Transfer Pricing Alert :- Highlights and insights from the 6th annual report on Advance Pricing Agreements released by the Central Board of Direct Taxes

BACKGROUND

The Central Board of Direct Taxes (CBDT), India’s apex tax administration, had introduced the programme of Advance Pricing Agreement (APA) in 2012. In December 2024, the CBDT released the 6th annual report on the APA programme, highlighting the key quantitative metrics and qualitative aspects underlining the progress made during fiscal year (FY) 2023-24. 

An APA is an agreement between the CBDT and the taxpayer, which, in relation to an international transaction, either determines the arm’s length price (ALP) in advance or outlines the manner of determination of ALP before the concerned transaction is entered into. It is one of CBDT’s foremost initiatives towards fostering a non-adversarial tax regime with two key objectives – tax certainty and avoidance of double taxation.

The APA program allows the Indian tax administration to enter into APAs with taxpayers in respect of their international transaction for a maximum period of 5 years. Post notification of the APA program, rollback provisions were introduced in March 2015, whereby the taxpayer could rollback the APA to earlier years, subject to a maximum of 4 years prior to the first year of the APA period. Accordingly, the Indian APA program allows the taxpayer to obtain certainty in matters of transfer pricing for a total period of 9 years.

HIGHLIGHTS OF THE ANNUAL REPORT

This annual report covers ample numerical data concerning various important aspects, cataloguing the popularity and growth of the APA program in India. Importantly, it also indicates the challenges faced during the year and reassures the commitment of the CBDT to take necessary steps to address these challenges.

Statistically, the key highlights of this report were: 

  • FY 2023-24 was a landmark year for the CBDT as 125 APAs were signed during this year - the highest-ever APA signings in any FY since the launch of the program. Further, the signing of over 100 APAs in a FY was a milestone achieved this year.
  •  Out of the 125 APAs signed, 39 were Bilateral APAs (BAPAs), which is the maximum number of BAPAs signed in any FY to date.
  •  Out of the 86 Unilateral APAs (UAPAs), 17 included a rollback term and out of the 39 BAPAs, 17 included a rollback term.
  • The service sector was the largest contributor to the UAPAs (almost 64%) as well as BAPAs (almost 54%) signed.
  • A majority of these service sector companies were captive, engaged in software development (SWD) and Information Technology enabled services (ITeS). Further, some of the companies were also engaged in engineering design services, contract R&D services, and Knowledge Process Outsourcing (KPO) services.
  • In terms of the nature of transactions covered, provision of SWD / IT support / ITeS / back-office support services along with reimbursement / recovery of expenses formed the major chunk. Accordingly, Transactional Net Margin Method (TNMM) and Other Method were the two most widely agreed upon methods for determination of ALP.
  • 74 associated enterprises (AEs) were covered across the 86 UAPAs signed, with the majority of the AEs located in USA, Singapore, UK, and Australia. Further, most of the BAPAs signed were with USA.

INSIGHTS 

The vast reach of the APA programme is underlined by the fact that the total years (including rollback years) of tax certainty covered by the APAs signed until 31 March 2024 is 3,430 years (with 714 years covered by APAs entered in FY 2023-24). This, coupled with the income and tax certainty contributed by APAs entered during FY 2023-24 (estimated at INR 25,000 crores / 250 billion resulting in tax certainty amounting to approximately INR 7,500 crores / 75 billion) further points to the substantial progress being made by the programme.

This past year marked a significant milestone in India’s tax administration, showcasing the Government’s commitment to fostering a business-friendly environment and reducing transfer pricing disputes. 

Even the BAPA applications have been increasing year-on-year, especially in the last two FYs. FY 2023-24 witnessed the highest number of BAPAs ever signed in a year, and although too early to declare this as a trend and draw conclusions therefrom, nevertheless, the growing shift towards BAPAs reflects taxpayers’ confidence in timely and efficient resolution with India’s tax treaty partners.

While a fair share of the statistics infuse positivity around the programme, there are still areas which need improvement. The average duration for closure of applications was around 54.65 months for UAPAs and approximately 63.11 months for BAPAs. Hence, clearly there is still scope for improvement in this regard.

BDO IN INDIA COMMENTS

The programme delivered excellent results in FY 2023-24. The tax certainty provided during this year itself covered more than 700 FYs. 

As indicated above, the timely processing of applications is an extremely crucial metric for the achievement of the programme’s objectives. While certain applications are under process, the CBDT has been putting in significant efforts to reduce the overall turnaround time. This is evident from the number of APA conclusions steadily rising. The government is closely monitoring duration of application processing, reasons for taxpayers withdrawing applications / not being able to reach an agreement with tax authorities, etc., in order to enhance the success even further.

All in all, the APA programme is one of the most important dispute resolution mechanisms introduced by the CBDT with a view to bring in ease of doing business and reduce the burden of litigation for not only the taxpayer, but also the government itself. Further, with the imminent advent of complicated international tax measures such as Pillar One and Pillar Two under BEPS, it is vital that dispute resolution measures are implemented even more effectively. 

With this context, the programme, which is now in its second decade of operation, is beginning to take vast strides toward achievement of its goals, primarily being resolution of complex transfer pricing issues which lead to long drawn litigation.