With globalization of the economy the trade between parties across the boundaries of the nation has also ascended. The augmentation of trade has also given rise to complex issues that emerge from transactions entered into between related parties in different countries belonging to the same group. The problem in this respect needs a certain solution wherein both related parties has entered in to a contract and same needs to analyze from the point of view of payment of tax for the same.

Transfer pricing, as provided in Section 92, 92A to 92F, of the Income Tax Act of 1961 is the process of determining Arm’s length Price for inter-country transactions between two or more related parties, so that a fair price is arrived. Restrictions relating to Transfer pricing are in place to ensure that the transaction is entered at fair price, that is, the price that will be charged in case of unrelated parties. Transfer pricing gives rise to lot of litigation. In recent assessments of transfer pricing, Tax authorities have raised huge tax demands.

Introduction of the Advance Pricing Rules can be seen as an attempt to reduce the frequency of litigation relating to transfer pricing.

Advance pricing agreements basically refers to agreement between tax authorities and tax payer ahead of time, clearly spelling out in advance the transfer pricing methodology, i.e. an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events), which will be complied by the tax payer .

The Finance Act, 2012 (Act) has brought the provision related to Advance Pricing Agreement and the same came into effect on 1st July, 2012. The provisions on Advance Pricing Agreement provided in the Act authorized Central Board of Direct Taxes to prescribe a scheme specifying the manner in form, procedure and any other general matter in respect of APA. The Notification on Advance pricing Rules1 provides a mechanism for entering into Advance Pricing Agreement. The said Notification on Advance pricing Rules is a welcome step and was highly awaited by tax authorities and industry in general.

The main features of Adv ance Pricing Rules are:2

  1. Eligibility:

A person undertaking an International transaction or contemplating to enter into an International transaction shall be eligible to enter in to an agreement under the APA rules.

  1. Application for APA:

Application for an APA is required to be made in Form No. 3CED to the Director General of Income Tax (DGIT) (or the competent Authority in the case of bilateral or multilateral APA) along with requisite fee. A company planning to enter into an APA, is required to furnish details of the proposed international transaction, including its structure and information about the company and the group.

  1. Method to be applied:

The most appropriate method can be one of the six methods provided in the Act mentioned herein below:

  • Comparable uncontrolled price method;
  • Resale price method;
  • Cost plus method;
  • Profit split method;
  • Transactional bet margin method;
  • Such other method as may be prescribed by the Board.
  1. Change in ‘Critical assumptions’:

In case of change in one of the critical assumptions, on which such APA was entered, the APA shall not be binding on the Board or the taxpayer,

  1. Pre-filing Consultation available:

Any person proposing to enter into an APA shall make an application in writing in form 3CEC to the DGIT. Such pre-filing consultation shall among other things determine the scope of the agreement, identify the suitability of International transaction for the agreement, discuss broad terms of the agreement.

  1. Fee Applicable:

The fee schedule for making the application is as follows: 

Click here to view schedule.

  1. Withdrawal of Application:

The applicant may withdraw the application of APA in Form No. 3CEE at any time before the finalization of the terms of the agreement.

  1. Time frame for applying under these Rules:

If an application is made for an International transaction of continuing nature, then such application should be made before the first day of the previous year relevant to the first assessment year for which the application is made. In any other situation, such application should be made before entering into the International transaction under consideration.

  1. Terms of the agreement:

The terms of the agreement will include international transaction, transfer pricing methodology, determination of Arm’s length price, critical assumptions, any other conditions, other than those provided in the act.

  1. Amendments to application:

An applicant may request in writing for amendment to an application at any stage, before the finalization of the terms of the agreement.

  1. Annual Compliance Report:

The assesses shall furnish an annual compliance report to Director General of Income Tax (International taxation) in Form 3CEF for each year covered in the agreement.

  1. Compliance Audit of the Agreement:

Transfer pricing officer having Jurisdiction over assessee shall carry out the compliance audit of the agreement for each of the years covered in the agreement.

  1. Revision of Agreement:

The agreement may be revised either soumoto by Board or on request of assessee, due to change in critical assumptions, failure to meet a condition, subject to which an agreement has been entered, change in law, request from competent authority in other country requesting revision of agreement in case of bilateral or unilateral agreement.

  1. Renewal of Agreement:

An agreement may be renewed after making an application for a new agreement, all procedure relating to fresh agreement will be carried, however no pre-filing consultation is required.

  1. Bilateral and multilateral Advance pricing agreements:

In case of bilateral and multilateral APAs, the APA process would be required to be initiated by Associated Enterprise in the other country. Then the Competent Indian Authority will be required to ascertain willingness of the of the Competent authority in the other country for initiation of negotiations . The applicant taxpayer will not be entitled to be part of discussion between the competent authority in India and the Competent authority in the other country or countries.


Advance pricing Rules have been introduced with the objective to provide much required certainty on transfer pricing related issues. Nationally as well as internationally, Advance Pricing Agreement mechanism has been recognized as one of the most effective tool to manage critical transfer pricing issues. Moreover, APA team shall include experts in economics, statistics, law or any other field in order to go to the root of the transaction in a more refined and technical way; this will ensure accuracy, transparency in APA mechanism. Finally, it can be expected that litigation arising from transfer pricing related issues will reduce and hence same will go a long way in increasing confidence of international investors in Indian Market.