Section 92CC of the Income Tax Act, 1961 empowers the Central Board of Direct Taxes (“CBDT”)to enter into an Advance Pricing Agreement (“APA”) with any person. An APA is essentially a contract between a taxpayer and the tax authorities that sets out beforehand the method for determining the arm's length price (“ALP”) or specifying the manner in which the ALP is to be determinedpertaining to transactions between a subsidiary and its foreign parent. The agreement entered into is valid for a period, not exceeding 5 (five) consecutive financial years, as may be mentioned in the agreement.
The Finance (No.2) Act, 2014 amended the Act to permit roll back of APAs for a maximum period of 4 (four) prior years with effect from 1 October 2014. Rollback provisions essentially mean that a negotiated position on pricing of an international transaction reached under the advance pricing arrangement can be applied to a similar transaction for up to 4 (four) years in the past.
The CBDT, on 14 March 2015, has notified the announced Income-tax (Third Amendment) Rules, 2015 (‘APA Roll Back Rules’) to prescribe the conditions, procedure and manner for such roll back mechanism.
As per the APA Roll Back Rules, an applicant who has filed or proposes to file an application may seek a roll back of the APA for the same international transaction for which an APA has been applied or is proposed to be applied.
The APA shall contain roll back provision subject to following conditions:
- the international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies;
- the return of income for the relevant rollback year has been or is furnished by the applicant before the due date of fling return under Section 139(1)of the Income Tax Act, 1961;
- the report in respect of the international transaction had been furnished in accordance with section 92Eof the Income Tax Act, 1961;
- the applicability of rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant; and
- the applicant has made an application seeking rollback in Form No. 3CEDA in accordance with prescribed Rule. An additional filing fee of INR 5,00,000 is to be paid along with the rollback application.
An applicant can apply for rollback provision even in those cases wherein agreement has been entered into prior to January 1, 2015 or wherein an APA application has been filed prior to 1 January 2015. In such cases, the applicant was initially required to request for roll back provision on or before 31 March 2015. However, considering that the window for filing the rollback applications was very short i.e. just 16 days, the CBDT has issued a press release declaring the extension of the deadline for filing of rollback forms to 30th June, 2015. The formal notification in this regard is awaited.
The APA rules have also been amended to make the APA pre-filing consultation optional for a potential APA applicant.
However, the roll-back provisions shall not be applicable in case the international transaction has been subject matter of an appeal and the Income Tax Appellate Tribunal has passed an order disposing of such appeal before signing of the agreement. Roll back is also not applicable if the application of the roll back has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said.
The incorporation of the rollback provisions in the APA program in India is an attempt to align with the best global practices and a positive attempt to resolve pending litigation and extending certainty to the taxpayers for at least 9 years. What would be important at this stage for the success of the Rollback program is for the CBDT to facilitate the practical implementation of the Rules.