Budget Update: Rationalisation of Transfer Pricing Provisions for Multi-Year Arm’s Length Price Determination

Introduction

The Government has introduced critical amendments to transfer pricing regulations aimed at streamlining the process of determining Arm’s Length Price (ALP) while reducing excessive compliance burdens. These new provisions establish a multi-year ALP determination framework, eliminating redundant assessments and ensuring uniformity in transactions that remain consistent over time. Effective from April 1, 2026, these provisions will apply to Assessment Year (AY) 2026-27 and onwards.

Background and Context

Transfer pricing regulations in India, as encapsulated in Sections 92 to 92F of the Income-tax Act, 1961, govern the determination of ALP for international transactions and specified domestic transactions between associated enterprises. The primary objective of these regulations is to prevent profit shifting and ensure that transactions between related parties are conducted at fair market value, in alignment with global tax principles.

Under the existing system, ALP is determined and reassessed annually, even when similar transactions occur across multiple years without any substantial changes in conditions. This leads to redundant compliance efforts, increased administrative burdens, and prolonged litigation due to repetitive reassessments. To address these inefficiencies, the Government has proposed a block assessment mechanism for transfer pricing.

Challenges in the Existing Transfer Pricing Framework

The current approach to transfer pricing assessment presents several challenges for both taxpayers and tax authorities:

• Annual Redundancy: Transactions that remain unchanged across multiple years are assessed repetitively, causing unnecessary compliance efforts.
• Litigation Risks: Disputes arising from inconsistent ALP determinations lead to prolonged tax litigation, burdening businesses and the tax administration.
• Administrative Inefficiencies: Tax authorities spend substantial time re-evaluating transactions that have already been assessed in prior years, diverting resources from more complex cases.
• Lack of Certainty for Businesses: Companies face unpredictability in tax assessments, affecting their ability to plan and allocate resources efficiently.

Introduction of Multi-Year ALP Determination

To enhance efficiency and provide relief to businesses, the new provisions introduce a multi-year ALP determination framework, wherein the ALP determined for a particular base year will automatically apply to similar transactions for the next two consecutive years. This eliminates repetitive ALP assessments and provides a stable tax framework for businesses engaged in cross-border transactions.

The implementation of this framework involves a structured process, ensuring both compliance and administrative efficiency.

Key Provisions of the Amendment

1. Exercising the Multi-Year ALP Option

Taxpayers must proactively opt for the multi-year ALP determination framework. The election to apply the ALP for multiple years must be made in a prescribed form, manner, and within a specific timeframe, as notified by the tax authorities. This option allows companies to stabilize their transfer pricing policies over a defined period, reducing year-on-year uncertainty.

2. Validation and Approval by the Transfer Pricing Officer (TPO)

Upon receiving the taxpayer’s request, the TPO must validate and approve the applicability of the multi-year ALP option within one month. The approval process will include:

• A review of the transactional comparability across multiple years.
• Examination of business conditions, economic factors, and pricing methodologies used by the taxpayer.
• Ensuring compliance with prescribed regulatory conditions.

Once validated, the ALP determined for the base year will apply to the subsequent two years without requiring separate annual assessments.

3. Automatic Application of ALP and its Implications

Following the approval of the multi-year ALP framework:

• The ALP determined for the base year will be automatically applied to similar transactions for the next two years.
• No fresh reference to the TPO will be required during this period, reducing compliance burdens for taxpayers and administrative workload for authorities.
• The AO will incorporate the pre-determined ALP in tax computations, ensuring consistency in assessments.

4. Recomputing Income and Adjustments Under Section 155

To ensure seamless implementation, a new sub-section (21) in Section 155 empowers the Assessing Officer (AO) to recompute taxable income based on the multi-year ALP determination. The key aspects of this recomputation process include:

• Amending assessment orders or any prior intimation under Section 143(1) to reflect the ALP adjustments approved by the TPO.
• Aligning computations with Dispute Resolution Panel (DRP) directives, if applicable.
• Ensuring the recomputed income aligns with the ALP for the entire block period, eliminating inconsistencies.
• Completion of recomputation within three months from the conclusion of the base year’s assessment.

Practical Implications and Benefits

1. Reduction in Compliance Burdens

By eliminating repetitive ALP assessments, the new framework allows businesses to focus on strategic growth rather than compliance formalities. Companies engaged in recurring cross-border transactions will experience a significant reduction in documentation and regulatory filings.

2. Enhanced Administrative Efficiency

The reform will streamline the workload of tax authorities by allowing TPOs to concentrate on new and complex cases instead of reassessing similar transactions repeatedly. This will facilitate faster dispute resolution, reducing tax litigation.

3. Alignment with Global Best Practices

The introduction of multi-year ALP determination aligns India’s transfer pricing regulations with OECD BEPS (Base Erosion and Profit Shifting) guidelines, fostering global consistency and improving India’s standing as a tax-friendly jurisdiction.

Potential Challenges and Considerations

While the amendment introduces positive reforms, businesses must carefully navigate potential challenges:

• Economic Fluctuations: The ALP determined for a base year might not remain relevant in dynamic market conditions, requiring additional regulatory guidance.
• Regulatory Ambiguities: Clear procedural guidelines from the Central Board of Direct Taxes (CBDT) will be necessary to ensure smooth implementation and minimize uncertainties.
• Industry-Specific Variations: Companies in rapidly evolving industries (e.g., technology, pharmaceuticals) may face challenges in applying a uniform ALP for multiple years due to frequent business model shifts.

Conclusion

The rationalization of transfer pricing provisions through the multi-year ALP determination framework marks a transformative shift in India’s tax compliance landscape. By reducing redundant assessments, aligning with international best practices, and enhancing administrative efficiency, this reform will benefit both businesses and tax authorities.

To ensure successful adoption, businesses must stay informed of evolving compliance requirements, proactively engage with tax authorities, and integrate this framework into their long-term transfer pricing policies. The structured approach to multi-year ALP determination is a progressive move toward predictability, efficiency, and stability in India’s transfer pricing regulations, fostering a more conducive environment for global trade and investment.