Scheme of Advance Pricing Arrangement (‘APA’) in India

APA’s have been now introduced in the Budget 2012 and has been welcomed by the Indian taxpayers as it will guarantee some amount of certainty in an uncertain world.

Some of the key salient features of the APA scheme are as follows:

• Agreement between taxpayer and Revenue authorities i.e. to determine the arm’s length price (ALP) and specify the manner in which ALP has to be determined;
• Option to apply for unilateral, bilateral, or multilateral APA;
• Would be binding on taxpayer and the revenue authority;
• Application can be filed for a proposed transaction or for an existing transaction;
• Scheme to be applicable from April 1, 2013;
• Can be applied for a maximum of 5 years ;
• Could be renewed at the end of the tenure specified in the APA; and
• Till now no specific provision relating to rollback.

Many pharma companies should watch out for this space in order to consider an APA in to bring certainty to its inter-group pricing and to avoid the long drawn litigation process in India.

Another space to watch out for the pharma companies is the provisions relating to Safe Harbour. As most of us would be aware of the recent press release by the Prime Minister where a committee on taxation of Development Centres & IT Sector has been setup. The prime objective of the this committee is to finalise sector wise Safe Harbour provisions after consultation with stakeholders and to suggest clarifications on tax issues relating to IT Sector & Development Centres (R&D).

As these Development Centres includes the Pharmaceutical R&D carried out by various pharma MNCs in India, it would be a good wait and watch strategy for the MNCs to watch out for the recommendation of the committee and the specific margin (arm’s length) which the revenue authorities would expect the MNCs to maintain in India.