New Delhi: India signed the first batch of five advance pricing agreements (APAs) with multinational companies on Monday, in a move that will reduce transfer pricing litigation and provide certainty to companies with a presence here.

Such agreements, between a taxpayer and the tax department, define a transfer-pricing procedure for a particular set of transactions. Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

The APAs have been signed for five years, the tax department said in a statement.

APAs will help companies mitigate tax and transfer pricing risks, said Vijay Iyer, partner and transfer pricing leader, at audit and consulting firm EY.

“With the first set of APAs signed and the CBDT (Central Board of Direct Taxes) managing to finalize the process and the basic text of the agreements, the next set of cases could see a faster turnaround time," he said.

India notified APA rules in August 2012 and received the first batch of 146 APA applications from companies in March 2013.

Negotiations between companies and the tax department are a long process but analysts say that India has managed to sign the agreements in one year against the international norm of at least two years.

The signing of the APAs will have a positive impact in reducing transfer pricing litigations and could see more tax payers opting for APAs for managing disputes, Rohan K. Phatarphekar, partner and national head, global transfer pricing services, KPMG India, said in a note.

Transfer pricing has been an area of increasing dispute, with the most recent round of completed transfer pricing seeing adjustments of more than $9 billion made by the tax department.

The APAs cover a range of international transactions, including interest payments, corporate guarantees, non-binding investment advisory services and contract manufacturing, and are across different industrial sectors such as pharmaceuticals, telecom, exploration and financial services, the tax department said. Companies are finding APAs more attractive than the safe harbour option as the latter may be a bit higher than the arm’s length price, Iyer said. “However, not all companies may be able to afford APAs and we may see some companies opting for safe harbour, provided the safe harbour rules are modified a bit," he added.

The income tax department charges 10-20 lakh for an agreement, depending on the size of the transaction. Safe harbour rules are circumstances under which the tax department will accept the transfer price given by the assessee. These were notified by the government last year but received a lukewarm response.

In a press briefing last week, R.K. Tewari, chairman, CBDT, said the government was looking at making changes to safe harbour rules to make them more attractive.

Sounding a note of caution, S.P. Singh, senior director, Deloitte Haskins and Sells, said that with 250 applications filed this year, there are around 400 applications pending with the tax department.

“With the present workforce, the APA team will have very uphill task in maintaining the high standard they have set in the first year and at the same time reach agreements for the pending applications within a short time framework," he added.

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