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CA Final · Direct Tax Laws & International Taxation · Miscellaneous Provisions

Kaveri Pharma Ltd. has applied to the competent authority for an agreement on determining arm's length price for its international transactions. Negotiations with the foreign competent authority are underway, but no agreement has yet been entered into. Which statement is correct under Rule 120 of the Income-tax Rules, 2026?

Chapter X continues to apply. Under Rule 120(1), merely filing an application for an agreement does not stop the operation of Chapter X for determining arm's length price, and it continues until the agreement is actually entered into, regardless of ongoing negotiations.

  1. AChapter X continues to operate for determining arm's length price until the agreement is entered into, because mere filing of the application does not prevent itCorrect
  2. BChapter X is suspended from the date of filing the application
  3. CChapter X is suspended from the date negotiations begin
  4. DChapter X applies only if the foreign competent authority consents

Explanation

Rule 120(1) states that mere filing of an application for an agreement does not prevent the operation of Chapter X for determining arm's length price until the agreement is entered into. Hence suspension on filing or on start of negotiations is incorrect, and no consent from the foreign authority is needed for Chapter X to apply.

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