Chapter X - Special Provisions Relating to Avoidance of Tax
Section 168
Section 168: advance pricing agreement
Section 168 allows the Board, with the Central Government's approval, to enter into an advance pricing agreement (APA) with a taxpayer, fixing in advance the arm's length price for an international transaction, or the income attributable to a non-resident's operations in India, for a defined future period.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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 166 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 (b) irrespective of anything contained in the Act, the period beginning with the date of such agreement and ending on the date of order under sub-section (7) shall be excluded for the purpose of computing any period of limitation under this Act and if immediately after the exclusion of the aforesaid period, the period of limitation, referred to in any provision of this Act, is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.
(9) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, also provide for determining the— (a) arm’s length price or specify the manner in which the arm’s length price shall be determined in relation to the international transaction entered into by the 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, transactions and activities carried out in India by or on behalf of that non-resident person, during any period not exceeding four tax years preceding the first of the tax years referred to in sub-section (4) and the arm’s length price of such international transaction or the income of such person shall be determined in accordance with the said agreement.
(10) Where an application is made by a person for entering into an agreement referred to in sub-section (1), the proceedings shall be deemed to be pending in the case of the person for the purposes of this Act till such agreement is entered into, or such proceedings are closed as may be prescribed.
(11) For the purposes of this section, the Board may prescribe a scheme specifying therein the manner, form, procedure and any other matter in respect of the advance pricing agreement.
Introduction
An advance pricing agreement can determine the arm's-length price, method or specified attributable income for covered transactions in advance. It is generally valid for up to five consecutive tax years, may include a four-year rollback, and can cease to bind on a material change in law or facts.
Key takeaways
Advance pricing agreement
With Central Government approval, the Board may agree in advance how the arm's length price of a proposed international transaction, or specified attributable income, will be determined.
Duration and effect
An agreement can cover up to five consecutive tax years and binds the parties identified in the section for the covered transaction, subject to its terms and validity rules.
What an advance pricing agreement can cover
The Board, with Central Government approval, may enter into an agreement determining, or specifying the manner of determining:
- the arm's length price in relation to an international transaction to be entered into by that person, and
- the income referred to in Section 9(2), as is reasonably attributable to the operations carried out in India by or on behalf of a non-resident person.
Methods used
The manner of determination may include the methods referred to in Section 165(1) (for arm's length price) or the methods provided by rules made under the Act (for attributable income), with such adjustments or variations as necessary.
Irrespective of anything contained in Section 165 or 166, once an APA has been entered into, the arm's length price of the covered international transaction or the attributable income under Section 9(2) is determined strictly as per the agreement.
Validity, binding effect and roll-back
| Aspect | What Section 168 provides |
|---|---|
| Validity period | Not exceeding five consecutive tax years, as specified in the agreement |
| Binding on | The person in whose case, and in respect of the transaction to which, the agreement was entered into, and the Principal Commissioner/Commissioner and subordinate income-tax authorities |
| Not binding if | There is a change in law or facts having a bearing on the agreement |
| Roll-back ("rollback" years) | Subject to prescribed conditions, procedure and manner, the agreement may also cover the arm's length price or attributable income for up to four tax years preceding the first tax year the agreement otherwise covers |
Agreement void ab initio
The Board, with Central Government approval, may by order declare an agreement void ab initio if it finds the agreement was obtained by fraud or misrepresentation of facts.
Once an agreement is declared void ab initio, all provisions of the Act apply as if the agreement had never been entered into. The period from the date of the agreement to the date of the void-ab-initio order is excluded when computing any limitation period under the Act, and if the remaining limitation period after that exclusion is less than sixty days, it is extended to sixty days.
Applications and pending proceedings
Where a person applies to enter into an agreement, proceedings in that person's case are deemed pending for the purposes of the Act until the agreement is entered into, or the proceedings are closed, as may be prescribed.
The Board may prescribe a scheme specifying the manner, form, procedure and other matters for advance pricing agreements.
Step-by-step flow for applying Section 168
- 1
What should the agreement cover?
Either the arm's length price (or the manner of determining it) for an international transaction, or, for a non-resident, the Section 9(2) income reasonably attributable to its operations in India.
- 2
Apply under the scheme prescribed by the Board
From the application until the agreement is entered into or the proceedings are closed, proceedings are deemed pending (Section 168(10)).
- 3
Agreement entered into by the Board with Central Government approval
Valid for the period stated in it, not exceeding five consecutive tax years. Subject to prescribed conditions, it may also cover up to four tax years before the first of those years (roll-back, Section 168(9)).
- 4
Have the law or the facts relevant to the agreement changed?
- Yes: The agreement is not binding (Section 168(6)).
- No: It binds the person and the tax authorities for that transaction, and the price or income is determined under the agreement despite Sections 165 and 166.
- 5
Was it obtained by fraud or misrepresentation of facts?
- Yes: The Board may declare it void ab initio. The Act then applies as if there were no agreement, and the period from the agreement to the order is excluded from limitation, with at least sixty days remaining.
Practical checklist
Do
- Define the covered transactions, pricing method, critical facts and agreement years precisely.
- Monitor changes in law, functions and facts and assess any prescribed rollback application separately.
Avoid
- Do not assume an agreement binds after relevant facts or law change.
- Do not extend it beyond the five-year prospective period or four-year rollback without the statutory basis.
Illustrative example
Worked example: agreement period and roll-back
Hypothetical facts (illustration only, not a real taxpayer): A non-resident group's Indian subsidiary pays its parent for technical services. It applies for an advance pricing agreement, and the agreement is entered into for the period of Tax Year 1 to Tax Year 5, with roll-back requested for earlier years.
Agreement period
Tax Years 1 to 5 are five consecutive tax years, which is the maximum Section 168(4) allows.
Roll-back
Subject to prescribed conditions, the agreement may also cover up to four tax years before Tax Year 1. A request covering five earlier years would exceed the limit by one year.
Binding effect
For the covered transaction, the arm's length price is the one fixed by the agreement, whatever Sections 165 and 166 would otherwise produce.
Change in facts
If in Tax Year 4 the subsidiary changes from routine services to a materially different function relevant to the agreement, the agreement ceases to be binding under Section 168(6); the section does not provide for it to continue in part.
Outcome
- Track the five-year window and the roll-back years separately, together with any prescribed roll-back conditions.
- Returns or modified returns to give effect to the agreement are dealt with under Section 169.
Glossary
- Advance pricing agreement
- An agreement with the Board on pricing or attributable income for specified transactions.
- Rollback
- Application of an agreement to permitted earlier tax years under subsection (9).
Frequently asked questions
What is an advance pricing agreement under Section 168?
An agreement the Board (with Central Government approval) enters into with a taxpayer, fixing in advance the arm's length price of a proposed international transaction, or the income attributable to a non-resident's Indian operations under Section 9(2).
How long can an APA last?
For such period not exceeding five consecutive tax years as specified in the agreement.
Can an APA also cover past years?
Yes - subject to prescribed conditions, procedure and manner, it may also determine the arm's length price or attributable income for up to four tax years preceding the first tax year covered by the agreement.
Can the tax department cancel an APA?
Yes - the Board, with Central Government approval, may declare an agreement void ab initio if it finds it was obtained by fraud or misrepresentation of facts, in which case the Act applies as if the agreement never existed.
Need help applying this provision to your situation?
Discuss an advance pricing agreement with our tax teamLast updated 10 October 2026