Section 168 Income Tax Act 2025: How Does an Advance Pricing Agreement Work?

An advance pricing agreement (APA) offers a mechanism to agree in advance on transfer pricing for international transactions, or on income attributable to Indian operations of a non-resident. Section 168 explains who may enter into an APA, its legal effect, duration, rollback and circumstances in which it ceases to bind.

Legal position: Section 168 of the Income-tax Act, 2025 applies under the new Act effective from 1 April 2026. It broadly corresponds to Section 92CC of the Income-tax Act, 1961. An APA is not automatic: statutory approval, prescribed procedures and the terms of the agreement matter.

What is an advance pricing agreement?

An APA is an agreement entered into by the Central Board of Direct Taxes (the Board), with Central Government approval, and a person regarding the arm's length price of an international transaction or the manner of determining that price. Section 168 also permits an agreement on income under Section 9(2) reasonably attributable to operations in India carried out by or on behalf of a non-resident.

It is a prospective certainty mechanism, with a limited statutory possibility of applying agreed terms to earlier tax years through rollback. An APA does not provide general immunity from tax scrutiny outside the person, transaction and period covered.

Section 168: Explanation of each subsection

Section 168(1): Authority and subject matter

The Board, with the approval of the Central Government, may enter into an APA with any person to determine the arm's length price or its method for an international transaction to be entered into. It may also determine, or prescribe how to determine, income under Section 9(2) attributable to operations in India of a non-resident.

Section 168(2): Permissible methods

Determination may use the methods specified in Section 165(1), or methods prescribed by rules, subject to necessary or expedient adjustments or variations. The chosen methodology must be read with the agreement's terms.

Section 168(3): Priority of agreed determination

Despite Sections 165 and 166 and the prescribed methods, the covered international transaction's arm's length price, or covered attributable income, is determined in accordance with the APA.

Section 168(4): Maximum term

An APA may be valid for a period specified in the agreement, not exceeding five consecutive tax years. Five years is a maximum, not a mandatory duration.

Section 168(5): Binding effect

The agreement binds the person and covered transaction, and the relevant Principal Commissioner or Commissioner and subordinate income-tax authorities in relation to that person and transaction.

Section 168(6): Change in law or facts

The APA is not binding if there is a change in law or facts having a bearing on the agreement. Taxpayers should monitor critical assumptions and report changes as required by the applicable procedure.

Section 168(7): Fraud or misrepresentation

The Board, with Central Government approval, may declare an APA void ab initio by order if it finds that the person obtained it through fraud or misrepresentation of facts.

Section 168(8): Consequences of a void agreement

When declared void ab initio, the Act applies as though the APA had never been entered into. The period from the agreement date to the voiding order is excluded when computing limitation periods; if the resulting remaining period is less than 60 days, it is extended to 60 days.

Section 168(9): Rollback to earlier years

Subject to prescribed conditions and procedures, the agreement may also determine arm's length price or attributable income for a period of up to four tax years preceding the first year covered by the prospective agreement. Rollback is conditional, not automatic.

Section 168(10): Pending APA proceedings

Once an application is made, APA proceedings are deemed pending until the agreement is entered into or the proceedings are closed in the prescribed manner.

Section 168(11): Procedural scheme

The Board may prescribe a scheme specifying the manner, form, procedure and other matters relating to APAs. Applicants must consult the applicable rules and scheme in addition to the section.

Important statutory concepts

Arm's length price: A price applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions; see the relevant definitions in Section 173 and the determination rules in Section 165.

International transaction: A transaction meeting the statutory conditions in Section 163, including relevant transactions between associated enterprises.

Associated enterprise: An enterprise related through participation in management, control or capital, or through specified statutory relationships, under Section 162.

Rollback: Conditional application of agreed pricing or income attribution to eligible earlier tax years, within the four-year limit under Section 168(9).

Void ab initio: Treated as invalid from the outset, rather than merely terminated prospectively.

Practical illustration

Illustration: An Indian company provides support services to its overseas associated enterprise. The company seeks an APA for tax years 2027-28 through 2031-32 covering a specified transfer pricing method and agreed parameters. If concluded, the APA may govern the covered transaction for those five years. Subject to the prescribed conditions, rollback may potentially cover up to four earlier tax years. The agreement will not automatically govern other transactions or years.

Note: This example illustrates the statutory structure, not approval of any particular pricing margin or rollback application.

What should an applicant check?

Identify the covered international transactions or Indian income-attribution issue precisely.
Document functions, assets, risks, comparables, economic analysis and critical assumptions.
Confirm the applicable APA application process, fees, forms, annual compliance requirements and rollback conditions under the rules.
Review the agreement's scope, validity years, reporting obligations and conditions for revision or cancellation.
Consider the separate consequences for returns and assessments under Section 169.

Frequently asked questions

Is an APA compulsory for related-party international transactions?

No. Section 168 enables a person to seek an APA; it does not require every taxpayer with international transactions to obtain one. General transfer pricing compliance continues to apply where relevant.

How long can an APA remain valid?

For a period specified in the agreement, not exceeding five consecutive tax years under Section 168(4).

Can an APA apply to past years?

Yes, a rollback provision may cover up to four preceding tax years, but only subject to prescribed conditions and procedure under Section 168(9).

Can tax authorities disregard an APA?

A valid APA is binding within its statutory scope. It ceases to bind where a relevant change in law or facts occurs, and may be declared void ab initio where obtained by fraud or misrepresentation.

Does Section 168 cover non-resident income attribution?

Yes. It expressly includes income under Section 9(2) reasonably attributable to Indian operations of a non-resident, in addition to arm's length pricing of international transactions.

Official law and related provisions

Read Section 168 alongside Sections 9(2), 162, 163, 165, 166, 169 and 173 and the applicable APA rules. The corresponding provision in the 1961 Act is Section 92CC.

Official Income-tax Act, 2025 (as amended)Income Tax e-Filing Portal

Last reviewed: 10 November 2026. This article is general legal information and should be read with the current Act, rules, notifications and the terms of any APA.