Rule 109 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 109 of the Income-tax Rules, 2026 governs how an advance pricing agreement application is processed — meetings, site visits and enquiries, with a one-year target, a three-year closure power and a two-year limit for IT services.
What processing under rule 109 involves
Sub-rule (1): if the application referred to in rule 108 has been allowed to be proceeded with, the team or the competent authority of India, or his representative, shall process it in consultation and discussion with the applicant. The 1962 parallel is rule 10L.
Sub-rule (2) sets out four powers:
- hold meetings with the applicant at such time and date as it deems fit;
- call for additional document or information or material;
- visit the applicant's business premises; or
- make such enquiries as it deems fit in the circumstances.
Sub-rule (4) makes the traffic two-way: the applicant may provide further document and information for consideration.
An advance pricing agreement is negotiated, not assessed, and rule 109 reflects that in its verbs. The team consults and discusses; the applicant may volunteer further material; and the outcome under sub-rule (8) is a "proposed mutually agreed draft agreement". The sanctions in sub-rules (11) to (13) exist precisely because that cooperative process can stall.
The unilateral route under rule 109
Sub-rule (3): for a unilateral agreement, the proceedings may, where it is possible, be completed within a period of one year from the end of the financial year in which the application was allowed to be proceeded with.
The words "may, where it is possible" make this a target rather than a limit — unlike the three-year and two-year provisions below, which carry consequences.
The bilateral and multilateral route
| Step | Who |
|---|---|
| Application forwarded | The competent authority forwards it to the Principal Chief Commissioner of Income-tax (International Taxation) |
| Assignment | The Principal Chief Commissioner assigns it to one of the teams |
| Enquiry and draft report | The team carries out the enquiry and prepares a draft report, forwarded by the Principal Chief Commissioner to the competent authority of India |
| Treaty procedure | Where the applicant requests a bilateral or multilateral agreement, the competent authority of India invokes the procedure in rule 122 in addition |
From draft to agreement
Sub-rule (8): the Principal Chief Commissioner (International Taxation) for a unilateral agreement, or the competent authority of India for a bilateral or multilateral one, and the applicant prepare a proposed mutually agreed draft agreement enumerating the result of the process — including the effect of the arrangement referred to in rule 122(5) which has been accepted by the applicant in accordance with rule 122(8).
Sub-rule (9): the agreement shall be entered into by the Board with the applicant after its approval by the Central Government. Sub-rule (10): once entered into, a copy is sent to the Commissioner of Income-tax having jurisdiction over the assessee.
Closure of proceedings under rule 109
| Trigger | Consequence |
|---|---|
| Three years from the end of the financial year of the rule 108 application with no agreement, and either the applicant has not provided relevant material or has failed to comply with directions for meetings, premises visits or enquiries | The Board may direct that the proceedings be treated as closed, after a reasonable opportunity of being heard |
| Two years from the end of the quarter of application, for a unilateral APA whose primary covered transaction is the provision of information technology services referred to in rule 89(2) | The proceedings shall be treated as closed — extendable by an additional six months on the assessee's request |
| Where proceedings are closed | The fee paid under rule 106 shall not be refunded |
The three-year power is discretionary and fault-based: the Board may direct closure, and only where the applicant has withheld material or ignored directions, with a hearing first. The two-year IT services limit is automatic: the proceedings shall be treated as closed, with no fault requirement and no hearing — the only relief being the applicant's own request for six more months. An applicant in that category should diarise the extension request rather than wait to see whether the agreement lands.
And in both cases the rule 106 fee is forfeited, which makes the extension request in sub-rule (14) considerably cheaper than a fresh application.
Worked example
| Facts | Position under rule 109 |
|---|---|
| Unilateral application allowed to proceed in FY 2026-27 | Completion targeted within one year from 31 March 2027 |
| Team seeks a factory visit; applicant declines | Failure to comply with a sub-rule (2) direction — relevant to the three-year closure |
| No agreement by three years, applicant fully cooperative throughout | Closure power not engaged — it is fault-based |
| Unilateral APA on IT services; application made in the quarter ending 30 September 2026 | Automatic closure if no agreement by 30 September 2028 |
| Assessee requests the additional period | Extended by six months |
| Proceedings closed | Rule 106 fee not refunded |
| Bilateral request made in the application | Rule 122 procedure invoked in addition |
Compliance checklist
- Treat the process as a negotiation — respond to meeting requests, document calls and visit directions promptly.
- Keep a record of every submission, since the three-year closure power turns on cooperation.
- For a bilateral or multilateral request, expect the rule 122 treaty procedure to run alongside.
- Track the two-year IT services limit from the end of the quarter of application.
- File the six-month extension request in good time where that limit applies.
- Note that the rule 106 fee is not refunded on closure.
- Confirm the Central Government approval before treating the agreement as concluded.
- Check that the jurisdictional Commissioner has received the copy of the agreement.
Common mistakes
- Treating the one-year period as a binding limit.
- Deferring document requests, and exposing the application to the three-year closure.
- Missing the two-year IT services deadline without seeking the extension.
- Assuming a refund of the application fee on closure.
- Acting on a draft agreement before Central Government approval.