In what could be a source of comfort to multinational companies, the Income Tax Department is set to ink the first set of advance pricing agreements (APAs) with MNCs on March 31. Seven-eight agreements may be signed by the month end, informed sources said.

An advance pricing agreement is a pact between a taxpayer and the tax authority determining the transfer pricing methodology for pricing the former’s international transactions for future years.

MNCs such as Shell and Vodafone were seen as being at the receiving end of the taxman’s aggressive transfer pricing adjustments in recent years.

As many as 146 applications were received by the Income Tax Department in the first year — 2013-14 — for which the pricing agreement programme was made available.

The APA programme was launched in July 2012 and formal applications had to be filed by end March 2013. Most of the 146 applications were from Indian units of MNCs.

“We are working on it. The first set (of agreements) will be done by March end,” RK Tewary, Chairman of the Central Board of Direct Taxes (CBDT), told Business Line. If the response to the first year (2013-14) is considered a surprise, the tally for the next year (2014-15) is astounding. As many as 250 applications are understood to have piled up before the Income Tax Department.

Together with the 146 for the first year, the total count of 400 applications is clearly a record and no country has received this many applications in the initial two years of launch of APA programme, say tax experts..

Aggressive adjustments
Faced with aggressive transfer pricing adjustments, MNCs have sought shelter under the APA programme.

Battered by a spate of high-pitch assessments — primarily on account of transfer pricing adjustments — MNCs now see in the APA a way to avoid disputes. The fear of protracted wrangling over unexpected tax demands has driven a record number of foreign companies to go in for the APA.

The overwhelming industry view is that Indian authorities may need to check their aggressiveness during transfer pricing assessments.

Deloitte view
It’s clearly a great achievement for the Indian tax authorities to have concluded an agreement within one year, said SP Singh, Senior Director, Deloitte in India. This will send the right signal to MNCs that they can mitigate transfer pricing adjustment risks through the APA programme, he pointed out.