Rule 110: APA terms and changes in critical assumptions
Rule 110 describes what an APA may contain and how changes in critical assumptions or failure of conditions affect it. Monitoring the agreed terms and giving the required notices are essential after the agreement is signed.
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Rule 110 - Terms of the agreement
(1) An agreement may among other things, include— (a) the international transactions covered by the agreement; (b) the agreed transfer pricing methodology, if any; (c) determination of arm's length price, if any; (d) the manner in which the arm's length price is to be determined, if any; (e) definition of any relevant term to be used in clause (b), (c) or (d); (f) critical assumptions; (g) rollback provisions referred to in rule 111; and (h) the conditions, if any, other than provided in the Act or these rules.
(2) 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.
(3) The binding effect of agreement shall cease only if any party has given due notice to the concerned other party or parties.
(4) In case there is a change in any of the critical assumptions or failure to meet the conditions subject to which the agreement has been entered into, the agreement may be revised or cancelled, as the case may be.
(5) The assessee which has entered into an agreement shall give a notice in writing of such change in any of the critical assumptions or failure to meet conditions to the Principal Chief Commissioner of Income-tax (International Taxation), as soon as it is practicable to do so.
(6) The Board shall give a notice in writing of such change in critical assumptions or failure to meet conditions to the assessee, as soon as it comes to the knowledge of the Board.
(7) The revision or the cancellation of the agreement shall be in accordance with rules 115 and 116, respectively.
Rule breakdown
Read the agreed scope and method
The agreement may identify covered international transactions, methodology, arm’s-length price or determination method, relevant definitions, critical assumptions, rollback and other conditions.
Use the actual executed terms to determine coverage. Do not assume a description in the original application survived unchanged into the agreement.
Monitor critical assumptions and conditions
The rule addresses a change in a critical assumption or failure to meet a condition of the agreement. It states that the agreement is not binding in those circumstances, read with the following notice provision.
Assign responsibility for detecting significant operational, functional, risk or other changes specified by the agreement.
Binding effect and due notice
Sub-rule (3) states that binding effect ceases only if a party has given due notice to the concerned other party or parties. The change therefore needs to be handled through the rule’s notice framework.
Do not merely stop following the agreement internally without reviewing the notice and subsequent procedural requirements.
Send written notice promptly
The assessee must notify the Principal Chief Commissioner of Income-tax (International Taxation) in writing as soon as practicable. The Board gives written notice to the assessee as soon as the change or failure comes to its knowledge.
Describe the changed fact, relevant agreement term and date, and preserve evidence of communication.
Revision or cancellation follows separate rules
The agreement may be revised or cancelled on the stated change or failure. Rule 110 directs use of Rules 115 and 116 respectively.
Review the proposed treatment and effective dates through those procedures rather than assuming a notice alone sets every tax consequence.
Key takeaways
Executed terms define coverage
Read the scope, method and conditions together.
Notice is required
The binding-effect provision includes due notice.
Separate follow-up procedures
Revision and cancellation follow Rules 115 and 116.
Practical checklist
- Monitor the agreement’s critical assumptions.
- Notify the designated authority promptly in writing.
- Retain evidence and assess the applicable follow-up procedure.
Avoid
- Do not rely on the application instead of the executed terms.
- Do not treat a material change as an undocumented internal adjustment.
FAQs
Can an assessee silently stop applying the APA after a critical change?
Sub-rule (3) requires due notice, and the rule provides written-notice and revision/cancellation procedures.
Who receives the assessee’s written notice?
The Principal Chief Commissioner of Income-tax (International Taxation).
Does Rule 110 itself contain every cancellation step?
No. It directs cancellation to Rule 116 and revision to Rule 115.
Glossary
- Critical assumption
- A factor or assumption identified as fundamental to the agreement’s binding basis.