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Transfer pricing: Encouraging developments on APA and MAP
August, 27th 2015

In July 2012, with a view to providing certainty and creating a non-adversarial tax regime in India, the government introduced the Advance Pricing Agreement (APA) program and further enhanced its effectiveness and aligned it to international practice by allowing rollback of APA from October 2014.

APA and MAP score card

Over 500 APA applications have been filed in the last 3 years since the advent of the APA regime that suggests an overwhelming response to the program. Of course, in large measure, the quest for APAs is fueled by the aggressive annual transfer pricing audits of the Indian Revenue, that leads on to considerable litigation and gives rise to contingent tax liabilities. Of these, about 14 agreements have been concluded. A recent Central Board of Direct Taxes (‘CBDT’) press release of August 6, 2015 announced signing of 2 unilateral APAs, including one with a rollback provision, and this has raised hopes of many MNCs, that hope to witness expeditious and reasonable closures. Amongst the APAs concluded is a bilateral with Japan.

Besides APAs, 35 (Mutual Agreement Procedure) MAP cases have also been settled (pertaining to transfer pricing issues in the IT / ITeS sectors) between India and US, and another 100 are in the pipeline which are likely to be resolved in three months. Resolution of MAP cases that were pending for several years provide US MNCs the ability to avoid double taxation by providing for correlative adjustments on the transfer prices agreed between the Competent Authorities. By concluding on a broad framework to resolve transfer pricing disputes in IT / ITeS sector, the resolutions pave the way for eventual bilateral APAs between India and US.


Recent news reports suggest that out of the about 550 APA applications filed, 35 percent are from IT / ITeS sector, which is the industry that is most susceptible to transfer pricing adjustments. Sources suggest that the APAs are concluded at around 17 percent to 18 percent. Recent MAP outcomes are also understood to be around 17 percent. These outcomes have to be viewed from the perspective of alternative dispute resolution options. In contrast, safe harbor rules provide for markups in the range of 20 percent and 22 percent (depending on the turnover of the international transactions). And Tribunal rulings that typically provide considerable relief by eliminating companies that are not comparable enable companies operating at markups in the region of 12 percent to 14 percent to be at arm’s length.

Whereas the APA outcomes in IT / ITeS sector were very fact driven and are apparently lower than safe harbor markups, which is entirely logical, it appears that there is still room for negotiation on matters such as working capital adjustments, technical expertise of work force and its utilization / competency building, and also the model in which it operates, aside from the comparables, that could potentially result in more favorable and differentiated outcomes. Further, bilateral APAs could well lead to markups being agreed that are closer to judicial precedents or MAPs, due to the intervention of the Competent Authorities of the foreign jurisdiction. To this extent, US corporates in particular, operating in India can consider converting the unilateral APA applications filed by them into bilateral APAs in order to obtain correlative relief.

Japanese connection

The Delhi Tribunal recently ruled on Marubeni Itochu Steel India Pvt Ltd (ITA No 761/Del/2015), upholding the adoption of the Berry ratio (the ratio of gross profit to operating expense) as a profit level indicator. The ruling, which followed Mitsubishi India Pvt Ltd (ITA No 5042/Del/2011), upheld globally accepted principles around Sogo Soshas* transactions and the principles of the ruling are likely to influence the authority’s view whilst negotiating MAPs and bilateral APAs (and unilateral APAs with the same fact pattern). To that extent, it is part of the continuing dispute resolution with Japan that will seek to build closer economic ties between India and Japan. In fact, several Sogo Soshas have applied for APAs – some close to finalization.

Notably, the Berry Ratio is not customarily to be applied to low risk distributors, but would be especially relevant in the case of Sogo Soshas, that are a unique business model, and peculiar to Japanese business houses, in case the fact pattern mirrors the ‘matchmaker’ functions.


There continues to be sustained interest among taxpayers for APAs (although several first movers have already filed and are ahead of the curve), and this is accentuated by the litigative transfer pricing environment. To this extent, the APA with rollback is an appealing proposition. APA applicants have been appreciative of the constructive approach of the APA authorities, and building on such attitude would enable taxpayers to gain confidence in the entire APA process. Even so, there remains a large backlog of cases, created by the fact that several APAs were filed in the first three years – approx. 140 in 2012-13, 230 in 2013-14 and 150 in 2014-15. Besides, rollback rules introduced in 2015 necessitated reworking of APA applications filed to accommodate the prior years. Catalysing the closure of the APAs would provide impetus to the foreign investment climate in the country.

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