Despite progress, problems loom for India’s APA program

by Ajit Jain

India’s Central Board of Direct Taxes (CBDT) on 22 May announced entering into two more unilateral advance pricing agreements (APAs) with Indian taxpayers in the first fortnight of May, including one  agreement that contains a rollback provision.

As per the CBDT, the two signed APAs pertain to transfer pricing issues associated with the chip design/development of embedded software and information technology (software development) sector. The number of APAs signed in the current financial year, which began 1 April, now is four.

The signing of these APAs adds to the recent progress India has made resolving APAs. India has signed 152 such agreements in a short span of 4 years, according to data contained in the CBDT’s “Annual Report on India’s APA Program-2016-17,” released 1 May.

While India’s tax authority should be commended for its recent progress signing APAs, a problem is looming.

Data from the May APA report shows that in FY 2012–13 a total 146 applications were filed out of which 66 applications are still under process.

According to the terms of the Indian APA, the agreement can be for a period of 5 prospective years. Thus, all the applications filed in FY 2012–13 will be completing their 5-year term on 31 March 2018.

If these applications are not disposed of in the coming 10 months, an interesting situation arises. Can an APA be signed after the term of the APA ends, i.e., after a period of 5 years? Can an application be filed to renew an APA which has not yet been signed?

This issue will become even more critical in March 2019, when 161 applications would be completing their term of 5 years.

How the tax authority will address this issue remains to be seen. Stay tuned.

–Ajit Jain is a Chartered Accountant with LL.M. in International Taxation from Vienna, located at Mumbai specializing in transfer pricing dispute resolution.  He can be reached at [email protected].