Advance Pricing Agreements

An Advance Pricing Agreement (APA) is voluntary agreement entered into between the Central Board of Direct Taxes (CBDT) and any person (entity), to determine in advance, the arms length price or the method to determine the arms length price, or both, of an impending business transaction between the associated enterprises. Once, an international transaction¹ is entered into, the arm lengths price with respect to such business transaction, for the period as mentioned in the agreement (which must not exceed 5 years) will be determined only in accordance with APA. It means, entering into an APA is voluntary but once an APA is entered into.

The Advance Pricing Agreements (APA) was introduced in the Finance Act 2012 by Ministry of Finance in order to harmonize the Transfer Pricing Norms with the existing regulatory framework. The rules governing APA i.e. Advance Pricing Agreement Scheme, was notified on 30th August 2012 by Central Government vide notification No. 36/2012.