Once an Advance Pricing Agreement is in place, the taxpayer must comply with its terms and conditions. The Transfer Pricing Officer conducts an annual compliance audit to verify compliance. Understanding what the Transfer Pricing Officer checks is essential for taxpayers to maintain their APA and avoid cancellation.
The Regulatory Framework
Annual Compliance Report
The assessee shall furnish an annual compliance report to the Principal Chief Commissioner of Income-tax (International Taxation) for each year covered in the agreement.
Form 52
The annual compliance report shall be in Form No. 52.
Filing Deadline
The annual compliance report for each year covered in the agreement must be filed within thirty days of the due date of filing the income-tax return for that year, or within ninety days of entering into an agreement, whichever is later.
Compliance Audit by Transfer Pricing Officer
Who Conducts the Audit
The Transfer Pricing Officer in respect of arms' length price and having the jurisdiction over the assessee carries out the compliance audit of the agreement for each of the year covered in the agreement.
What the Transfer Pricing Officer Checks
The Transfer Pricing Officer may require:
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Substantiation of Compliance: The assessee to substantiate compliance with the terms of the agreement, including:
- Satisfaction of the critical assumptions
- Correctness of the supporting data or information
- Consistency of the application of the transfer pricing method
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Additional Information: The assessee to submit any information or document to establish that the terms of the agreement have been complied with
Critical Assumptions
What Are Critical Assumptions?
Critical assumptions are the factors and assumptions which are so critical and significant that, if changed, the parties to the agreement shall not continue to be bound by the agreement.
Verification
The Transfer Pricing Officer verifies whether the critical assumptions remain valid. If a critical assumption has changed, the agreement may need to be revised or cancelled.
Compliance Audit Report
Content
The Transfer Pricing Officer submits a compliance audit report mentioning findings as regards compliance by the assessee with terms of the agreement.
Recipients
- Unilateral APA: Principal Chief Commissioner of Income-tax (International Taxation)
- Bilateral or Multilateral APA: Competent authority of India
Timeline
The compliance audit report shall be furnished within six months from the end of the month in which the Annual Compliance Report is received.
Consequences of Non-Compliance
Finding of Failure
Where there is a finding of failure on the part of the assessee to comply with the terms of the agreement, the Principal Chief Commissioner of Income-tax (International Taxation) forwards the report to the Board for cancellation of the agreement.
Cancellation
If the compliance audit reveals material non-compliance, the agreement may be cancelled.
Regular Audit Exemption
No Regular Audit
The regular audit of the covered transactions shall not be undertaken by the Transfer Pricing Officer, if an agreement has been entered into.
Exception
Regular audit may be undertaken where the agreement has been cancelled.
Practical Considerations
For Taxpayers
- Maintain complete documentation supporting compliance
- Ensure critical assumptions remain valid
- File Form 52 on time
- Cooperate with the Transfer Pricing Officer during the audit
For Tax Practitioners
- Advise clients on compliance requirements
- Assist with Form 52 preparation
- Prepare for compliance audit
- Address any findings promptly
Expert Legal Guidance
Understanding the APA compliance audit is essential for taxpayers with APAs in place. Anuj Desai & Associates provides expert advisory services on APA compliance, helping taxpayers maintain compliance, file Form 52, and manage the compliance audit process.