Transfer Pricing: Multi-Year ALP Determination in Budget 2025 – FAQs

Transfer pricing provisions determine the Arm’s Length Price (ALP) for income arising from international or specified domestic transactions. Under the current system, the Assessing Officer (AO) refers the computation of ALP to the Transfer Pricing Officer (TPO) annually for each transaction, which can result in repetitive processes. The Finance Bill 2025 introduces a provision where the ALP determined for one year can be applied to similar transactions for the following two consecutive years, reducing the need for repeated proceedings. Taxpayers can exercise this option by submitting a prescribed form during the transfer pricing proceedings. The TPO will review whether the transactions in subsequent years are similar and declare the option valid within one month. Once validated, no further references will be made for those transactions. If the option is exercised, the AO will recompute the total income of the assessee for the two consecutive years based on the determined ALP, under the provisions of section 155(21) of the Income Tax Act.

FAQs: Rationalization of transfer pricing provisions for carrying out multi-year arm’s length price determination – Budget 2025

Q.1 What are transfer pricing provisions?

Ans. Transfer pricing provisions enable computation of income arising from an international transaction or a specified domestic transaction with regard to an Arm’s Length Price (ALP).

Q.2 How is income computed while reference is made for determination of arm’s length price?

Ans. The determination of ALP in transfer pricing provisions inter alia proceeds in the following manner –

• the Assessing Officer (AO) may, refer the computation of the ALP in relation to an international transaction or a specified domestic transaction entered in any previous year, to the Transfer Pricing Officer (TPO);
• the TPO determines the ALP in relation to the said transaction in accordance with sub­section (3) of section 92C and sends a copy of his order to the AO and to the assessee;
• the AO proceeds to compute the total income of the assessee for such previous year under sub-section (4) of section 92C in conformity with the ALP as so determined by the TPO.
• This examination is done during a reference made every year and is repetitive.

Q.3. What change is provided under the current Finance Bill to the assessee for the determination of Arm’s Length Price?

Ans. The assessee will have option to get the ALP, determined in relation to an international transaction or a specified domestic transaction for any previous year, applied to a similar transaction for the two consecutive previous years immediately following such previous year. In effect, the ALP determined in addition to such transaction for a year can be valid for similar transactions for the next 2 years. This shall reduce multiple proceedings for determining ALP for similar transactions.

Q4. How will the taxpayer exercise this option?

Ans. The taxpayer shall submit the option in a prescribed Form and the manner of filing this Form shall also be provided in the Rules.

Q5. When can this option be exercised? Can more than one option be exercised for one assessment year?

Ans. The assessee shall give this option to the TPO during the course of TP proceeding for determination of ALP. The exact timeline will be prescribed in the Rules. For transactions of different assessment years, option may be exercised separately. Thus, multiple options can be exercised for one assessment year.

Q.6 How shall the option be dealt by the TPO upon exercise of the option as introduced in the current Finance Bill?

Ans. The TPO may by an order within one month from the end of the month in which such option is exercised, declare that the option is valid subject to the prescribed conditions. For determining validity he will examine whether the transactions of the subsequent years are similar transactions or not.

Q.7 Can AO make a reference again for a transaction for which a valid option has been exercised by the assessee?

Ans. A reference will not be made again for the transaction for which valid option is exercised. Even if any reference is made in respect of such transaction, it shall have the effect as if no reference is made for such transaction provided the TPO has passed order determining the option as valid in respect of such transactions.

Q.8 Do the provisions of exercising option mentioned above and consequent proceedings, apply to search cases?

Ans. No.

Q.9 How will the income will be recomputed once the TPO has examined and determined the ALP in relation to such similar transaction for such consecutive previous years, in the order?

Ans. The AO shall recompute the total income of the assessee for such consecutive previous years as per the provisions of sub-section (21) of section 155.

Q.10 How will the AO recompute the total income of the 2 consecutive previous years under the provisions of section 155(21) of the Income Act, 1961?

Ans. The AO shall recompute the total income of the assessee for such consecutive previous years, by amending the order of assessment or any intimation,-

i. in conformity with the ALP so determined by the TPO under sub-section (4A) of section 92CA in respect of such transaction (being a similar transaction);

ii. considering the directions issued under sub-section (5) of section 144C, if any on the referred transaction.