Finance Bill 2025: Amendment related to Transfer Pricing

Finance Bill 2025: Amendment related to Transfer Pricing

Summary: The Finance Bill 2025 proposes a rationalized approach to transfer pricing by introducing a multi-year Arm’s Length Price (ALP) determination mechanism to reduce compliance and administrative burdens. Currently, ALP is determined annually for international or specified domestic transactions, leading to repetitive processes. The proposed amendments allow taxpayers to apply the ALP determined for one financial year to similar transactions in the next two years by filing an application. The Transfer Pricing Officer (TPO) will validate the application and determine the ALP for subsequent years in a consolidated manner, eliminating separate references. The Assessing Officer (AO) will then compute total income based on this determination. The Central Board of Direct Taxes (CBDT) may issue guidelines for smooth implementation, ensuring efficiency in transfer pricing assessments.

1. Introduction

Transfer pricing rules are designed to ensure that income from international transactions or certain domestic transactions is determined on the basis of an “arm’s length price” (ALP). This means that the price charged in the transactions between the related parties should be the same as if the parties involved were unrelated and acting independently.

These rules are outlined in sections 92 to 92F of the tax law.

2. Existing Framework of Determination of ALP

The Income Tax Act lays down the procedure for referring international transactions or specified domestic transactions to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) in section 92CA. Section 92C prescribes the methodology for computing the ALP concerning such transactions.

The existing transfer pricing framework of ALP determination involves the following steps:

• If a taxpayer (assessee) has entered into an international transaction or a specified domestic transaction in a previous year, and the Assessing Officer (AO) believes it is necessary or expedient to do so, the AO can refer the case to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP) of the transaction.
• The Assessing Officer (AO) can refer the case to the TPO, if selected based on the selection criteria as per CASS parameters or in other cases, as per the procedure laid down in Circular 03/2016. with the previous approval of the Principal Commissioner or Commissioner.
• The Transfer Pricing Officer (TPO) thereafter may call for any information related to the transaction with an Associated Enterprise (AE), including any information or documents as specified under Section 92D(3). After considering the evidence collected and the information available with the TPO, he then determines the arm’s length price (ALP) for the international transaction or specified domestic transaction.
• The TPO has to pass the order under Section 92CA(3) within the time limits as specified in Section 92CA(3B) read with Section 153.
• On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm’s length price as determined by the Transfer Pricing Officer.

3. The Difficulties in the Existing System

In most cases, the same type of international or domestic transactions takes place over multiple years, with similar details like the agreements, parties involved, the size of the transaction, and the location of the businesses, as well as the FAR (Functions, Assets, and Risks) analysis of the parties involved. This leads to the determination of ALP on the basis of similar parameters every year, until there is any change in the facts of the case.

This repetition consumes lot of time and energy of both taxpayers (compliance burden) as well as tax authorities (administrative burden).

To address this difficulty, the Finance Bill 2025 proposes a block assessment approach for transfer pricing, wherein the ALP determined for a given financial year shall be applied to similar transactions for the subsequent two consecutive financial years.

4. Proposed Amendments

 (i) The assessee shall have the option to apply the ALP determined for a particular financial year to similar transactions for the next two consecutive years, by filing an application in the prescribed form, manner, and timeframe [new sub-section (3B) in Section 92CA].

(ii) The TPO shall, within one month from the end of the month in which such option is exercised, issue an order validating the application, subject to prescribed conditions [new sub-section (3B) in Section 92CA].

(iii) Upon validation of the option by the TPO:

• The ALP determined for a particular financial year shall automatically apply to similar international or specified domestic transactions for the next two financial years [new sub-section (3B) in Section 92CA].
• The TPO shall examine and determine the ALP for such similar transactions for the consecutive financial years in a consolidated manner [new sub-section (4A) in Section 92CA].
• Based on the TPO’s order, the AO shall recompute the assessee’s total income for those years in accordance with sub-section (21) of Section 155 [new sub-section (4A) in Section 92CA].
• No separate reference for ALP computation in these cases shall be made [new first proviso to sub-section (1) of Section 92CA].
• If a reference has already been made before or after the TPO’s declaration, it shall be deemed as non-existent [new second proviso to sub-section (1) of Section 92CA].

(iv) The above provisions shall not be applicable to proceedings under Chapter XIV-B (relating to block assessment) [proviso to new sub-section (3B) in Section 92CA].

(v) If any difficulty arises in implementing the new provisions, the Central Board of Direct Taxes (CBDT) may, with the prior approval of the Central Government, issue guidelines to address such difficulties. These guidelines shall be binding on both the income tax authorities and the assessee [new sub-section (11) in Section 92CA].