Summary of Budget 2025 - Transfer Pricing (TP) Amendments

 The Union Budget 2025 introduces significant amendments to transfer pricing (TP) regulations under the Income Tax Act. These changes focus on multi-year application of arm’s length price (ALP), streamlining compliance, and reducing litigation. The key amendments affect Section 92CA (Transfer Pricing Officer’s Reference) and Section 155 (Recomputation of Income).

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1. Key Transfer Pricing Amendments

1.1. Amendments to Section 92CA – Reference to Transfer Pricing Officer (TPO)

• Existing Provision:

  • The Assessing Officer (AO) can refer international or specified domestic transactions to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP).
  • The TPO then assesses the transaction and passes an order.

• Amended Provision:

  • New Subsections (3B) and (4A) allow the ALP determined in one year to be applied to similar transactions for the next two years if the taxpayer opts for it.
  • Conditions for ALP Application for Two Additional Years:
    • The taxpayer must formally opt-in for this provision.
    • The option must be exercised in a prescribed form and manner.
    • The TPO must approve the option within one month of submission.
  • Implications:
    • Reduces Compliance Burden: Eliminates the need for annual ALP determinations.
    • Ensures Pricing Consistency: Provides tax certainty and reduces disputes.
    • Facilitates Tax Administration: Streamlines TP assessments for businesses and tax authorities.

• Effective Date:

  • These amendments will be effective from April 1, 2026, applying to Assessment Year 2026-27 and beyond.

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1.2. Amendments to Section 155 – Recomputation of Income

• New Subsection (21) is inserted in Section 155 to mandate the recomputation of income for two consecutive years if the ALP for a transaction is applied under Section 92CA (3B).
• The Assessing Officer (AO) must adjust the income in line with the ALP determined by the TPO.
• Time Limit: Recomputation must be completed within three months from the completion of the original assessment.

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2. Outstanding Questions & Clarifications Needed

1. Definition of "Similar Transactions":
   • The amendments rely on transactions being similar for ALP applicability, but clear criteria for similarity need to be defined.
2. Process & Forms for Claiming Multi-Year ALP Option:
   • A notification or circular is expected to outline the procedure for opting in.
3. Clarification on Filing Timelines:
   • The timeframe within which taxpayers must apply for multi-year ALP treatment needs specification.

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3. Conclusion

• The Budget 2025 TP amendments provide greater certainty, reduce compliance costs, and streamline TP administration.
• However, businesses must await clarifications on procedural aspects before fully utilizing these changes.