Section 168 · Avoidance of tax
Section 168 of the Income-tax Act, 2025 — Advance Pricing Agreement (APA)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter X
📜 What the law says — Section 168, Income-tax Act 2025
168. (1) The Board, with the approval of the Central Government, may enter into
an advance pricing agreement with any person, determining the—
(a) arm’s length price or specifying the manner in which the arm’s length
price is to be determined, in relation to an international transaction to
be entered into by that person;
(b) income referred to in section 9(2), or specifying the manner in which
the said income is to be determined, as is reasonably attributable to the
operations carried out in India by or on behalf of that person, being a
non-resident.
(2) The manner of determination of the arm’s length price referred to in sub-section
(1)(a) or the income referred to in sub-section (1)(b) may include, respectively,—
(a) the methods referred to in section 165(1); or
(b) the methods provided by rules made under this Act,
with such adjustments or variations, as may be necessary or expedient so to do.
(3) Irrespective of anything contained in section 165 or 16671 or the methods provided
by rules made under this Act,—
(a) the arm’s length price of any international transaction; or
(b) the income referred to in sub-section (1)(b),
in respect of which the advance pricing agreement has been entered into, shall be
determined as per the advance pricing agreement so entered.
(4) The agreement referred to in sub-section (1) shall be valid for such period not
exceeding five consecutive tax years as specified in the agreement.
(5) The advance pricing agreement entered into shall be binding—
(a) on the person in whose case, and in respect of the transaction in relation
to which, the agreement has been entered into; and
(b) on the Principal Commissioner or Commissioner, and the income-tax
authorities subordinate to him, in respect of the said person and the said
transaction.
(6) The agreement referred to in sub-section (1) shall not be binding if there is a
change in law or facts having bearing on the agreement so entered.
(7) The Board may, with the approval of the Central Government, by an order, declare
an agreement to be void ab initio, if it finds that the agreement has been obtained
by the person by fraud or misrepresentation of facts.
(8) Upon declaring the agreement void ab initio,—
(a) all the provisions of this Act shall apply to the person as if such agreement
had never been entered into; and
In plain language
What Section 168 is about
Section 168 of the Income-tax Act, 2025 is the "Advance Pricing Agreement" (APA) provision. It lets a taxpayer and the tax authority agree, in advance, on the arm's length price (ALP) — or the method to work it out — for future cross-border dealings with related parties. Instead of fighting over transfer pricing years later during assessment, the business locks in a price/method up front and gets certainty for several years. This is the modern re-write of the old Section 92CC of the Income-tax Act, 1961 (with the "effect of APA" rules that were in Section 92CD now folded into the same scheme).
Who can enter into an APA — and who signs it
- The Central Board of Direct Taxes (CBDT) enters into the APA, but only with the approval of the Central Government [Sec 168(1)].
- Any person carrying out an "international transaction" (a dealing with an associated enterprise, at least one of which is a non-resident) can apply. It is most used by MNC subsidiaries, IT/ITeS and BPO companies, captive service centres, and groups with intra-group loans, royalties or management fees.
- It can also fix the income of a non-resident attributable to operations in India under Section 9(2) — for example, profit attribution to a permanent establishment.
What the APA can decide
- The arm's length price itself, or the manner of determining the ALP [Sec 168(1)].
- The method may be one of the prescribed methods in Section 165(1) (CUP, resale price, cost plus, profit split, TNMM) or any other method provided by the rules, with suitable adjustments [Sec 168(2)]. This "any other method" flexibility is a big practical advantage over normal assessments.
Key conditions and limits
- Validity: up to 5 consecutive tax years [Sec 168(4)]. The taxpayer specifies the years it wants covered.
- Roll-back: up to 4 preceding tax years [Sec 168(9)] — so the same agreed method can settle earlier open years. Combined, an APA can bring certainty to as many as 9 years (4 + 5).
- Overriding effect: Once an APA is in force, the ALP is determined as per the APA, notwithstanding the normal ALP rules in Sections 165 and 166 [Sec 168(3)].
- Binding on both sides: The APA binds the taxpayer for the covered transactions and binds the income-tax authorities for that person and transaction [Sec 168(5)].
- Ceases to bind on change of law/facts: If there is a change in law, or a change in the facts on which the APA was based, it no longer binds [Sec 168(6)].
- Void ab initio for fraud: If the APA was obtained by fraud or misrepresentation, CBDT can declare it void from the beginning, and the Act then applies as if the APA never existed [Sec 168(7)–(8)].
How it interacts with the rest of Chapter
- No TPO reference for APA-covered years: Where a valid APA exists, the Transfer Pricing Officer cannot re-open the price for those transactions/years.
- Modified return: After signing, the taxpayer files/revises the return to give effect to the APA, and the assessment is completed on that basis (the "effect of APA" mechanism, formerly Section 92CD).
- Companion provisions: definition of associated enterprise (Sec 162), international transaction (Sec 163), ALP methods (Sec 165), reference to TPO (Sec 166), safe harbour (Sec 167) and secondary adjustment (Sec 170).
Practical implications
- Certainty and no litigation for the covered years — hugely valuable for high-value, recurring or complex intangible/financing transactions.
- Types: Unilateral (only Indian authority), Bilateral or Multilateral (with treaty-partner countries) — bilateral/multilateral also eliminate double taxation.
- Under the draft Income-tax Rules, 2026, the APA application is made in Form 51 (renewal in Form 54), reportedly with a proposed flat fee of ₹20 lakh replacing the old value-based slabs — confirm the final notified figure before filing.
- Applications are best filed before the transaction/year begins; the process (pre-filing, negotiation, signing) typically runs into a few years, so plan early.
💡 Example
Worked example 1 — certainty on a service margin. IndiaTech Pvt. Ltd. is a captive software development centre for its US parent and bills the parent on a cost-plus basis. It signs a unilateral APA under Section 168 fixing the method as TNMM with an agreed operating margin of 15% on total cost for tax years 2026-27 to 2030-31 (5 years). If its operating cost for 2026-27 is ₹100 crore, the arm's length revenue is ₹115 crore. Even if the TPO would otherwise have argued for an 18% margin, the APA overrides that — the price stands at ₹115 crore, no adjustment, no dispute.
Worked example 2 — roll-back saving. The same company had open assessments for 2022-23 to 2025-26 where the department was proposing a higher margin, creating a demand of about ₹6 crore per year (~₹24 crore total). Using the roll-back option in Section 168(9), the agreed 15% method is applied to those 4 preceding years too, closing them at the same margin and wiping out the proposed additions — turning 5 years of future certainty into 9 years of total peace.
A relatable story. Think of Meera, a CFO who dreaded every transfer-pricing audit — each year the same fight over her group's royalty rate, ending in appeals that dragged on for a decade. She likened it to renegotiating rent with a landlord every single month. An APA is like signing a 5-year lease at a rate both sides accept in advance: the price is settled, everyone plans with confidence, and the annual argument simply disappears — as long as the facts stay the same and nobody hid anything.
| Feature | Position under Section 168, Income-tax Act 2025 |
|---|
| What it fixes | Arm's length price, or the manner/method of determining ALP; can also fix income under Sec 9(2) |
| Who enters it | CBDT, with prior approval of the Central Government [168(1)] |
| Maximum validity | Up to 5 consecutive tax years [168(4)] |
| Roll-back to past years | Up to 4 preceding tax years [168(9)] — total up to 9 years |
| Method allowed | Sec 165(1) methods or any other method by rules, with adjustments [168(2)] |
| Binding on | Taxpayer and income-tax authorities, for that person/transaction [168(5)] |
| Ceases to bind if | Change in law or in the facts on which it was based [168(6)] |
| Can be voided if | Obtained by fraud or misrepresentation — void ab initio [168(7)-(8)] |
| Types | Unilateral / Bilateral / Multilateral |
| 1961 Act equivalent | Section 92CC (with effect-of-APA rules of Section 92CD) |
| Application form (draft Rules 2026) | Form 51 (renewal Form 54); proposed flat fee reportedly ₹20 lakh — verify final notification |
Related sections
Section 165 — Computation of arm's length price and methods Section 166 — Reference to Transfer Pricing Officer Section 167 — Safe harbour rules Section 162 — Meaning of associated enterprise Section 163 — Meaning of international transaction Section 170 — Secondary adjustment in certain cases
Frequently asked questions
What is an Advance Pricing Agreement under Section 168?
It is an agreement between a taxpayer and CBDT (with Central Government approval) that fixes the arm's length price, or the method to compute it, for future international transactions with associated enterprises. It gives certainty and avoids transfer-pricing disputes for the covered years.
How many years does an APA cover?
An APA is valid for up to 5 consecutive tax years under Section 168(4). It can also be rolled back to up to 4 preceding tax years under Section 168(9), giving certainty for as many as 9 years in total.
What is the difference between unilateral, bilateral and multilateral APAs?
A unilateral APA involves only the Indian tax authority. Bilateral and multilateral APAs are negotiated with the tax authorities of one or more treaty-partner countries, which additionally protects the taxpayer from double taxation.
Can an APA be cancelled once signed?
Yes. It stops binding if there is a change in law or in the facts on which it was based [Sec 168(6)], and CBDT can declare it void from the very beginning if it was obtained by fraud or misrepresentation [Sec 168(7)].
Which section of the old Income-tax Act, 1961 does Section 168 replace?
Section 168 corresponds to Section 92CC of the 1961 Act, and it also absorbs the 'effect of APA' rules that were earlier contained in Section 92CD.
How do I apply for an APA and what does it cost?
Under the draft Income-tax Rules, 2026 the application is made in Form 51 (renewal in Form 54). A flat fee of around ₹20 lakh has been reported as replacing the older value-based slabs, but you should confirm the final notified fee before filing.
Does an APA stop the Transfer Pricing Officer from making an adjustment?
Yes. For transactions and years covered by a valid APA, the price is determined as per the APA regardless of the normal rules, so the TPO cannot make a separate transfer-pricing adjustment for those years.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
💬 Discussion & questions
0 comments · Ask anything about this — a Chartered Accountant or the community will reply.
Have a doubt about this (Section 168)? Ask here 👇
Free · takes 20 seconds · our CA answers. No account needed.
No comments yet — be the first to ask. 👆
EaseValue