image

India Signed 95 Advanced Pricing Agreements in FY23 for Tax Certainty

The Advanced Pricing Agreements in India address complex transfer pricing issues, mitigating the need for litigation and align with India's objective of enhancing the ease of doing business.


India’s tax department, the Central Board of Direct Taxes (CBDT), released the fifth annual Advanced Pricing Agreement (APA) report in early September. The report provides essential data and statistics related to the APA program, covering aspects such as the distribution of applicants across sectors, the nature of transactions addressed, and the transfer pricing methodologies employed.

The fifth report offers an update on the status of applications filed until March 31, 2023, with statistics reflecting developments up to the Financial Year (FY) 2022-23. This period saw the CBDT recording the highest number of APA signings in any fiscal year since the inception of the program, with a total of 95 APAs.

The CBDT also entered into 32 Bilateral Advance Pricing Agreements (BAPAs) in FY23, marking the highest number of BAPAs in any financial year to date. This figure represents a notable increase, more than doubling the previous record of 13 BAPAs signed in a single fiscal year.

The APA report provides insights into the country-wise distribution of these advanced pricing agreements, highlighting engagements with tax treaty partners such as Finland, the UK, the US, Denmark, Singapore, and Japan. This reflects the growing maturity of India's relationships with various treaty partners.

India also recorded the largest number of APA signings in a single day, with a total of 21 APAs signed on March 24, 2023. Rounding up other key milestones, FY23 saw the signing of the 400th Unilateral Advance Pricing Agreement (UAPA) and the 500th APA.

So far India has filed a total of 516 APAs bringing finality in taxation to income of about INR 190 billion (US$2.28 billion). This, per the CBDT, translates to a payment of about INR 70 billion (US$840 million).

What is the advanced pricing agreement program?

Since its initiation in July 2012, the Advance Pricing Agreement program has successfully addressed numerous intricate transfer pricing issues that were susceptible to prolonged and costly litigation. The APA program addresses actual or potential disputes and provides tax certainty to MNCs by allowing them to negotiate how profit margins for India operations will be calculated.

The APA program provides an alternate and effective dispute resolution mechanism to bring uniformity in laws dealing with transfer pricing in India, as the existing administrative and judicial institutions fail to address specific questions of law while focusing primarily on the questions of facts.

Through the APA program, India aims to deliver a non-adversarial tax regime for foreign investors. Other benefits of an APA include avoiding rigorous and burdensome audit requirements while delivering the tax outcome on the basis of agreed terms of the agreement.

Impact of the Advanced Pricing Agreement program in India

The effectiveness of the Advance Pricing Agreement program in enhancing the ease of doing business environment is apparent in its consistent provision of certainty in transfer pricing matters and the subsequent reduction in litigation. Despite its relatively brief tenure in India, the APA program has collectively ensured certainty for a cumulative duration exceeding 3200 years.

The Advance Pricing Agreement program also helps to alleviate the burden on tax tribunals and higher courts, specifically concerning transfer pricing litigation. Even under a conservative estimate, assuming only half of these assessment years would have resulted in litigation, the APA program has effectively averted or resolved litigation for over 1600 assessment years, equivalent to more than 1600 appeals related to transfer pricing matters. Per the fifth annual report, in the previous financial year alone, the APA program delivered tax certainty for more than 500 assessment years annually.

Particulars

APA years

Rollback years

Total years

Agreements signed till 2021-22

2023 years and 7 months

693 years

2716 years and 7 months

Agreements signed in 2022-23

452 years, 3 months, and 21 days

84 years and 8 months

536 years, 11 months, and 21 days

Total agreements signed till March 31, 2023

2475 years, 10 months and 21 days

777 years and 8 months

3253 years, 6 months, and 21 days

Unilateral Advanced Pricing Agreements

Average processing time

The average time for concluding UAPA applications in the fiscal year 2022-23 was approximately 59.73 months. When considering the average duration of processing on a cumulative basis, it is approximately 44.2 months.

Duration of processing

Unilateral Advanced Pricing Agreements signed FY 2022-23

Within 12 months

1

13-24 months

2

25-36 months

9

37-48 months

16

49-60 months

12

61-72 months

7

More than 72 months

16

Total

63

Duration of processing

Unilateral Advanced Pricing Agreements signed till March 31, 2023

Within 12 months

10

13-24 months

54

25-36 months

123

37-48 months

104

49-60 months

52

61-72 months

46

More than 72 months

31

Total

420

Sectoral distribution of UAPA applicants

As observed, a significant portion of UAPA applications leading to APA agreements in FY 2022-23 is related to the service sector.

S.No.

Economic activity / sector

UAPAs signed

1.

Service

44

2.

Manufacturing and trading

4

3.

Trading and service

5

4.

Manufacturing and service

8

5.

Manufacturing, trading, and service

2

 

Total

63

Among these, a notable majority consists of captive companies engaged in software development and IT-enabled services. Some of these companies also operate in engineering design services, contract R&D services, and Knowledge Process Outsourcing (KPO).

Overall, out of the 63 companies with which the CBDT reached agreements, 14 engage in manufacturing activities, and 11 are engaged in trading activities.

Thus, the entire spectrum of trading, manufacturing, and services is covered under the signed UAPAs.

Industry-wise distribution of UAPAs

The predominant share of UAPAs executed during the fiscal year 2022-23 apply to the information technology (IT) industry, banking and insurance, and engineering services.

This underscores India's status as a prominent outsourcing hub for IT and business processes, with a substantial presence of foreign multinational enterprises (MNEs) in key IT clusters like Bengaluru, Hyderabad, Chennai, Gurgaon, and Noida.

Additionally, there is a growing representation of the pharmaceutical / chemical industry in the signed APAs, reflecting the global significance of the Indian pharmaceutical sector.

S. No.

Industry

APAs signed

1.

Information technology

18

2.

Cement

1

3.

Pharmaceuticals / Chemicals

11

4.

Automotive

2

5.

Services

26

6.

Packaging

1

7.

Beverages

2

8.

Publication

1

9.

Apparel

1

 

Total

63

Location of Associated Enterprises

During the FY23, 63 Unilateral Advance Pricing Agreements were established with Associated Enterprises (AEs) spanning 130 countries. Typically, a single APA encompasses AEs situated in various jurisdictions, with the transactions involving these AEs serving as the primary covered international transaction or a closely linked transaction, such as reimbursement/recovery of expenses.

In a majority of instances, AEs are situated in the United States, the United Kingdom, France, and Germany, reflecting the global reach of the APA applicants, often subsidiaries of MNE groups based in these countries. Additionally, numerous AEs are located in key investment and business hubs, such as Singapore, Hong Kong, and Ireland.

The below table indicates the top 35 country jurisdictions of the AEs, which have entered UAPAs with India.

S.No.

Country location of AEs

AEs in signed UAPAs

1.        

USA

302

2.        

China

96

3.        

UK

83

4.        

France

61

5.        

Germany

58

6.        

Singapore

58

7.        

Netherlands

51

8.        

Japan

42

9.        

Australia

41

10.    

Ireland

39

11.    

Canada

29

12.    

Taiwan

25

13.    

Spain

24

14.    

UAE

24

15.    

Malaysia

23

16.    

Denmark

22

17.    

Hong Kong

21

18.    

Israel

20

19.    

Italy

19

20.    

Mexico

19

21.    

Poland

18

22.    

Brazil

17

23.    

India

17

24.    

Philippines

17

25.    

Switzerland

17

26.    

Thailand

17

27.    

South Korea

15

28.    

Saudi Arabia

14

29.    

South Africa

14

30.    

Austria

13

31.    

Belgium

13

32.    

Hungary

12

33.    

Luxemburg

12

34.    

Bermuda

11

35.    

New Zealand

11


Dezan Shira & Associates' transfer pricing practice specializes in assisting companies engaged in transactions with related parties to navigate transfer pricing issues. Our team of tax professionals offers comprehensive services customized to each client's specific requirements, taking into account the distinctive nature of their business operations. Whether you require support with transfer pricing documentation, benchmark studies, tax audits, or monitoring transfer pricing policies, please reach out to us at india@dezshira.com. We are here to provide tailored solutions to address your transfer pricing needs.


 

CHANGE SECTION

Events in India

How can we help?

Hi there!

Let me show you how I can be of assistance.

I can help you find and connect with an advisor, get guidance, search resources, or share feedback about this site.

Please select what you’d like to do:

Typing...
How can we help?

Hi there!

Our contact personel in Italy is:

profile Alberto Vettoretti

Please select what you’d like to do:

Typing...
Let us help you advance in Asia

Typing...
Speak to an expert!

Please share a few details about what guidance you seek. We can have a suitable advisor contact you within one business day.

Security Check
Back to top