Explain the term "Advance Pricing Agreement" as specified under section 92CC of the Income-tax Act, 1961. State the purpose and validity of the same. Who are bound by Advance Pricing Agreement ?

Advance Pricing Agreement: Section 92CC of the Income Tax Act, 1961, was inserted by the Finance Act, 2012 with effect from 1st July, 2012 to provide a frame work for advance pricing agreement (APA) under the Income Tax Act, 1961. Advance Pricing Agreement (APA) is an agreement between a tax payer and Tax Authority on an appropriate transfer pricing method for a set of international transactions to be entered into by such tax payer over a fixed period of time. The CBDT has been empowered to enter into an advance pricing agreement with any person. The purpose of advance pricing agreement is to decide about the arm's length price or decide the methodology by which arm's length price shall be computed. The advance pricing agreement shall be valid for the period specified in the agreement which shall not exceed 5 consecutive previous year. The advance pricing agreement will be binding only on the person and the Tax Authority in respect of transactions in relation to which the agreement has been made.