Rule 114: APA compliance audit by the TPO
Rule 114 requires the TPO to audit compliance for every APA-covered year. The review checks whether the agreement’s terms and assumptions are actually followed; it is distinct from treating the covered transactions as if no agreement existed.
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Rule 114 - Compliance audit of agreement
(1) The Transfer Pricing Officer in respect of arms‘ length price and having the jurisdiction over the assessee shall carry out the compliance audit of the agreement for each of the year covered in the agreement.
(2) For the purposes of sub-rule (1), the Transfer Pricing Officer may require— (a) 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 (b) the assessee to submit any information, or document, to establish that the terms of the agreement has been complied with.
(3) The Transfer Pricing Officer shall submit the compliance audit report, for each year covered in the agreement, to the Principal Chief Commissioner of Income-tax (International Taxation) in case of unilateral agreement and to the competent authority of India, in case of bilateral or multilateral agreement, mentioning therein his findings as regards compliance by the assessee with terms of the agreement.
(4) The Principal Chief Commissioner of Income-tax (International Taxation) shall forward the report to the Board, where there is finding of failure on part of assessee to comply with terms of agreement and cancellation of the agreement is required.
(5) 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.
(6) 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.
Rule breakdown
Prepare evidence of actual compliance
The TPO may require proof of compliance with the agreement, including critical assumptions, correctness of supporting data and consistent application of the transfer-pricing method.
Keep an agreement-to-evidence checklist covering transaction scope, computations and changes in relevant facts. A copy of the signed APA alone does not establish annual compliance.
Information requests support the audit
The TPO may request documents or information establishing that the terms have been met. Respond with the underlying records and explain reconciliations or differences clearly.
Coordinate the annual report with finance and operational evidence so the same facts support both.
Audit findings go to the designated authority
The report goes to the Principal Chief Commissioner for unilateral agreements and the competent authority for bilateral or multilateral agreements. The specified failure finding is forwarded to the Board where cancellation is required.
An adverse finding can have consequences under the separate cancellation procedure. Address potential non-compliance promptly rather than assuming an agreement cannot be disturbed.
The TPO report has a receipt-based month-end clock
The compliance audit report must be furnished within six months from the end of the month in which the Rule 113 annual compliance report is received by the relevant officers.
Retain annual-report filing and receipt evidence. The clock is not stated as six months from signing the APA.
Regular audit of covered transactions is restricted
Sub-rule (6) says the TPO does not undertake the regular audit of covered transactions where the Rule 109 agreement has been entered into, except where it has been cancelled under Rule 116.
This does not remove the compliance audit described in the same rule or extend coverage to transactions outside the agreement.
Key takeaways
Annual compliance evidence
Terms, assumptions, data and method consistency are checked.
Six-month report clock
Measure from the specified receipt month-end.
Covered-transaction distinction
Regular audit restriction does not eliminate compliance audit.
Practical checklist
- Maintain an agreement-to-evidence checklist.
- Reconcile annual reports and supporting computations.
- Preserve receipt dates and respond to requests.
Avoid
- Do not treat a signed APA as evidence of compliance without records.
- Do not extend the regular-audit restriction to non-covered transactions.
FAQs
Does the APA remove all TPO review?
No. Rule 114 expressly requires compliance audit for each covered year.
When is the compliance audit report due?
Within six months from the end of the month of the specified annual-report receipt.
Can regular audit resume after cancellation?
Sub-rule (6) states an exception where the agreement is cancelled under Rule 116.
Glossary
- Compliance audit
- The TPO’s review of whether the agreement’s terms, assumptions and prescribed methodology have been followed.