India Signed 95 Advanced Pricing Agreements in FY23 for Tax Certainty

The Advanced Pricing Agreements in India address complex transfer pricing issues, mitigating the need for litigation and align with India's objective of enhancing the ease of doing business.

India’s tax department, the Central Board of Direct Taxes (CBDT), released the fifth annual Advanced Pricing Agreement (APA) report in early September. The report provides essential data and statistics related to the APA program, covering aspects such as the distribution of applicants across sectors, the nature of transactions addressed, and the transfer pricing methodologies employed.

The fifth report offers an update on the status of applications filed until March 31, 2023, with statistics reflecting developments up to the Financial Year (FY) 2022-23. This period saw the CBDT recording the highest number of APA signings in any fiscal year since the inception of the program, with a total of 95 APAs.

The CBDT also entered into 32 Bilateral Advance Pricing Agreements (BAPAs) in FY23, marking the highest number of BAPAs in any financial year to date. This figure represents a notable increase, more than doubling the previous record of 13 BAPAs signed in a single fiscal year.

The APA report provides insights into the country-wise distribution of these advanced pricing agreements, highlighting engagements with tax treaty partners such as Finland, the UK, the US, Denmark, Singapore, and Japan. This reflects the growing maturity of India's relationships with various treaty partners.

India also recorded the largest number of APA signings in a single day, with a total of 21 APAs signed on March 24, 2023. Rounding up other key milestones, FY23 saw the signing of the 400th Unilateral Advance Pricing Agreement (UAPA) and the 500th APA.

So far India has filed a total of 516 APAs bringing finality in taxation to income of about INR 190 billion (US$2.28 billion). This, per the CBDT, translates to a payment of about INR 70 billion (US$840 million).

What is the advanced pricing agreement program?

Since its initiation in July 2012, the Advance Pricing Agreement program has successfully addressed numerous intricate transfer pricing issues that were susceptible to prolonged and costly litigation. The APA program addresses actual or potential disputes and provides tax certainty to MNCs by allowing them to negotiate how profit margins for India operations will be calculated.

The APA program provides an alternate and effective dispute resolution mechanism to bring uniformity in laws dealing with transfer pricing in India, as the existing administrative and judicial institutions fail to address specific questions of law while focusing primarily on the questions of facts.

Through the APA program, India aims to deliver a non-adversarial tax regime for foreign investors. Other benefits of an APA include avoiding rigorous and burdensome audit requirements while delivering the tax outcome on the basis of agreed terms of the agreement.

Impact of the Advanced Pricing Agreement program in India

The effectiveness of the Advance Pricing Agreement program in enhancing the ease of doing business environment is apparent in its consistent provision of certainty in transfer pricing matters and the subsequent reduction in litigation. Despite its relatively brief tenure in India, the APA program has collectively ensured certainty for a cumulative duration exceeding 3200 years.

The Advance Pricing Agreement program also helps to alleviate the burden on tax tribunals and higher courts, specifically concerning transfer pricing litigation. Even under a conservative estimate, assuming only half of these assessment years would have resulted in litigation, the APA program has effectively averted or resolved litigation for over 1600 assessment years, equivalent to more than 1600 appeals related to transfer pricing matters. Per the fifth annual report, in the previous financial year alone, the APA program delivered tax certainty for more than 500 assessment years annually.

Unilateral Advanced Pricing Agreements

Average processing time

The average time for concluding UAPA applications in the fiscal year 2022-23 was approximately 59.73 months. When considering the average duration of processing on a cumulative basis, it is approximately 44.2 months.

Sectoral distribution of UAPA applicants

As observed, a significant portion of UAPA applications leading to APA agreements in FY 2022-23 is related to the service sector.

Among these, a notable majority consists of captive companies engaged in software development and IT-enabled services. Some of these companies also operate in engineering design services, contract R&D services, and Knowledge Process Outsourcing (KPO).

Overall, out of the 63 companies with which the CBDT reached agreements, 14 engage in manufacturing activities, and 11 are engaged in trading activities.

Thus, the entire spectrum of trading, manufacturing, and services is covered under the signed UAPAs.

Industry-wise distribution of UAPAs

The predominant share of UAPAs executed during the fiscal year 2022-23 apply to the information technology (IT) industry, banking and insurance, and engineering services.

This underscores India's status as a prominent outsourcing hub for IT and business processes, with a substantial presence of foreign multinational enterprises (MNEs) in key IT clusters like Bengaluru, Hyderabad, Chennai, Gurgaon, and Noida.

Additionally, there is a growing representation of the pharmaceutical / chemical industry in the signed APAs, reflecting the global significance of the Indian pharmaceutical sector.

Location of Associated Enterprises

During the FY23, 63 Unilateral Advance Pricing Agreements were established with Associated Enterprises (AEs) spanning 130 countries. Typically, a single APA encompasses AEs situated in various jurisdictions, with the transactions involving these AEs serving as the primary covered international transaction or a closely linked transaction, such as reimbursement/recovery of expenses.

In a majority of instances, AEs are situated in the United States, the United Kingdom, France, and Germany, reflecting the global reach of the APA applicants, often subsidiaries of MNE groups based in these countries. Additionally, numerous AEs are located in key investment and business hubs, such as Singapore, Hong Kong, and Ireland.

The below table indicates the top 35 country jurisdictions of the AEs, which have entered UAPAs with India.

Dezan Shira & Associates' transfer pricing practice specializes in assisting companies engaged in transactions with related parties to navigate transfer pricing issues. Our team of tax professionals offers comprehensive services customized to each client's specific requirements, taking into account the distinctive nature of their business operations. Whether you require support with transfer pricing documentation, benchmark studies, tax audits, or monitoring transfer pricing policies, please reach out to us at india@dezshira.com. We are here to provide tailored solutions to address your transfer pricing needs.