Rationalization of Transfer Pricing Provisions: A Three-Year Block Assessment Approach

Transfer Pricing Assessments- Status quo

Under the existing transfer pricing provisions, companies conducting similar transactions with related entities across multiple years are required to undergo the transfer pricing assessment process annually. This repetitive process often involves extensive audits, lengthy disputes with tax authorities, and significant administrative work. This creates a heavy burden for both businesses and the tax authorities, especially when the transactions in question are consistent year-on-year.

Proposed Amendments to Section 92CA: Multi-Year ALP Determination

To address these challenges, the Finance Bill has proposed an amendment to Section 92CA of the Income-tax Act, which would allow the determination of the ALP for an international transaction or SDT to be valid for a block period of three years. This multi-year ALP determination would reduce the need for businesses to undergo a new TP assessment every year for similar transactions. The aim is to reduce administrative burdens, enhance compliance, and provide greater predictability to MNEs.

How It Works: The Process of Multi-Year ALP Determination

• Voluntary Option for Taxpayers: The taxpayer must opt for the multi-year ALP determination by following prescribed rules and timelines. 

• Approval by TPO: The TPO must approve the multi-year ALP option. This approval process will happen within one month of exercising the option. 

• ALP Valid for Three Years: Once the ALP is determined for the first year, it will apply to the same transaction in the following two years. 

• TPO’s Review and Reassessment: Although the ALP will remain valid for three years, the TPO will still review the transactions for the subsequent years. The Assessing Officer (AO) will recompute the total income based on the multi-year ALP, reducing the need for fresh assessments. Once validated, no further reference to the TPO is required for those two years, and the AO recomputes the total income based on the established ALP. Crucially, the legislation clarifies that once a valid option is exercised, no further reference for the same transaction can be made. 

Benefits of the Proposal

One of the most significant benefits of this proposal is the reduction in the administrative burden on both businesses and tax authorities. In many cases, international transactions involve repeated dealings with the same related entities under similar conditions. By allowing the use of an existing ALP for multiple years, the proposal eliminates the need for repetitive transfer pricing assessments, which are often redundant.

The introduction of this system aligns with India’s aim to modernize its tax administration and provide a more business-friendly environment, especially as the country seeks to enhance its position in global markets.

Caveats of the Proposal

While the multi-year ALP determination simplifies the process, it does carry some potential risks for taxpayers. If a company opts for a three-year block assessment and the TPO adopts an aggressive stance, the company could face increased tax liabilities across all three years. This is because the tax authorities will apply the ALP determined in the first year to all three years, leaving the taxpayer exposed to greater scrutiny and potential tax demands.

Conversely, in the current system of annual assessments, there is a possibility that only one year would be scrutinized as there is a chance that other years might not be reviewed, providing a level of protection for the taxpayer and mitigating this risk. This potential downside might make some taxpayers hesitant to opt for the block assessment.

What Remains Unchanged: Ongoing Compliance Requirements

Despite these changes, certain compliance requirements will remain unchanged. For example, the filing of Form 3CEB (prescribed under Section 92E), conducting TP studies, benchmarking analysis, FAR (Functional, Asset, Risk) analysis, and preparing the Master File and Country-by-Country Reporting (CBCR) will still be required. These forms and analyses serve as the foundation for transfer pricing assessments and will not be waived by the introduction of block assessments. As such, businesses will still need to maintain the necessary documentation and comply with the ongoing reporting requirements.

Implementation Timeline

The amendments to Section 92CA and related changes are expected to come into effect from April 1, 2026, applicable to the assessment year 2026-27 and onwards. The rules for block assessment and related procedures will be subject to further guidelines, which the government may issue to address practical issues and ensure smooth implementation.

Expansion of Safe Harbour Rules

Alongside the multi-year ALP determination proposal, there is also an expansion of the Safe Harbour rules. These rules provide taxpayers with a level of certainty by offering predefined conditions under which transfer pricing is considered acceptable by the tax authorities. With more detailed and clearer Safe Harbour provisions, businesses can benefit from reduced risk of disputes, further contributing to a more predictable tax environment.

CONCLUSION

The introduction of the block assessment is a significant step towards modernizing India’s tax administration and aligning it with global best practices. It promises to reduce administrative burdens, minimize disputes, and create a more predictable tax environment for MNEs. However, taxpayers must carefully weigh the potential risks and benefits before opting for this new system. The forthcoming guidelines and instructions from the CBDT will be crucial in addressing practical issues

How BCL India Can Assist You:

• Assessment of Eligibility: We’ll analyze your specific transactions to determine if the block assessment is the right fit for your business. 

• Option Exercise Support: We’ll assist you in preparing and filing the necessary documentation for opting into the block assessment. 

• TPO Interaction: We’ll represent you before the TPO, ensuring your case is presented effectively and efficiently. 

• Risk Management: We’ll identify and assess potential risks associated with the block assessment and develop strategies to mitigate them. 

• Compliance Support: We’ll help you maintain all necessary documentation and ensure ongoing compliance with transfer pricing regulations. 

• Strategic Planning: We’ll work with you to develop a long-term transfer pricing strategy that aligns with your business objectives. 

Partner with BCL India and gain the confidence you need to navigate these changes successfully. 

Contact us today for a consultation.