Introduction

As a major boost to multinational companies located in Korea and doing business in India, the Central Board of Direct Taxes (CBDT) has clarified that the roll back provision would be available for applications under bilateral Advance Pricing Agreement (APA) under the India-Korea Double Taxation Avoidance Agreement (DTAA), involving international transactions with associated enterprises in Korea for the APA period beginning Financial Year (FY) 2017-18. This goes in line with the agenda of the government to make India an easier place to do business and inspire confidence in Korean companies for resolving transfer pricing disputes.

Background

A revised DTAA between India and Korea for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to taxes on income was signed on 18 May 2015 and came into force on 12 September 2016. Article 9(2) of the revised India-Korea DTAA provides recourse to the taxpayers of both countries to apply for Mutual Agreement Procedure in transfer pricing disputes as well as apply for Bilateral APAs for the APA period beginning FY 2017-18.

In light of the above, CBDT has received queries from taxpayers regarding availability of rollback provision in respect of bilateral APA applications for the period beginning FY 2017-18.

Requests for a rollback provision are to be processed in accordance with Section 92 CC (9A) of the Income Tax Act 1961 (IT Act), and the rules framed thereunder.

Khaitan Comment

The APA provisions were introduced in the IT Act in 2012 and the roll back provisions for dispute redressal were introduced in 2014. An APA permits taxpayers and tax authorities to mutually agree on the arm’s length price for a related party transaction with associated enterprises. Prior to the notification of the rollback provision, the APA provisions were applicable for 5 (five) prospective financial years from the date when the APA has been applied. Post the applicability of the roll back provision, an APA would be applicable for 5 (five) prospective years as well as immediately preceding 4 (four) years, thereby ensuring that there is certainty to the taxpayer for a maximum period of 9 (nine) years.

To illustrate, if an applicant had filed for an APA on 31 March 2017, it would become effective for five prospective years, starting 1 April 2017 that is FY 18, FY 19, FY 20, FY21 and FY22. However, after the availability of a roll back provision, in addition to these years, the taxpayer under the India- Korea DTAA can now also apply to cover four past years in the same APA application that is FY 14, FY15, FY16 and FY17.

A retrospective applicability of the APA would imply that such cases do not need to go through the domestic litigation system which can be a long drawn process. Overall, with the allowance of the roll back provision, the government has enabled Korean companies doing business in India to manage transfer pricing disputes in an effective manner.