral APA is best suited to those cases where it is either unnecessary to involve a foreign tax authority in the APA process (e.g., where the counter-party to an Indian resident’s international related party transaction is a taxpayer in a country which does not have a tax treaty with India), or where it is considered that there is very little attendant tax risk for the counter-party from the transfer pricing method being proposed for the APA. A unilateral APA would also be appropriate where a foreign tax authority declines to participate in what would otherwise be a bilateral APA.

Unilateral APAs would therefore involve only the Indian taxpayer and the tax authorities. This limited involvement of parties to the APA means that a unilateral APA is likely to be able to be finalized in a relatively brief period of time compared to an APA that would necessitate the involvement of another tax authority. While there can be no guarantee as to how long a unilateral APA would take to finalize, international experience suggests a period of approximately three to 18 months from the date of formal application.[11]

A bilateral or multilateral APA would require the involvement of at least one other tax authority in the APA process. This involvement would occur under the provisions of the mutual agreement procedures article and/or the exchange of information article in India’s tax treaty with the other relevant country. This type of APA is often referred to as mutual agreement procedures (MAP APA). A MAP APA is therefore best suited where the Indian resident’s international related party transaction(s) occurs with a related party that is a taxpayer in a tax treaty partner country. The agreement with the foreign tax authority ensures there is no economic double taxation in respect of the transaction(s) covered by the APA.

A MAP APA generally consists of at least three agreements – (1) between the Indian tax authorities and the foreign tax authority, (2) between the Indian taxpayer and the Indian tax authorities, and (3) between the foreign tax authority and the related party in the foreign country.   The involvement of the foreign tax authority inevitably adds additional time to the period for finalizing a MAP APA relative to a unilateral APA. International experience suggests a period of at least 18 months – 30 months to finalize a MAP APA.[12]

The APA Scheme as per the Indian rules has enabled companies to not only opt for Unilateral APA, but also for Bilateral and Multilateral APAs. However, in case of a unilateral APA, the APA rules require the taxpayers to explicitly mention in the application the reasons for entering into a unilateral APA instead of a bilateral or a multilateral agreement. Bilateral and multilateral APAs would be routed through the Competent Authority (“CA”) and it is imperative that the Associated Enterprises (“AE”) have initiated APA in their own country.[13]


The legal basis for an APA in India is:

  • Sections 92CC and 92CD inserted into the Income-tax Act, 1961 by the Finance Act, 2012 with effect from 1-7-2012.
  • CBDT has inserted the Advanced Pricing Agreement Scheme consisting of new rules 10F to 10T and new rule 44GA in the Income-tax Rules, 1962 videNotification No. 36/2012 dated 30-8-2012 with effect from 30-8-2012.
  • CBDT has issued a Press Release dated 31-8-2012 clarifying same to the aspects of the scheme.[14]

Application for APA: Companies desirous of entering into an APA need to file an application with the DGIT for Unilateral APA and with Competent Authority (‘CA’) of India for bilateral and multilateral APAs. Also, though the number of years can be proposed by the applicant, but it cannot exceed 5 years as suggested in the Finance Act, 2012.

APA Process:

As per Section 92CC (1) of the Income-tax Act, 1961, “The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person”. As such, all the international intercompany transactions entered with Associated Enterprises (“AEs”) are covered within the purview of an APA.

According to Rule 10G any person who has undertaken an international transaction or is contemplating to undertake an international transaction shall be eligible to enter into APA. Thus, the eligibility criterion is very wide in scope. The taxpayer could decide the intercompany transactions in respect of which they would like to negotiate and enter into an APA. There is no requirement that all AEs or all intercompany transactions must be covered under an APA. However, it is important to fully disclose all the intercompany transactions proposed to be entered into by the taxpayer to the tax authorities’ APA team. In certain cases, if tax authorities are of the view that it would be important to include certain other intercompany transactions (originally proposed by the taxpayer to be excluded) for various reasons, the tax authorities may discuss with the taxpayer and mutually agree to include such transactions. An APA should ideally cover complex / high value transactions considering the time and cost linked in concluding an APA.[15]

The process of entering into an advance payment agreement is a detailed step-by-step procedure to be followed by the taxpayer and the tax authorities. This process is elaborated in the Income Tax Rules. The process is detailed below:

  1. Feasibility study: An APA may not be suitable for everyone and in every situation. Thus, a feasibility study needs to be undertaken. A feasibility study should encapsulate the objective, type of transaction to be covered, cost-benefit (economic) analysis and the risk threshold. This will enable a company to decide if an APA is feasible or not. The taxpayer will have to determine an appropriate threshold limit in terms of time, resource and money that it would want to invest in an APA process. In the process of filing for an APA one will have to disclose a lot of confidential information. Therefore, while undertaking the feasibility study; an evaluation of this risk also should not be ignored.
  2. Pre-filing consultation: The process for an APA would start with a pre-filing consultation meeting. The taxpayer can request for a pre-filing consultation meeting which shall be held with the objective of determining the scope of the agreement, understanding the transfer pricing issues involved and examining the suitability of international transactions for an APA. The tax-payer also has an option of applying for a pre-filing consultation on an anonymous basis. The pre-filing consultation shall neither bind the Board nor the taxpayer to initiate or enter into an APA.[16]

Rule 10H is the rule which deals with pre-filing consultation. Pre-filing consultation shall, among other things, (a) determine the scope of the agreement, (b) identify transfer pricing issues, (c) determine the suitability of international transaction for the agreement and (d) discuss broad terms of the agreement.

Rule 10H further talks about the steps which are required to be taken for pre-filing consultation, as below:

  • Every person proposing to enter into an agreement under these rules shall, by an application in writing, make a request for a pre-filing consultation.
  • On receipt of the request in Form No. 3 CEC, a team constituted by Director General of Income-tax (International Taxation) will hold pre-filing consultation with the applicant.[17]
  1. Application for an APA After the pre-filing meeting: If the taxpayer is desirous of applying for an APA, an application is required to be made by him in Form No. 3 CED.[18] For continuing transactions, the APA can be applied for the period starting from 1 April 2013, and for proposed transactions, an APA can be applied for at any time before undertaking the actual transaction. Apart from the basic details, the taxpayer would be required to provide the international transactions to be covered, type of APA applied for, reason for not applying for bilateral/ multilateral APA, proposed transfer pricing methodology, detailed functional analysis, and standalone and consolidated financial statements for prior five years, etc.

Procedurally, the application for unilateral APAs would be made to the Director General of Income Tax (International Taxation) [DGIT], and for bilateral and multilateral APAs to the Competent Authority in India. The application would be required to be filed along with the requisite fee. The fee for an APA is linked to the value of the transaction undertaken or proposed to be undertaken.[19]

Amount of International Transaction Fee
Amount not exceeding INR 100 crores (approx. USD 20 million) INR 1 million (approx. USD 20,000)
Amount exceeding INR 100 crores (approx. USD 20 million) but not exceeding INR 200 crores (approx. USD 40 million) INR 1.5 million (approx. USD 30,000)
Amount exceeding INR 200 crores (approx. USD 40 million) INR 2 million (approx. USD 40,000)

Upon receiving the application under Form No. 3 CED would undergo a preliminary screening. As per Rule 10K, every application filed by the taxpayer should be complete respects and accompanied by requisite documents. The DGIT or Competent Authority in India shall issue a deficiency letter if:

  • any defect is noticed in the application, or
  • any relevant document is not attached, or
  • application is not in accordance with understanding reached in pre-filing consultation

The deficiency letter shall be served to the taxpayer before the expiry of one month from the date of receipt of the application.[20]

On receipt of the deficiency letter the taxpayer will have to remove the deficiency or modify the application within a period of fifteen days (maximum 30 days) from the date of service of the deficiency letter.[21]

Based on the modified application, acting under Rule 10 K (4) the DGIT or the competent authority in India, as the case may be, if satisfied with the modified application may pass an order for the application to be further processed. In case they are not satisfied then the application shall not be allowed to be proceeded. However, Rule 10 K (5) provides that no order will be passed without providing an opportunity of being heard to the applicant and if an application is not allowed to be proceeded with, the fee paid by the applicant shall be refunded.

  1. Negotiation between taxpayer and tax administration: After understanding and gathering all the required information the tax administration would then arrange for negotiation meetings with the taxpayer. In case of unilateral APAs, the tax administration will arrange negotiations and discussions with the taxpayer. For bilateral APAs, the tax administration will first arrange negotiations with the taxpayer and then enter into discussion rounds with the relevant competent authorities.[22] In the negotiation phase the tax administration and the taxpayer would mutually reach to a conclusion on the transfer pricing of the covered transactions.[23]
  2. Draft and Execute APA: The formal agreement is based on the negotiation carried out between the taxpayer and the tax authorities. In the case of a unilateral APA, the tax authorities and the taxpayer in the course of negotiation may have agreed on a methodology or outcome, and it is then up to the tax authorities to draft an appropriate agreement that recognizes this particular outcome. However, in the case of a bilateral/multilateral APA, a similar process would be followed where the relevant tax authorities agree on a TPM or outcomes. While drafting the APA the tax authorities may take into account many basic assumptions like: corporate shareholding structure; constant conditions regarding market conditions, market shares, revenue volumes, and sales prices (e.g. no significant changes due to new technology); constant conditions regarding regulatory law, customs, import and export restrictions, and international payment transactions; constant function and risk allocation; constant business model; constant conditions regarding exchange rates and interest rates; no material changes in the tax framework of the other state; and any other critical assumptions. The APA authorities could consider using a standard template of an APA agreement like the US IRS.[24]
  3. Annual APA Compliance Report: The tax authorities will draft the formal agreement in a manner consistent with the laws of that country relating to contractual arrangements and having regard to provisions in the tax law. It is imperative that the taxpayer should consult with its advisers as to the appropriateness of the agreement proposed by the tax authorities. This formal agreement will be binding on both the taxpayers and tax authorities. If any tax demand is raised as a result of the normal TP audit process on any subject matter of the APA, the same should not be enforced till the execution of the APA.[25] The taxpayer is also required to prepare and file an annual compliance report in relation to the implementation of the APA to the tax authority for each year of the APA.[26]
  4. Compliance Audit: The TPO having the jurisdiction over the taxpayer will carry out the compliance audit of the agreement for each of the year covered in the agreement. The TPO will have to furnish the compliance audit report within six months from the end of the month in which the annual compliance report is referred to him. While undertaking the compliance audit, the TPO may require the assessee to substantiate compliance with the terms of the agreement, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method. The TPO may also ask the assessee to submit any information, or document, to establish that the terms of the agreement has been complied with.
  5. APA Renewal: When an existing APA is drawing to a close of its term, the parties agree to enter into further discussions or negotiations with a view to extending the APA beyond the period originally provided. Any such extended arrangement is concluded as a new APA.[27] The taxpayer may have to file an application along with supporting evidence to confirm that there have not been any major changes to the facts and conditions in the existing APA, and that the taxpayer has been in full compliance with the provisions and requirements of the APA. After receiving the application, tax authorities will review and evaluate the application documents, and negotiate with the taxpayer to draft the new APA.
  6. Withdrawal of APA application: The taxpayer has an option to withdraw the application anytime before the finalisation of the terms and conditions of the agreement. However, the filing fee shall not be refunded in case of withdrawal.[28]
  7. Cancellation of an APA: The Board may cancel the APA, in case the taxpayer fails to furnish the ACR, there are material errors in the ACR, the TPO finds there is a failure on the part of the taxpayer to comply with the terms and conditions of the APA, or on account of fraud or misrepresentation of facts by the taxpayer.[29]
  8. Revisions of an APA: An APA may be revised in case there is a change in the critical assumptions, law under which the agreement is covered, or in case of a request from the Competent Authority in other country in case of bilateral or multilateral APA.[30]
Feature Global Best Practice India Observation
Pre-filing meeting Yes Yes The pre-filing consultation meeting would play a vital role in the entire process. Permitting anonymous pre-filing meetings without any charge would act as an enabler for taxpayers to get on board.
Flexibility/amendment/ withdrawal/revision Yes Yes The APA rules have provided significant flexibility in the overall process by allowing the taxpayer to amend the APA application, provide further information/documents for consideration of APA team and allowing for revision of the APA in case of change in critical assumptions/law under which the agreement is covered etc. The taxpayer is also permitted to withdraw the APA application at any time before finalisation.
Team composition experts in economics, statistics, law etc. Yes Yes The rules provide for constitution of an APA team consisting of experts in economics, statistics, law etc. The Government, through its intention to form such team, has clearly exhibited its dedication and seriousness towards the APA programme.
Documentation simplification Yes Yes The ACR would reduce the compliance burden of taxpayers.
Roll back Yes No Though not expressly provided in the rules, per practical experiences in other countries, the resolution reached in unilateral/bilateral APAs should be helpful for resolving open years.
Timeline No No The rules do not prescribe any indicative timeline for concluding the APAs. However, the Government has shown its inclination towards early processing of the APA applications.


APA in AUSTRALIA- The legislation which deals with APA is Practice Statement Law Administration 2011/1[31]. There, an APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (for example, method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing of those transactions over a fixed period of time (generally for 3 to 5 years but may be longer). An APA may be applied by any Australian taxpayer who has international related party dealings between:

– Related separate legal entities (including PE of separate legal entities).

– Permanent establishment and its head office.

– Two permanent establishments of the same entity.


Regulation dealing with APA is Information circular on Advanced Pricing Arrangements, March 16th 2001[32]. An APA is defined as an arrangement between the Minister of National Revenue and a taxpayer. It covers certain transactions and arrangements between the taxpayer and non-resident entities. APA confirm appropriate transfer pricing methodologies, in advance, and their application to specific cross-border non-arm’s length transactions or arrangements for specified periods of time, under specified terms and conditions, for purposes of the Act. The term of an APA is usually 3 to 5 years, but it may depend on the facts and circumstances. APAs may also be applied to issues similar or related to transfer pricing, such as the proper attribution of income between permanent establishments and other parts of the same entity. Any taxpayer may apply for APA consideration, regardless of the size of the organization, the type or scope of its operations, or the nature of the transactions and proposed TPMs.


Regulation which deals with APA is Statement of Practice 2/10 on Advanced Pricing Agreements (this SP updates an earlier Statement on APAs published in 1999[33]. APA is written agreement between a business and the Commissioners of HRMC which determines a method for resolving transfer pricing issues in advance of a return being made. When the terms of the agreement are complied with, it provides assurance to the business that the treatment of those transfer pricing issues will be accepted by HMRC for the period covered by the agreement. Typically the term is from 3 to 5 years. An APA can be used to resolve questions relating to the following broad situations giving rise to transfer pricing issues:

– Transfer prices between separate business enterprises where questions may arise as to the determination of the arm’s length principle.

– Attribution of income or profit between parts of a business enterprise which operates in more than one country where questions may arise as to the taxable income to be recognized in any such part.


Regulation which deals with APA is Internal Revenue Proc. 2006-9 issued by Internal Revenue Service, released on December 19th 2005[34]. APA is a voluntary process whereby the IRS and taxpayers may resolve transfer pricing issues under 482 of the Internal Revenue Code. It is an agreement between a taxpayer and the Service in which the parties set forth, in advance of controlled transactions, the best transfer pricing method (TPM) within the meaning of 482 of the Code and the regulations. The agreement specifies the covered controlled transactions, TPM, term, operational and compliance provisions, appropriate adjustment, critical assumptions, annual reporting responsibilities, etc. The taxpayer must propose a term for the APA appropriate to the industry, products and transactions involved. Although the APA term is determined on a case-by-case basis, a request for an APA should propose an APA term of at least 5 years unless the taxpayer states a compelling reason for a shorter term[35].


Serial no. Countries Pre-filing When APAs were introduced Type of APA Filing fee Time frame to conclude Term of agreement
1. Australia Mandatory 1992 Unilateral, Bilateral and Multilateral No fees Not specified 3-5 years
2. Canada Mandatory 1992 Unilateral, Bilateral and Multilateral Out-of-pocket costs for normal APA and flat fee of CAN $ 5000/- for small business APAs Not specified 3-5 years but may vary depending upon the facts of the case
3. United Kingdom Optional 1999 Unilateral and bilateral (there is no distinction between bilateral & multilateral agreements) No fees Not specified 18 to 21 months from the date of formal submission
4. United States Mandatory 1991 Unilateral, Bilateral and Multilateral APA filing- $50,000; small businesses- $22,500 Not specified 3-5 years
5. India Mandatory 2012 Unilateral, Bilateral and Multilateral Not specified 3-5 years


The APA scheme has many advantages as under:

  1. An APA may be less costly, in time and money.
  1. Multilateral APA’s reduce the possibility of double taxation. APA’s provide tax administrations with a better understanding of a taxpayer’s business and allow the development of industry skills which would allow better handling of other cases by the tax administration. It can be illustrated with the help of a simple illustration[37]: suppose India tax authorities determine that the price charged by the Indian subsidiary is not at arms’ length and proceed to make an adjustment, it will lead to double taxation of the income in respect of which adjustment is made. The adjusted income was already offered for tax in US and will now be also taxed by Indian tax authorities. Similar situation occurs if US tax authorities do not accept the transfer price and make an adjustment. If there is certainty about the transfer price being accepted in both the jurisdictions, the risk of double taxation is eliminated. This is precisely what APA aims for. APA entered between both the jurisdictions and tax-payers provide certainty to a great extent that the transfer price will be accepted and thus the risk of double taxation is eliminated.
  1. An APA allows the tax payer to compute tax liabilities in of international transactions and therefore, aid tax planning.
  1. 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. Also, when the term of an APA expires, the opportunity may also exist for the relevant tax administrations and enterprises to renegotiate the agreement. Because of the certainty provided by an APA, an enterprise may be in a better position to predict its tax liabilities, with the governments providing a tax environment that is favourable for investment.
  2. 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[38].
  3. Typically, associated enterprises are allowed to participate in the process of obtaining an APA, by presenting the case to and negotiating with the tax administrations concerned, providing necessary information, and reaching agreement on the transfer pricing issues. From the associated enterprises’ perspective, this ability to participate is an advantage over the conventional mutual agreement procedure.
  4. Due to the taxpayer participation, APAs can provide an opportunity for both tax administrations and taxpayers to consult and cooperate in a non-adversarial spirit and environment. The opportunity to discuss complex tax issues in a less confrontational atmosphere than in a transfer pricing examination can stimulate a free flow of information among all parties not least because in an APA discussion no irreversible actions have been taken. The APA process leaves, therefore, more flexibility than a MAP process. The non-adversarial environment may also result in a more objective review of the submitted data and information than may occur in a more adversarial context (e.g. litigation). The close consultation and cooperation required between the tax administrations in an APA program may also lead to closer relations with treaty partners on transfer pricing issues.
  5. The disclosure and information aspects of an APA as well as the cooperative attitude under which an APA can be negotiated may assist tax administrations in gaining insight into complex international transactions undertaken by MNEs. APAs can improve knowledge and understanding of highly technical and factual circumstances in areas such as global trading and the tax issues involved. The development of specialist skills that focus on particular industries or specific types of transactions will enable tax administrations to give better service to other taxpayers in similar circumstances. Through APAs tax administrations have access to useful industry data and analysis of pricing methodologies in a cooperative environment[39].
  6. From the angle of tax jurisdictions, APA may pave the way for increased foreign direct investment as it will help in boosting the confidence of the foreign investors by bringing certainty in the transfer pricing issues. Also transfer pricing issues addressed by APA shall enable the jurisdictions to deal with similar issues in “open years”. Also experiences gained from APA will be instrumental in future improvement of the law. However, it is pertinent to note that there are no specific provisions regarding the roll backs in the Indian context. So it will be critical to see whether tax authorities practically use the methodology adopted during the APA process to deal with the issues in the open years.
  7. Further, the taxpayer and tax authority may agree to a methodology other than the prescribed methods for determining the arm’s length price, depending upon the commercial nature of the international transaction. This may be quite useful in scenarios where transfer price is set with pure commercial rationale. Tax-payer can negotiate an economic method to justify the set transfer price.
  8. Lastly, APA may be particularly helpful in case of start-up enterprises. Start-up enterprises require set up time in initial phase of business. So in the initial years it may end up in making very low profit or even losses. So it will be hardship for the tax-payer if a transfer pricing adjustment is imposed on the enterprise on the criteria that the transaction is not at arm’s length. APA can address this situation by including a provision of term-test. Term test refers to testing of an international transaction over a period of time rather than examining it on year to year basis. This relieves the tax-payer from the hassles of transfer pricing compliance for every year and from potential litigations[40].


However, it also has some disadvantages as listed below:

  1. Cost of entering into a APA, in certain situations may be more than the benefits derived from it, especially when there are complex transactions and more than one tax authorities involved, negotiations may take a number of years to be completed.
  2. Unilateral APA’s are a problem since they do not eliminate the possibility of double taxation. Taxpayers may over allocate income to the APA country and create a problem in the non-APA countries involved. Where compensating adjustments are used to provide the required result of a unilateral APA this may cause difficulties with the foreign competent authority in allowing a corresponding adjustment if the arm’s length principle is not preserved.
  3. The APA scheme in the Indian context has come out with the revision procedures but does not specify any time limit for the completion of the revision. Instead the scheme rolls out similar procedures for revision as in the time of entering into the original agreement. This leads to the consumption of additional time and efforts of the taxpayers.
  4. The time taken in negotiating APAs is disadvantageous as it places a resource burden on tax administrations for they would have to divert the resources from other priority areas.
  5. Another disadvantage is that in case of APAs tax administration will seek more information which under a normal tax audit could be avoided. Other concerns include confidentiality of sensitive information, the misuse of data obtained through an APA, application of the data to earlier years, the effect on competitors and the difficulties (and costs) of applying an APA programme to “small” taxpayers.
  6. Also, APA guarantees certainty only in respect of the acceptance of the pricing policy and methods. The dispute over compliance with legal provisions can still continue in an APA regime. One possible instance is the dispute over use of data for comparability analysis. The period for which the comparative data is to be used has been an issue of litigation under Indian domestic laws. Unless agreed in advance APA will not guarantee remedy to these issues.
  7. Confidentiality is also an important concern as important group policies and trade secrets are disclosed by the taxpayers to the tax authorities while entering into APA. The information shared with the tax authorities during the course of finalising an APA needs to be handled with great amount of diligence. The information shared by a tax-payer while negotiating an APA may contain the group policy, pricing policy, future business predictions, revenue model which are of strategic importance to the MNE group. Sharing of these with the competitors can adversely affect the tax-payers market position. There is a great concern among the industry about the possibility of ill-use of the data by the tax authorities. Tax authorities may use the information as potential comparable information against the tax-payers who have not entered into APA. With the Indian APA scheme comprising of no provisions regarding the confidentiality of tax-payers information, it remains a matter of serious concern for the taxpayers.
  8. Taxpayer should not under-estimate the obligations and efforts required on his part to support and see to fruition the APA process. The APA process may prove a highly time consuming and costly exercise – See IRAS Supplementary Circular[41].

(i) Unilateral vs. bilateral/multilateral APAs

  1. Unilateral APAs may present significant problems for tax administrations and taxpayers alike. From the point of view of the associated enterprises involved, one problem is the possible effect on the behaviour of the associated enterprises. Unlike bilateral or multilateral APAs, a unilateral APAs gives only certainty for the taxpayer in one jurisdiction and may not in all cases lead to a reduction in economic or juridical double taxation for the MNE group. If the taxpayer accepts an arrangement that over-allocates income to the country making the APA in order to avoid lengthy and expensive transfer pricing enquiries or excessive penalties, the administrative burden shifts from the country providing the APA to other tax jurisdictions.
  2. On the other hand, there are cases where unilateral APAs may be helpful or even the only possibility. For example, in countries where only unilateral APAs are available, or in cases where many countries are involved, a unilateral APA my be the only pragmatic solution. The same may be true for SMEs and in cases where only a small amount of tax is at stake or
  3. Where the tax issue is not difficult and does not require the heavier process of a bilateral or multilateral APA. Care must be taken, however, that unilateral APAs are consistent with the arm’s length principle in the same way as bilateral or multilateral APAs.

(ii) Specific disadvantages for tax administrations

  1. An APA may initially place a strain on transfer pricing audit resources, as tax administrations will generally have to divert resources earmarked for other purposes (e.g. examination, advising, litigation, etc.). Demands may be made on the resources of a tax administration by taxpayers seeking the earliest possible conclusion to an APA request, keeping in mind their business objectives and time scales. These demands may not coincide with the resource planning of the tax administrations, thereby making it difficult to process efficiently both the APAs and other equally important work. Renewing an APA, however, is likely to be less time-consuming than the process of initiating an APA. The renewal process may focus on updating and adjusting facts, business and economic criteria, and computations. In the case of bilateral arrangements, the agreement of the competent authorities of both Contracting States is to be obtained on the renewal of an APA to avoid double taxation (or non-taxation).
  2. Experience in some countries has shown that, most often, taxpayers which would be interested in APAs are very large corporations with a good voluntary compliance history which would be audited on a regular basis, with their pricing methodology then being examined in any event. There are some indications that taxpayers, having experienced
  3. Difficulty with tax administrations on transfer pricing issues and not wishing these difficulties to continue, are often interested in applying for an APA. There is then a serious danger of audit resources and expertise being diverted to these taxpayers and away from the investigation of less compliant taxpayers, where these resources could be better deployed in reducing the risk of losing tax revenue. The balance of compliance resources may be particularly difficult to achieve since an APAs tend to require highly experienced and often specialised staff. Requests for APAs may be concentrated in particular areas or sectors, e.g. global trading, and this can overstretch the specialist resources already allocated to those areas by the authorities. Tax administrations require time to train experts in specialist fields in order to meet unforeseeable demands from taxpayers for APAs in those areas[42].
  • Specific disadvantages for taxpayers
  1. Some businesses expressed concern that an APA may allow the tax administration to make a closer study of the transactions at issue than would occur in the context of a transfer pricing examination, depending on the facts and circumstances. The taxpayer must provide detailed information relating to its transfer pricing and satisfy any other requirements imposed for the
  2. Verification of compliance with the terms and conditions of the APA. At the same time, the taxpayer is not sheltered from normal and routine examinations by the tax administration on other issues. An APA also does not shelter a taxpayer from examination of its transfer pricing activities. The taxpayer may still have to establish that it has complied in good faith with the terms and conditions of the APA, that the material representations in the APA remain valid, that the supporting data used in applying the methodology were correct, that the critical assumptions underlying the APA are still valid and are applied consistently, and that the methodology is applied consistently.
  3. APAs cannot be used by all taxpayers because the procedure can be expensive and time consuming and small taxpayers generally may not be able to afford it. This is especially true if independent experts are involved. APAs may therefore only assist in resolving mainly large transfer pricing cases. In addition, the resource implications of an APAs may limit the
  4. Number of requests a tax administration can entertain. In evaluating APAs, tax administrations can alleviate these potential problems by ensuring that the level of inquiry is adjusted to the size and complexity of the international transactions involved[43].


  • Certain specified domestic transactions are also now covered under transfer pricing. Hence, it would have been better if the provisions pertaining to advance pricing agreement (unilateral agreements) would have been extended to these specified domestic transactions.
  • Time limit has not been laid down for completion of APA process.
  • Though section 92 CC(2) allows usage of any other method (other than the method prescribed u/s. 92C(1)) for determinations of arm’s length price in case of APA, the rules notified restricts it only to the usage of method prescribed u/s 92 C(1).
  • The rules are also silent in confidentiality of the data provided by assesses.
  • When entering into an APA, a taxpayer should clarify that the business activities, functions, risks, assets, accounting methods, and estimates remain materially the same for the period of the APA. When the APA team reaches a conclusion that is different from any contained in the taxpayer’s application, the team should discuss its evaluation with the taxpayer in an open and transparent manner to reach a mutually acceptable outcome in a timely manner.
  • Post-APA compliance should be minimal. While the APA provisions in the Finance Act 2012 provide for filing of revised tax returns and completion of reassessments on the basis of conclusions out of the APA, it is appropriate to hold the assessment proceedings while the APA negotiations are under progress, at it may not serve any purpose in spending time and effort in completing the process as it does not lead to any result. This may require an amendment to the existing provisions.
  • Confidentiality of data, provided during to the authorities during the APA process, is a major concern that must be addressed appropriately. Because significant time and effort are involved in concluding an APA, the rules should provide for rollback of the conclusions to past years under litigation or audit.
  • Finally, the roll forward/renewal of an APA should be concluded in the least possible amount of time, in those cases when there are no significant changes in the facts or critical assumptions relating to the international transactions.


Just as the U.S. APA Program ushered an era of best practices for addressing TP issues, so does the India APA Act usher an entirely new era. APA programs, when properly designed and administered, allow both taxpayers and tax administrators to achieve certainty for current and future tax years, often on a bilateral basis. Whereas the up-front investment in time and resources can be significant (particularly for first-time users) that up-front investment pays continuing long-term dividends by reducing (and often eliminating) the financial and economic opportunity costs of compliance and continued uncertainty over the appropriate TP for intercompany transactions. The recipe for success of the APA regime lies in ensuring that both the tax authorities and taxpayers hold these negotiations in a transparent environment, with a balanced approach to arrive at a win-win outcome. Timely conclusion of APAs would be a great reprieve for multinational companies facing the brunt of transfer pricing adjustments.



  1. Anand G. Srinivasan, ‘Advance Pricing Agreement’ Encompassing everything you need to know about it, [2013] 35com 322 (Article)
  2. Anand G. Srinivasan, CBDT unveils APA Scheme – Costly with fat application fee and not time-bound – FAQs on APAs, [2012] 26com 164 (Article)
  3. P. Aggarwal, Rule 10 H on pre-filing consultation: A unique feature of Advance Pricing Agreements, June 16, 2013 (available at: http://www.business-standard.com/article/economy-policy/rule-10h-on-pre-filing-consultation-a-unique-feature-of-advance-pricing-agreements-113061600657_1.html )
  4. Karishma R. Phatarphekar, Indian Advance Pricing Regime- The Game Changer, 2012(at:http://www.grantthornton.in/assets/Indian_APA_regime_The_Game_changer.pdf)
  5. Radhika Suri, Taxmann’s Fundamentals of Indian Tranfer Pricing, Taxmann Allied Services (P.) Ltd., New Delhi, 2008
  6. Samir Gandhi, Advance Pricing Agreements- What the Rules Entail (available at: http://www.tp.taxsutra.com/experts/column?sid=83#content-bottom)
  7. Shanto Ghosh, India Transfer Pricing: A New Path Forward?, (available at http://www.deloitte.com/assets/Dcom-Denmark/Local%20Assets/Documents/Vores%20loesninger/Skat/India_Transfer_Pricing_A_New_Path_Forward.pdf)
  8. Working document, EU Joint Transfer Pricing Forum- Secretariat Discussion Paper on Alternative Dispute Avoidance and Resolution Procedures, DOC: JTPF/003/REV2/2005/EN, (available on http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/12th-altern_res.pdf)


  1. http://www.cra-arc.gc.ca/E/pub/tp/ic94-4r/ic94-4r-e.pdf
  2. http://www.deloitte-tax-news.de/transfer-pricing/files/apa-india-recommendations-for-a-model-june2011.pdf
  3. http://www.ey.com/Publication/vwLUAssets/Tax_Alert_India_publishes_rules_for_implementing_Advance_Pricing_Agreements/$FILE/Tax_Alert_India_publishes_rules_for_implementing_Advance_Pricing_Agreements.pdf
  4. http://www.hmrc.gov.uk/agents/sop.pdf
  5. http://www.irs.gov/pub/irs-drop/rp-06-9.pdf
  6. http://law.ato.gov.au/atolaw/view.htm?docid=%22psr/ps20111/nat/ato/00001%22
  7. http://newsletter.pwc.ch/inxmail9/images/TAXeNEWS%20CT/TeN_India_EN.pdf
  8. http://www.oecd.org/ctp/tax-global/4.%20Advance_Transfer_Pricing_Arrangements.pdf
  9. http://www.ustransferpricing.com/arms_length_principle.html

[1] Radhika Suri, Taxmann’s Fundamentals of Indian Tranfer Pricing, Taxmann Allied Services (P.) Ltd., New Delhi, 2008, p.1

[2] Samir Gandhi, Advance Pricing Agreements- What the Rules Entail (available at: http://www.tp.taxsutra.com/experts/column?sid=83#content-bottom)

[3]Available at: http://www.ey.com/Publication/vwLUAssets/Tax_Alert_India_publishes_rules_for_implementing_Advance_Pricing_Agreements/$FILE/Tax_Alert_India_publishes_rules_for_implementing_Advance_Pricing_Agreements.pdf,

[4] Suri, supra note 3, p. 101

[5] Karishma R. Phatarphekar, Indian Advance Pricing Regime- The Game Changer, 2012, p.4 (available at http://www.grantthornton.in/assets/Indian_APA_regime_The_Game_changer.pdf)

[6] Section 92CC (1), Income Tax Act, 1961

[7] Anand G. Srinivasan, ‘Advance Pricing Agreement’ Encompassing everything you need to know about it, [2013] 35 taxmann.com 322 (Article)/[2013] 27 CPT 230 (Article)

[8] Available at: http://www.ustransferpricing.com/arms_length_principle.html

[9] Srinivasan, supra note 9

[10] Phatarphekar, supra note 7, p. 6

[11] Recommendations for a Model Advance Pricing Agreement Scheme in India, June 2011, p.22 (available at: http://www.deloitte-tax-news.de/transfer-pricing/files/apa-india-recommendations-for-a-model-june2011.pdf)

[12] Ibid., p.23

[13] Phatarphekar, supra note 7, p. 7

[14] Anand G. Srinivasan, CBDT unveils APA Scheme – Costly with fat application fee and not time-bound – FAQs on APAs, [2012] 26 taxmann.com 164 (Article)

[15] Phatarphekar, supra note 7, p. 17

[16] Available at: http://newsletter.pwc.ch/inxmail9/images/TAXeNEWS%20CT/TeN_India_EN.pdf

[17] H.P. Aggarwal, Rule 10 H on pre-filing consultation: A unique feature of Advance Pricing Agreements, June 16, 2013 (available at: http://www.business-standard.com/article/economy-policy/rule-10h-on-pre-filing-consultation-a-unique-feature-of-advance-pricing-agreements-113061600657_1.html)

[18] Rule 10 I

[19] Supra note 18

[20] Rule 10 K (2)

[21] Rule 10 K (3)

[22] Phatarphekar, supra note 7, p. 27

[23] Rule 10 L

[24] Phatarphekar, supra note 7, p. 27

[25] Ibid., p. 28

[26] Rule 10-O

[27] Rule 10 S

[28] Rule 10 J

[29] Rule 10 R

[30] Rule 10 Q

[31] Available at http://law.ato.gov.au/atolaw/view.htm?docid=%22psr/ps20111/nat/ato/00001%22,

[32]Available at http://www.cra-arc.gc.ca/E/pub/tp/ic94-4r/ic94-4r-e.pdf,

[33] Available at http://www.hmrc.gov.uk/agents/sop.pdf (Page 319)

[34] Available at http://www.irs.gov/pub/irs-drop/rp-06-9.pdf,

[35] Pilot version for comments, Advance Pricing Arrangements

Approaches to Legislation, available at http://www.oecd.org/ctp/tax-global/4.%20Advance_Transfer_Pricing_Arrangements.pdf,

[36]Phatarphekar, supra note 7, p.34

[37]Phatarphekar, supra note 7, p. 30

[38] Srinivasan, supra note 9

[39] Working document, EU Joint Transfer Pricing Forum- Secretariat Discussion Paper on Alternative Dispute Avoidance and Resolution Procedures, DOC: JTPF/003/REV2/2005/EN, (available on http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/12th-altern_res.pdf,)

[40]Phatarphekar, Supra note 7, p. 31

[41] Srinivasan, Supra note 9

[42] Shanto Ghosh, India Transfer Pricing: A New Path Forward?, available at http://www.deloitte.com/assets/Dcom-Denmark/Local%20Assets/Documents/Vores%20loesninger/Skat/India_Transfer_Pricing_A_New_Path_Forward.pdf,

[43] Pilot version for comments, Advance Pricing Arrangements

Approaches to Legislation, available at: http://www.oecd.org/ctp/tax-global/4.%20Advance_Transfer_Pricing_Arrangements.pdf,

Image source: https://www.dreamstime.com/stock-illustration-advance-pricing-agreement-post-memo-chalkboard-sign-illustration-design-image56994528