SKP Tax Alert
11 September 2018
Advance Pricing Agreement (APA) Program of India - Annual Report 2017-18

The second APA Annual Report (2017-18) issued by the Central Board of Direct Tax (CBDT) on 31 August 2018, provides key facts and statistical details. It furthermore adds that the APA program, which was introduced six years ago, has turned out to be a huge success in the Indian context.
 
Key findings of the APA Annual Report 
  • No. of APA applications and sign-offs/concluded
    The report states that the total count of APAs signed till 31 August 2018 was 219 (which included 199 Unilateral APAs and 20 Bilateral APAs).

    The successful adoption and trust within the APA program can be gauged by the total of 985 applications that were filed till 31 March 2018. These included both Unilateral and Bilateral APAs, the details of which are provided in the table below:
    Financial Year (FY) Unilateral APA (UAPA) Bilateral APA
    (BAPA)
    Applications filed Signed Applications filed Signed
    2012-13 117 0 29 0
    2013-14 206 5 26 0
    2014-15 192 3 14 1
    2015-16 113 53 19 2
    2016-17 78 80 23 8
    2017-18 115 58 53 9
    Total 821 199 164 20
     
    For the current year (FY 2017-18), 168 applications were filed including 115 UAPAs and 53 BAPAs.
     
    Also, for FY 2017-18, the report indicates that there was a dip in the number of APAs signed (27.5%), which is mainly attributable to the fact that concomitantly many complicated cases were handled during the period with limited workforce. 
  • Backlog of cases pending sign-offs/conclusion
    The report reveals that a total of 684 applications (i.e., 985 minus 219 signed agreements) are pending to be disposed off, and there is a huge backlog that needs to be resolved/ concluded by the APA team.

    The government in this report has assured that necessary actions are being taken to work on the pending cases, and a road-map is laid down to work on the shortage of the manpower within the APA teams.

     
  • How has Indian APA program fared in comparison with other countries
    India has concluded 219 APAs in five years, while China has signed off 139 APAs in 12 years (between 2005 and 2016). In addition, China has renewed 20 Agreements during the period between 2011 and 2016. Through the 219 APAs signed-off so far, CBDT has managed to provide cumulative tax certainty for 1428 years (which includes 387 years covered in rollback period of concluded APAs).

    India concluded UAPAs in less than 32 months and BAPAs in less than 42 months on average, which is better than the world average-time taken
    [1] to conclude the APAs. The report also explains that the nature of the APA application, the responsiveness of the taxpayer/ APA team and the complexity of transactions have a bearing on the time taken for concluding the APA.
     
  • BAPAs and the countries covered
    Out of the total 821 UAPAs filed originally (i.e., from FY 2012-13 to FY 2017-18), 35 were converted into BAPAs.

    Separately, 164 BAPAs were filed during FY 2012-13 to FY 2017-18, which later on increased to 197 due to the conversion of UAPAs to BAPAs (i.e., 33 UAPAs were converted into BAPAs). During the FY 2017-18, the count of BAPAs signed was 9, and BAPA application filed till date involved countries like the US, Japan, South Korea, the UK, Switzerland, Singapore, the Netherlands, Canada, Australia, New Zealand and Finland.


    The report specifically highlights that FY 2016-17 and FY 2017-18 have seen a marked increase in the number of BAPAs signed by Indian taxpayers after the conclusion of Mutual Agreements with the Competent Authorities of Treaty partners. The other reason behind the development was that the US Competent Authority had opened up the BAPA program with India from February 2016. Furthermore, it would be encouraging to know that India has shown a willingness to accept BAPAs even in the absence of Article 9(2) or its equivalent (correlative adjustment) within the tax treaty with the intent of avoiding double taxation. 
  • Sector/nature of transactions covered, method used and the nature of transactions
    The services sector has been the largest contributor to India’s international trade constituting nearly 69% of the economic activity for the signed UAPAs and 78% for the BAPAs.


    The total number of international transactions covered under UAPA and BAPA were 25 and 18 respectively, which mainly comprises of:
    • Provision of IT-enabled services;
    • Provision of software development services;
    • Provision of engineering/engineering-support services;
    • Provision of contract R&D Services; 
    • Provision of KPO Services;
    • Provision of marketing support services and Intangible related transactions including royalty; and incurring of AMP expenses, etc. 
       
    The most widely used transfer pricing method to achieve certainty with an APA for the covered international transaction is Transactional Net Margin Method (TNMM), which is evident by the data contained in the APA report. The data shows that TNMM was used in 116 out of 164 transactions that were covered in APA program till 31 August 2018.
 
[1] For example US had an average time of 40.4 months for concluding an UAPA and around 46.9 months for concluding BAPA in FY 2017.
SKP's Comments
It is conservatively estimated that the 219 signed APAs have resulted in additional income of about 1382.93 million USD approximately. This translates to a tax payment of about 414.88 million USD approximately without getting into any litigation or dispute. The key facts and statistical details in the APA Annual Report provide a heads-up that APA program introduced by the Government, 6 years back, is clearly backing its specific long-term vision with which the Government is moving forward on its reform agenda.
 
The large number of APA applications filed in FY 2017-18 also includes renewal applications for the first cycle of APAs expiring in FY 2017-18. This itself speaks volumes of the successful implementation of the APA program by CBDT, and also indicates that the APA program has evolved/ matured over the period and has gained the confidence of the taxpayers.
 
The statistics indicate that taxpayers are looking at APA as an alternative dispute resolution mechanism. Also while they are seeking to get certainty on their international transactions, they are also willing to invest in the APA program to resolve the legacy transfer pricing issues.
 
While, the APA program aligns itself with the Government’s vision and provides certainty to the taxpayers, with a rationalization of the safe harbor rules and reduced industry-wise margins, it will be very interesting to see how the Government takes the next leap to keep up with the expectations of taxpayers.

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