[2012] 6 ILT 496 (Article)

[2012] 6 ILT 496 (Article)

Date of Publishing: January 13, 2014

India Enters a New Era in Transfer Pricing with introduction of Advance Pricing
Agreements

ALPANA SAKSENA*

"In a globalised economy with expanding cross-border production chains and growing trade within
entities of the same group, Advance Pricing Agreement (APA) can significantly bring down tax litigation
and provide tax certainty to foreign investors. Though, the provision for APA has been included in the
DTC Bill, 2010, I propose to bring forward its implementation by introducing it in the Finance Bill,
2012."
With this optimistic announcement made by India's Finance Minister, Pranab Mukherjee, in his budget
address to the nation on March 16, 2012, India formally entered a new era in transfer pricing with the
introduction of the Advance Pricing Agreement ("APA") program.

Globally, APA programs have been viewed by multinational companies as attractive propositions to resolve
potential transfer pricing controversies and avoid time consuming and disruptive audits, while affording
opportunities to mitigate the risk of double taxation. APAs have been an important part of the transfer pricing
landscape since the mid-1990s, operating for over a decade in countries such as the United States and Japan.
With competing economies such as China having already introduced this program several years ago, India's
entry in the APA club was long overdue.

The number of pending income-tax disputes of foreign companies operating in India and the revenue involved
in such cases have continued to plague both tax authorities and taxpayers, draining precious energies and key
resources, as they have strained to navigate through complex legislation and grapple with uncertain tax
positions, clogging the administrative systems with an alarming litigation overload. The announcement of the
APA program, like a breath of fresh air, is expected to afford the much needed relief to the international
taxpaying community, weary of challenges presented by aggressive regulatory positions and chronic litigation
and desperate for sustainable resolution strategies in a highly litigious system. With APAs around the corner,
taxpayers would now have a viable controversy management alternative and can expect to engage in principled
negotiations with the Indian tax authorities in a co-operative and harmonious atmosphere to counter the
present adversarial environment.

1. APA – A Historical Perspective

The APA era was formally inaugurated with Japan publishing 'Guidance on Calculation of Arm's Length Prices'
(referred to as 1987 Directive), on April 24, 1987, the objective of which was, as spelled out in the directive
itself, "…. to ensure the proper and smooth enforcement of transfer pricing legislation by giving
administrative confirmation as to the most rational methods of calculation of arm's length prices for
corporations."
The US Treasury Department followed suit and in June of 1990 a draft IRS Revenue Procedure for Advance
Determination Rulings was publicly disseminated and the first APA was concluded in January of 1991. With the
publication of Rev. Proc. 91–22 (1991–1 C.B. 526), in March of 1991, the IRS formally initiated the APA
Program, and by the end of that year, 15 new negotiations had started.1 The efficacy of the APA as a tool to
provide predictability in the uncertain world of transfer pricing, prompted several countries to emulate the
Japanese and United States experience; the 1990s witnessed a quantum spate in countries surging to adopt the
APA program with Canada, Australia, the UK, Belgium and France being the trailblazers. The ever watchful
Organisation for Economic Co-operation and Development (OECD) helpfully pitched in with a set of APA
guidelines in 1999 as the APA umbrella expanded to bring into its fold South American and Asian countries
such as Mexico, Venezuela, China and Korea in the last decade.

While Japan and the United States — the frontrunners in the implementation of formal APA programs — have
to date signed the most APAs compared to other countries, the year-on-year increase in numbers of countries
adopting the APA program extols the popularity of APAs as one of the preferred methods to stem the tide of
burgeoning transfer pricing disputes and foster cooperation between the taxpayers and tax authorities. As the
Indian experience is about to commence the world is watching with bated breath.

2. The Indian APA Program

As India prepares to take its first fledgling steps to join the elite APA league, the gestation period may be beset
with preliminary birth pangs, as India's track record with transfer pricing audits is fueling considerable concern
about the workability of the program itself while lauding the honourable intentions behind the launch.
However, the angst is not unusual, given the experience of now mature APA regimes in their own teenage years.

3. Key APA Provisions

An APA is an agreement between a taxpayer and a taxing authority on an appropriate arms length price or a
transfer pricing methodology for a set of transactions over a fixed period of time in future. As per the Finance
Bill, 2012 (the "Finance Bill"), the APA provisions will take effect from July 1, 2012 and the operating guidelines
are expected to be issued before this date delineating the manner, form, procedure and any other matter
generally governing the implementation of the APA program.

A brief summary of the key APA provisions introduced in the Finance Bill 2 follow:

♦ The Central Board of Direct Taxes (CBDT)3 ("The Board") may, with the approval of the Central
Government, enter into an APA with any person undertaking an 'international transaction.'4
♦ Such APAs shall include determination of the arm's length price or specify the manner in which arm's
length price shall be determined, in relation to an international transaction which the person
undertakes.
♦ The manner of determination of arm's length price in such cases shall be any method including those
provided Indian Transfer Pricing Regulations with such adjustments or variations, as may be
necessary or expedient.
♦ The arm's length price of any international transaction, which is covered under such APA, shall be
determined in accordance with the APA and the APA shall be valid for such previous years as
specified in the agreement which, in no case, shall exceed five consecutive previous years.
♦ The APA shall be binding only on the person and the Commissioner (including income-tax
authorities subordinate to him) in respect of the transaction in relation to which the agreement has
been entered into. The APA shall not be binding if there is any change in law or facts having bearing
on such APA.
♦ The Board may declare, with the approval of Central Government, any such agreement to be void ab
initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of
facts. Once an agreement is declared void ab initio, all the provisions of the Income Tax Act,
1961("the Act) shall apply to the person as if such APA had never been entered into.
 ♦ The Board may prescribe a 'Scheme' providing for the manner, form, procedure and any other matter
generally in respect of the APA.
♦ The person entering into such APA shall necessarily have to furnish a modified return within a period
of three months from the end of the month in which the said APA was entered in respect of the return
of income already filed for a previous year to which the APA applies. The modified return has to
reflect modification to the income only in respect of the issues arising from the APA and in
accordance with it.
The APA regulations have been proposed as new sections 92CC and 92CD in the existing Transfer Pricing
Regulations,5 and will come into effect from July 1, 2012.

4. Key Features discussed

4.1 An APA is a voluntary arrangement

The proposed new section 92CC in the Act, which begins with the proposition that the Board "… may enter into
an (APA) …" clearly indicates the voluntary nature of the program and underscores the internationally
acceptable prerogative available to tax authorities that a country cannot be coerced into negotiating an APA
even though initiated at the behest of the taxpayer.

4.2 To be entered into with the approval of the Central Government

The new section furtherrequires the Board to enter into an APA "with the approval of the Central
Government," a requirement which indicates the Government's desire to monitor, and even regulate, the
progress of an APA program with the intention of, perhaps, evaluating its efficacy as well as its impact on
revenue of the country. It is quite possible and expected that the Central Government would designate an
authority empowered to grant approval on its behalf – a practice which is normal in such situations. Though
the stage at which the said approval would be obtained is yet to be spelled out, it is expected that detailed
guidelines would be issued in this regard. The involvement of the Central Government is likely to impart a
measure of sanctity to an APA, which, in view of the express approval of the Government, would be regarded as
indisputable, unless the terms thereof are breached.

4.3 Determination of Arms length Price

The proposed new section further provides that APAs shall include 'determination' of the arm's length price or
specify the 'manner' in which arm's length price shall be determined in relation to an 'international transaction'
to be entered into by that person. The manner of determination of arm's length price may include methods
provided in the Act or any other method, with such adjustments or variations, as may be necessary or expedient
so to do.

Thus the first limb of this provision provides an option for determining the arms length price upfront and could
be applicable to transactions which are amenable to such determination. Such transactions could be fixed
payment for royalties, prices of fixed assets, lump sum payment for technology transfers and outright sale of
intangibles, licenses, etc.

The second limb of the provision provides for the 'manner' of determination of arm's length price, which may
be 'any other method' including those provided in the Act, with necessary adjustments or variations "as may be
necessary or expedient so to do." Thus the provisions envision that any transfer pricing methodmay be adopted
to determine an arm's length price – thereby not limiting the taxpayer and the tax authorities to the methods
prescribed in the Act (i.e., the traditional transaction methods including comparable uncontrolled price, resale
price and cost plus, and the transactional profit methods including transaction net margin method and
transaction profit split method). This affords a considerable degree of flexibility to both the taxpayer and the
tax authorities to agree on a method most suited to the purpose of determination of the arm's length price and
transcend the limiting regime of prescribed methods especially where prescribed methods may not best reflect
an arm's length outcome. However, the method proposed by the taxpayer should arguably be the most
appropriate method given the nature and circumstances attendant on the transaction covered by the APA. This
could afford a welcome opportunity to both the taxpayer and the tax authorities to deal with those very difficult
scenarios which have, given the rigidity of prescribed methods, spawned endless disputes.

4.4 Prospective transactions

The new APA rules prescribe that an APA can be negotiated for a transaction "to be entered into" emphasizing
the prospective nature of the APA program. Thus an APA would apply to prospective years and transactions
and the actual term would depend on the industry, products or transactions involved. However, one can
optimistically expect that, even though no rollback has been yet specified, given the Indian experience, there
could be scope for a prospective APA to exercise considerable persuasive influence on the preceding years
where unresolved transfer pricing disputes exist at various litigation levels. In such a scenario taxpayers can
evaluate fortifying their appellate strategies to defend their pricing models and tax positions based on the
outcome of the APA negotiations and present them as persuasive possibilities before the appropriate appellate
or dispute resolution forums.

4.5 Adjustments and Variations

The new APA rules mandate that the manner of determination of the arms length price of any international
transaction may be made not only with any method suitable for the purpose but also "with such adjustments or
variations, as may be necessary or expedient so to do." Such adjustments apparently contemplate variations to
either income or expenditure to harmonize the actual results obtained in an international transaction within
the arm's length price range agreed in the APA. The adjustment clause will, however, be inapplicable if the
arms length price is determined upfront and a fixed price is agreed upon. Thus, in cases where a taxpayer's
actual results may vary from the agreed outcomes, mandatory adjustments would be required to bring the
actual results in line with the position agreed upon in the APA.

4.6 Processing of Applications

It is expected that the Board would begin accepting applications from July 1, 2012. However, it remains to be
seen whether the applications would be processed on a first-come first-serve basis or there would be criteria
governed by priorities. At any point of time, the speed of the APA process will generally depend on a
combination of factors — the key being the applicant's ability to speedily submit the desired information and
data relevant to the APA application, the degree of cooperation existing between negotiating parties, and the
ability of the tax authorities to deploy sufficient skilled resources to process the application in a timely manner.
In a bilateral situation, the preparedness of the relevant foreign tax authorities to participate in the APA would
be of paramount importance. In view of the above, the tax authorities may reserve the right, to prioritize
applications for APAs where the number of applications received places unreasonable demands on the
resources and time available.

5 Potential Issues

5.1 "Change in law and facts" – The Role of Critical Assumptions

The OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, define an
'advance pricing arrangement' (agreement) (APA) as:

"an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria
(e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events)
for the determination of the transfer pricing for those transactions over a fixed period of time."
(paragraph 4-124.)
The Indian APA regulations are applicable for 'transactions to be entered into…." Given the prospective nature
of an APA, and given that any future event is hard to predict, careful consideration of all those factors is
required, which could render the proposed transfer pricing methodology (or the outcomes from an application
thereof) inconsistent with arm's length pricing approaches. Moreover, certain 'assumptions' would be
imperative to account for the inevitable uncertainty of events that may occur during the period of the APA.
Predictably, and consistent with international practices, the Indian APA regulations see APAs as binding
contractual agreements, the terms of which, once negotiated and agreed upon, are virtually fixed during the
period of the agreement except if "there is a change in law or facts having bearing on the agreement so
entered." While the Indian APA proposals make it clear that in the event any such change is triggered the APA
will no longer remain binding, this proposal also brings in the prospect of defining and negotiating certain
critical assumptions, spelling out the circumstances which would constitute "change in facts."

A critical assumption is normally anunambiguous statement of conditions or events incorporated and spelled
out in the APA contract, the trigger of which would affect the life of the APA and call for renegotiation or
cancellation.

The U.S. APA program spells out the following standard critical assumption:

"The business activities, function performed, risks assumed, assets employed, and financial and tax
accounting methods and classifications of Taxpayer in relation to the Covered Transactions will remain
materially the same as described or used in Taxpayer's APA Request. A mere change in business results
will not be a material change." This assumption also indicates that absent the other triggers, a mere
rise/fall in profits would not imply renegotiation of the APA.

While, at the first blush, the prospect of adopting critical assumptions in APAs looks attractive, the data
published by the U.S. Internal Revenue Service (IRS) indicates that APAs with anything other than the
standard critical assumption are relatively rare – thus indicating that in mature regimes, like United States, a
loss in certainty may ensue if narrow (or broad) critical assumptions are spelled out.

The APA program of every country will normally have such built in assumptions (not always linked to business
results though), however, thetaxpayers and the tax authorities could also structure or customize critical
assumptions, to mirror their own special circumstances or to account for various economic contingencies like
currency fluctuation, input prices, capacity utilization, sales volume, oil prices, labour unrest or lockouts and
bankruptcy – depending on the facts and circumstances peculiar to each transaction or business.

While 'critical assumptions' require 'predictions' to be made, the reliability of any prediction used in an APA
would depend both on the nature of the prediction and the critical assumptions on which the prediction is
based. For example, it would be shortsighted to assert that short-term intra-group borrowings for a certain
corporation should freeze an unchanging arms length rate of 5 per cent interest for the full term of the APA. It
would make more sense to link such interest rate with the London International Bank Official Rate (LIBOR),
plus some fixed percentage. The reliability of the prediction would be enhanced if an appropriate critical
assumption were added linking the interest rate to the company's credit rating which could modify/alter the
calculation (e.g. the addition to LIBOR will change if the credit rating changes). On another note, predictions of
absolute future profit would also be unrealistic and least plausible as would be the use of profit ratios of
independent enterprises as comparables, which are often volatile and unpredictable. Thus, tremendous caution
needs to be exercised while defining appropriate critical assumptions as a tool to enhance the reliability of
predictions.

'Critical assumptions' are required to be negotiated and defined before an APA is signed so as to preserve the
benefits the APA seeks to achieve. Properly structured critical assumptions can impart considerable flexibility
to an APA. The breach of a critical assumption usually leads to renegotiations of the APA, and not an
immediate cancellation unless the change, in fact, is so fundamental that the continuation of the APA becomes
redundant, e.g., discontinuing the line of business covered by the APA.

It is also expected that 'critical assumptions' may not be the subject of the operating guidelines to be issued by
the Board, given the subjective nature of the concept and the impossibility of assigning exclusive definitions
thereto. Hence, international best practices could provide concrete guidance in the matter and may be
leveraged upon while preparing a case for critical assumptions.

5.2 TP Audit vs APA programme

International experience has demonstrated that APAs remain vulnerable in the face of their stricter sibling —
transfer pricing audits. International statistics reveal that the number of transfer pricing audits far exceeds the
number of APAs. Although the importance of APA, as a risk management tool, and as a replacement to frequent
cycle of audit, is enhanced where taxpayers face a high audit risk, the efficacy of an APA program would depend
largely on its ability to distinguish itself from the normal transfer pricing audit proceedings and the traditional
exam process. The prospective nature of the APA program may make it difficult for the tax department to rely
on traditional audit approaches - mainly because future business results cannot be conclusively quantified nor
exact predictions about future conduct of business be reliably made. If an APA is negotiated by the same
officials who are entrusted with the task of performing regular transfer pricing audits, then there is genuine
concern that their approach to APA may be coloured by their previous duties which may lend to the APA the
feel of a regular audit. This in turn may result in an identity crisis for the APA program and preclude the
program from becoming a preferred alternative for handling transfer pricing controversy.

The international experience in this regard is that several jurisdictions have mechanisms for distinguishing the
APA alternative from traditional transfer pricing regulatory framework and establishing strict firewalls. For
example, in the United States, the Revenue Procedure (Rev. Proc.) 2006-9, Sec. 2.04(1)) establishes the APA
program as an established alternative to the traditional examination process:

"APAs are intended to supplement traditional administrative, judicial, and treaty mechanisms for
resolving transfer pricing disputes."
The United States engages with taxpayers in a "principled and cooperative manner on a prospective basis."
(Rev. Proc. 2006-9, Sec. 2.01).

India is expected to leverage on international best practices of such nature while formulating the operating
guidelines, given the fact that in preparation of launching the program, the Indian tax authorities have visited
several APA regimes to understand contemporary APA processes.

5.3 Confidentiality of information

The successful implementation of an APA program is critically dependant on how tax authorities handle the
taxpayer's confidential information received during the APA negotiations. To this end, taxpayers may wish to
seek assurance from Indian tax authorities about their disclosures, particularly given the prospective nature of
an APA which could require the taxpayer to furnish confidential information regarding future transactions
(which may even cover information with respect to innovations or inventions designed to give competitive
advantage to a taxpayer) and attendant business strategies and predictions. The concerns of the taxpayer may
assume critical proportions if the APA were to not succeed and be aborted, leaving critical information with the
tax department.

The Indian Income-tax Act has strict confidentiality provisions in place (Section 138 of the Income-tax Act,
1961) which prohibit disclosure of taxpayer information to third parties. Thus, any information tabled by a
taxpayer with the Indian tax authority retains its confidentiality and is prohibited from being released to
persons otherwise not authorized to receive that information. Hence, given the existing confidentiality
provisions, there is every reason to expect that tax authority's preservation of strict confidentiality in respect of
those transactions would be maintained and that tax secrecy rules would apply to information received during
the APA negotiations as well, even though the negotiations may fail to reach finality. However, given the
sensitive nature of APA negotiations, there are chances that existing confidentiality/secrecy provisions may be
revisited for the purpose of augmenting their strictness with appropriate firewalls.

5.4 Post APA Monitoring and Compliance

The key to success of an APA program resides in the policies a tax authority devises to monitor compliance,
post-APA, as it is natural for each tax administration involved in the APA to ensure that the taxpayer is fully
compliant with the terms negotiated. Thus the rules governing post-APA compliance requirements are as
important as the provisions for the APA process, to which end it is expected that concrete guidance would be
spelled out in the operating guidelines to be announced soon by the CBDT.
While we await the guidelines, one could recount the international experience in this regard to understand
what could be the best practices prevalent in mature APA regimes.

There is international consensus that post-APA compliance/monitoring process should not cast onerous
obligations on either the taxpayer or the tax authorities. Generally, most countries with the APA programs
require preparation and/or filing of an APA annual compliance report — for every fiscal year covered by the
APA term — for taxpayers to demonstrate the extent of their compliance with the terms and conditions of the
APA and to also evaluate that the critical assumptions agreed upon remain relevant. However, the
requirements with respect to contents of the report and procedural aspects differ for each country.

In the United States,6 the APA annual report must be filed by the taxpayer with the APA Director in
Washington, D.C., for each taxable year covered by the APA, within 90 days after its due date for federal
income-tax return. However, the IRS and the taxpayer may agree to alternative filing dates. Failure to file a
timely, complete or accurate annual report may be grounds for cancelling or revoking the APA. In addition, the
taxpayer must maintain books and records to enable verification. In the United Kingdom,7 the annual report
generally accompanies the tax return. The report is required to be sent to Her Majesty's Revenue and Customs
(HMRC), responsible for the business' tax affairs and should demonstrate in a concise format whether the
business has complied with the terms and conditions of the APA. In Australia,8 annual reports are required
from taxpayers who have executed APAs and must be submitted with their annual returns. In Japan,9 the
taxpayer is required to submit annual compliance reports by the due date of final tax return for each year
covered by the APA, or during the period specified by the District Director of the Tax Office, evidencing its
compliance with the terms of the APA. In China,10 the taxpayer is required to file an annual compliance report
in relation to implementation of the APA to the tax authority within five months after the end of each year. In
addition, the taxpayer must maintain a complete record of relevant documents and information (including
accounting records and other relevant records). During the term of the APA, the tax authority shall regularly
inspect the taxpayer's compliance in order to make adjustments, if required.

Most authorities also require that if there are substantial changes that are likely to impact the terms of the APA,
the taxpayer should report these changes forthwith in writing with a detailed explanation regarding the impact
of these changes on the implementation of the APA. Post the filing of compliance reports, the tax authorities
are most likely to verify the correctness thereof and may limit the verification exercise to examining the
reliability and accuracy of the presentations in the APA annual reports and the accuracy and consistency of how
the particular methodology has been applied. It is also expected that the modalities of such examination could
be agreed in the APA itself so as to also customize the annual compliance activity on a case-by-case basis.

5.5 Involvement of Associated Enterprises

The role and cooperation of the associated enterprises with whom the 'International Transaction' is to be
entered into by a taxpayer, is vital and can contribute significantly to a successful APA negotiation.

The Indian experience is replete with instances of aggressive regulatory positions being adopted in many cases
where information about foreign associated enterprises, which was considered crucial to a transfer pricing
audit, was not forthcoming. The non submission of information could well have been on account of
confidentiality concerns between the related parties or the taxpayer, being only a subsidiary with minority
shareholding not being able to exercise sufficient control on the parent to ensure necessary compliance.
However, given the context of APAs, where successful negotiations thrive in the face of free-flowing
information, it may be crucial that the associated enterprises participate proactively in making available desired
information to assist the taxpayer in meeting the enforceable documentation obligation. The associated
enterprises can aid their group entity in each step of the negotiation process by providing reasonable
methodologies that are most appropriate for arms length determination to and helping with robust
documentation to support the APA proposal. Especially in the Indian context, the associated enterprise would
in all likelihood be the Parent entity equipped with the necessary wherewithal to assist its offspring. The willing
participation of the parent entity in the APA process by assisting its group entity in presenting critical data and
necessary information, from time to time, may cure the malaise of information deficit so common in cross-
border situations and aid the tax authorities in advancing the APA process.

5.6 Unilateral and Bilateral APAs

The current Indian APA provisions are broadly worded and do not exclude the possibility of unilateral as well
as bilateral APAs. A unilateral arrangement would be one where the tax authority and the taxpayer establish an
arrangement without the involvement of other interested tax administrations. However, a unilateral APA may
affect the tax liability of associated enterprises in other tax jurisdictions. Under these circumstances OECD
guidelines advise that "Where unilateral APAs are permitted, the competent authorities of other interested
jurisdictions should be informed about the procedure as early as possible to determine whether they are
willing and able to consider a bilateral arrangement under the mutual agreement procedure."11

International experience in this regard has demonstrated that some countries prefer unilateral APAs at the
inception of the APA program. In China, the launch of the APA program in 2004 witnessed a flurry of unilateral
APAs in the first four years of the program with only three bilateral APAs in the same period. Australia12 too
has a high incidence of unilateral APAs and they are most preferred by medium-to-small enterprises with
modest turnovers. The singular reason advanced for the same is the cost effectiveness and ease of resolution so
vital to a medium-range enterprise.

It is found that a unilateral APA is best suited to those cases where, absent a Double Tax Avoidance Agreement,
it is either unnecessary to involve a foreign tax authority in the APA process or where such tax authority poses
minimal risk for the counter-party in respect of the transfer pricing method being proposed for the APA. A
unilateral APA could also be expected where a foreign tax authority declines to participate in what would
otherwise be a bilateral APA. The absence of complexity in a unilateral APA may advance the time frame of
completion of the APA process while conserving precious resources for both the parties.

Having said this, the bilateral (or multilateral) approach is most likely to ensure freedom from double taxation,
while ensuring equity and greater certainty for all stakeholders.

5.7 Harmonization of transfer pricing rules under Income Tax and Customs using APA

The contradiction between the valuation concepts that apply under the transfer pricing and customs regimesis
an unresolved and burning issue and the centre of focus of all tax administrations and taxpayers alike. The
surge in cross-border intra-group transactions and increased regulatory enforcement of both transfer pricing
and customs valuation rules bring the glaring differences in both approaches to light — and with it the anguish
of the taxpayers in being torn between two sets of rules applicable to the same transactions. The fundamental
differences in the applicable statutes, missions of the tax and customs agencies, and conflicting valuation
systems in practice are differences the resolution of which seems nowhere in sight, despite several convergence
seminars and conferences.

The presence of multiple tax regimes in India, including income-tax, customs, and value-added tax (VAT), all
with inherently disparate tax objectives and valuation principles, — compounds the contradictions for inter-
company pricing, spawning costly disputes and generating a virtual impasse and causing serious concern
amongst taxpayers absent any conclusive jurisprudence on acceptance of customs valuation for transfer pricing
purposes and vice versa. Though there is talk of increasing collaboration between the income-tax and customs
authorities, these siblings are yet to call truce.

While the proposed APA process in India is, from a corporate tax perspective, expected to reduce potential tax
exposure, avoid expensive penalties and time-consuming examinations, and obtain assurance of stable
transfer-pricing tax treatment - the APA program as proposed does not openly address the inherent conflict of
transfer pricing with the VAT and customs regimes and it is not clear how convergence between Income Tax
and Customs would be achieved.

However, one may tentatively infer that, as the present APA rules require mandatory approval of the Central
Government (which is the governing authority for both Income Tax and Customs) before they are finalized; the
approval once given is likely to be respected by all revenue authorities.

India may well draw favourable inference from China whose APA rules make it clear that an APA supersedes
local authority: "All state and local tax bureaus shall accept and implement an APA that is concluded between
the tax authorities and the taxpayer, provided that the taxpayer abides by all the terms and requirements of
the APA." (IMSTA13, Chapter 6, Article 59).

6. The journey begins

As the APA program unfolds in India —the initial apprehension about its timely implementation laid to rest
with its proactive launch — the finer nuances are expected to begin rearing their collective head soon. It is felt
that a collaborative environment is the key ingredient to the success of the programme and would require
technically competent team members with professional skills on both sides. The potential for success is also
dependent on the Board's deployment of sufficient resources such as number of locations, office space,
technology, technical experts and economists. Given the fact that India is one of the world's fastest growing
economies, the keenness of foreign investors to participate in this collaborative process would soon become
apparent. If the team of professionals is not large enough to handle the inflow of APA requests, this inflow
could quickly result into huge backlogs resulting in adverse impact on account of procedural delays. A smooth,
fast-track process is essential to attract taxpayers into the APA program. The process should not be excessively
time-consuming and tedious. The Board could prescribe a guideline laying down the time limit for APA
process. The provisions for termination, modification, withdrawal, and renewal of APAs would require being
fairly comprehensive in order to avoid ambiguity. Taxpayers' practical experiences in dealing with the APA
administration during the process of obtaining APAs and, thereafter, could be the decisive factor in
determining the success of the APA program. As the Board swings into action to devise structures and
procedures to administer the program, the pre-launch activity in the tax department gives favourable
indications that the APA program is on track and would hopefully provide a amicable process for the taxpayer
to consult and co-operate with the tax authorities in a non-adversarial spirit and resolve current transfer
pricing issues in a collaborative environment.

■■

* Alpana Saksena is a director in KPMG LLP's Global Transfer Pricing Services and a former Commissioner of Income
Tax with the Indian Revenue Service. She can be reached at asaksena@kpmg.com.
The author would like to extend a special thanks to Shwetal Shah of KPMG's Economic and Valuation Services practice
(New York City) for assistance with this article.
This article represents the views of the author(s) only, and does not necessarily represent the views or professional advice
of KPMG LLP.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability
of the information to specific situations should be determined through consultation with your tax adviser.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.
All rights reserved. [This is optional and may not be allowed by the publisher.]
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Administration of Taxation; English translation provided by KPMG China.