Section 166: reference to a Transfer Pricing Officer

When a reference can be made

Where an assessee has entered into an international transaction or specified domestic transaction in a tax year, and the Assessing Officer considers it necessary or expedient, he may refer determination of the arm's length price for that transaction to the Transfer Pricing Officer, but only with the previous approval of the Principal Commissioner or Commissioner.

Once the Transfer Pricing Officer has declared an option exercised by the assessee under sub-section (9) as valid for a tax year, no fresh reference for computing the arm's length price of that transaction can be made for that year - a reference made before or after such a declaration is treated as if no reference was made.

How the Transfer Pricing Officer proceeds

After a reference is made, the Transfer Pricing Officer serves a notice on the assessee requiring evidence to be produced in support of the arm's length price already determined by the assessee.

If any other international transaction or specified domestic transaction (including one the assessee did not include in the accountant's report under Section 172) comes to the TPO's notice during the proceedings, it is treated as if it too had been referred to him under sub-section (1).

After hearing the evidence, considering any further evidence required, and taking into account all relevant material, the Transfer Pricing Officer determines the arm's length price by a written order under Section 165(4) and sends a copy to both the Assessing Officer and the assessee.

Timelines for the TPO's order

An order under sub-section (6) may be made at any time before one month prior to the month in which the limitation period under Section 286 or 296 for making the assessment/reassessment/recomputation order expires. Where that limitation period expires on 31 March of a year, the TPO's order must be made on or before 31 January of that year; where it expires on 31 December of a year, the order must be made on or before 31 October of that year.

If the period of limitation available to the Transfer Pricing Officer for making the order is less than sixty days in the circumstances referred to in Section 286(3)(b) or (h), that remaining period is extended to sixty days.

The two-year option for identical transactions

The arm's length price determined by the TPO for a tax year can also apply to similar international or specified domestic transactions for the two consecutive tax years immediately following, if the assessee exercises an option to that effect in the prescribed form and manner, and the Transfer Pricing Officer, within one month from the end of the month the option is exercised, declares by written order that the option is valid, subject to prescribed conditions.

This two-year option provision does not apply to any proceedings under Chapter XVI-B.

Effect on the assessment and rectification

On receiving the Transfer Pricing Officer's order, the Assessing Officer computes the assessee's total income under Section 165(6) in conformity with the arm's length price so determined.

Where the TPO has declared an option valid under sub-section (9), he separately determines the arm's length price for the two following tax years, and the Assessing Officer then recomputes the total income for those years as per Section 288(2).

The Transfer Pricing Officer may amend his own order to rectify any mistake apparent from the record (applying Section 287 as far as may be), and must send a copy of any such amendment to the Assessing Officer, who then amends the assessment order accordingly.

For determining the arm's length price under this section, the Transfer Pricing Officer may exercise all or any of the powers specified in Section 246(1)(a) to (d), Section 252(1)(a), or Section 253.

Who is a Transfer Pricing Officer

"Transfer Pricing Officer" means a Joint Commissioner, Deputy Commissioner, or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in Sections 165 and 171, in respect of any person or class of persons.

Removing difficulties

If any difficulty arises in giving effect to the provisions on the two-year option and the related recomputation (sub-sections (9) and (12)), the Board may, with the Central Government's prior approval, issue guidelines to remove the difficulty. Every such guideline must be laid before each House of Parliament for thirty days, and Parliament may modify or annul it, without affecting anything already done under it.

Frequently asked questions