Advanced Pricing Agreement (APA) is a process in which a company and tax authority mutually agree upon an appropriate transfer pricing methodology for a specific set of transactions. It is a step towards avoiding transfer pricing disputes between the two parties. In India, the APA program was introduced by the Central Board of Direct Taxes (CBDT) in 2012 under the Direct Tax Code.
Recently, the government has introduced a pilot project called the Advance Pricing Agreement – Profit Attribution to India PIB (APA-PA). This project aims to provide a framework to determine the profits attributable to a permanent establishment (PE) in India through the use of profit attribution methods. The APA-PA applies to non-residents who have a PE in India, and it is available for financial years starting from 2021-22.
The APA-PA is a welcome step towards providing clarity and certainty to non-residents who have a PE in India. The profit attribution methods used under the APA-PA include transactional net margin method (TNMM), profit split method (PSM), and any other profit attribution method deemed appropriate by the tax authorities.
Under the APA-PA, the taxpayer and the tax authorities enter into an agreement regarding the profits attributable to the PE in India. The agreement is binding, and it provides certainty to the taxpayer on the profits to be attributed to the PE in India. This certainty helps the taxpayer plan its tax affairs better and avoids the possibility of future transfer pricing disputes.
The APA-PA also provides for a rollback mechanism, which allows the taxpayer to apply the agreed-upon profit attribution method for past years as well. The rollback mechanism is subject to certain conditions and is available for a maximum of four years preceding the financial year in which the APA-PA was entered into.
In conclusion, the APA-PA is a positive step towards providing certainty and clarity to non-residents who have a PE in India. The APA-PA provides for a framework to determine the profits attributable to the PE in India and helps avoid transfer pricing disputes. The introduction of the APA-PA is a positive development and will enable taxpayers to plan their tax affairs better.