Rule 116 — Cancellation of an agreement. Made under s.168 of the Income-tax Act, 2025.
Rule 116 gives effect to Section 168 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) lists the grounds on which the Board is to cancel an advance pricing agreement: the compliance audit referred to in rule 114 has resulted in a finding of failure on the part of the assessee to comply with the terms of the agreement; the assessee has failed to file the annual compliance report in time; the annual compliance report furnished contains material errors; or the agreement is to be cancelled under rule 115(4) or rule 117(7).
Sub-rule (2) requires the Board to give the assessee a reasonable opportunity of being heard before proceeding to cancel. Sub-rule (3) requires the competent authority of India, in the case of a bilateral or multilateral agreement, to communicate with the competent authority of the other country or countries and provide the reason for the proposed cancellation.
Sub-rule (4) requires the order of cancellation to be in writing and to give reasons for the cancellation and for non-acceptance of the assessee's submission, if any. Sub-rule (5) requires the order to specify the effective date of cancellation, where applicable. Sub-rule (6) requires an order under section 168(7) declaring the agreement void ab initio on account of fraud or misrepresentation of facts to be in writing and to give reasons for the declaration and for non-acceptance of the assessee's submission, if any. Sub-rule (7) requires the order of cancellation to be intimated to the Assessing Officer and the Transfer Pricing Officer having jurisdiction over the assessee.
An advance pricing agreement binds both sides for a run of years, so the Act has to allow it to be undone when the assessee does not keep to it, and the rule says on what grounds and by what procedure. It also separates two different outcomes: cancellation, which ends the agreement from an effective date, and a declaration under section 168(7) that the agreement was void ab initio because it was obtained by fraud or misrepresentation of facts. Sub-rule (7) exists because the officers who must act on the assessee's assessments need to know the agreement no longer stands.
Cancellation is not confined to substantive non-compliance found in a compliance audit: a late annual compliance report, or one containing material errors, is a ground in itself under sub-rule (1)(b) and (c). Every cancellation must be preceded by a reasonable opportunity of being heard and must be reasoned in writing, including reasons for rejecting whatever the assessee said. Sub-rule (5) makes the effective date part of the order where applicable, which decides how many years survive the cancellation. A declaration under section 168(7) is a distinct order under sub-rule (6) and, being a declaration that the agreement is void ab initio, leaves nothing standing at all — it is not the same as cancellation from a date. Note that the text of sub-rule (2) speaks of proceeding to cancel "an application" although the rule deals with cancellation of an agreement.
A company with a five-year advance pricing agreement files its annual compliance report for the third year four months late. Under sub-rule (1)(b) that delay is itself a ground for cancellation, and the Board must give the company a reasonable opportunity of being heard under sub-rule (2) before passing a written order that gives reasons and specifies the effective date of cancellation. A copy goes to the Assessing Officer and the Transfer Pricing Officer having jurisdiction over the company under sub-rule (7).
In the show cause and hearing that precede a cancellation order, in the cancellation order itself, and afterwards in the assessment proceedings before the Assessing Officer and Transfer Pricing Officer who are intimated of it.
The Board shall give a reasonable opportunity of being heard to the assessee, before proceeding to cancel an application.
The order of cancellation of the agreement shall be in writing and shall provide reasons for cancellation and for non-acceptance of submission of the assessee, if any.