India: Advance Pricing Agreements

An Advance Pricing Agreement (APA) is voluntary agreement entered into between the Central Board of Direct Taxes (CBDT) and any person (entity), to determine in advance, the arms length price or the method to determine the arms length price, or both, of an impending business transaction between the associated enterprises. Once, an international transaction1 is entered into, the arm lengths price with respect to such business transaction, for the period as mentioned in the agreement (which must not exceed 5 years) will be determined only in accordance with APA. It means, entering into an APA is voluntary but once an APA is entered into.

The Advance Pricing Agreements (APA) was introduced in the Finance Act 2012 by Ministry of Finance in order to harmonize the Transfer Pricing Norms with the existing regulatory framework. The rules governing APA i.e. Advance Pricing Agreement Scheme, was notified on 30th August 2012 by Central Government vide notification No. 36/2012. Many other countries have also notified the rules and the provisions of APA in order to manage the international transactions from their countries.


The Kinds of APA depends upon the number of parties who are entering into Agreement. Accordingly, there are following kinds of APA:

  • Unilateral APA: - It is an agreement between CBDT and the applicant and does not involve any other party. As no other party is involved, such an agreement is binding only on the CBDT and the applicant entity. It is imperative to mention here that Unilateral APA is not binding on such other country of residence of the other party of the International Transaction.
  • Bilateral APA: - The parties involved in this type of agreement are CBDT, the applicant and the competent authority of the other country. These parties through Mutual Agreement Procedure (MAP) negotiate and reach at a mutual agreement. Hence, such a negotiated agreement is binding on all of the parties involved.
  • Multilateral APA: - CBDT and the applicant along with all the competent authority of other countries are the parties in these types of agreements. These parties through Mutual Agreement Procedure (MAP) negotiate and reach at a mutual agreement. Hence, such a negotiated agreement is binding on all of the parties involved.


Request for bilateral or multilateral APA can be accepted by Indian competent authority where:

  • a tax treaty exists between India and other country(ies) containing an article on "Mutual Agreement Procedure";
  • in case of international transactions leading to economic double taxation arising out of TP adjustments, the said tax treaty contains provisions similar to paragraph 2 in the article 9 as provided in OECD model convention on "Associated Enterprises", and
  • the corresponding APA program exists in the other country. As is the international practice, before formally applying for the APA there will be a pre-filing consultation between the taxpayer and the Government to enable the applicant and the APA team to assess the possibility of entering into an APA.


  • APA provides tax certainty with regard to determination of ALP in the international transaction.
  • Reduces compliance cost by eliminating the risk involved in transfer pricing audit.
  • It also helps in reducing the cost which could have been infused in litigation.
  • Reduces the burden of book keeping, as the documents involved in APA is comparatively minimum and is based on the terms and conditions between the parties.
  • As agreements are made between the parties, the risk of double taxation is minimal.


  • Pre-filing consultation
  • Furnishing of an APA application in Form No. 3CED
  • Acceptance/ Rejection of an application
  • Negotiation in the Agreement
  • Amendment to the APA application
  • Assignment of an application to the APA team
  • Examination and analysis of such agreement
  • Entering into APA depending upon the type of APA
  • Negotiation between the competent authorities (if any)
  • Action by the Tax payer and the Assessing officer on entering into an APA
  • Annual compliance report
  • Compliance audit of the agreement
  • Cancellation and revision of APA

Before entering into any agreement, CBDT requires an approval of the Central Government. The fees for the application depends on the amount of transaction involved which shall be not less than Rs 10 lacs and is to be paid to the Indian Government.

As per the Indian APA Rules, the regular audit of the covered transactions under the APA shall not be undertaken by the Transfer Pricing Officer (TPO) once an APA is concluded. TPO having the jurisdiction over the assessee shall carry out the compliance audit of the agreement for each of the year covered in the agreement. The TPO shall submit the compliance audit report, for each year covered in the agreement, to the Director General of Income Tax ("DGIT") (International Taxation) in case of unilateral agreement and to the competent authority in India, in case of bilateral or multilateral agreement, mentioning therein his findings as regards compliance by the assessee assess with terms of the agreement.


(1) An APA is binding on the assessee who entered into an APA in relation to the covered transactions and on the Commissioner of Income-tax and other income tax authorities subordinate to him in respect of that assessee and that transaction. If the assessee complies with the terms and conditions of the APA, the tax administration will not contest the ALP or the application of the TPM to the covered transactions in the APA in the case of the assessee for the years to which the APA specifically relates.

(2) The APA shall not be binding on the assessee or the Commissioner, if-

  • There is a change in law or facts having bearing on the agreement so entered [section 92CC (6) of the Act];
  • The agreement has been obtained by the assessee by fraud or misrepresentation of facts-the agreement void ab-initio [section 92CC(7) of the Act];
  • There is any change in any of the critical assumptions or there is failure on the part of the assessee to meet conditions subject to which the agreement has been entered into the agreement can be revised or cancelled [Rule 10M(4)];
  • The agreement is cancelled under Rule 10R.


India has the highest number of litigations over transfer pricing, where MNCs have been charged of reducing their tax liability by transferring profits to group companies abroad. The introduction of the APA rules will surely pave the way for the MNC's to engage in the International Transaction and will also reduce the complexity involved. As the Indian APA is in parlance with the Global APA regime, there will be less number of cases wherein the competent authority of different countries could be reluctant to accept the covenants of the APA agreement.

Against all the backdrops which Indian Industry faced in the form of Vodafone, Shell, WNS and Nokia Tax dispute, the introduction of APA will cater to increase of faith in the Indian administration and the APA process is on track to become one of the very important risk mitigation tool for multi-national companies. To substantiate such a faith, more than 200 MNC's have already filed an application with the CBDT to obtain ruling over intra-group pricing arrangement and ensuing tax liability.


1. "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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