Rule 110 — Terms of the agreement.
Sub-rule (1) lists what an agreement may, among other things, include: the international transactions covered by it; the agreed transfer pricing methodology, if any; determination of the arm's length price, if any; the manner in which the arm's length price is to be determined, if any; definitions of any relevant term used in those clauses; critical assumptions; rollback provisions referred to in rule 111; and conditions other than those provided in the Act or these rules.
Sub-rules (2) to (4) deal with what unsettles the agreement. It shall not be binding on the Board or the assessee if there is a change in any of the critical assumptions or a failure to meet conditions subject to which it was entered into. The binding effect shall cease only if any party has given due notice to the concerned other party or parties. And on such a change or failure the agreement may be revised or cancelled, as the case may be.
Sub-rules (5) and (6) place the duty to speak on both sides. The assessee which has entered into an agreement shall give notice in writing of the change in critical assumptions or the failure to meet conditions to the Principal Chief Commissioner of Income-tax (International Taxation), as soon as it is practicable to do so. The Board shall give notice in writing of such a change or failure to the assessee, as soon as it comes to the knowledge of the Board.
Sub-rule (7) directs that any revision or cancellation of the agreement be in accordance with rules 115 and 116 respectively.
An advance pricing agreement fixes a price or a method years ahead, and it can only do that on stated assumptions about the business and the market. The rule identifies what an agreement is to contain, and then deals with the case those assumptions do not hold. Its central choice is that a broken assumption does not silently void the agreement: the binding effect ceases only on due notice, and revision or cancellation follows the routes in rules 115 and 116 rather than being left to either party's own view.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Time for the assessee's notice of a change in critical assumptions or failure to meet conditions | As soon as it is practicable to do so | Notice in writing to the Principal Chief Commissioner of Income-tax (International Taxation) | Sub-rule (5) |
| Time for the Board's notice of such a change or failure | As soon as it comes to the knowledge of the Board | Notice in writing to the assessee | Sub-rule (6) |
Sub-rules (2) and (3) have to be read together or the first is misread. A change in critical assumptions or a failure to meet conditions makes the agreement not binding on the Board or the assessee, but the binding effect ceases only if a party has given due notice to the other, so an assessee that discovers a broken assumption and says nothing cannot later disown the agreement from the date the assumption failed, and neither can the Department. The consequence is not automatic termination either: sub-rule (4) offers revision or cancellation, and sub-rule (7) sends each to its own rule, revision to rule 115 and cancellation to rule 116. The contents in sub-rule (1) are permissive — the agreement may include them, and three of the pricing items are qualified by "if any" — so an agreement that fixes a methodology without fixing a price is within the rule. Rollback is a term of the agreement, not something added later; it is included under sub-rule (1)(g) by reference to rule 111.
An agreement covering a group's distribution transactions rests on a critical assumption that the assessee continues to bear no marketing risk. Two years in, a group restructuring moves that risk to the assessee. Under sub-rule (5) the assessee gives written notice of the change to the Principal Chief Commissioner of Income-tax (International Taxation) as soon as practicable. The agreement does not simply lapse: its binding effect ceases only on due notice under sub-rule (3), and what follows is a revision under rule 115 or a cancellation under rule 116, as the case may be.
An assessee meets it in the terms of the agreement itself, particularly the critical assumptions clause, and in the written notice it must give when those assumptions change.
The agreement shall not be binding on the Board or the assessee, if there is a change in any of critical assumptions or failure to meet conditions subject to which the agreement has been entered into.
The binding effect of agreement shall cease only if any party has given due notice to the concerned other party or parties.