SKP Tax Alert
17 March 2015 | Volume 7 Issue 23
Indian government notifies rules for Advance Pricing Agreement rollback provisions

The Indian government introduced provisions relating to Advance Pricing Agreements (APAs) in the Income-tax Act, 1961 (the Act), with effect from 1 July 2012, vide the Finance Act, 2012.  It was undoubtedly an important development from the perspective of taxpayers with regards to gaining certainty for transfer pricing matters. However, the provisions then did not include rollback provisions.

The rollback mechanism was brought into the Act vide the Finance Act, 2014, with effect from 1 October 2014.  While the provisions for Budget 2015 have been presented by the Finance Minister, everyone was surprised that the rollback rules were not prescribed or provided for, especially with the new government at the helm of affairs.

The Central Board of Direct Taxes (CBDT) has now announced detailed rules explaining the rollback provisions and procedures giving effect to those provisions.

Key features of the rules for rollback and SKP's comments
  • The outcome of an APA can be made applicable backwards for four years preceding the first year covered under the APA. As an example, it suggests that if the applicant files an application for an APA covering FY 2015-16 to FY 2019-20 and also applies for a rollback, the rollback years would cover the period from FY 2011-12 to FY 2014-15.  It essentially covers a period of nine years in totality under the APA.
  • For the rollback years, the APA may provide for determining the arm's length price (ALP); or specify the manner in which the ALP shall be determined.
  • The application for rollback applicability to be made in a separate form (Form 3CEDA) along with the main APA application. Regarding the APA applications filed prior to 1 January 2015, the application for rollback can be made before 31 March 2015 or by entering into an agreement, whichever is earlier. Considering that the timeline for filing an APA application to make it applicable for FY 2015-16 onwards is soon approaching i.e. 31 March 2015, it could be a daunting task for applicant companies to take a decision and also to comply with requisite procedural formalities in the next two weeks.
  • An additional amount of INR 500,000 (approximately USD 8,000) to be paid as the fee for applying for rollback, which is to be accompanied with the application for rollback.
  • The transaction/s under the years of rollback should be the same as covered under the APA application.
  • The rollback should be applied for all the years in which international transactions have been undertaken. The choice to select particular years for rollback if a transaction has been entered into during all the four years doesn't appear to exist. However, in the joint reading of the aforesaid rule and the prescribed form for rollback (Form 3CEDA), it is not entirely clear whether rollback can be selectively applied for.  Further clarity in this regard is expected.
  • The effect of rollback should not result into reduction in profit or increase in loss for the rollback years. While this was expected, essentially it is denoted in cases where applicants have adopted transfer pricing positions in previous years on a conservative basis, whereas, the outcome of the APA meets their expectations, still for the rollback years, the APA outcome cannot be applied if it results into reduction of profits or increase in losses for those rollback years.
  • The return of income and the Form 3CEB (CA certificate reporting the transactions entered into with associated enterprises) should have been filed by the statutory due dates for the rollback years.
  • In case the issue of determining the arm's length price for the rollback year is pending before the Income-tax Appellate Tribunal (the Tribunal) and it passes an order before signing the APA, the rollback would not be applicable for that particular year. Further clarity is required in relation to cases where the Tribunal has 'set aside' the matter and while technically the Tribunal has passed an order, the applicant may not be able to benefit from the rollback provisions.
  • Once the APA (with the rollback) is in place, the return of income filed for rollback years should be revised and the modified return should be furnished. All the appeals lying at various levels for the rollback years, involving the issue which is the subject matter of the rollback provision, shall be withdrawn.
  • In case the rollback provision cannot be made effective on account of failure from applicant, the agreement shall be cancelled. It seems like a stringent provision and taxpayers should carefully study the rollback rules in light of the specific facts of their case before applying for the rollback.
  • Pre-filing consultation is now made optional. While the notification mainly talks about the rollback provisions, one important change brought about in the APA regime, is that now a taxpayer can directly make a main application, with or without the pre-filing meeting. Earlier, the pre-filing application and consultation was compulsory which now is at the choice of the taxpayer.

Concluding remarks
Aspirant APA applicant companies were seeking detailed rollback rules a bit early to provide for enough time for them to comply with rollback formalities. Also, it would have been a welcome addition, if the government had given an option to the taxpayer to choose whether it wishes to apply for the rollback after negotiation and conclusion of an APA.

Nevertheless, it's a welcome move on the part of the Indian government and could go a long way in reducing transfer pricing litigation and the burden of courts in India.

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