Transfer Pricing –Advance Pricing Agreement
Introduction: In current scenario it is possible that entity is operating not only in multiple state but also in multiple country; for said purpose it is important to understand whether entity is required to comply any additional law; how income tax will be levied if one of the branches of entity which is operating in tax free zone makes transfer of goods or service to another branch who is operating in taxable zone or vice-versa. In this article we will cover all compliance and related interpretation of transfer pricing.
In previous part we have discussed the methods used for computation of Arm’s Length price, in this part we will cover what is Advance Pricing Agreement.
Advance pricing agreement is undertaken by assessee to determine transaction price or method for computation of transaction price for transactions to be entered with associated enterprise, the said price is approved by department in advance. Now that question that may arise and solutions to it are as follows:
Whether Advance Pricing Agreement entered by assessee will override normal provision for determination of Arm’ length price?
It has been stated that if entity has entered in to an Advance Pricing Agreement than Arm’ length price will be computed in accordance with said agreement and such agreement will be considered over normal provision for determination of Arm’ length price i.e., Advance Pricing Agreement will override normal provision for determination of Arm’ length price.
What will be the validity of Advance Pricing Agreement?
The advance pricing agreement can be valid for five consecutive previous years, but the said cannot be exceeded for more than five years.
On Whom Advance Pricing Agreement will be Binding?
Advance pricing agreement will be binding on person in whose case, and in respect of the transaction in relation to which it has been entered and on Principal Commissioner or Commissioner and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.
In what circumstance it will be non-binding on Income Tax department?
In case if there is change in law or if there is change in circumstances than in that case Advance Pricing Agreement will not be binding. Further in case if it comes to knowledge of department that such agreement has been entered by assessee by stating false facts or misrepresentation than in that case it will be treated as void and transaction price will be determined as if agreement has never been entered.
What are types of matters for which Advance Price Agreement can be entered?
Entity can enter into agreement for determining details of International Transaction to entered, for determining transfer price methodology, for determining arm’s length price, for determining terms to be used in calculation of transfer price or in relation to international transaction.
Whether assessee will be liable for any compliance after entering in to Advance Pricing Agreement?
After entering into advance pricing agreement entity will be required to furnish annual compliance report in quadruplicate to Director General of Income-tax (International Taxation) for every financial year for which advance pricing agreement is entered within 30 days of the due date of filing income-tax return for that year, or within 90 days of entering into an agreement, whichever is later.
Illustration: If agreement is entered on 30th January, 2020 and due for furnishing Income tax return for that year was 30th September, 2021; than what will be due within which annual compliance report is required to be filed by assessee.
As per the provision stated above entity will be required to furnish annual compliance report in quadruplicate to Director General of Income-tax (International Taxation) for every financial year for which advance pricing agreement is entered within 30 days of the due date of filing income-tax return for that year, or within 90 days of entering into an agreement, whichever is later. In this case 90th day after entering into agreement is 30th April, 2021 and 30th Day from due date is 30th October, 2021; therefore, date within which annual compliance report will be required to be furnished by assessee will be later of two date i.e., 30th October, 2021.
Whether once agreement entered can be revised?
It has been stated in provision that agreement entered by assessee can be revised by board on Suo-moto basis or on application of revision made by assessee the competent authority in India or the Director General of Income-tax (International Taxation) on the ground that
One of the conditions which shall be noted is revised agreement shall include the date till which the original agreement is to apply and the date from which the revised agreement is to apply.
Whether there are any circumstances under which agreement can be cancelled?
There are many circumstances where agreement entered by assessee with department can be cancelled, the agreement can be cancelled by board for following reasons:
Department will be required to give opportunity of being heard to assessee before passing order of cancellation. The order of cancellation shall specify effective date of cancellation.
Illustration: Entity has carried out transaction with one of its associate enterprise at transaction price of Rs. 2 Crores, The Arm’s Length price of such transaction is Rs. 4 Crores (Determined in accordance with transfer pricing rules). The entity knowing the fact filled application for advance pricing agreement. The said application is yet not approved, department wants to make addition of such additional amount as Income. Whether it can be done by department as assessee has already filed application for advance pricing agreement?
It has been stated in provision that if assessee wants to enter into advance pricing agreement, he is required to file application for entering into such agreement. Further if advance pricing agreement is entered than it will override all the provision given for computation of transfer pricing. However, it has been specified that mere filling of application by assessee for entering into advance pricing agreement will not be covered stop department from making addition. Therefore, in above case department can make addition to income by Rs. 2 Crores.
In next part we will consider, what is rollback provision and what are the question that may arise in reference to said provision.