India Budget 2025 – Introduction of Block Transfer Pricing Assessment Scheme

published on 11 February 2025 | reading time approx. 4 minutes

Unlike in previous year's budgets, this year’s budget has certain proposals on the TP Regulations perspective. First one is on the introduction of the concept of block TP assessment, Secondly, a reassurance by the Finance Minister on expanding the scope of safe harbour rules, and lastly a sort of providing required flexibility on the date within which the central government had to notify the faceless assessment procedure for TP assessment proceedings.

Among these, the most significant proposal is the alignment of TP assessment proceedings with global best practices, which is discussed in more detail below:

Existing TP Assessment Process »
Proposal for Block TP Assessment (Three-Year Period) »
Global Best Practices »
Unresolved Ambiguities »
Conclusion »

Existing TP Assessment Process

Currently, a tax officer initiates an assessment proceeding for a specific financial year (“FY”) by issuing a notice under Section 143(1) of the Income Tax Act (“the Act”). The timeline for completing this process is 12 months. For instance, if an assessment for FY 2022-23 (Assessment Year “AY” 2023-24) is initiated, it must be completed by 31 March 2025.

If the taxpayer has engaged in international transactions with Associated Enterprises (“AEs”), the case may be referred to a Transfer Pricing Officer (“TPO”) with prior approval from the Principal Commissioner/Commissioner. In such cases, the timeline extends by another 12 months. Consequently, for FY 2022-23, the normal assessment deadline extends to 31 March 2026, and the TPO must complete the TP assessment by 31 January 2026.

Proposal for Block TP Assessment (Three-Year Period)

The 2025 Budget proposes a new scheme allowing the TPO to apply the same Arm’s Length Price (“ALP”) methodology for a three-year block period. If a TP assessment is completed for a lead year (e.g., FY 2022-23, AY 2023-24), the same methodology can be applied for the following two years (FY 2023-24 and FY 2024-25).

However, eligibility for this scheme is conditional upon:

The taxpayer is undertaking the same international transactions with its AEs.
The consistent application of the same TP methodology across the three years.

According to the budget memorandum, this scheme aims to reduce the administrative burden on tax authorities and provide certainty to taxpayers regarding ALP determinations. Importantly, the scheme is optional and can only be initiated at the taxpayer's discretion.

Global Best Practices

The budget states that the scheme aligns India’s TP assessment process with global best practices. However, there are some notable differences compared to similar frameworks in other jurisdictions.

For example, the German Tax Audit Regulations state that the frequency and duration of tax audits shall be aligned with the size of the audited company. For entities classified as “Large” every financial year needs to be audited, which in practice results in block audits with a duration of three years or more. No justification is necessary even if a tax audit extends upon the common three-year period. For entities classified as “Medium” or smaller the German Tax Audit Regulations recommend a tax audit period of three years which may still in certain circumstances be extended, for example, when significant changes of the tax base are expected, even if this benefits the taxpayer.

This approach ensures consistency in TP policy implementation rather than focusing on yearly deviations. It furthermore allows taxpayers to provide more context to transfer pricing decision making and to show the development of a company.

In contrast, the Indian proposal appears to apply the ALP methodology individually for each year within the block period.

Unresolved Ambiguities

Despite introducing a structured framework, certain practical uncertainties remain:

Adoption Mechanism: The process by which taxpayers can opt for this scheme is yet to be defined. The budget states that details will be notified by the Board in due course.
Examining same TP analysis for subsequent 2 FYs: The proposal state that to opt for the option, the taxpayer must have same facts for subsequent 2 FYs in the nature of the taxpayer undertaking similar international transactions, same AEs, proportionate quantum of transactions, etc. In such case, it is still not abundantly clear that what will be the position that the TPO will adopt while validating the option, if there are minor variations in the said factors on a y-o-y basis.
Timeline for TP Assessments of Subsequent Years: No clarity is provided on the timeframe within which the TPO must complete assessments for the following two years once the scheme is opted for.
Opting Out Mechanism: It remains unclear whether a taxpayer can withdraw from the scheme after opting in and, if so, under what conditions.

Conclusion

The introduction of the block TP assessment scheme is a positive step. However, taxpayers must carefully evaluate their position before opting for this framework. Key considerations include:

If the TPO makes a TP adjustment for the lead year, applying the same ALP methodology to the subsequent two years could lead to further adjustments.
Even in cases where the lead year assessment is clean, taxpayers should assess potential exposure before opting in.

This scheme might be most beneficial when the taxpayer has received a favorable TP assessment (i.e., no or minimal TP adjustments) and prefers certainty over future TP proceedings. However, given the inherent uncertainties, taxpayers may need additional clarity before making an informed decision.