Transfer pricing—the means by which income (or expense) is allocated between related parties operating in different tax jurisdictions—has been an area of constant dispute between tax authorities and taxpayers globally, with India emerging as a jurisdiction with significant amount of controversy in this domain. In an environment where the government has been trying to attract multinational enterprises to ‘Make in India’, it is time to introduce initiatives or measures to signal a clear focus on making doing business in India easier.
One such initiative has been the notification of rollback rules as part of the advance pricing agreement (APA). Introduced in 2012, the Indian APA programme has received a tremendous response from taxpayers craving for certainty in their tax obligations arising from transfer pricing matters. Conceptually, an APA allows taxpayers and tax authorities to mutually agree on the arm’s length price for a related party transaction.
Such an arrangement may include agreeing on the arm’s length price for the transactions itself, or a methodology for determining the arm’s length price.
Until the rollback provision was introduced, the APA provisions were applicable for five prospective financial years from the date when the APA has been applied. While finance minister Arun Jaitley mentioned rollback provisions in his July 2014 Budget speech, guidance on how these rollback provisions would apply was awaited. The reprieve came in the form of the notification issued by the Central Board of Direct Taxes (CBDT) dated March 14, 2015, which amended the Income Tax Rules, 1962, to introduce rollback provisions. Based on the amendment, an APA could be made applicable for five prospective years as well as the immediately preceding four years, thereby providing certainty to the taxpayer for a maximum period of nine years.
For example, before the notification, if an applicant had filed for an APA on March 31, 2013, it would become effective for five prospective years, starting April 01, 2013—i.e. FY14, FY15, FY16, FY17 and FY18. However, after the notification, in addition to these years, the taxpayer can now also apply to cover four past years in the same APA application—i.e. FY10, FY11, FY12 and FY13.
Applicability and benefits
The option to avail the rollback has to be applied by filing an additional application along with the main APA application, and making an additional payment of R5 lakh. Since the APA was effectively available from the financial year starting April 1, 2013, the benefit of these rollback provisions can be availed by all taxpayers who have filed their APA application, or have entered into an agreement, prior to January 1, 2015, by applying for the rollback using Form 3CEDA, and producing proof of additional fee before March 31, 2015. Further conditions applicable for availing rollback provisions, as notified by the CBDT, are:
(a) the international transaction must be the same as the one to which the APA is applicable;
(b) the return of income for the relevant rollback year has been filed;
(c) the report in respect of the international transaction has been furnished as required under Section 92E;
(d) the rollback is requested for all rollback years in which the international transaction has taken place; and
(e) the application has been made in the prescribed format of Form 3CEDA.
However, the notification lays out conditions where an applicant may not be eligible for availing rollback provisions if (a) the said international transaction for the said rollback year has been under appeal before the Appellate Tribunal, and an order has been passed by the Tribunal in the matter; and (b) the application of rollback provisions has the effect of reducing total income or increasing the loss of the applicant.
Besides signalling the willingness of the government to make India an easier place to do business and inspire confidence in MNEs for resolving impending transfer pricing disputes, the rollback provisions offer more tangible benefits to both the taxpayer and the tax administration.
Greater certainty for taxpayers in a highly litigated environment: Transfer pricing adjustments have ranged between R60,000 and R70,000 crore in the past assessment years, making it extremely difficult to anticipate optimal transaction structuring and tax obligation.
Lesser litigation burden: Retrospective applicability of the APA would imply that these cases are freed from the domestic litigation system which can be a protracted and long drawn.
Cash tax benefit: Since there would be lesser uncertainty of assessment or litigation outcomes, taxpayers can manage cash flows better on account of unforeseen tax demands.
Proactive controversy management: Overall, with the introduction of these provisions, the government has enabled taxpayers to effectively manage transfer pricing controversy to a large extent, especially on transactions where there is uncertainty of treatment during the course of an audit or assessment. The ability to resolve a likely dispute in the future, as well as applying the same result for past untested years, is a huge relief.
While the sentiment behind the decision is in the right direction, and signals the intent of the government to reduce litigation, some issues need attention. One, taxpayers have said that the timeline for applying for rollback is too short to consider all the implications of making the application—the notification is dated March 14, 2015, and the deadline for applications is March 31, 2015.
Two, the rules leave some drafting clarifications on whether taxpayers who opt for the rollback have the flexibility to withdraw from only the rollback and not from the future years APA, or will withdrawal mean that one has to exit from the entire programme.
Three, what happens to the cases of taxpayers where agreement has been signed between January 1, 2015, and March 14, 2015 (date of notification).
As tax authorities work on addressing these concerns, and taxpayers analyse pros and cons of applying for the rollback, the government clearly has taken a big step to address uncertainty and hostility faced by taxpayers on account of transfer pricing. The notification laying out the rollback provisions for APA contributes to the ‘Make in India’ pitch of the government.
The author is partner, Transfer Pricing Services, EY. Views are personal
