In a step towards giving certainty to taxpayers in international transactions and bringing down litigation on transfer pricing disputes, the government on Monday signed the first batch of Advance Pricing Agreements (APA) with five multinationals in the field of pharmaceuticals, telecom, exploration and financial services.

As the country is going to have a new government after the elections in May, the agreements, covering five years from assessment year 2014-15 to 2018-19, provide comfort to India units of multinationals by specifying in advance the arm's length price for the international transactions entered into by them.

"The agreements provide complete certainty to the taxpayers for five years with regard to the covered international transactions. The whole scheme of APA has been designed with the intention of creating a taxpayer-friendly environment in transfer pricing matters and to minimise transfer pricing disputes," the Central Board of Direct Taxes said on Monday.

The unilateral pacts include a range of international transactions, including interest payments, corporate guarantees, non-binding investment advisory services and contract manufacturing. The government withheld the identity of the taxpayers for confidentiality reasons. It is embroiled in transfer pricing rows with Vodafone and Shell, but the APAs would not include past cases.

The department also did not reveal the profit margins agreed upon by them, fearing other taxpayers might make it the benchmark for their APA negotiation.

The industry welcomed the signing of APAs saying it would lend credibility to the government's efforts to provide certainty to taxpayers, particularly when safe harbour rules failed to attract taxpayers. It will be signing more APAs in the next few months since the process and methodology has been ironed out.

"This could have a positive impact on reducing transfer pricing litigation in India, with more taxpayers choosing this for managing dispute resolution," said Rohan K Phatarphekar, partner and national head, global transfer pricing services, KPMG.

Vijay Iyer, partner with EY, said in some concluded cases, the APA team had shown they were willing to deviate from safe harbour norms if the circumstances so deemed.

The APA programme came in effect on July 1, 2012, and at the end of the financial year in March 2013, the government had got 146 applications -the largest received by any country in the first year of APA. This year 250 applications have been filed.

For a department which has got flak for tax uncertainty and being unfriendly towards taxpayers, the conclusion of the first set of agreements in a year of its introduction is a feat. Applications received this year would be taken up the next financial year. Internationally, it takes two years to conclude an APA as the tax department does fact-finding on the foreign transactions of the Indian company with its related company.

"The APA team has 400 applications pending. This may go up the next year, unless safe harbour rules are made reasonable or the approach of the transfer pricing authorities becomes reasonable during audits," said S P Singh, senior director, Deloitte.

PwC, lead advisor in two of five APAs signed on Monday, said the professional and open approach of the authorities had been an enabler in the early success of the programme.

Before filing APA applications, taxpayers are given the opportunity to share their expectations from the APA process during the pre-filing consultations and the APA team shares a broader understanding of the coming APA procedure.

After receiving the application, the APA team works towards establishing the appropriate economic analysis of the covered international transactions. This involves a site visit, including physical verification of the business of the applicant.

Generally, an APA is valid up to five years and the Act provides for renewal, revision or cancellation of an APA under certain circumstances. During the five-year period, the taxpayer is required to file an annual report to confirm compliance with the terms of the APA. The tax authorities will then conduct a limited audit to ensure compliance.