Income Tax 2025

Appearance

Reference to Transfer Pricing Officer ​

166(1) ​

Where,—

  • (a) the assessee has entered into an international transaction or specified domestic transaction in any tax year; and
  • (b) the Assessing Officer considers it necessary or expedient so to do, he may refer the determination of the arm’s length price in relation to such transaction to the Transfer Pricing Officer, with the previous approval of the Principal Commissioner or Commissioner.

166(2) ​

No reference under sub-section (1) for computation of the arm's length price in relation to an international transaction or a specified domestic transaction shall be made, if the Transfer Pricing Officer has declared that option exercised by the assessee in sub-section (9) in relation to such transaction is valid for such tax year

166(3) ​

If any reference for an international transaction or a specified domestic transaction under sub-section (1), in respect of a tax year, for which the option is declared valid under sub-section (9) is made before or after such declaration by the Transfer Pricing Officer, the provisions of sub-section (1) shall have the effect as if no reference is made for such transaction.

166(4) ​

Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date specified therein, any evidence on which the assessee may rely in support of the determination made by him of the arm’s length price in relation to such transaction.

166(5) ​

Where,—

  • (a) any international transaction or specified domestic transaction, other than an international transaction or a specified domestic transaction referred under sub-section (1); or
  • (b) any international transaction or a specified domestic transaction that the assessee has not included in the report under section 172, comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such transaction is a transaction referred to him under sub-section (1).

166(6) ​

On the date specified in the notice under sub-section (4), or as soon thereafter as may be,––

  • (a) after hearing such evidence as the assessee may produce, including any information or documents referred to in section 171(2);
  • (b) after considering such evidence as the Transfer Pricing Officer may require on any specified points; and
  • (c) after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm’s length price in relation to the international transaction or specified domestic transaction as per section 165(4) and send a copy of his order to the Assessing Officer and to the assessee.

166(7) ​

Where a reference was made under sub-section (1), an order under sub-section (6) may be made at any time before sixty days before the expiry of limitation period referred to in section 286, or 296, for making the order of assessment or reassessment or recomputation or fresh assessment.

166(8) ​

If the period of limitation available to the Transfer Pricing Officer for making an order under sub-section (6) is less than sixty days in the circumstances referred to in section 286(3)(b) or (i) ,such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to have been extended accordingly.

166(9) ​

The arm’s length price, being determined in relation to the international transaction or the specified domestic transaction under sub-section (6) for any tax year shall apply to similar international transaction or specified domestic transaction for the two consecutive tax years immediately following such tax year, on fulfilment of the following conditions:––

  • (a) the assessee exercises an option or options to the above effect for the said two consecutive tax years;
  • (b) such option or options are exercised in such form, manner and within such period as prescribed; and,
  • (c) the Transfer Pricing Officer shall, within one month from the end of the month in which such option or options are exercised, by an order in writing, declare that such option or options are valid subject to the conditions, as prescribed.

166(10) ​

The provisions of sub-section (9) shall not apply to any proceedings under Chapter XVI-B.

166(11) ​

On receipt of the order under sub-section (6), the Assessing Officer shall compute the total income of the assessee under section 165(6) in conformity with the arm’s length price as so determined by the Transfer Pricing Officer.

166(12) ​

Irrespective of anything contained in sub-section (11), where the Transfer Pricing Officer has declared an option exercised by the assessee as valid option under sub-section (9), he shall examine and determine the arm’s length price in relation to such similar transaction for two consecutive tax years immediately following such tax year, in the order referred to in sub-section (4) and on receipt of such order, the Assessing Officer shall proceed to recompute the total income of the assessee for the said two consecutive tax years as per the provisions of section 288.

166(13) ​

For rectifying any mistake apparent from the record, the Transfer Pricing Officer,––

  • (a) may amend any order passed by him under sub-section (6), and the provisions of section 287 shall, so far as may be, apply accordingly; and
  • (b) shall send a copy of such order to the Assessing Officer who shall thereafter amend the order of assessment in conformity with such order of the Transfer Pricing Officer

166(14) ​

The Transfer Pricing Officer may exercise all or any of the powers specified in section 246(1)(a) to (d) or 252(1)(a) or 253 for the purposes of determining the arm’s length price under this section.

166(15) ​

If any difficulty arises in giving effect to the provisions of sub-sections (9) and (12), the Board may, with the prior approval of the Central Government, issue guidelines for the purpose of removing such difficulty.

166(16) ​

No guideline under sub-section (15) shall be issued after the expiration of two years from the 1st April, 2026.

166(17) ​

Every guideline issued by the Board under sub-section (15) shall be laid before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive session aforesaid, both houses agree in making any modification in such guideline or both Houses agree that the guideline, should not be issued, the guideline shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that guideline.

166(18) ​

In this section, “Transfer Pricing Officer” means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 165 and 171 in respect of any person or class of persons.

Explanation

Section Summary: ​

Section 166 of the Income Tax Act deals with the reference to a Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) in cases involving international transactions or specified domestic transactions. The section outlines the process for referring such transactions to the TPO, the conditions under which the TPO can determine the ALP, and the implications for taxpayers. It also introduces provisions for extending the validity of ALP determinations to subsequent years under certain conditions.

Key Changes: ​

  1. Introduction of Sub-section (9): Allows taxpayers to opt for the same ALP determination to apply for two consecutive tax years after the initial determination, provided certain conditions are met.
  2. Clarification on TPO’s Powers: The TPO can now exercise powers similar to those of an Assessing Officer under specific sections of the Act.
  3. Time Limits for TPO Orders: The TPO must issue an ALP determination order at least 60 days before the expiry of the limitation period for assessment or reassessment.
  4. Guidelines for Implementation: The Central Board of Direct Taxes (CBDT) can issue guidelines to address difficulties in implementing sub-sections (9) and (12), but these guidelines must be laid before Parliament.

Practical Implications: ​

  1. For Taxpayers:

    • Taxpayers involved in international or specified domestic transactions must be prepared to justify their ALP calculations if the Assessing Officer refers the matter to the TPO.
    • If the TPO validates an option under sub-section (9), the ALP determined for one year can apply to the next two years, reducing compliance burdens for similar transactions.
    • Taxpayers must ensure timely submission of required documentation and evidence to the TPO during proceedings.

  2. For Businesses:

    • Businesses with recurring similar transactions can benefit from the extended validity of ALP determinations, reducing the need for annual reassessments.
    • However, businesses must carefully evaluate whether opting for extended ALP validity is beneficial, as it may limit flexibility in pricing strategies.

  3. For Compliance Processes:

    • The TPO’s involvement adds an additional layer of scrutiny, requiring taxpayers to maintain robust transfer pricing documentation.
    • The process may lead to delays in finalizing assessments, especially if the TPO’s determination is contested.

Critical Concepts: ​

  1. Arm’s Length Price (ALP): The price at which unrelated parties would agree to transact under similar circumstances. It is used to ensure that transactions between related parties are priced fairly.
  2. International Transaction: A transaction between two or more associated enterprises, at least one of which is a non-resident.
  3. Specified Domestic Transaction: Certain domestic transactions between related parties that are subject to transfer pricing regulations.
  4. Transfer Pricing Officer (TPO): A tax officer authorized to determine the ALP for international or specified domestic transactions.
  5. Option under Sub-section (9): A taxpayer can opt to apply the ALP determined for one year to the next two years, provided the TPO validates the option.

Compliance Steps: ​

  1. Documentation:

    • Maintain detailed transfer pricing documentation, including evidence supporting the ALP determination.
    • Ensure compliance with the prescribed form and manner for exercising options under sub-section (9).

  2. Reporting:

    • Include all international and specified domestic transactions in the report under Section 172.
    • Respond promptly to notices from the TPO and provide requested evidence.

  3. Timely Action:

    • Exercise the option under sub-section (9) within the prescribed period if seeking extended ALP validity.
    • Monitor the TPO’s timeline for issuing orders to avoid delays in assessments.

Examples: ​

  1. Scenario 1:

    • A multinational company (MNC) in India sells goods to its parent company in the USA. The Assessing Officer refers the transaction to the TPO for ALP determination. The TPO determines the ALP and issues an order. The MNC opts under sub-section (9) to apply this ALP to the next two years, reducing the need for annual reassessments.

  2. Scenario 2:

    • A domestic company engages in a specified domestic transaction with its subsidiary. The TPO discovers the transaction during proceedings and applies the same rules as for international transactions. The company must provide evidence to justify its ALP determination.

This section aims to streamline transfer pricing compliance while ensuring fairness in related-party transactions. Taxpayers must carefully navigate the provisions to optimize their tax positions and avoid disputes.