Budget 2025: A new approach in transfer pricing audits

Partner: Himanshu Sinha, Counsel: Prashant Meharchandani, Associate: Kanika Jain

The Finance Bill, 2025 has proposed a significant amendment to the transfer pricing assessment framework in India, allowing taxpayers to opt for a block assessment of three years. The Finance Minister, in her budget speech, emphasised the need to provide an alternative to the yearly examination of transfer pricing assessments, aligning with global best practices.

1. Global best practices vis-à-vis block transfer pricing assessments

The case for a block or multiple-year transfer pricing assessment is endorsed by both, the Organisation for Economic Cooperation and Development (OECD) and the United Nations transfer pricing guidelines. The OECD has articulated its position by stating that “… to simplify compliance burdens on taxpayers, tax administrations may determine, as long as the operating conditions remain unchanged, that the searches in databases for comparables supporting part of the local file be updated every three years rather than annually. Financial data for the comparables should nonetheless be updated every year in order to apply the arm’s length principle reliably.”

Jurisdictions like the Netherlands and Singapore allow a taxpayer to refresh its benchmarking analysis every three years and update its local files on an annual basis, assuming there are no relevant changes to the business model.

2. Proposed amendment to the transfer pricing assessment framework

The amendment proposes multiple-year transfer pricing assessment of international transactions and specified domestic transactions (SDT) as an alternate option for the taxpayers. It provides that where the Transfer Pricing Officer (TPO) has determined arm’s length price (ALP) for any assessment year (AY), the taxpayer may opt to be governed by the same ALP for similar transactions for two subsequent AYs as well. A taxpayer can exercise this option by making an application to the TPO in a form and within the time limit which will be prescribed. The option can be exercised for all or any of the international transactions or SDTs undertaken during the three years. The TPO will have the discretion to declare whether the option exercised by the taxpayer is valid or not within one month from the end of the month in which the option is exercised. If this exercise of option is declared valid, the TPO is required to determine the ALP for two subsequent AYs. In such cases, the Assessing Officer (AO) does not need to refer to the TPO for determination of ALP. Instead, once the TPO has determined the ALP for the two subsequent AYs, the AO shall recompute the total income of the taxpayer based on the order of the TPO and directions issued by the Dispute Resolution Panel (if any) by amending the assessment order.  

These revisions to the framework have been proposed through new sub-sections (3B) and (4A) to Section 92CA, two provisos to sub-section (1) to Section 92CA and sub-section (21) to Section 155 of the Income Tax Act, 1961.

3. No change in reporting compliance burden

No amendment has been proposed in respect of local files (transfer pricing study and other documentation) prepared and maintained by the taxpayers. The changes have been proposed only to the assessment regime and not to the documentation requirement.

The taxpayer will still be required to undertake benchmarking analysis annually. Therefore, while the audit process may potentially be reduced, the documentation compliance burden will remain the same for the taxpayers.

4. Analysis and way forward

The proposed amendment is a positive step in the right direction. The Central Board of Direct Taxes (CBDT) is required to frame rules and issue clarifications to bring this amendment to life once it comes into effect. The CBDT is expected to address the following areas of concern while prescribing rules and issuing instructions to operationalise the proposed amendment:

a. Effective period: It is unclear whether the amendment will apply to all proceedings ongoing or selected for scrutiny after 1 April 2025, or only to assessments pertaining to AY 2026-27 onwards. While the memorandum to the Finance Bill, 2025 specifically makes the amendment applicable from AY 2026-27, it is not clear if AY 2026-27 should be considered the first year or can be considered as the second year for the multiple-year assessment.

b. Dispute resolution mechanism: No separate dispute resolution mechanism has been proposed for the taxpayer to challenge the decision of the TPO to declare the multiple-year assessment invalid under sub-section (3B) of Section 92CA. It appears that all disputes arising in connection with this new scheme are intended to be addressed through the appeal against the draft assessment order. This may add another layer of complexity to the appeal process. 

c. Timelines for completion of assessments: The CBDT may consider providing clear timelines for the completion of assessments for subsequent AYs. The second proviso in the proposed changes to Section 92CA(1) does not specify whether the extended limitation under Section 153(4) will apply to the assessments for subsequent AYs if the AO does not make reference to the TPO on account of a valid exercise of the option by an assessee. Further, the proposed sub-section (21) to Section 155 also does not provide for any separate remedy against incorrect computations of the margins of the comparables leaving scope for ambiguity.

d. Exercise of option for one AY:  It appears that the legislative intent is to allow the taxpayer to exercise the option under section 92CA(3B) for any of the two subsequent years if there is a change in operating conditions for one of the years. The CBDT may clarify this to avoid any potential dispute in this regard.

e. Reduction in compliance burden: The CBDT may consider easing the documentation burden by clarifying that the benchmarking analysis may be undertaken once in three years, and simpler documentation may be maintained for the other two AYs.

f. Defined discretion to the TPO: To make these amendments effective, the CBDT may consider laying down specific guidelines for the TPO to follow while exercising its discretion to accept or reject the option exercised by the taxpayer.

g. Time of exercising the option: The proposed law intends to permit the exercise of the option only upon the TPO’s order for the initial year. The timeline expected to be prescribed by the CBDT for the exercise of the option will be a crucial element. While the proposed proviso to Section 92CA(1) takes care of a situation where reference is made before such declaration, the burden to file initial responses during transfer pricing assessments will continue to exist in the subsequent years. Therefore, as a policy decision, the legislature may consider introducing appropriate amendments in the limitation period for assessment to provide relief to the taxpayers from litigation burden in the subsequent years.  

h. Scope of similar transactions: Presently, sub-sections (3B) and (4A) of Section 92CA provide that the ALP of a transaction determined in a particular AY may be applied for determining ALP of ‘similar transactions’ in two subsequent AYs. However, no guidance has been issued regarding the scope of ‘similar transactions’. The scope must be clearly defined to avoid litigation. Reference in this regard may be drawn from Rule 10B(2) of the Income-tax Rules, 1962, which provides guidance on the comparability of transactions.

5. Conclusion

The proposed introduction of multiple-year transfer pricing assessments is a welcome move aimed at reducing compliance and litigation costs for taxpayers. However, the success of this framework will depend upon its administrative implementation. This reform has the potential to ease the audit burden on taxpayers, provided that the operationalisation of the scheme is carried out efficiently and transparently.

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