Recently, the Finance Minister of India announced the much-anticipated Union Budget 2025. One of the most critical amendments proposed in the Union Budget 2025 is the introduction of a new Transfer Pricing (‘TP’) assessment scheme.
Presently, the TP assessment can be made for each year separately based on reference made by the Assessing Officer(‘AO’). There is no exception provided in the law for the same.
Now, in order to ease the compliance burden for the taxpayers as well as the administrative burden on the Transfer Pricing Officers (‘TPO’), an option is proposed to be provided in the law to carry out TP assessment in a “block”. As per the Hon’ble Finance Minister, the amendment is in line with the global best practices.
This article seeks to discuss the amendment, the potential issues needing clarification and also the global practices being followed for transfer pricing compliance and assessments.
Proposed block assessment
International transactions or specified domestic transactions undertaken in various years are often
identical or similar. The factual matrix such as the AE with whom transaction has been undertaken, the proportionate value of the transaction, location of the AE etc., may be common across years.
The key features of the proposed “block” TP assessment are as follows:
1. An arm’s length price (‘ALP’) determined in relation to the international transaction or the
specified domestic transaction by the TPO for a particular year shall apply for the next two
consecutive years, on fulfillment of the following conditions:
* The assessee exercises an option for those subsequent years.
* The option is exercised in the form, manner, and time period as may be prescribed.
* The TPO, by an order in writing, declares that such option is valid subject to the conditions, as prescribed.
2. Once the TPO passes an order declaring the option as valid, the consequences will be as under for the years covered by the option:
* No reference shall be made by the AO to the TPO.
* The TPO shall examine and determine the ALP in relation to such similar transaction and pass its Order.
* The AO shall thereafter pass its order for said years computing/ recomputing the total income of the assessee in conformity to the ALP determined by the TPO in its Order.The AO shall take into account the directions issues by the Dispute Resolution Panel (‘DRP’) while finalizing the assessment.
* The provisions for exercising option of TP block assessment shall not be applicable to search proceedings.
* The provision also gives authority to the Board to issue guidelines for introducing clarifications.
This amendment will take effect from 1.04.2026. As per the memorandum explaining the bill, the block TP assessment scheme shall apply for AY 2026-27 (i.e. FY 2025-26) and subsequent years.
Global practices
Transfer pricing has been one of the most litigative areas across the globe. Countries are following varied practices when it comes to transfer pricing compliances and assessments. On a holistic review, it can be said that the endeavor of most countries is to reduce compliance burden for taxpayers in case of repeated nature of transactions.
For instance, in countries such as Singapore, subject to satisfaction of certain conditions, the taxpayers may refresh their TP documentation once in every three years. The conditions for availing the option include, same type of international transaction in subsequent year, same related parties, the functions, asset and risk analysis for all the years should be appropriately captured in the study, the method chosen to benchmark should be appropriately disclosed.
In France as well, when the conditions for carrying out activity remain unchanged, the studies of
comparables can be updated in a three year period.
In United Kingdom (UK), if the functions and risks remain unchanged, and market conditions are consistent, the authorities may extend the approach to compute ALP to earlier or later years, with suitable adaptations if necessary.
Is India’s proposal in sync with Global practices?
The amendments proposed in the Union Budget may reduce burden by avoiding multiplicity of proceedings. However, no amendment has been proposed in relation to maintenance of the Transfer Pricing documentation by taxpayers, as provided by other countries. As a result, even if a taxpayer opts for block assessment and the TPO approves the same, the TP Study shall be required to be maintained by the taxpayers for the entire period. Accordingly, the compliance burden shall still remain for all the 3 years covered in the block assessment. Non-maintenance of the TP Study may invite penalty proceedings against the taxpayers (such as under section 271AA of the Act and 271G of the Act).
Accordingly, the objective of easing compliance burden for taxpayers may not be met in true spirit as the taxpayers are still required to undertake transfer pricing compliances. To this extent, India has deviated from the position of other countries such as France and Singapore. Exempting taxpayers opting for block assessment scheme from preparation of TP Study for the next 2 years may have been a desirable solution to achieve the objective of reducing compliance for taxpayers.
Further, in the proposed law, certain conditions are yet to be prescribed subject to which the TPO may approve the option of the taxpayer. It is reasonable to expect these conditions to be in line with the global practices discussed in the foregoing paragraphs such as same nature of transactions, same related parties, FAR of parties remaining unchanged and same benchmarking methodology applied by taxpayer for the block period.
Ambiguities in the budget proposals
Certain gaps exist in the proposed TP block assessment, which are required to be plugged. Firstly, it is not clear that at which stage option must be exercised by the taxpayer. The FAQs issued by CBDT gives the impression that the option is to be exercised prior to determinatin of ALP by TPO. If that be the case, the amendment may not yield intended results. This is because without knowing the results of TP assessment for year 1, the taxpayer may not be in a position to exercise the option. In Author’s view, for the scheme to be viable for taxpayers, the taxpayers should be asked to opt for the option post finalization of assessment based on the directions received from Dispute Resolution Panel (DRP).
Further, it is not clear as to whether the ALP as determined for one year should apply for the next 2 years or will only the approach followed for determining ALP shall apply to the later years. The issue can be explained with the help of an illustration. In case of a captive service provider in India rendering backoffice services to its AE, let’s say the TPO determines ALP during the TP assessment for year 1 by considering India Co has tested party and applying Transactional Net Margin Method. Applying approach, let’s say, the TPO determines arm’s length margin range as 10% to 12%. Now, in case the taxpayer exercises the option, whether the same range of 10% to 12% shall be considered as ALP for the next two years or only the methodology i.e. the method selected and the manner of choosing comparables in year 1 shall be adopted in year 2 and 3.
In the Author’s view, considering the intent of the amendment, the arm’s length margin (i.e. 10% to 12%) as determined for year 1 should be made applicable for the next two years. In case the taxpayer earns margins in said range in the next two years, no TP adjustment should be made. This is regardless of the fact that the arm’s length margins for next years may have otherwise undergone a change. In case only methodology is fixed in year one, then it would not ease the burden either for taxpayers or for the tax authorities.
Furthermore, there is no clarity whether for each transaction, the taxpayer will have to exercise the option separately. If this is the case, then it will make the entire process a lot cumbersome for the taxpayers and the tax authorities. This is because for the transactions for which the option is valid, the TP assessment may happen automatically based on the option exercised. However, for other transactions, the TP assessment may be carried out independently for each year. In case there is interlinkage between the transactions, it will further add complexity for the taxpayers.
In new scheme, even after the option has been declared valid by the TPO, the provision states that the “TPO shall examine and determine the arm’s length price in relation to such similar transaction”. Now, what is not clear is the level of examination carried out by the TPO and whether any opportunity shall be granted to the Assessee before finalisation of assessment.
Another aspect which requires clarity is that in case the taxpayer objects to the draft assessment order passed post TP assessment by filing objections before DRP, whether the impact of DRP order passed in the first year shall also be taken while arriving at ALP for subsequent two years in the block period.
Conclusion
Overall, the proposed amendment looks like a work-in-progress. Although the objective is to benefit
taxpayers by reducing compliance burden, the gaps in the scheme may lead to unintended results both for the taxpayers and the tax authorities. It is important that appropriate amendments/ clarifications are incorporated in the law before its enactment. Also, it is important that the Government considers exempting taxpayers opting for the block period assessment from preparing TP Study for the 2 subsequent years of block assessment.
[The authors are Associate Partner, Senior Associate and Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]
