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Tax Insights
2 September 2023
Fourth and Fifth APA Annual Reports published – CBDT
In brief
The Central Board of Direct Taxes (CBDT) released the Fourth and Fifth Annual Reports on the Indian Advance Pricing Agreement (APA) Programme (APA Report) on 29 August 20231 and 1 September 20232, respectively.
The Fourth APA Report highlights the progress made in the financial years (FY) 2019–20 to 2021–22, while the Fif th APA Report elaborates on APA developments in FY 2022–23. Despite the impact of the COVID-19 pandemic on a few years, the APA statistics continue to be encouraging as the total APA tally has reached 516, cumulatively bringing tax certainty to over 3,200 FYs. It is estimated that the 516 signed APAs have resulted in bringing finality in taxation to income of about INR190,000m which translates into payment of tax of about INR70,000m.
Notably, FY 2022–23 was a record-breaking year for the APA programme as it saw the highest ever APA signings (95) in any FY since the start of the APA programme, the highest number of Bilateral APAs (BAPA) (32) signed in any year, and a record of the largest number of single day signings (21) in the history of the programme on 24 March 2023. Additionally, the signing of the 400th Unilateral APA (UAPA) and 500th APA were also milestones achieved in FY 2022–23.
A noteworthy development highlighted in the Fourth APA Report is the amicable resolution of intra-group services (IGS) transactions, a widely litigated issue, under both UAPA and BAPA. Also, for the first time, the Fourth and Fifth APA Reports acknowledge that the APA programme is an important tool to decongest the tax tribunals and higher judiciary of transfer pricing (TP) litigation. However, there was a significant increase in the time taken to conclude APAs in FYs 2019–20 to 2022–23 over the average of prior periods, primarily due to closure of backlog cases and resolution of more complex cases in recent years.
For the f irst time ever, the CBDT has also published statistics related to Mutual Agreement Procedure (MAP). A remarkable development is the resolution of more than 180 MAP cases each in 2020 and 2021, and a decline in India’s overall MAP inventory to 697 cases as on 31 March 2023.
In detail
The APA programme was introduced in 2012 for providing a non-adversarial approach to the taxpayer. The First APA Annual Report was released in April 2017, detailing aspects of its efficacy for the five operational years. The Second and Third APA Reports, which were released in September 2018 and November 2019
1 Advance Pricing Agreement (APA) Report
2 APA report (for FY 2022-23)
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respectively, focused on performance and statistics related to FYs 2017–18 and 2018–19. After a gap of almost f our years, the CBDT has now published the Fourth and Fifth APA Reports covering statistics and qualitative insights for FYs 2019–20 to 2022–23.
Key statistics and qualitative insights Overall
A total of 57 APAs were signed in FY 2019–20, 31 APAs in FY 2020–21, 62 APAs in FY 2021–22 and 95 APAs in FY 2022–23. The number of APAs signed in FY 2020–21 dropped primarily due to the impact of COVID-19 but showed an impressive upswing in FYs 2021–22 and 2022–23. The APA Report acknowledges that adaptive measures such as virtual discussions and remote signing protocols contributed to this increase.
In terms of the years covered by the APAs signed during FYs 2019–20 to 2021–22, on an average, the CBDT managed to provide tax certainty to more than 300 assessment years (AYs) annually. Moreover, in FY 2022–23 itself , the APA programme provided tax certainty to more than 500 AYs annually.
The total number of APA applications filed remained largely consistent from FYs 2017–18 to 2019–20 (165 applications on an average) before a sharp drop in FY 2020–21 (93 applications) and FY 2021–22 (87
applications), possibly because the COVID-19 pandemic may have impacted the decision of certain taxpayers to participate in the APA programme. However, the number of filings bounced back in FY 2022–23 (193), primarily driven by the highest number of BAPA filings (77) ever.
While the APA application filing trend has shown a 3:1 preference in terms of UAPA and BAPA applications in the past, the share of BAPAs in the total APA applications filed has steadily been increasing, signifying the conf idence in the quick and efficient resolutions of BAPAs by India with many of its treaty partners.
Out of the 1,659 APA applications filed till 31 March 2023, a total of 831 applications have been disposed of, and 828 applications are still under processing. The Fourth APA Report categorically clarifies that applications tagged as ‘under processing’ include applications where the applicant has neither been responsive to the queries of the APA team nor has shown much interest in engaging in the APA process but has also not withdrawn its application.
UAPAs and BAPAs
Particulars UAPA BAPA
Number of APA applications
Decreased from an average of 100 every year till FY 2019–20 to 55 in FY 2020–21 and 50 in FY 2021–22. However, the applications bounced back to 116 in FY 2022–23.
Consistent with the average of 37 applications filed every year till FY 2019–20, 38 applications were filed for FY 2020–21 and 37 for FY 2021–22.
However, FY 2022–23 was a landmark year with 77 applications being filed.
Number of APAs signed
A total of 420 UAPAs were signed till 31 March 2023. Among these, 180 were signed during FYs 2019–20 to 2022–23 (out of which 59 had a rollback).
A total of 96 BAPAs were signed till 31 March 2023. In FY 2022–23 itself, 32 BAPAs were signed, recording almost a three-f old increase in BAPA
signings.
Moreover, an overwhelming majority of 63 applicants out of 96 who have signed a BAPA opted for renewal of the APA till date.
Processing period Out of the total 420 UAPAs inked till 31 March 2023, only 64 UAPAs were signed within two years, while most took three to f our years to resolve.
Notably, the average time taken to conclude BAPAs during FYs 2019–20 to 2021–22 was approximately 71 months, which reduced to
approximately 62 months in FY 2022–
Particulars UAPA BAPA The average duration of processing
UAPAs since the start of the APA programme has been approximately 44 months. The average time taken to process UAPAs was approximately 56 months during FYs 2019–20 to 2022–23.
23. The average time taken to process all BAPAs concluded till 31 March 2023 was approximately 59 months.
Reason f or increased processing period
The APA Report attributes the reason for the long processing time to the closure of backlog cases and resolution of more complex cases in recent years.
The COVID-19 pandemic contributed to the delay in concluding the BAPAs during FYs 2020–21 and 2021–22.
Moreover, the Fourth and Fifth APA Reports specifically highlight that several BAPAs are resolved much bef ore they are finally signed.
However, due to various reasons such as the desire of the applicants to conclude both the unilateral and bilateral legs of the application
together, the applicant waiting to clear the draf t of agreements through multiple levels of internal approvals, etc. the f ormal signing takes longer even af ter bilateral resolution, which increases the final duration of processing of BAPAs.
Sector and industry coverage
The service sector continues to lead the number of UAPAs signed (118 UAPAs in FYs 2019–20 to 2022–23),
predominantly from the IT, banking and insurance, and engineering services industry. This is consistent with the trend seen in the previous APA Reports.
It is interesting to note that companies involved in manufacturing and trading activities have recorded an uptick in the APAs signed. In FY 2022–23, the pharmaceutical and chemical industry saw an increased representation in the APAs signed.
The service sector, predominantly the IT industry, continues to dominate the BAPAs concluded during FYs 2019–20 to 2022–23, and service-related transactions continue to lead the transaction mix.
Covered transactions Some of the notable covered transactions are as f ollows –
• Generation of marketing intangibles
• Interest on trade credits
• Waiver of liability received
• Provision of data analytics services
• Repayment of External Commercial Borrowings
• Contract manufacturing of pharmaceutical products
Some of the notable covered transactions are as f ollows –
• Transfer of intellectual property rights
• Provision of data hosting services
• Import of capital assets
• Deemed international transactions
• Provision of new product launch services
• Import of assets free of charge
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Particulars UAPA BAPA
• Provision of CAPEX charges
• Deemed international transactions
• Grant of non-exclusive and recoverable license
• After-sales service income during warranty period
• Provision of welcome support centre services
TP methods used While the transactional net margin method (TNMM) and other method have typically been the most preferred method f or benchmarking transactions as highlighted in previous APA Reports, interestingly, in FYs 2019–20 to 2022–
23, the comparable uncontrolled price method, cost plus method and resale price method have also been adopted.
TNMM continued to be the most applied method in the BAPAs concluded during FYs 2019–20 to 2022–23. Notably, the profit split method has been considered as the most appropriate method in some transactions.
Global coverage As the APA programme leaves a global f ootprint, of the various countries where the associated enterprises of Indian applicants are located, the USA tops the list, f ollowed by China, the UK,
Singapore, etc.
The maximum number of BAPAs signed so far have been with the USA f ollowed by the UK and Japan. More than 70% of the total BAPA
applications that are still under
processing are with f ive countries – the USA, the UK, Japan, Switzerland and Singapore.
IGS APAs
Receipt of IGS has been acknowledged in the Fourth APA Report as being amicably settled under both UAPA and BAPA. As per the Fourth APA Report, 51 IGS transactions have been settled under UAPA and 8 under BAPA. The Fourth APA Report acknowledges that IGS transactions are widely litigated, and their coverage by APAs is an indication that this issue can be amicably resolved by collaboration between the tax department and industry.
MAPs
For the f irst time, the CBDT has published statistics related to MAPs. The number of MAP cases closed in 2020 (182), 2021 (184) and 2022 (144) are substantially more than the number of new MAP applications invoked in these years (271). As a result, the total number of MAPs in India’s inventory is gradually reducing. The closing inventory of MAPs is 697 cases as on 31 March 2023.
The takeaways
The APA programme has matured over the past ten years, and the various statistics prove that APAs are the solution to resolve TP issues instead of the long litigation route in India. With the resolution of TP issues which were prone to litigation under the APA programme, the government has been able to divert resources away f rom the audit and litigation processes to more productive work and enhance the ease of doing business in India.
However, some challenges remain to be addressed in the APA programme. Due to the high number of APA applications filed in the initial years, there is a huge backlog of cases which are yet to be resolved
(approximately 50% of the total APA applications). Also, some of the complex transactions are benchmarked using multiple methods (a primary method and a secondary method for sanity check). Moreover, with more complex cases being resolved, the APA Report has recognised the significant increase in the time taken for concluding APAs, and a commitment has been made to provide adequate human and physical resources to the APA programme.
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