NEW DELHI: Despite paucity of manpower available with the government, a record 125 Advance Pricing Agreements (APAs) were signed during FY24, in what experts believe shows the APA teams have become more efficient.
“The government has multiple APA teams spread across the country and with every year, both taxpayers and APA teams are gaining more experience in relation to various international transactions,” said Sanjiv Malhotra, senior advisor, Shardul Amarchand Mangaldas & Co. “This experience and efficiency seem to be a prime contributor for the number of signings going up on a year-on-year basis,” he said. In FY23, the total APAs signed were 95.
Currently, there are four teams under CBDT – based in Delhi, Mumbai, and Bengaluru, who take up both bilateral and unilateral APA applications. The fifth team, set up recently in Gurugram, takes up only BAPA applications.
APAs are pacts signed by two parties – taxpayer and tax administration – in order to determine the transfer pricing methodology for pricing the taxpayer’s cross-border related party transactions for future years, and to prevent any dispute arising from it. They are effective for a maximum period of five years.
APAs can be bilateral, involving CBDT and the tax authorities of another country, or unilateral, which involves the CBDT only. In FY24, the increase in signings was predominantly recorded in unilateral APAs (UAPAs). The total UAPAs signed in FY24 were 86 as compared to 63 in FY23; while the total bilateral APAs (BAPAs) signed were 39 vis a vis 32.
UAPAs are solely driven by the pace at which the taxpayer and Indian APA teams work. The CBDT – without engaging with its foreign counterpart – signs the pact with a domestic firm (taxpayer) undertaking transfer pricing transactions with its offshore entity. But BAPA requires coordination and negotiations with a foreign competent authority team as well. Thus, the timing for closure of BAPA is not entirely controlled by the Indian side, and hence typically, it takes a longer time.
“The signed APAs typically pertain to cases filed in prior years as the APA process comprises several important steps generally spread over a year and beyond,” said Vijay Iyer, partner and transfer pricing leader, EY India.
According to the FY23 APA annual report, Of the 95 APAs signed, the bilateral APAs signed were 32. But these were still significantly lesser than the number of applications filed in that fiscal year. A total of 193 APA applications were filed in FY23, of which 192 were under process – as per the report – meaning the signed ones were filed in the previous financial years.
However, a source told FE that the government did work on a few APAs in FY24, wherein the time from start to finish was “less than 12 months”.
EY India’s Iyer says that the CBDT continuously engages with stakeholders to receive suggestions on how the program can be enhanced and expedited to process more cases annually. “These include fast-tracking renewal cases, an accelerated process for routine services applications, and simplification of the APA approval process within the tax department,” he said.
FE had reported earlier that the government’s plan to fast-track BAPA negotiations is being thwarted by the lack the requisite expertise and manpower to conclude the process, citing official sources. This is despite the Centre setting up a fifth APA team, based in Gurgaon, specifically for the purpose of fast-tracking BAPA negotiations.
The increase in BAPA signings (39 in FY24 vs 32 in FY23) is largely a result of negotiations being concluded for the applications filed in previous years, and not in FY24, said an official source.
There are three stages in conclusion of any bilateral APA. First, a dedicated team examines the applications for the agreement and makes recommendations regarding the methodology for pricing the taxpayer’s transactions to the CBDT. The second step involves the CBDT negotiating the terms of pacts with their counterparts, and the last step is signing of the pact between the tax authorities and their respective domestic taxpayers.
“The government is facing issues with the first step only as there are several pending applications, and only a-third among them are able to move to the second step. This is mainly due to low manpower and lack of expertise,” the source said.
Karishma Phatarphekar, Partner, Deloitte India suggests the government should maintain a clear separation between international tax issues and transfer pricing (TP) considerations within the APA process, to expedite the conclusion process.
“The APA team should primarily focus on determining arm’s length pricing rather than delving into broader tax implications which are not relevant for determination of arm’s length price,” she said. “In many cases, it is often noticed that due other non-TP tax implications, the APA team gets prejudiced in determination of arm’s length price leading to significant delays in churning out position papers.”
Source: The Financial Express
