Implications of APA on pre-rollback transactions (Oct 19 2016)
The Chennai Bench of the Income-tax Appellate Tribunal admitted the taxpayer’s advance pricing agreement (APA) as additional evidence about the characterization of international transactions. Thus, the decision reflects possible implications of an APA on the characterization of international transactions in prior years.
The taxpayer was engaged in the manufacture of footwear for its related party in the British Virgin Islands. The taxpayer did not characterize itself as a contract manufacturer for the years at issue. The Transfer Pricing Officer, however, recharacterized the taxpayer as a contract manufacturer, and proposed transfer pricing adjustments that were upheld by the Dispute Resolution Panel.
The taxpayer sought to introduce its APA as additional evidence and asserted that the APA had a bearing on the issues in the years on appeal. The taxpayer stated that it became a contract manufacturer only after multiple labor strikes during the period 2010-2011. The APA was concluded in May 2016 and was applicable from FY 2014-2015 onwards, with the “rollback” period reduced to three years (instead of four years).
The tribunal admitted the APA, and took note of the taxpayer’s claim that it had only become a contract manufacturer given the APA rollback of three years. The tribunal set aside the findings of the lower authorities, and returned the case to the Transfer Pricing Officer for a fresh adjudication.