Bilateral APAs – India’s preferred method of dispute resolution

Hitesh Gajaria & Manoj Pardasani

India’s Advance Pricing Agreement (APA) programme which came into existence in 2012, has been gaining momentum, with a large number of APA conclusions. It has become a preferred method of dispute resolution for taxpayers, providing relief to those who had thus far been entangled in protracted litigation. The approach of the APA authorities in dealing with taxpayers too has been cordial and non-intrusive and also open to suggestions to resolve issues distinct to a taxpayer’s business.

Till date India has an impressive tally of 173 unilateral APAs and 17 bilateral concluded APAs. Bilateral APAs have been signed with countries like Japan, the UK, Netherlands, and now most recently with the USA. Currently, India has bilateral APA applications in progress with countries like the UK, South Korea, Australia, Switzerland, the Netherlands, Sweden, Denmark, Canada, Finland and Sri Lanka.

Even as unilateral APAs take lesser time to conclude and are easier to implement, bilateral APAs have a relative advantage in which they conclusively mitigate the possibility of double taxation. Bilateral APAs are also very well suited in cases where the business operations of a multinational group across jurisdictions are highly integrated or where there are complex transfer pricing issues such as intangibles, profit sharing arrangements, etc. Further they are crucial, so as to ensure availability of corresponding adjustments to income in both jurisdictions. This administrative action, post successful conclusion of a Bilateral APA effectively relieves economic double taxation. Further, the nature of transactions covered in bilateral APAs include availing of intra-group services, purchase and sale of goods and provision of marketing/sales support services, etc. The most preferred transfer pricing method used to arrive at the Arm’s Length Outcome is the Transactional Net Margin Method.

The APA Annual Report (2016-17) released in 2017 by the Central Board of Direct Taxes (CBDT) notes the increase in the number of bilateral APA applications filed and also in the number of conversions from unilateral APA to bilateral APA applications. This is ever since the USA opened its bilateral APA programme with India in February 2016. The same report also notes that the average time duration for processing bilateral APAs in India, has been 39 months which is better than the U.S. average duration of 51 months.

The first bilateral APA was signed in December 2014 between India and Japan and in February 2016, two bilateral APAs were signed with the U.K. on the complex and litigated issues of management charges and brand royalty. The first bilateral APA with a rollback provision was entered into with a Japanese trading company in August, 2016. In November 2016, three bilateral APAs were signed with the U.K. (with rollback provisions) covering payments for intra-group service charges in the telecom industry. In March 2017 another bilateral APA was concluded with a subsidiary of a Japanese trading company with rollback provision. The total number of bilateral APAs signed with Japanese subsidiaries is five in all with rollback provisions. This provides certainty in tax treatment for ’Sogo Soshas’ (trading giants) which had been a long standing demand of the Japanese government and industry. In November 2017, two bilateral APAs pertaining to electronics and technology sectors, were concluded with the Netherlands.

In January 2018, India signed its first ever bilateral APA with USA. The APA involved the determination of an appropriate mark-up on cost for Information Technology (IT) / Information Technology Enabled Services (ITES) transactions undertaken by an India captive centre to support the U.S. operations of the group. This is a huge step forward for the Indian APA regime, as the USA had started accepting applications for bilateral APAs from U.S. taxpayers only in February 2016. Thus, effectively the first Indo-US APA has been concluded in less than a year.

The number of bilateral APAs being filed is all set to rise in the near future with India now deciding to accept transfer pricing Mutual Agreement Procedure (MAP) and bilateral APA cases even where Article 9(2) of the Double Taxation Avoidance Agreement (DTAA), which speaks about ’Corresponding Adjustment’ is absent. Till recently, India did not accept such applications. In the past few years, there has been an active attempt by the Indian government to make bilateral APAs available to more taxpayers by including Article 9(2) in the revised DTAAs with countries like South Korea and Singapore. However, India still does not have Article 9(2) in its DTAAs with some of its major trading partners including Belgium, Germany and France. The CBDT’s acceptance of Bilateral APAs with even these countries is a major step forward to amicably arrive at a resolution and ensure economic non double taxation.

The momentum gained by the Indian government in resolving satisfactorily a number of large cases in a relatively short timeframe is commendable. This can be is attributed to the focussed approach, knowledge and competence of India’s officials in the CBDT.  With the Organisation of Economic Cooperation and Development’s (OECD) recommendations on Base Erosion and Profit Shifting Action Plan 13 being implemented in various jurisdictions the world over, including India, possibility of increasing transfer pricing disputes cannot be ruled out.  In such an evolving environment APAs seem to be the most preferred choice of taxpayers to resolve disputes and gain tax certainty.

(Co-Authored by Hitesh Gajaria, Partner, Tax, KPMG in India, and Chartered Accountant Manoj Pardasani)