• In case of a multilateral APA, if negotiations with one or all of the countries fail, the applicant can opt for a unilateral APA or a multilateral APA, not involving the country with which agreement could not be reached.
• The taxpayer does not have to compulsorily enter into an APA for all its international transactions. However, if the transactions are intrinsically linked to each other such that they cannot be benchmarked independently, the tax administration can inform the applicant that these transactions need to be covered in the application and the fees need to be calculated accordingly.
• History of the taxpayer’s case is one of the several factors looked at by APA authorities during the negotiation process. However, as they are not bound by this, it is not necessary that the position taken in the past shall guide the APA process.
• An amendment to the APA application can be made at any time before it is finalised as long as it does not alter the nature of the original application. The Board has clarified that in case of a unilateral APA, an application can be amended before the draft agreement is sent by the DGIT (International Tax) to the Board and in case of a bilateral/multilateral APA, before the MAP arrangement is sent by the Competent Authority to the Board.
  
  Further, it has been clarified that a unilateral APA maybe converted into a bilateral/multilateral APA before finalisation of the terms of the agreement and not thereafter. This will not be considered as altering the nature of the original application.

• The information filed by the applicant in course of the negotiation process may be shared within the Income Tax Department in line with international practices and also according to the provisions of the Income Tax Act, 1961 (the Act). Thus, there are no firewall provisions.
• During the negotiation phase of the APA, the regular provisions of the Act will continue to apply to the applicant until a modified return is filed after entering into an APA. However, once the APA is entered into, the applicant is only required to maintain documents so as to satisfy the terms of the APA.
• There is no option to appeal against the CBDT’s decision of cancelling the agreement under the Income Tax Act. However, one may resort to constitutional remedies against the CBDT’s decision.
• The terms of the APA would not apply to prior periods that are pending audit and the Transfer Pricing Officers are not bound to conduct audits in accordance with the terms of the APA.
• The benefit of variation of up to 3% will not be allowed once the arm’s length price is determined in accordance with the APA.
• The annual compliance audit by the Transfer Pricing Officer is a focused audit with a view to ascertain compliance with the terms of the APA. Assurance has been provided that the compliance would not be as broad-based as in case of regular transfer pricing assessments.
• Retrospective amendments in the laws that govern the APA shall impact the APA already concluded.

SKP’s Comments

The clarifications provided by the CBDT shed light on the intricacies of the scheme and would help taxpayers understand the process better and thus, assist in complying with the scheme. However, there are certain noteworthy points:

• The Board states that a request for bilateral APAs shall be accepted only if the treaty with the respective country provides for MAP procedures and provisions similar to Article 9(2) of the OECD tax conventions. This provision may deny the benefits of bilateral APAs to taxpayers having transactions with entities located in France, Singapore, Korea, Germany, Belgium, Brazil, Mauritius, Norway, Russia, UAE, in the absence of provisions similar to Article 9(2) in the respective tax treaties.
• The process of negotiation for entering into an APA may be spread over a few years during which the regular proceedings under the Income Tax Act continue against the applicant. This may become an additional burden for applicants especially if the negotiations are successful and an APA is entered into covering those years.
• One of the biggest limitations of the APA rules is that it gives sweeping powers to the CBDT to cancel the agreement in case the Transfer Pricing Officer submits adverse remarks against the applicant. The clarification provides little relief to taxpayers by stating that only constitutional remedies may be resorted to against the decision of the CBDT. An appellate procedure under the Act would help taxpayers gain better access to remedies in case of grievances.
• The lack of firewall provisions with respect to the details submitted to the APA team may cause applicants to be wary of submitting details during the negotiation process in such an aggressive tax regime. The impact of disclosing such confidential information, which may not be shared or asked for by the Income Tax authorities ordinarily during assessments, may result in applicants losing confidence in the APA scheme. This may in turn prove to be detrimental to the scheme’s success.
• The Board states that retrospective amendments in law will render the APA void. This provision seems to be too severe on applicants and may dampen their morale. Though the rules provide for a revision procedure, the same will result in additional time, effort and costs for the applicants. Rather, it would be reasonable to grant immunity to the applicant entered into an APA against any amendment in law considering that the APA is only valid for a maximum of 5 years.
• The APA scheme is silent on its applicability to Specified Domestic Transactions. From a plain reading of the rules, one understands that the APA mechanism is available to taxpayers having international transactions and not specified domestic transactions.

The Guidance by the CBDT does provide relief to taxpayers by providing clarity on the documentation requirements for periods covered under the APA, allowing requests for profit attribution to PE and limiting the scope of annual compliance audits. Further, even though roll-back provisions are not allowed, the persuasive value of APAs cannot be ruled out during audits of preceding periods.
Overall, while the APA scheme is a positive step by the Board towards achieving greater certainty for taxpayers, the machinery employed to implement the scheme has some grey areas as noted above.