Covid-19 pandemic, staff crunch deal blow to pending APA applications

The tax departmĀ­ent has taken a stand against issĀ­uing a general guidance on APA revision, but will look at the issue on case-by-case basis.
The Covid-19 pandemic-led economic disruption and severe manpower crunch in the income-tax (I-T) department have led to a pile up of applications for specific tax agreements that multinational companies (MNCs) have with Indian authorities, dampening the business environment.

According to estimates, the number of pending advance pricing agreement (APA) applications has crossed 750. Several MNCs are seeking modifications, given they are unable to maintain the preset margin. Experts pointed out that the manpower crunch has compounded woes, with a team of four commissioners and four additional commissioners working on APAs.

“We are working towards fast-tracking clearance of APAs. Some cases pertain to renewal; others have sought revisions. We are reviewing the cases,” said a government official.

“It will be an achievement if the department can clear le­a­st 40 APAs this year, against 90 applications coming in each year,” said sources. 2016-17 saw 88 APA applications get cleared.

APAs are aimed at providing certainty to taxpayers in respect of the transfer price of the cross-border transactions undertaken by such taxpayers with their group entities.

An APA is a mechanism to resolve transfer pricing issues in advance. In simple terms, the transfer price of goods and services transacted between group entities is decided in advance by the tax authorities and taxpayers, so as to prevent any dispute arising from such transfer pricing. APAs provide certainty to the company operating in India for a maximum of nine years (prospective five years and four roll-back years).

Mukesh Butani, managing partner at BMR Legal, said site interviews — one of the important processes for an APA — could not take place, leading to rising pendency rate. “Even though the APA commissioners may be handling request for information with advisors and applicants through a virtual route, it may not be very effective. In a bilateral APA, one-on-one meetings with competent authorities are not happening due to ban on international travel,” said Butani. He added that Covid has only accentuated the issue of delay in APA approvals.

Akhilesh Ranjan, former member, Central Board of Direct Taxes, said. “We need a team five times the current strength. In the US, over 100 people work on APAs. We are grossly understaffed.” Even if proposals are made by commissioners, they need to be app­roved at the board level, he said. 
Moreover, there hasn’t been a regular member in-charge.

Vijay Iyer, partner, EY, said the government must address manpower crunch and ensure clearance of APA applications in a time-bound manner. 

“With over 750 applications pending, there has to be an administrative exercise to try and get these cleared in a time-bound manner. There needs to be a deadline,” said Iyer.

Due to Covid-19, several MNCs have sought revisions, with critical assumptions and preset margins having become irrelevant on account of factors like relocation of persons, sup­ply-chain disruption, abnormal expenses, change in asset deployment, risk assumed, etc.

However, the tax departm­ent has taken a stand against iss­uing a general guidance on APA revision, but will look at the issue on case-by-case basis.

“All agreements may not be affected since APAs are long-term in nature. The governm­e­nt has clarified it will consi­der revisions, if companies ha­ve do­cumented the specific cha­nges,” said a government official.

Most companies, barring ones in software, pharmaceutical, information technology or consumer non-durables, have been affected and been forced to alter supply chains and business models. Acco­rding to I-T rules, an agreement may be revised if there is a change in critical ass­um­ptions or failure to meet a condition, subject to which the agreement has been entered into.

APAs could be a unilateral agreement between the company and Indian tax authorities or a bilateral pact involving a foreign country.

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