Indian APA Program Grows as MNEs Avoid Transfer Pricing Disputes

Transfer pricing provisions stipulate that related party transactions meet the “arms-length price” criterion, meaning that they reflect the conditions and remuneration set in comparable transactions between unrelated parties.

However, the element of subjectivity in applying this rule can lead to uncertainty. As a result, transfer pricing issues often can prompt tax litigation.

The Indian Income-tax Act, 1961 aims to provide certainty and consistency for taxpayers with the option of using an advance pricing agreement. This offers an opportunity for taxpayers to enter into an agreement with the income tax department to determine the arm’s-length price, or to specify how it is to be determined for a set of international transactions for a fixed period of time.

Since its introduction in July 2012, the Indian APA program has grown as a tool to mitigate transfer pricing litigation, achieve certainty, prevent judicial overload, and resolve complex transfer pricing issues which otherwise could be subject to lengthy litigation.

The APA program thus provides a good opportunity for foreign taxpayers and multinationals to mitigate transfer pricing disputes by agreeing the arm’s-length price/method of its determination in advance with the Indian income tax department.

The sixth annual APA report recently published by the Central Board of Direct Taxes shows that as at March 31, 2024, the CBDT successfully signed 641 APAs (providing closure to approximately 3,400 transfer pricing assessment years). This has finalized taxation of income of about 250 billion Indian rupees ($2.9 billion), which translates into collection of tax of approximately 75 billion Indian rupees, free of litigation.

The Indian financial year 2023-24 recorded 125 APA signings, the highest in any single year since the start of the APA program—including 39 bilateral APAs with countries such as the US, UK, Australia, Canada, Denmark, Japan, and Singapore.

While the law doesn’t prescribe any specific timeline for the completion of an APA, the average processing time typically has been around four to five years. Ideally, this will gradually reduce.

Why consider an APA? One of the most significant features of the APA program is its binding nature on the taxpayer as well as the Indian income tax department. This helps to achieve tax certainty by resolving transfer pricing issues such as payment of royalty/license fees, payment of interest on borrowings that may otherwise result in drawn-out litigation—saving time, energy, and resources.

A taxpayer can enter into an APA at one time for a maximum period of five consecutive years. The program also provides for a “rollback mechanism” where the APA can be applied to the same “international transactions” already undertaken by the taxpayer during the four years immediately preceding the period covered under the APA.

This means an APA can effectively provide certainty from a transfer pricing standpoint for the covered transactions for nine consecutive years.

Which sectors are using the APA program? Unlike the “safe harbor rules” system—which is restricted to a specified set of transactions, such as providing software services, IT-enabled services, and corporate guarantees—the scope of the APA program isn’t limited.

Multinational enterprises in the information technology sector and services sector, or that have intra-group transactions such as back office services, software development, and IT-enabled services are likely to be the biggest beneficiaries of the APA program as they tend to have recurring similar related party transactions every year. For multinationals that have such type of transactions, annual tax certainty is important.

With India becoming a preferred destination for establishing global capability centers, the APA program’s success is likely to increase.

Some key considerations for multinationals. First, taxpayers should be mindful of the concept of “critical assumptions” in the APA program. These are defined as “the factors and assumptions that are so critical and significant that neither party entering into an agreement will continue to be bound by the agreement, if any of the factors or assumptions is changed.”

Essentially, these are the foundational aspects of an APA so any change in them can lead to the APA losing its binding force.

Second, taxpayers should be mindful of the timeline. As mentioned above, the average processing time for completion of an APA has been typically around four to five years.

Third, prospective applicants should consider whether they want to enter an APA with the Indian income tax department only or with the tax authorities of foreign jurisdictions as well. There has been a steady increase in the signing of bilateral APAs over the years, as they provide certainty in both tax jurisdictions involved in a related party transaction.

Reducing the judicial burden. In recent years, the Indian government has taken several steps to reduce the judicial burden that include:

• Maintaining a minimum threshold of tax effect to be involved in a matter if the income tax department is to file an appeal to the higher appellate forums, set at different levels for the relevant tribunal or court
• Safe harbor rules—specified scenarios where a transaction price declared by a taxpayer is accepted by the income tax department
• The proposed block transfer pricing assessment concept announced in the recent Union Budget 2025, providing the option to a taxpayer for determination of the arm’s length price for three years where similar transactions are involved.

With the rapid increase of cross-border business and trade, transfer pricing litigation has the potential to surge. Tax certainty in an offshore jurisdiction is of paramount importance for any investor or business group. Multinational enterprises can consider the APA framework as an alternative tool to mitigate transfer pricing litigation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Raghav Bajaj is Counsel and Mihir Chitalia is Senior Associate with Khaitan & Co.

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