Under the advance pricing agreement (APA), a facility built into the income tax law to avoid litigation to the extent possible, an MNC can get audit exemption either by a mutual agreement with the taxman on the arm's length price of cross-border transactions or the profit margins they need to declare in India regarding such transactions.
According to sources, the government has now decided that in case an MNC opts for agreement on arm's length price, then, as regards past transactions, the said price has to be adjusted for inflation. This means, for instance, if an Indian entity is exporting a service to an associate in another country at an arm's length price agreed under an APA, it will have to show a lower price for the previous years for audit waiver.
The arm's length price is defined as the price at which two unrelated parties would have done a similar transaction in an open market.
Similarly, an Indian entity importing a product or service from a foreign associate will have to consider inflation in that country while arriving at the value of past year transactions to get APA benefit for those years. Inflation in India has been high in recent years compared to most of India's leading trade partners, including western countries.
In the absence of the APA benefit, the companies would need to go through the more cumbersome process of maintaining records to prove transactions between associate entities are on an arm's length basis and face audits.
So far, the tax department has received 378 requests for APAs since it was introduced in 2012-13, of which five have already been signed.
Finance minister Arun Jaitley, in his Budget, conceded to the industry's demand for a 'roll back' (retrospective application) of the APA deals signed between companies and the tax department to avoid tax audits in future years if certain minimum profits are declared by the firms.
The inflation pattern may differ from industry to industry and hence the same norm cannot be applied across the board. The rules for rollback of APAs have to be as simple as possible. Otherwise, it may be difficult for taxpayers to comply and tax officials to monitor, said SP Singh, senior director of Deloitte in India.