APAC Tax Matters: 12th edition
At a glance
- India publishes rules for implementing APAs
- Format of application and procedures for obtaining a TRC
- Ruling on income classification and permanent establishment issues in respect of e-commerce transactions
India publishes rules for implementing Advanced Pricing Agreements (APAs)
The Finance Act, 2012 (FA 2012), introduced provisions to enable Advance Pricing Agreements (APAs) in the Indian Tax Laws (ITL) with effect from 1 July 2012. On 31 August 2012, the Central Board of Direct Taxes (CBDT) issued a notification introducing new Rules for implementing APAs. The key provisions of these Rules are summarized below.
An APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for determining the transfer price for those transactions over a fixed period of time. FA 2012 introduced a plan for APAs by empowering the CBDT to enter into an APA with any person undertaking an international transaction and also authorized the CBDT to formulate rules with respect to the APA mechanism.
As a first step for initiating the APA process, a taxpayer is required to undertake a pre-filing consultation. This may be requested on an anonymous basis, before a formal APA application is submitted.
After the pre-filing consultation, an eligible taxpayer may submit an application for an APA in the prescribed form, together with the requisite fee. The requisite fee will vary in accordance with the value of the international transaction entered into, or the proposed transaction to be undertaken.
The application can be withdrawn at any time before the finalization of the terms of the agreement, or may be amended with the approval of the Tax Authority. The taxpayers’ Associated Enterprise is expected to initiate an APA process with the competent authority (CA) in the other country in case a bilateral or multilateral APA is envisaged.
On being satisfied that the application for an APA can be accepted, the Tax Authority will process the application in consultation with the applicant.
Upon completion of the process, the APA Authority and the applicant shall prepare a proposed mutually agreed draft agreement enumerating the result of the APA process. The agreement shall be entered into by the APA Authority only after seeking approval from the Central Government of India.
Thereafter, the taxpayer is required to furnish the APA Authority with an Annual Compliance Report in the prescribed form for each year covered in the APA. The Transfer Pricing Officer having the jurisdiction over the taxpayer shall carry out a Compliance Audit of the APA for each of the years covered in the APA.
An APA may be revised or cancelled by the CBDT, either suo moto, after providing an opportunity of being heard by the taxpayer, or on request by the taxpayer. A request for renewal of an APA may be made by the taxpayer.
Taxpayers may need to give due consideration to APAs as part of their transfer pricing controversy management strategy as regards India. The introduction of APAs is expected to provide an alternative channel for resolving transfer pricing questions in advance of a dispute.
The CBDT notifies format of application and procedure for obtaining a Tax Residency Certificate (TRC)
The Finance Act 2012, introduced provisions to the ITL requiring a non-resident (NR) to furnish a Tax Residency Certificate (TRC) in order to avail itself of benefits under a Double Taxation Avoidance Agreement (DTAA). Possession of a TRC is a necessary, but not sufficient condition, for a person to avail himself/itself of a DTAA benefit.
The requirement to produce a TRC is introduced to ensure that DTAA benefits are available only to residents of a particular country and prevent residents of a third state from claiming DTAA benefits.
The CBDT has issued a Notification introducing the Rules prescribing the format of an application for obtaining a TRC and related procedures.
Mumbai Tribunal rules on income classification and permanent establishment issues in respect of e-commerce transactions [TS-734-ITAT-2012(Mum)]
Background and facts
The Taxpayer, a Swiss tax resident, operated websites from outside India providing an online platform for facilitating the purchase and sale of goods and services to users based in India. On facilitating a successful sale, the Taxpayer earned its revenue by charging a user fee to third-party sellers in India registered on its websites.
For availing certain support services in connection with the websites, the Taxpayer entered into a Marketing Support Agreement with its Indian affiliates (I Cos) and reimbursed the costs incurred by them with a mark-up. The services provided by the I Cos were:
- Providing suggestions for business related legal requirements
- Providing marketing and promotional services
- Collecting and remitting the user fees to the Taxpayer
- Furnishing reports and information for budget/administration and support activities as per the Taxpayer’s requirement
- Performing local customer support activities
For the tax year 2005-06, the Taxpayer filed a NIL return of income, claiming that because it did not have a permanent establishment (PE) in India, its income, which was in the nature of business profits, was not taxable in India. The ITA however was of the view that the Taxpayer’s income was in the nature of fees for technical services (FTS) and that the Taxpayer had a dependent agent permanent establishment (DAPE) in India on account of the I Cos.
On appeal before the Tribunal, the issues were whether the user fee was in the nature of FTS and whether the I Cos constituted a PE of the Taxpayer under the India-Switzerland Double Taxation Avoidance Agreement (DTAA).