CBDT issues TP rollback clarifications
MUMBAI: The Central Board of Direct Taxes (CBDT) recently issued clarifications on the rollback provisions available under the advance pricing agreement (APA) mechanism in the arena of transfer pricing. While some clarifications – such as availability of a rollback even when a revised income tax return is filed, or the ability to opt out of rollback without affecting the main APA application for future years – have been appreciated, certain grey areas remain. A key drawback is the restricted definition of the term ‘same’ international transaction.
These clarifications, issued last week, are in the format of ‘frequently asked questions’, or FAQs. In March this year, the CBDT had issued detailed rules relating to the rollback mechanism, which came into effect from October 1, 2014. According to government sources, the FAQs are in response to queries raised by India Inc.
An APA – which is entered into between a taxpayer (for example, an Indian company which has cross-border transactions with related parties such as a foreign parent company) and the Indian tax authorities – provides transfer pricing certainty for a nine-year period (with rollback). A rollback enables taxpayers to retrospectively apply the APA agreed upon for a period of the past four years. In case of bilateral APAs, the foreign related party and the tax authorities of the foreign country are also involved. Transfer pricing litigation is a major concern of multinationals operating in India with their subsidiaries or group companies. For the year ended March 31, 2015, the transfer pricing adjustments imposed on India Inc were Rs 46,465 crore which, even on the most conservative estimate, would result in a tax demand of at least Rs 14,000 crore (at base rate of 30%).
One key issue, on which tax experts feel that the CBDT in its FAQs has taken a restrictive view, relates to the definition of the ‘same’ international transaction. The rules mandate that the rollback provision shall apply in respect of an international transaction that is the ‘same’ as the one to which the APA applies. In its recent FAQs, the CBDT clarifies that the term ‘same’ implies the same nature of transaction which is undertaken with the same related party (technically termed as associated enterprise). Also, the underlying functions, assets and risks (FARs) of the transaction should not be ‘materially’ different.
Sanjay Tolia, transfer pricing leader at PwC, says, “It may be possible that the same international transaction, for a variety of reasons, is now undertaken with a different related party. This should not prohibit applicability of the rollback provision.” Tolia illustrates: An Indian company (which is the APA applicant) may now be providing IT services (which is an international transaction) to a US group company, instead of its US parent. Whereas, for %the past period to which the rollback would have applied, the services were rendered to its US parent. The rules do %not call for the ‘same’ associated enterprise. “A further clarification to align FAQs with the rules would end uncertainty,” he adds.
Hitesh Gajaria, chartered accountant, says, “There are grey areas on how the term ‘same nature of the transaction’ would be construed by tax authorities.” He illustrates: An Indian company has historically classified customer support services (provided to overseas related parties) along with other pre- and post-sales activities as ‘sales and marketing services’ and has charged a blended cost plus markup in the prior years. However, for the future years covered under the APA, the company now correctly proposes to segregate the transactions and classify the customer support as back-office services with a separate cost plus markup.
“In this case, given the words in the FAQs, the two transactions, though involving broadly similar functions, would not qualify for the applicability of rollback because in the APA a different nomenclature of “back-office service” has been adopted. The word ‘similar’ would have provided more emphasis on the substance of the transaction,” states Gajaria.
Vijay Iyer, transfer pricing leader at EY, states, “The CBDT’s clarification also specifies that the FARs should not have changed materially. In the real world, there would hardly be any company whose FARs would not change in nine years.” He adds, “The rollback provisions also do not allow the flexibility to choose less than four years for their applicability, leading to rigidity.”
For example, if a taxpayer files an APA application on or before March 31, 2015, covering a period of up to five years from the financial year (FY) 2015-16 to FY2019-20 and applies for a rollback, the rollback years will cover the period from FY2011-12 to FY2014-15.
Till date, 386 APA applications have been filed. The CBDT has already signed agreements in five unilateral cases on March 31, 2014. A bilateral agreement with a Japanese company was signed last December.
