Rule 114 — Compliance audit of agreement.
The rule provides for the compliance audit of an advance pricing agreement — who conducts it, what may be called for, where the report goes and by when, and what the agreement displaces.
Sub-rule (1) puts the audit on the Transfer Pricing Officer in respect of arms' length price having jurisdiction over the assessee, who shall carry it out for each of the years covered in the agreement. Sub-rule (2) lets that officer require the assessee to substantiate compliance with the terms of the agreement, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method, and to submit any information or document to establish that the terms have been complied with.
Sub-rule (3) requires the compliance audit report, for each year covered in the agreement, to be submitted to the Principal Chief Commissioner of Income-tax (International Taxation) in the case of a unilateral agreement and to the competent authority of India in the case of a bilateral or multilateral agreement, mentioning the officer's findings as regards compliance by the assessee with the terms of the agreement. Sub-rule (4) requires the Principal Chief Commissioner of Income-tax (International Taxation) to forward the report to the Board where there is a finding of failure on the part of the assessee to comply with the terms of the agreement and cancellation of the agreement is required.
Sub-rule (5) fixes the time: the compliance audit report shall be furnished by the Transfer Pricing Officer within six months from the end of the month in which the Annual Compliance Report referred to in rule 113 is received. Sub-rule (6) provides that the regular audit of the covered transactions shall not be undertaken by the Transfer Pricing Officer if an agreement has been entered into under rule 109, except where the agreement has been cancelled under rule 116.
An advance pricing agreement fixes the price in advance on stated assumptions, so what has to be checked afterwards is not the price but whether the assessee stayed inside the agreement — the critical assumptions, the data and the consistent application of the method. The rule builds that check as an audit separate from the regular transfer pricing audit, routes its findings to the authority that owns the agreement, and closes the loop by removing the ordinary audit of the covered transactions for as long as the agreement stands.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Time for the Transfer Pricing Officer to furnish the compliance audit report | Within six months from the end of the month in which the Annual Compliance Report is received | The Annual Compliance Report referred to in rule 113 | Sub-rule (5) |
| Coverage of the compliance audit | Each of the years covered in the agreement | One report for each such year | Sub-rules (1) and (3) |
The compliance audit is year by year — one for each of the years covered in the agreement — and the six-month clock in sub-rule (5) does not start with the year end but with the end of the month in which the rule 113 Annual Compliance Report is received, so a late Annual Compliance Report moves the audit deadline with it. Where the report goes depends on the kind of agreement: the Principal Chief Commissioner of Income-tax (International Taxation) for a unilateral agreement, the competent authority of India for a bilateral or multilateral one. Sub-rule (4) is narrower than the report itself — the forwarding to the Board is required where there is a finding of failure and cancellation of the agreement is required, not on every adverse remark. Sub-rule (6) is the practical benefit of the agreement, and it is conditional: the regular audit of the covered transactions is not undertaken while the agreement stands, but it returns where the agreement has been cancelled under rule 116, and it never extended to transactions the agreement did not cover.
A company with a five-year unilateral agreement files its Annual Compliance Report for the third year under rule 113 in October. The Transfer Pricing Officer having jurisdiction must furnish the compliance audit report for that year by the end of the following April, that is within six months from the end of October, and it goes to the Principal Chief Commissioner of Income-tax (International Taxation). Meanwhile the covered transactions for that year are not put through the regular transfer pricing audit; a transaction outside the agreement's coverage is unaffected by sub-rule (6).
You meet it after the Annual Compliance Report is filed, when the Transfer Pricing Officer asks the assessee to substantiate compliance with the terms of the agreement and the critical assumptions, and in the report that follows.
The compliance audit report shall be furnished by the Transfer Pricing Officer within six months from the end of the month in which the Annual Compliance Report referred to in rule 113 is received by such officers.
The regular audit of the covered transactions shall not be undertaken by the Transfer Pricing Officer, if an agreement has been entered into under rule 109, except where the agreement has been cancelled under rule 116.
