Section 92CC Advance Pricing Agreement

Section 92CC Advance Pricing Agreement — Time Limit if Agreement Becomes Void

Extract of Income Tax Act of India for Section 92CC

Section 92CC of the Income Tax Act of 1961 deals with Advance Pricing Agreements (APAs). An APA is an agreement between a taxpayer and the tax authority determining the transfer pricing methodology for pricing the taxpayer’s international transactions for future years. This section aims to provide taxpayers with certainty regarding transfer pricing.

Section 92CC(1): The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

Section 92CC(2): The manner of determination of arm’s length price referred to in sub-section (1) may include any method, whether specified in section 92C or the rules made thereunder, or any other method.

Section 92CC(3): Notwithstanding anything to the contrary contained in this Act, the arm’s length price of any international transaction, which is covered under the agreement referred to in sub-section (1), shall be determined in accordance with the advance pricing agreement.

Section 92CC(4): The agreement referred to in sub-section (1) shall be binding—

• (a) on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and
• (b) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

Section 92CC(5): The agreement shall not be binding if there is a change in law or facts having a bearing on the agreement so far as it relates to the international transaction entered into by the person.

Section 92CC(6): The agreement referred to in sub-section (1) shall be valid for such period as may be specified in the agreement.

Section 92CC(7): The agreement shall be deemed to be void ab initio if it is found that the agreement has been obtained by the person by fraud or misrepresentation of facts.

Section 92CC(8): The Board, with the approval of the Central Government, may make a scheme specifying the manner, form, procedure, and any other matter generally in respect of the advance pricing agreement.

Purpose and Objective of the Act

The primary objective of Section 92CC is to provide certainty to taxpayers regarding their transfer pricing obligations. APAs help in minimizing disputes between the tax authorities and taxpayers concerning the arm’s length price of international transactions. The provision encourages voluntary compliance and reduces litigation costs by providing a pre-determined method for computing the arm’s length price.

Proper Reasoning

The introduction of APAs under Section 92CC is based on the following reasoning:

1. Certainty in Taxation: APAs provide taxpayers with certainty regarding their transfer pricing obligations, reducing the risk of future disputes with tax authorities.
2. Reduction of Litigation: By agreeing on a transfer pricing methodology in advance, both taxpayers and tax authorities can avoid prolonged litigation and administrative costs.
3. Mutual Agreement: APAs foster a collaborative approach between taxpayers and tax authorities, promoting mutual trust and cooperation.
4. Compliance Assurance: APAs encourage taxpayers to comply with transfer pricing regulations, knowing that their transactions will be evaluated based on agreed-upon terms.

Legal Recourse and Legal Proceedings

If an APA becomes void, the following legal recourse and proceedings are applicable:

1. Notice of Voiding: The tax authorities will issue a notice to the taxpayer stating that the APA has been deemed void ab initio due to fraud or misrepresentation of facts.
2. Re-assessment: The tax authorities may reassess the taxpayer’s income for the years covered by the void APA, using the standard transfer pricing provisions.
3. Right to Appeal: The taxpayer has the right to appeal the decision of voiding the APA. This appeal can be made to the Income Tax Appellate Tribunal (ITAT) or higher judicial authorities.
4. Penalties and Interest: If the APA is voided, the taxpayer may be liable for penalties and interest on the reassessed tax liabilities.

Do’s and Don’ts

Do’s:

• Ensure all information provided in the APA application is accurate and complete.
• Maintain transparency and honesty in all dealings with tax authorities.
• Keep detailed documentation supporting the transfer pricing methodology and transactions.
• Seek professional advice to ensure compliance with all APA requirements.

Don’ts:

• Do not provide false or misleading information in the APA application.
• Avoid withholding any material facts that could impact the APA.
• Do not assume the APA is permanent; be aware of the conditions under which it can be voided.
• Do not ignore any changes in law or facts that might affect the validity of the APA.

Example

Scenario: ABC Ltd., an Indian subsidiary of a multinational company, enters into an APA with the Indian tax authorities for its international transactions with its parent company. The APA specifies the transfer pricing methodology for a period of five years. During the third year, it is discovered that ABC Ltd. had misrepresented certain key financial facts in its APA application.

Notice of Voiding: The tax authorities issue a notice to ABC Ltd., stating that the APA is void ab initio due to the misrepresentation of facts.

Re-assessment: The tax authorities reassess the income of ABC Ltd. for the first three years covered by the void APA, using the standard transfer pricing provisions instead of the agreed methodology.

Right to Appeal: ABC Ltd. decides to appeal the decision, arguing that the misrepresentation was not intentional and providing additional documentation to support their case.

Penalties and Interest: If the appeal is not successful, ABC Ltd. will be liable for penalties and interest on the additional tax liabilities arising from the reassessment.

Conclusion

Section 92CC of the Income Tax Act, 1961, provides a framework for Advance Pricing Agreements, offering taxpayers certainty and reducing transfer pricing disputes. However, it is crucial for taxpayers to provide accurate and complete information when entering into an APA, as any fraud or misrepresentation can render the agreement void ab initio. By understanding the provisions, objectives, and proper procedures associated with Section 92CC, taxpayers can effectively navigate the APA process and ensure compliance with transfer pricing regulations. Proper documentation, transparency, and adherence to the agreed terms are essential to maintaining the validity of an APA.