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Regulatory Framework

Advance pricing relief for cross-border deals

Centre notifies ‘rollback’ rules for applying these agreements to transactions in four prior years

In a move that brings a big relief for corporations doing cross-border transactions, the government has notified the rules governing the rollback provisions in (APA). Though these provisions were announced in Finance Minister Arun Jaitley’s maiden Budget in July 2014, these could not be operationalised because the rules were not codified.

Rollback provisions refer to the facility of rolling back an ruling on arm’s length price (ALP) or a method to calculate ALP for transactions done years prior to those covered by an APA. is a mechanism through which a taxpayer can seek and obtain the tax department’s view on what the ALP or ALP method for a particular transaction would be.

The notification dated March 14 amending the Income Tax Rules, 1962, defined terms such as ‘rollback provision’ and ‘rollback year’, and the procedure for bringing such a rollback provision to effect in an APA.

Accordingly, companies can now seek and obtain rollback of rulings for up to four prior years. As of now, transfer pricing assessments have been completed up to financial year ending March 2011. The new provisions will allow taxpayers to now get advance rulings rolled back for 2011-12, 2012-13, 2013-14 and 2014-15. Earlier, this was not possible as by virtue of being an ‘advance’ ruling it could be applicable only to prospective transactions.

Consultants said the notification is a big relief for India Inc. However, some conditions, such as rollback provisions should not lower income or raise losses, could discourage companies from using these APAs.

Samir Gandhi, partner, Deloitte Haskins and Sells, said, “This is a welcome move, which will provide certainty to taxpayers for their four prior tax years and in all provide certainty for nine years, that is, five prospective years and four prior years.”

Gandhi added the move would help reduce significantly the number of cases that would go to the dispute resolution panel and subsequent litigation over the next few years. The APA schemes of many foreign countries provide for ‘rollback’ mechanism for dealing with ALP issues relating to transactions entered into during the period prior to APA.

Gandhi said one could opt for rollback provisions only with respect to the same international transactions covered in the forward-looking agreement. “Taxpayers who have already filed an APA application or have already entered into an agreement prior to January 1, 2015, need to ensure that they file the rollback application in the proposed Form 3CEDA by 31 March, 2015.”

Additionally, even for applicants entering into an APA for 2015-16 onwards, rollback application in Form 3CEDA would have to be filed by March 31 alongwith the forward-looking APA application in Form 3CED. These applicants need to pay an additional fee of Rs 5 lakh.

Vaishali Mane, executive director, Walker Chandiok & Co, said though there would be relief in the form of tax certainty, conditions such as rollback provisions should not bring down the total income or increase the loss in that particular year could prove a dampener. “Technology firms can hope that they could get a ruling for cost plus 18 per cent or 20 per cent in place of cost plus 24 per cent some TPOs [transfer pricing officers] draw. But it may not go down to cost plus 16 per cent due to these conditions.”

She added the additional fee of Rs 5 lakh was also found to be “burdensome” by some clients.

Rollback would follow the main APAs in key aspects. For example, if the forward-looking agreement is bilateral, the rollback would also be bilateral. Similarly, where the forward-looking APA is unilateral, the rollback years would also be unilateral. Unilateral APAs involve only a tax assessee and the Indian government, while bilateral APAs also involve the government of the country where the parent company is located.

What the rulebook says
Key conditions for rollback
  • The international transaction should be same as the one for which advance pricing agreement applies to
  • Return for income for the relevant rollback year has been filed
  • Report under Section 92E on the transaction has been furnished
  • Rollback must be requested for all rollback years in which the said transaction was undertaken
  • Application must be made in the prescribed format Form 3CEDA
Rollbacks will not be allowed, if…
  • The appellate tribunal has already passed an order in an appeal covering the particular transaction for the particular year
  • The rollback provision has the effect of decreasing the total income or increase the loss
Source: Gazette notification

Now with experience of three years of APA filing, the pre-filing consultation that was earlier mandatory has been made optional for the taxpayer, consultants said.

The APA scheme was introduced in 2012. It had received an enthusiastic response, with about 340 applications filed in the first two years of its introduction. In fact, the first batch of five applications was concluded in March 2014 within a year against the international benchmark of one and a half year.

India had signed a bilateral advance pricing agreement with Japan’s Mitsui for five years in 2014.

Layman’s guide to transfer pricing
What is transfer pricing?
The setting of prices for goods and services sold between controlled or related legal entities within an enterprise. For instance, between a foreign parent and an Indian subsidiary and vice versa
What is arm’s length price?
The price at which parties would have transacted had they not been related to each other
What is transfer pricing adjustment?
The difference between the actual price at which the transaction takes place and the arm’s length price as determined by tax authorities
What is advance pricing agreement?
An arrangement through which taxpayer and tax authorities agree the on arm’s length price or the method of calculation of arm’s length price in a cross-border transaction
What are rollback provisions?
A facility through which an advance pricing agreement can be extended to the years already concluded
How many previous years are allowed for rollback?
Four, according to the Centre’s latest notification