APA Report Card @5 - Dawn of a New Era in TP Litigation?

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In a recent and welcome initiative, CBDT released its first ever APA Annual Report (2016-17) providing a snapshot of the statistical and qualitative aspects of the Indian APA program. The Report indicates that the Indian APA program has matured over the last 4 years since its introduction and the signing of a record number of 152 APAs stands testimony to that fact. The Report also reveals that the APA office has been actively moving the inventory of cases (as evident from an impressive 29 months processing time for inking unilateral APAs as against USA’s average timeline of 34 months for unilateral APAs) but there are still 535 applications under processing as on March 31, 2017 (including 47 applications from the first round of filing in FY 2012-13). Stressing that the Indian APA program is poised to move ahead quicker than it has done so far, CBDT assures that the Indian Govt. is committed to strengthening the program by providing adequate resources so as to create conducive environment for global corporate giants to do business in India.  

Do you think APA closures are a turning point in the transfer pricing litigation landscape and if there are any other focus areas? What do you think would be outlook of tax authorities in review of annual compliance report to be filed by taxpayers? What do you think will be the impact on the Indian APA program in the post-BEPS world, e.g. BEPS guidance on profit split and intangibles?

Rahul Mitra
(Partner & National Head, Transfer Pricing & BEPS, KPMG India)

Ever since transfer pricing was introduced in India in 2001, it had become the single largest source of tax disputes & litigation for MNCs operating in India, thus positioning the Indian Revenue as one of the toughest Revenue Administrators in the world. However, the introduction of advance pricing agreement (APA) programme in 2012; and its successful administering & monitoring by the Indian Revenue over the last couple of years, have significantly changed the scenario, as the Indian Revenue has resolved more than 150 APAs till date in a most non-adversarial manner through congenial negotiations with taxpayers & Revenue Authorities of other countries. Taxpayers have reposed significant confidence in the new image of the Indian revenue, as manifested in the APA programme; and have filed more than 800 APA applications over the last five years. KPMG in India had conducted a survey within the industrial fraternity for gathering the views of the industry on the success of APA programme; and also suggestions for the improvement thereof. We had relayed the results of the survey to the Indian Revenue, who listened to the feedback & suggestions with care & interest; and gave their comments as well. The APA survey report released by us incorporates the views & suggestions of the...

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Vishweshwar Mudigonda
(Partner, Deloitte Haskins & Sells LLP)

It is a commendable job by the Central Board of Direct Taxes and the taxpayers to have signed out 152 APA applications within a span of 4 financial years from the introduction of APA program in India. The average period of 29 months and 39 months for closing Unilateral and Bilateral APA applications respectively, is arguably the shortest time span taken by any country to close on the application. Overall, the Indian APA programme has been successful in gaining the confidence of the taxpayers as a mechanism for achieving tax certainty. 

While, the number of APA applications filed over the period and the number of APA applications successfully completed stand testimony to the success of the program, one of the possible reasons for tremendous response to India APA programme is lack of effective dispute redressal mechanism which resulted in long drawn litigation for the MNEs, and APA option was a respite to the MNEs. 

Currently, majority of APA applications cover transactions that are simple and routine (about 72 % of applications are in the area of services (1), possibly where the Indian subsidiaries work on a cost plus basis). Generally, APAs are meant for complex transactions....

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Kunj Vaidya
(Leader, Transfer Pricing, Price Waterhouse & Co LLP)

Over the past 4-5 years, the experience with APA program has been quite positive and the published statistics are indicative of that. The Indian APA team has done a commendable job on this front and has helped bringing tax certainty, a big concern for lot of MNCs.   

Having said the above, and taking into account the ongoing global developments in the TP arena, it makes sense to keep the following perspectives in mind going forward: 

  • Courtesy the treaty re-negotiations with Singapore and Korea, bilateral APAs and TP related MAPs involving these key trade partners of India, are now on the table.  However, there continue to be other key trade partners of India (such as Germany and France), where it makes sense for India to embrace minimum standard on dispute resolution as recommended by OECD BEPS Action Plan 14 and allow bilateral APAs and MAPs.
  • India has signed 152 APAs, with 11 of them being bilateral APAs.  This is good progress.  However, it would be important for India to work towards closure of more bilateral APAs.  This should help improve India's credentials and standing from a dispute resolution perspective.  Towards that end, it has been heartening...

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Karishma R. Phatarphekar
(Partner & Transfer Pricing Leader, BMR Associates & LLP)

1. Do you think APA closures are a turning point in the transfer pricing litigation landscape and if there are any other focus areas? 

Indeed, APA has been the most successful initiative of the Indian tax authorities towards dispute resolution on transfer pricing litigation as it has imparted certainty on treatment of TP issues to the taxpayers and also ensured appropriate tax collections to the Government.  This Annual Report would indeed enhance the global investor community’ faith in  India’s commitment to the Minimum Standards stipulated per the BEPS Action 14 - Making Dispute Resolution Mechanisms More Effective  and also put India in a better light per any peer review process on its adherence to the minimum standards. 

While the success of the APA programme is indeed a great achievement it may be viable to also focus some attention on Safe Harbours especially in view of the long-standing expectation of rationalizing the safe harbor margins especially for the IT/ITeS sector.  

Further, on the APA front, the Government may as well consider accepting bilateral APAs irrespective of the existence of Article 9(2) in the respective countries’ tax treaty to consider a quick resolution. 

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Milind Kothari
(Managing Partner and Head of Tax, BDO India LLP)

On completion 5 filing cycles of APAs, the first Annual Report published by the CBDT on the subject this month showcases an encouraging success story. The APA outcomes promises to go a long way in reducing the potential transfer pricing litigations significantly and ease out the pressure on the already over-burdened revenue authorities, tax tribunals and courts and most importantly, deliver tax certainty to taxpayers that is much sought after. 

The IT and ITES transactions account for a significant proportion of total APA signed so far where traditional dispute resolution mechanism or safe harbor route would have under-delivered. Notwithstanding its success, it is hoped that the safe harbor rules in India are recalibrated to relieve undue pressure on the APA program. 

While APA route delivers, potential irritants remain in the law. A taxpayer is still obligated to file the annual compliance report to the transfer pricing officer to ensure that the transfer pricing methods, results, critical assumptions and other terms and conditions are in line with the APA agreed with the CBDT. While the taxpayers would comply with the ACR by filing the Form 3CEF, the revenue authorities ought to ensure that the compliance audit does...

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Rakesh Nangia
(Managing Partner, Nangia & Co LLP )

So far, India was unceasingly considered as the non-adversarial tax country.  However, with introduction of various new policies in relation to ease of doing business in India and to establish a predictable and non tax-adversarial regime, the Government of India, to a certain extent, has achieved in regaining the confidence of foreign investors. Through introduction of APA program, not only the taxpayers have managed to get certainty over transfer pricing issues for five or nine years but the Indian tax administration has also been able to divert resources away from the audit and litigation processes to more productive work. With applaudable performance of the Indian APA team, the APA program in India has indeed managed to impart flexibility in developing practical approaches for complex transfer pricing issues and thus, has turned out to be a huge success amongst the taxpayers.  Further, the APAs are also gaining ingratiatory value in various rulings of the Indian courts.   In the case of PCIT vs. Ameriprise India Pvt. Ltd. [TS-174-HC-2016(DEL)-TP] the court has taken a due cognizance of the APA entered into by taxpayers with CBDT in subsequent years.  

With the success of Indian APA program, the India Government is still required...

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Arun Chhabra
(Partner, Walker Chandiok & Associates)

After a somewhat slow start, the pace at which APAs have been signed, in the recent years, is highly commendable. The response to resolving impending and protracted litigation through APAs has largely been positive. Although, there is a huge backlog of applications pending to be processed, APA program continues to be a viable option for taxpayers to avoid long drawn and costly litigation. 

Safe harbor regime is another dispute avoidance mechanism. Although introduced almost four years back, Safe harbor scheme has not seen a lot of participation from the taxpayers owing to high margins / price. There have been talks of revision/rationalization of the safe harbors. A more liberal safe harbor mechanism would help in reducing litigation and in filtering out APA applications for routine issues, thereby reducing the work load of the APA directorate. 

The annual compliance report filed by the taxpayer is intended to serve the purpose of ensuring compliance with terms of the APA agreement. One hopes that the tax authorities would do a limited scrutiny so as to satisfy themselves that assesse is in compliant with the various terms and conditions of the APA Agreement, instead of doing a detailed scrutiny and analyzing the international transactions critically thereby diluting the effectiveness of the APA resolution. 

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