GAIL signs advance pricing agreement with CBDT; first oil, gas PSU to do so

State-run GAIL (India) Limited entered into a advance pricing agreement (APA) with the Central Board of Direct Taxes (CBDT) for determining the transfer pricing margin payable on its long-term LNG sourcing contract from the United States for a period of five years.

GAIL is the first public sector undertaking in oil & gas sector in India to successfully sign the APA.

The APA scheme was launched in 2022 to enhance the government's goal of promoting a non-adversarial tax system and improve the ease of doing business in India. 

According to the Income Tax department, APA programmes are operational in a number of countries and they are almost 30 years old in countries like Canada, USA, Japan and UK. 

The primary goal of such programmes is to provide certainty to taxpayers in respect of the transfer price of the cross-border transactions undertaken by such taxpayers with their group entities. 

Rapid growth in international trade through an increasing number of Multi National Enterprises has given rise to numerous tax disputes on the issue of transfer pricing. 

An APA is a mechanism to resolve transfer pricing issues in advance, i.e., before the cross-border related party transaction actually takes place or, at least, before a dispute arises in respect of such cross-border transaction.

The transfer price of goods and services transacted between group entities is decided in advance by the tax authorities and the taxpayers, so as to prevent any dispute arising from such transfer pricing.

Focus on US

GAIL (India) is depending on the US to secure a stable supply of LNG cargoes. The company currently has two contracts to buy a combined 5.8 million tons per year of LNG from the US, comprising around 90 standard sized cargoes.

GAIL had been struggling to replace supply from a former trading arm of Gazprom, which has not delivered on scheduled shipments since May, 2022.

Back in 2012, Gazprom’s former subsidiary, Gazprom Marketing and Trading Singapore (GMTS), had entered into a 20-year contract to supply GAIL with 2.85 million tonnes of LNG a year. 

Supplies under the deal had started in 2018 and the full volume was expected to be reached in 2023.

But after the Russian invasion of Ukraine, Germany seized control of Gazprom Germania in April, housing it under Gazprom Germania GMBH. Subsequently, Gazprom gave up its ownership of the company without any explanation, and imposed sanctions.

Up to 55 per cent of India’s local gas demand is met through imports. On the other hand, while gas meets only 6.2 per cent of India’s energy needs, the Centre has been planning to raise this figure substantially, in order to reduce the dependence on petroleum.

New Delhi is advocating for an aggressive gas purchase policy, and balancing sources of import, most of which have originated from Qatar in recent years.

Qatar and the United States — the two largest producers globally — currently supply India with LNG through multiple contracts. Third largest producer Australia mostly supplies China.