Rule 10H on pre-filing consultation: A unique feature of Advance Pricing Agreements

Finance Act, 2012, introduced the concept of Advance Pricing Agreements (APA). APAs are common in other developed countries.

An Advance Pricing Agreement (APA) is an agreement between the taxpayer and the tax authorities on the pricing of international transactions between the taxpayer and its associated enterprises (AE). An APA provides certainty on the pricing to be adopted for the covered intercompany transactions. Further, a bilateral/multilateral APA eliminates the risk of potential double taxation arising from controlled transactions.

The government has framed rules for APAs. Rule 10H is a very interesting rule which deals with pre-filing consultation. Every applicant is required to apply for pre-filing consultation. Pre-filing consultation shall, among other things, (i) determine the scope of the agreement (ii) identify transfer pricing issues (iii) determine the suitability of international transaction for the agreement (iv) discuss broad terms of the agreement.

An assessee has an option not to go in for APA after pre-filing consultation. Up to this stage, no fee is payable to the Government. This kind of provision is an extremely welcome proposition, which will certainly encourage foreign companies to enter into APAs rather than take the risk of litigation in India.

Rule 10H talks about the steps which are required to be taken for pre-filing consultation, as below:

• Every person proposing to enter into an agreement under these rules shall, by an application in writing, make a request for a pre-filing consultation.
   
• On receipt of the request in Form No. 3 CEC, a team constituted by Director General of Income-tax (International Taxation) will hold pre-filing consultation with the applicant.

In the background of provisions relating to pre-filing consultation, the following issues need to be addressed:

Sub-rule 10H(6) of I.T. Rules, 1962 specifically provides that the pre-filing consultation shall not bind the board to enter into the agreement or initiate an agreement process.

Therefore, it is also possible that this entire exercise may prove to be fruitless because the proceedings are neither binding on the taxpayer nor on the board.

Composition of the team constituted by DG (IT) for consultations also needs to be considered. Sub-rule 10F(j) talks about composition of team as ""team" means advance pricing agreement team consisting of income-tax authorities as constituted by the board and including such number of experts in economics, statistics, law or any other field as may be nominated by the Director General of Income-tax (International Taxation)".

Since the team will be constituted entirely at the direction of DG(IT), its impartiality could be in doubt. The rules do not provide for any time limit for completion of APA procedure.

Whether taxpayers should opt for APA or not is a difficult question to answer. However, the taxpayers should bear in mind that the entire APA mechanism is controlled by the bureaucracy of the tax department. The dominance of tax department may be found not only irrational but also pro-revenue. But, since APA is essentially a bilateral agreement, the tax payer always has an option to opt out if not satisfied at any stage of the proceedings. Therefore, one view is that the taxpayers should make a serious effort to go in for APA and take the crucial decision to proceed or not only after the stage of pre-consultation.

It is necessary that the following problems should be addressed by the board on an urgent basis:

• The constitution of 'team' should be fair and independent. In the current provision of law the apprehension of tax payers that the composition of team could be biased and pro revenue cannot be ignored.
   
• There should be review committee for addressing the matter where assessee is dissatisfied with recommendations of the APA Team
   
• Some appeal procedure should be prescribed against the cancellation of APA made by Board under Rule 10R of I.T. Rules, 1962.
   
• There should be some time limit for completion of APA procedure.

It will not be out of place to remember that the experience of creation of Dispute Resolution Panel (DRP) is vividly alive in our memory. The institution of DRP which was created to help to resolve transfer pricing problems faced unfortunate and avoidable problems in the beginning. It was general perception that the institution of DRP in fact failed because of lack of proper direction for its working and also because of some fundamental defects in its constitution.

Although the government subsequently took steps to solve the problems by amending the law as also by issuing notifications and clarifications etc. but in the meantime large number of cases had already been decided by the DRP which not only raised the level of litigation to an astronomical figure but also put a question mark on the judiciousness of the decision to create DRP.

Let the experience of DRP be not repeated in APA. The board is advised, therefore, to issue suitable directions and instructions for proper functioning of APA regime.

The article has been co-authored by Alok Gupta
e-mail: hp.agrawal@sskmin.com
a.gupta@sskmin.com