Tax Efficiency: Advance Pricing Agreement (APA) in India

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Brief info about the Advance Pricing Agreement

The term APA, which is known as the Advance Pricing Agreement, is defined as an agree-ment between the tax authority and taxpayer on the pricing of any future course of the inter-company transaction in the case of the reduction of the prices, which would also include past transactions concerning international transactions. Back in 2012, the Central Board of Direct Taxes (CBDT) introduced the pricing of international transactions by mutual agreement be-tween the parties, i.e., the taxpayer and tax authority. The Board saw a surge in disputes aris-ing out of international transactions, and many cases came up on it. We at Enterslice offer a variety of services related to the Advance Pricing Agreement as well as APA consultancy, which includes expert consultation, documentation process, compliance assistance and tax planning, and other compliance related to your business.

Idea of the Advance Pricing Agreement

The Advance Pricing Agreement can be well understood as an agreement between the tax au-thority and the taxpayer through fixing the transfer pricing method after finalizing the terms and conditions of the Advance Pricing Agreement, which has been applied for a specific peri-od. The idea of signing the APA will lead to transparency and also give clarity to the taxpayer company concerning the risk associated with it and the terms of the risk. We facilitate APA consultancy services with expert guidance to your business.

Motive of Advance Pricing Agreement

The main objective behind the upcoming Advance Pricing Agreement is to keep a check on the big multinational companies (MNCs), so it won't be possible for them to indulge in tax fraud. The subsidiaries and associated companies can always have a high chance of fixing their profits based on their inter-corporate transactions. These MNCs also tend to divert their profits outside India by applying various methods that help them in the reduction of their tax liability in the country. There are certain provisions given under the Income Tax Act from Sec-tion 92 to Section 92F, which direct the international transactions between the associated companies computed on the basis of the Arm's Length Prices (ALP) method to avoid any dis-crepancies concerning the tax invasion by the companies. We facilitate APA consultancy ser-vices with expert guidance to your business.

Types of Advance Pricing Agreement (APA)

Furthermore, it has been bifurcated into different types of Advance Pricing Agreements (APA) also for the APA consultancy, which is based on the parties involved in international business transactions which can be as follows

Unilateral Advance Pricing Agreement

The name only suggests the meaning of this type of agreement. The significance of this kind of agreement is only hinted at by its name. Only the tax authority of the nation where the firm has its headquarters and the taxpayer company that is a party to the foreign transaction are engaged in this sort of transfer pricing.

Bilateral Advance Pricing Agreement

The name only suggests the meaning of this type of agreement. The first requirement for this type of transfer pricing is that the taxpayer's business must be located abroad. The second requirement is that the tax authority of the nation in which the business is located. The third requirement is that the taxpayer's associated entity, or enterprise, must be located abroad and report to the tax authority of the nation in which the associated entity has been located.

Multilateral Advance Pricing Agreement

The name only suggests the meaning of this type of agreement. It can be said that there are multiple parties involved in the business, which adds up to international financial transactions. These entities include two or more associated companies of the taxpayer company, the taxpayer company, the tax authority where the taxpayer company has been situated, and also the taxing authorities, respectively, of the countries where these associated companies are located.

Advantages of forming the Advance Pricing Agreement

Here are the various advantages of forming Advance Pricing Agreements as well as APA con-sultancy with Enterslice for the taxpayer to look for. These are the following advantages

Risk management

The Advance Pricing Agreement can minimize the risk involved in applying the pricing methodologies in tax issues or audit risks.

Gives certainty

The Advance Pricing Agreements give certainty to the taxpayer companies to establish the pricing methodologies, mitigating the risk of tax and audits.

Cost and time saving tool

The Advance Pricing Agreement can save resources and time, which can invested to spend the time on the negotiation of the transfer pricing that is aligned with the tax regulations and rules to reduce the risk of fines or penalties.

Efficiency in operation

The Advance Pricing Agreement can be aligned to the transfer pricing process and Document requirements, which allows the business to concentrate on base-level operations instead of other compliance activities.

Benefits arising from the Advance Pricing Agreement with Enterslice

In common parlance, we can observe that the Advance Pricing Agreement, as well as APA consultancy, plays a very important role for the tax authorities in tracing the tax frauds involved in international financial transactions. We at Enterslice facilitate various services related to the Advance Pricing Agreement as well as APA consultancy throughout the whole process. Some of the benefits arising from the APA are listed below in the following

  • As per the data from the tax authorities of various other countries, the application and formulation of the Advance Pricing Agreement generally cut down the extra pressure involved in managing the resources and also reduce the cost of administration.
  • The main purpose for which the Advance Pricing Agreement has evolved is to check the tax frauds that direct the international transactions between the associated companies computed based on the basis of the Arm's Length Prices (ALP) method to avoid any discrepancies concerning the tax invasion by the companies.
  • The Advance Pricing Agreement minimizes the effort and time spent on the auditing task. It separates the risk of audit for an entity taxpayer who has run the business across several other nations.
  • The Advance Pricing Agreement also gives rise to competitiveness among the companies to match the level of commitment to responsible tax practices, which can enhance their reputation in the global market.

Set eligibility criteria to apply for the Advance Pricing Agreement

As per the Indian rules and regulations related to the Advance Pricing Agreement as well as the APA consultancy, there are, as so much, no restricted monetary conditions prescribed to apply for the APA. It can also be said in such a way that any company that has undertaken international financial transactions or is looking to undertake can be eligible to file for APA. But we can comprehend from the above discussion that it can be right to say that the APA cannot apply to domestic transactions. Also, it can be stated that one of the objectives of pre-filing consultation is to determine the suitability of international financial transactions

We at Enterslice will provide you with assistance and consultation through the procedure of filing an Advance Pricing Agreement to fulfil your goals.

List of procedures involved in the Advance Pricing Agreement

There are various procedures used by the tax authorities to resolve any disputes arising out of the transfer pricing issues in multinational organizations. We at Enterslice will assist you throughout the procedure involved in the Advance Pricing Agreement. There are certain steps involved to give you a better insight

Request for APA

It is the responsibility of the taxpayer company to make a formal request for the Advance Pricing Agreement to the tax authorities, including a detailed description of the transfer methodology that has been applied by the taxpayer.

Prefiling consultation procedure

The tax authorities, as well as the taxpayer, have to primarily discuss whether APA is suitable for the transfer pricing services has to be addressed.

Analysis and review

The tax authority is duly authorized to review the request and other additional pieces of in-formation from the taxpayer to assist in the evaluation process. Also, to analyze the financial economics of the business of the organization.

Negotiation and implementation

The tax authorities and the taxpayer have to negotiate concerning the pricing methodology of the transfer pricing of the businesses once the Advance Pricing Agreement is finalized and signed by the parties.

Application before the competent authority for the Advance Pricing Agreement in India

To initiate any Advance Pricing Agreement, the taxpayer company has to apply the competent authority to decide. It can be differentiated in various ways; the unilateral APA application has to be submitted before the Director General of Income Tax (DGIT) of the international taxation regime. Similarly, in the case of bilateral APA and multilateral APA, it has to be made before the competent authority in India. Then, the application for the APA has to be sent to DGIT by the competent authorities and has to be handed over by the DGIT to the respective APA teams. We at Enterslice will assist you in this complicated process with our expert guid-ance to avoid any discrepancy in filing the APA application as well as in APA consultancy.

Validity of the Advance Pricing Agreement (APA)

Depending on the different conditions of the countries and the terms negotiated between the tax authority and the taxpayer, the Advance Pricing Agreement's valid length may vary from three to five years. It is significant to note that the Advance Pricing Agreement may be used to establish the validity term, which is something that is agreed upon during the whole nego-tiating process. We at Enterslice will facilitate assistance in negotiating the terms required for the APA filing in a structured manner with our expert guidance.

Frequently Asked Questions

It can be helpful for any taxpayer who has been involved in international financial trans-actions or is of the view to file for the APA.

The tax authority is duly authorized to communicate the discrepancy or errors arising out of the filing of the Advance Pricing Agreement for not accepting the APA. The tax au-thorized has been duly authorized to communicate in a written or physical form about their disagreement with the business proposal for the transfer pricing of international fi-nancial transactions.

Yes, the APA application can be modified when the change request has been made in the written format prior to the APA has been finalized.

Yes, the process of renewing the APA can be an easy task compared to the process of making the Advance Pricing Agreement.

The CCIT (International Taxation) can be considered the competent authority of India and can be either Join Secretary, FT, and TR-I or Joint Secretary FT and TR-II also, depending upon the country to which the bilateral APA is to be negotiated under this Tax treaty.

This program was launched by the Finance Act of 2012 with the view to avoiding the double taxation levied on the taxpayer's company.

It can be calculated by multiplying the transfer price per item or consignment by the number of items transferred to solve the total transfer price.

The team could consist of the officers from the Income Tax Department as authorized by the Central Board of Direct Taxes (CBDT).

This method can be stated as to decide the price at which a willing buyer and unrelated seller would agree freely from any influence or the trade between the parties that has been conducted as they were unrelated or no conflict has arisen out of the financial trans-actions.

The transaction that has been covered in the APA formation should be an international financial transaction business, and the nature of the transaction can never be domestic.

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