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  Notification No. 32 CENTRAL BOARD OF DIRECT TAXES

CBDT seals more than 100 advance pricing agreements
September, 26th 2016

The APA scheme, introduced in the Income Tax Act in 2012, is aimed at providing certainty to taxpayers in the domain of transfer pricing by specifying the methods of pricing and setting the prices of international transactions in advance.

The Central Board of Direct Taxes (CBDT) on Friday said it has entered into five unilateral advance pricing agreements (APAs) with Indian taxpayers. One of these agreements has a rollback provision in it. With these signings, the total number of advance pricing agreements entered into by the CBDT has reached 103, the finance ministry said in a statement.

The APA scheme, introduced in the Income Tax Act in 2012, is aimed at providing certainty to taxpayers in the domain of transfer pricing by specifying the methods of pricing and setting the prices of international transactions in advance. These agreements allow MNC units to declare a value for their transactions with their overseas parents, under the rules prescribed by India, and avoid audit or questioning by Indian authorities for five years. As for bilateral APAs, the tax authorities in the home country of the MNCs could accept the taxes paid in India by the Indian unit as a valid business expenditure, negating the chances of double taxation.

Without naming the companies that have signed the advance pricing agreements on Friday, the finance ministry said that they pertain to diverse sectors such as information technology, sourcing services and investment advisory services. The 103 APAs signed so far include four bilateral APAs and 99 unilateral APAs. A total 39 APAs have been concluded in six months of the current financial year.

The profitability of contract research and development centres set up in India by global IT and IT-enabled services firms has been a major area of dispute between them and the Indian tax department. Based on its internal benchmarks of industry averages and median industry price, the department demanded higher taxes by ascribing higher profitability to such units.

It had, for instance, attributed about 30-40 per cent profitability to contract research units, while the firms claimed to have eked out much less.
The higher estimates of profit margin allowed the taxman to revise upwards the value of the service rendered by the captive Indian units to its overseas parent, in what could inflate the tax liabilities of these units.

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