APA - A level playing field in TP litigation?

June 12,2018
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Ajit Kumar Jain (Partner, Ajit Kumar Jain & Co. LLP)

Siddhesh Chaugule (Assistant Manager, Ajit Kumar Jain & Co. LLP)

The CBDT introduced the Advance Pricing agreement (‘APA’) scheme in 2012. The CBDT set out FAQs on APA in May 18, 2013. As per FAQs there will be a confidentiality clause however, the information filed before the APA authorities could be shared with the tax officers or audit officers. Hence, a question lingers in the mind of taxpayers whether the taxpayer or the revenue can rely on the APA agreement during appeal proceedings before the CIT(A) or the ITAT or the High Court?

Taxpayers have already taken arguments based on the APA agreement and filed the agreement before the ITAT to seek a favourable judgement.

In Spencer Stuart India Ltd,[1] the Mumbai ITAT accepted the taxpayer’s reliance on the APA entered between taxpayer and the Government of India whereby a separate benchmarking was agreed for international transactions of License fee and Executive search fee by using Profit Split Method for Executive search fee and Comparable Uncontrolled Price method for license fee.

In Ranbaxy Laboratories Limited[2] the Delhi ITAT heavily relied on the APA signed between the taxpayer and the Government of India in the subsequent years. The ITAT upheld the foreign AE being the tested party as held in the APA signed in subsequent years wherein CBDT approved selection of foreign AEs as tested party with TNMM as the most appropriate method. The ITAT further held “that assessee’s Functional, Assets & Risk (“FAR”) analysis as well as international transactions for APA year as well as year under appeal were identical and adequate financial data for comparison on region basis / country basis were available, the APA agreement entered into by CBDT with the assessee has considered all the aspects of the manner of determination of ALP which are also similar for the year, should be given highest sanctity and therefore mechanism suggest in that agreement should be necessarily followed in determining ALP of the transactions for this year”

In Ameriprise India Pvt Ltd[3] the Delhi High Court relied on the APA filed in the case of the taxpayer in the subsequent years to uphold the finding of the ITAT that the cost-plus pricing methodology in taxpayer’s case was according to the agreement entered between the taxpayer and its AE.

In AXA Technologies Shared Services Pvt[4] Ltd the taxpayer representative filed a copy of the APA application entered between the taxpayer and the Government of India for a different year to contend that the Management fee and ITES transaction is a composite transaction and should be benchmarked together and they cannot be segregated. The Bangalore ITAT held that the department segregating the transaction and benchmarking them separately is contrary to the stand taken by the department under APA hence such a position cannot be allowed. The ITAT set aside the matter to the AO/TPO to consider the matter fresh by considering management fee cost as part of operating cost of ITES Transaction.

Hence, from the above reported judgements we note that the ITAT have accepted the APA agreement as an evidence and decided the matter.

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