1. 408 International Taxation Vol. 12 May 2015 52
A
rguably, in recent decades, transfer pricing has been
the most controversial area in taxation across the globe.
In India during the last four-five years it has been
drawing the attention of taxpayers, tax authorities and
policy makers due to the aggressive and regressive approach of
the authorities. Advance Pricing Agreement (‘APA’) scheme was
introduced in the Income-tax Act, 1961 (‘the Act’) to provide
predictability to the prospective international transactions, to be
entered into by the existing or prospective taxpayers, thereby
providing fillip to trade and investment. The APA scheme was
to be a dispute prevention mechanism.
Recently, the Government of India introduced rollback provision
as part of the continuing APA program. Many taxpayers are
likely to avail of the rollback provision as it provides a relief
not only on the forward transactions but also for transactions,
which had been undertaken in the past four years. The objective
of this rollback program, though salutary, needs to be examined
from the stand-points of (a) whether the program would result
in reduction of the transfer pricing disputes, and (b) whether it
will provide a tax regime, which is a win-win for both taxpayers
as well as the tax administration – taxpayers get relief not only
from the future disputes but also from the continuing disputes,
and the tax administration gains certainty of tax collection and
goodwill of the taxpayers.
Though it may be early days for any such assessment, it is
important nonetheless that the program is designed appropriately,
Rollback of Advance
Pricing Agreements –
Clarity Needed
SP Singh*
M. Fahad Khalid**
Sanjay Kumar***
* SP Singh, Senior Director, Deloitte India.
** M. Fahad Khalid, Manager,
*** Sanjay Kumar is an Ex-IRS.
- The views expressed are not necessarily of the organisation.
- The authors would like to thanks Rhea Munjal for her valuable inputs.
TRANSFER PRICING
408

2. 409International Taxation Vol. 12 May 2015 53
aligned with the objective and intent, from the
beginning to erase any chance of controversy
later on. This article analyses the rollback
scheme from the above points of view, and
suggests certain infirmities in the scheme,
requiring clarifications, to bring it in sync
with the objective and purpose that it has
set out to do.
Background
The Advance Pricing Agreement (‘APA’)
program in India was introduced by the
Finance Act 2012 vide insertion of sections
92CC and 92CD in the Act, effective from
July 1, 2012. Detailed rules for making the
APA program effective, were announced on
August 30, 2012, and for that Rules 10F to
10T were inserted in the Income-tax Rule,
1962 (‘the Rules’). Further rule 44GA was
introduced for giving effect to bilateral/
multilateral APAs.
To understand in brief, an APA is an
agreement between the taxpayer and the tax
administration (in India, the tax administration
is represented by the Central Board of Direct
Taxes) determining in advance the price of
an international transaction. An APA ensures
determining in advance arm’s length prices of
various international transactions between the
two associated enterprises, thereby providing
a mechanism for dispute prevention between
the tax administration and the taxpayer. Indian
APA program provides for an agreement on
the arm’s length prices for five years for the
future transactions.
APA being a voluntary process to be initiated
by a taxpayer, can be of two kinds, unilateral
APA involving a taxpayer and the Indian
tax administration and bilateral/multilateral
APA involving tax administrations of two
or more countries, Indian tax administration,
foreign taxpayer and the Indian taxpayer.
Figure below summarizes the APA process.

3. 410 International Taxation Vol. 12 May 2015 54
The Indian APA rules provides for filing
of an application for an APA with respect
to continuing international transaction by
March 31st to obtain coverage for the next
five financial years starting from the first
day of the next financial year i.e. April
1st. For a new international transaction, the
application is to be filed at any time before
such transaction is undertaken. The coverage
for both transactions, as stated above is for
the next five financial years on a prospective
basis.
Accordingly, March 31, 2013 was to be the first
cut-off date by which any application for APA
for the continuing transaction was to be filed.
Till date, three rounds of APA filings have
been completed and the Indian APA program
is generally considered successful both in
terms of the number of APA applications filed
as well as in terms of the APAs concluded.
Table below highlights this.
Financial year
ended
Number
of APA
applications
filed
Unilateral Bilateral Concluded
March 31, 2013 146 117 29
5 unilateral on March 31, 2014
1 bilateral on December 19, 2014
3 unilateral on March 31, 2015
March 31, 2014 232 206 26
March 31, 2015
185 approx. (this data is only for unilateral
APA’s)
The huge numbers of applications is driven by
push and pull factors – aggressive approach
of authorities coupled with time and resource
consuming litigation process work as push
factors while possibility of early resolution in
APA coupled with positive approach of the
team in the department works as pull factors.
The resource crunch in the tax department
is leading to slow progress in finalising
agreements, which is putting question mark
on the efficiency of the scheme.
Need for the rollback provisions
Indian APA program no doubt incorporated
the best global practices, nonetheless certain
shortcomings or deficiencies remained, as it
would be in any policy design to start with.
One of these shortcomings was the non-
availability of the rollback provisions. Rollback
provisions are typically available in modern
and advanced tax jurisdictions. The rollback
provisions apply arm’s length prices arrived
in the APA negotiations to the transactions
of the past years also, making the process
and the outcome more robust and gainful
to both taxpayers and tax administration.
Indian taxpayers wanted similar mechanism,
particularly considering the chequered history
of aggressive transfer pricing adjustments and
protracted litigations thereon. Table below
evidences this fact.
Transfer
pricing audit
year
Assessment
year
Number of
Transfer
Pricing audits
completed
Number of
cases adjusted
% of cases
adjusted
Amount of
adjustment
(USD million)
2005-06 2002-03 1,061 239 23% 300
2006-07 2003-04 1,501 337 22% 560
Transfer Pricing

4. 411International Taxation Vol. 12 May 2015 55
Transfer
pricing audit
year
Assessment
year
Number of
Transfer
Pricing audits
completed
Number of
cases adjusted
% of cases
adjusted
Amount of
adjustment
(USD million)
2007-08 2004-05 1,768 471 27% 860
2008-09 2005-06 1,945 754 39% 1,100
2009-10 2006-07 1,830 813 44% 2,160
2010-11 2007-08 2,368 1,207 50.97% 4,440
2011-12 2008-09 2,638 1,343 50.91% 9,000
2012-13 2009-10 3,171 1,686 53.17% 12,000
2013-14 2010-11 3,617 1,920 53.08% 10,000
Source: Based on Annual Report, 2013-14, Ministry of Finance
It is estimated that during the last 10 financial
years, more than 9,000 assessments have
suffered a transfer pricing adjustment; out of
these 1,920 were for assessment year 2010-11
alone. The transfer pricing aggressiveness was
particularly witnessed during the last five
financial years – one in every two transfer
pricing case suffered an adjustment. Many of
these adjustments were of high value.
Both in number as well as in value, the
transfer pricing adjustments were aggressive
and when the APA program was announced,
not many taxpayers opted for APA filing
as compared to the cases in which transfer
pricing adjustments have been made in the
past, reflecting probably a careful response to
the APA program. The number of APAs filed
till date are around 560 out of approximately
2,000 taxpayers suffering adjustments. This
probably did not reflect the enthusiastic
reaction to the APA regime in terms of
dispute prevention, signifying the need to
introduce APA rollback, i.e. making the APA
gains applicable to the transactions of past
years as well.
Introduction of the rollback provisions in
India
Sensing the obvious gap in the APA program,
the Indian government introduced rollback
provisions vide the Finance Act 2014, effective
from October 1, 2014, thereby aligning the
Indian APA program to global best practices.
The Budget Memorandum introducing the APA
rollback provisions sums up the underlying
objective and vision:
“In many countries the APA scheme provides
for “rollback” mechanism for dealing with
ALP issues relating to transactions entered
into during the period prior to APA. The
“rollback” provisions refers to the applicability
of the methodology of determination of ALP,
or the ALP, to be applied to the international
transactions which had already been entered
into in a period prior to the period covered
under an APA. However, the “rollback” relief
is provided on case to case basis subject
to certain conditions. Providing of such a
mechanism in Indian legislation would also
lead to reduction in large scale litigation which
is currently pending or may arise in future
in respect of the transfer pricing matters.”
These rollback provisions were introduced
as sub-section (9A) of section 92CC of the
Act, authorizing the rollback to any period
not exceeding four previous years preceding
the first of the previous years for which the
APA is first applicable, subject to certain
conditions. Rules governing the APA rollback,
i.e. Rules 10MA & 10RA, were announced
on March 14, 20151
, detailing operational
procedure for rollback.

5. 412 International Taxation Vol. 12 May 2015 56
Key features of the Indian rollback
provisions
An application for a rollback is to be filed in
Form No. 3CEDA along with the main APA
application (in Form No. 3CED), as per the
provisions of Rule 10MA. It stipulates that
“subject to the provisions of this rule, the
agreement may provide for determining the
arm’s length price or specify the manner in
which arm’s length price shall be determined
in relation to the international transaction
entered into by the person during the rollback
year”. The rule requires that the following
conditions should be satisfied:
The tax return along with the accountant’s
report in Form No. 3CEB, disclosing the
international transactions, for the year
proposed to be covered by the rollback
should have been filed on or before the
statutory due date;
The international transaction proposed
to be covered under the rollback should
be the same for which the main APA
application has been filed; and
The rollback should be requested for
all the prior four years during which
such transaction was undertaken. This
means that the taxpayer does not have
the right to pick and choose the year
from the prior four years.
In addition, taxpayer is also required to
pay an additional fee of INR 500,000 (i.e.
USD 8,400 approx.) and submit along with
the Form No. 3CEDA, the proof of payment
for the same. This fee is in addition to the
APA filing fee.
Rule 10MA provides that the manner in which
the arm’s length price shall be determined
for an international transaction entered during
the rollback year would be the same that
would be agreed between the taxpayer and
the CBDT for the prospective years.
Rule 10MA also provides the non-applicability
of the rollback provisions in case either of
the following two conditions exits:
If the taxpayer has filed an appeal be-
fore the Income-tax Appellate Tribunal
(‘ITAT’) for any of the rollback years and
the ITAT has passed an order disposing
off such appeal before the signing of
the APA agreement; or
The application of rollback provision for
the prior years has the effect of reduc-
ing income/increasing the loss.
For the cases, where APAs have already been
entered into or application for which has
already been filed before the announcement
of the rollback rules, Rule 10MA provided
a window of opportunity for filing rollback
application by March 31, 2015, which has been
subsequently extended by the CBDT, after
receiving public comments, to June 30, 2015.
Rule 10RA provides for the procedure for
giving an effect to the rollback. The procedure
is as follows:
The taxpayer is required to furnish
modified tax returns in consonance with
the outcome of the APA for the rollback
years and pay additional taxes, if any;
The taxpayer needs to withdraw any
appeal pending before the ITAT or the
High Court, on the issue subject to APA
rollback, in respect of the rollback years.
This needs to be done before furnishing
the modified return;
The tax department also needs to with-
draw any appeal before the ITAT or
the High Court on such issues within
a period of three months from the date
of filing the modified tax return by the
taxpayer;
The fact that an APA has been entered
into for the rollback years need to be
intimated, along with a copy of the agree-
ment, to the Dispute Resolution Panel/
Commissioner of Income-tax (Appeals)/
ITAT/High Court by the tax department
as well as the taxpayer as soon as it is
practicable to do so.
Transfer Pricing

6. 413International Taxation Vol. 12 May 2015 57
Rule 10RA also stipulates that if the rollback
cannot be given effect for any of the rollback
years because of failure attributable to the
taxpayer, the APA shall be cancelled.
The flowchart below schematically demonstrates
the steps in filing the rollback application.
Global best practices
For purpose of gauging the alignment of
the Indian APA program with the global
best practices, it will be useful to compare
the rollback provisions in India with the
practices prevalent across the globe. No
doubt, different countries would have different
applicability criteria for rollback, depending
on the legal structure providing APA rules,
tax administration regime, and the dispute
resolution mechanism. Some countries have a
relaxed regime about the rollback, providing
it even without specific rules, in an informal
manner, but there are also some countries,
which have stringent legal requirements.
Table below provides a brief snapshot of the
rollback process in some tax administrations.

7. 414 International Taxation Vol. 12 May 2015 58
Jurisdiction Years covered in rollback Rollback procedure
Australia Rollback is available at the
discretion of the Australian
Tax Office (‘ATO’).
No formal rules for rollback.
Conclusion arrived at in an APA is applied by
the ATO and taxpayers to resolve past disputes.
Canada Rollback is available for
taxation years which are not
under audit or for which a
documentation request letter
has not been received.
Rollback is applicable when facts and circumstances
of prior years were similar to the facts and
circumstances under which APA was concluded.
Rollback provisions are not available for unilateral
APAs and small business APAs.
China Rollback option is available
for a period as far back as
10 years.
Rollback available subject to approval from the
tax authorities.
Japan Rollback option is available
for a period as far back as
6 years.
Rollback is allowed subject to request for
inclusion of rollback is made with the original
APA request.
Only available for bilateral APAs.
United Kingdom Rollback is available for prior
years based on the discretion
of Her Majesty’s Revenue
and Customs (‘HMRC’).
HMRC is usually very flexible about rollback.
The rollback request can be made either by the
taxpayer or may be suggested by the HMRC.
Only available for bilateral and multilateral APAs.
United States of America Rollback is only available
for open tax years.
The Internal Revenue Services (IRS) has discretion
whether to consider and grant a rollback request.
Rollback does not apply to unilateral APAs
in which rollback would decrease the taxable
income on a return filed.
Open questions
While the effort of the government in providing
an APA and rollback regime through a rule-
based process is laudatory and it is hoped that
will also provide certainty and predictability
to the transfer pricing mechanism in the
country, it nonetheless seems to have some
missing links in the policy and rule designing,
raising questions about its robustness. These
questions, if answered either through frequently
asked questions or otherwise, can make the
regime taxpayer friendly and will help in
removing any ambiguity, which may have
crept in the design of the rollback regime.
These questions are discussed below.
Years of applicability - Rule 10MA(2)
(iv) refers to an international transaction
for all the rollback years covered in the
agreement. Can taxpayers apply for the
years -1, -2 and -3 and not -4? Can
taxpayers go for years -1 and -3 only
and not for -2 and -4? In other words,
does the taxpayer have an option to
choose the years to be covered under
the rollback or should they necessarily
go for all the four preceding years?
Selective international transaction - Rule
10MA(2)(iv) refers to an international
transaction covered in the agreement for
rollback years. Can the taxpayers apply
for selected international transactions for
rollback years?
In what cases is the taxpayer required
to withdraw an appeal from the High
Court - Rule 10MA(3)(i) provides that
rollback provisions shall not be provided
in respect of an international transaction
for a rollback year if it is the subject
matter of an appeal before the ITAT and
the ITAT has passed an order disposing
of such appeal at any time before sign-
ing of agreement. Rule 10RA(4) refers
to withdrawal of an appeal pending
Transfer Pricing

8. 415International Taxation Vol. 12 May 2015 59
before the High Court before furnishing
the modified return for the rollback to
be applied. Is there a conflict between
the two rules? If so, how can this be
reconciled?
Reducing income or increasing loss -
Rule 10MA(3)(i) of the Rules provides
that the rollback provision shall not
be provided if its application has the
effect of reducing the total income or
increasing the loss, as the case may be,
of the taxpayer as declared in the return
of the income of the said year. Does
this mean that the rollback provision is
not applicable at all for the said year?
Does this also mean that the taxpayer
will continue to be subjected to regular
audit, appeal and litigation process for
that year?
Condition for cancellation - Rule 10RA(7)
provides that in case rollback effect
cannot be given for any rollback year
on account of failure on the part of
the taxpayer, the agreement shall be
cancelled. However, the rule does not
mention the circumstances for such can-
cellation. It also does not outline how
the failure on the part of the taxpayer
would be constituted?
Effect on the bilateral agreements where
rollback results in reducing the income/
increasing the loss - For bilateral agree-
ments, other countries’ tax authorities
may not agree with the present Rule
10MA(3)(i), considering the present rule
position as an one-sided approach This
may effectively prevent any rollback
being applied to any bilateral APA.
How such a potential stalemate can be
resolved and what action the CBDT will
undertake to correct such imbalance?
Renegotiating bilateral APAs - In case
of bilateral APAs have already been
concluded, will the rollback years be
negotiated afresh with the competent
authorities of the country of the associ-
ated enterprises? Will Does this mean
that the agreement will be modified or
will there be a separate, new agreement
for rollback years?
Payment of additional tax - For giving
effect to the rollback agreement, will the
taxpayer be asked to pay only additional
tax and/or interest or will it be insisted
on the taxpayer to bring cash from the
associated enterprise?
Process for APAs already signed - For
the APA agreements already signed, the
process for giving effect to rollback pro-
visions is not clear. The process is not
included in the rules. There are certain
anomalies that require to be resolved.
These are:
Rule 10RA(3) requires that modified return
shall be furnished in respect of the first
of the previous years of rollback. But for
agreements already signed, such return
would have already been filed before
rollback provisions were agreed on. Does
this not make it impossible to file the
modified return by the stipulated time?
Once the revised return is filed, what will
be time period available to the Trans-
fer Pricing Officer/Assessing Officer to
comment on the modified return? What
will be consequences if the review fails
by a stipulated time period?
Who will review the revised return -
Even for APA agreements that have not
been signed, the process for review of
revised return by the TPO/AO is not
clear. Can the TPO/AO challenge it as
a regular return?
Conclusion
The introduction of the rollback provisions is
seen as a positive step towards strengthening the
Indian APA program. The rollback provisions
are detailed and provide explicit details of
requirement as well as the applicability.
However there are certain gaps which needs

9. 416 International Taxation Vol. 12 May 2015 60
to be clarified by the CBDT to ensure that
the rollback provisions achieve the aim
with which they have been introduced. It is
therefore imperative that the CBDT provides
the required clarifications by way of frequently
asked questions (‘FAQs’) or otherwise, as
was done at the time of introduction of the
Indian APA program.
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1. Income-tax (Third Amendment) Rules, 2015
Transfer Pricing