Will APA address questions arising out of Texas MAP ruling?

Taxsutra has recently reported a ruling in case of Texas Instruments India P Ltd [TS-655-ITAT-2012(Bang)-TP]. In this case, a huge transfer pricing addition was made during assessment. The assessee (an IT company) obtained dispute resolution under MAP procedure available under US tax treaty. As per the MAP arrangement, the arm’s length margin was determined at 17.5% on ‘operating costs’. During assessment, the AO had also made a disallowance in respect of loss due to damages to computers during shipment. The AO held that the loss was capital in nature and not allowable as deduction. ITAT had confirmed this conclusion. Before ITAT, the assessee made a claim that while computing transfer pricing adjustment, this loss should not be deducted, treating it as ‘non-operating’ cost. The assessee contended that if this loss is excluded from operating cost, there would be corresponding decrease in arm’s length adjustment determined by the TPO. On this issue, ITAT remitted the matter back to the CIT(A). ITAT directed the CIT(A) to consider if the ALP could be altered after accepting MAP resolution passed by Competent Authority.

On a reading of this ruling, a question immediately comes to one's mind is whether there was any guidance available in MAP agreement on determination of operating costs. The ruling however has not discussed this aspect or the terms of MAP arrangement in detail. But, with availability of APA mechanism under Indian tax law, these issues assume a great significance.


APA rules provides that APA should state international transactions covered, agreed transfer pricing methodology, determination of ALP, critical assumptions, conditions agreed if any, etc. APA can be entered into for a period upto 5 years. If we consider entering of APA in the facts similar to Texas Instrument case, it may not be possible to predict incurrence of costs like loss on damages in shipment, etc. It would be interesting to see what would be resolutions for such disputes between the assessee and IT Department. Would it result in revision or cancellation of APA? Would it amount to change in critical assumptions? How would the TPO treat this issue while conducting annual compliance audit? If TPO does not accept the claim of the assessee, would there be an addition to assessed income? Would this again lead to litigation, despite entering into APA? Can the assessee approach appellate authorities for such issues?


Though no clear answers to these questions are readily available, it is crystal clear that the taxpayer has to be very careful while negotiating terms of APA.