India Signs First Bilateral APA with Japanese Company

Transfer pricing has become the most discussed tax topic over the last few years, not only among tax experts and policy makers, but also in corporate Board rooms. Transfer pricing authorities are often considered very aggressive and unappreciative of business and economic realities. The volume of adjustments in the recent times has been increasing in leaps and bounds. While, such adjustments have created an atmosphere of uncertainty and cash flow challenges for taxpayers, they have not been benefiting the government either, because majority of cases are eventually being decided against the department. Recently, Bombay High Court has decided that share infusion is not covered under transfer pricing regulations thus wiping out the 1000s of crores of adjustments that the department made.

In order to reduce this uncertainty, in 2012 the government introduced mechanism of Advance Pricing Agreement (APA). To avoid protracted litigation, many multinational companies have decided to adopt the APA route. In the first year, 146 applications were filed, which was a record compared to APA program of any other country. This was broken in the second year, when 232 applications were filed. To make APA route more attractive and to further reduce litigation in 2014 the government introduced roll back provisions whereby not only future 5 years will be covered, but past four years will, also, be covered.

On 31^st March 2014, five unilateral APAs were signed, wherein the agreement was reached between taxpayer and the Central Board of Direct Taxes, India. These APAs were concluded within almost a year, which is also commendable because most countries take around two years to conclude unilateral APAs.

On similar lines, on 19^th December 2014 the Central Board of Direct Taxes has signed the first Bilateral Advance Pricing Agreement (BAPA) with the Japanese government and a large Japanese company. It may be interesting to mention that this consists of signing of agreement at various levels – one between the Competent Authorities of India and Japan, another between the Central Board of Direct Taxes and the company in India and the third one between the tax authority in Japan and the group company in Japan. Thus the entire process is quite complex and normally takes a few years to complete. However, credit goes to the two authorities and the taxpayer that the first BAPA between India and Japan has been signed in less than two years.

Subject Matter Experts from Deloitte, who have been involved in the finalization of the BAPA, feel that the approach of the authorities in the whole process of negotiation and finalization of the BAPA, right from the APA team to the senior most authorities, has been positive. They were looking to provide a solution acceptable to the taxpayer as well as protect the interest of revenue. They underwent a rigorous fact finding exercise, open and frank discussions, and appreciated the business and economic factors associated with relevant transactions.

No doubt, BAPAs will be good to reduce double taxation and protracted litigation and provide certainty. Unless and until the whole process of transfer pricing audit is substantially changed there will be unjustified additions and litigation. The government must encourage APAs and at the same time must attend to the root cause of undesired litigation.