CBDT signs first bilateral APA with Japan

The CBDT has signed its first bilateral advance pricing agreement (APA) with Japan. The APA regime was introduced in 2012 and it allows taxpayers and tax authorities to determine in advance, an appropriate transfer pricing methodology for a given set of transactions.

In what can be considered as a positive, the CBDT has signed its first APA within 18 months. Although the name of the company is unknown, sources suggest that it is a Japanese trading company.

The agreements have been signed at 3 levels under this Bilateral APA. The first agreement is between the Competent Authorities of India and Japan. The second agreement is between CBDT and the Japanese company in India. And the third agreement is between the Japanese tax authority and the group company in Japan.

This Bilateral APA is important for two reasons - firstly, it reduces the transfer pricing litigation as it indicates consensus between the tax department and the taxpayer on the arm’s length price for that particular international transaction. Secondly, it reduces the risk of potential double taxation.