The genesis of APAs in India lies with the growing litigation in transfer-pricing. After introduction of the transfer-pricing regulations in 2001, in the initial years the approach of the transfer-pricing authorities was fairly reasonable. However, over the last few years, they have become very aggressive, resulting in a surge of transfer-pricing audits, both in terms of the percentage of cases suffering transfer-pricing adjustments as well as the quantum of adjustments. Coupled with this, the taxpayers have to face cash flow problems as well as uncertainty as a favourable decision at tax tribunal level does not assure end of litigation. To provide certainty to the taxpayers and to address the numerous cases in dispute, the government introduced APA regulations by the Finance Act 2012. APAs allow taxpayers to proactively achieve greater certainty via advance agreements on their transfer-pricing methodologies with one or more tax authorities and can help bridge the trust deficit currently prevailing between the taxpayer and the tax authorities. Its primary driving force is its ability to reach the best possible solution by delivering certainty in a non-adversarial manner, thereby reducing litigation and compliance costs.
The APA programme had garnered an enthusiastic response from multinational enterprises, both foreign and Indian, in the first year itself. India has seen the highest number of APA applications getting filed in the first year, with a record 146 applications filed by March 31, 2013. The overwhelming number of close to 250 applications filed in the second year is evidence of the faith reposed by the corporate fraternity in the entire process.
This takes the total tally close to 400 applications in the first two years of the APA programme, which itself is an astounding achievement.
Reportedly, the applications have been filed by industries in IT, ITeS, media, manufacturing, financial services, pharmaceuticals, etc. The taxpayers have approached the APA wing of the Indian revenue for many transactions, some of which involve issues such as share valuation, royalty payments, guarantee fee, AMP expenses, provision of software and back-office support services, management fees, cost allocation, provision of investment advisory services, integrated/complex services involving application of profit split method, and various other transactions that have been the subject matter of the ongoing transfer-pricing litigation.
During the negotiations stage, the APA team demonstrated keenness to settle the past disputes instead of challenging the pricing policies of taxpayers and endorsing the views of the field officers. Our field experience suggests that the APA team is open to fair negotiations representing a dramatic shift in the relationship between taxpayers and tax authorities in India compared to protracted litigation in normal compliance mechanism. This change is likely to have a far reaching impact well beyond the narrow confines of individual APAs.
An important lesson from the entire process is that taxpayers need to be mindful of a wide range of aspects which may come up for discussion during the course of the APA negotiations. Some of the key aspects, for example, relate to site visits conducted by the APA team, interaction with the senior employees to understand the functional profile of the taxpayer, role played by overseas associated enterprise in the transaction under examination, level of details maintained by the taxpayers to demonstrate the functional profile etc, on which there should be clarity and completeness to ensure a successful conclusion of the APAs.
Once more APAs are concluded in the near future, these will provide an effective tool to minimise litigation, build confidence and enable government to protect the tax base.
SP Singh & Vineet Chhabra
Singh is senior director and Chhabra is director, Deloitte Haskins & Sells. Views are personal