Reference to Transfer Pricing Officer
[Section-166 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 166(1) of Income Tax Act 2025
166(1) Where,—
- (a) the assessee has entered into an international transaction or specified domestic transaction in any tax year; and
- (b) the Assessing Officer considers it necessary or expedient so to do,
he may refer the determination of the arm’s length price in relation to such transaction to the Transfer Pricing Officer, with the previous approval of the Principal Commissioner or Commissioner.
Section 166(2) of Income Tax Act 2025
166(2) No reference under sub-section (1) for computation of the arm’s length price in relation to an international transaction or a specified domestic transaction shall be made, if the Transfer Pricing Officer has declared that option exercised by the assessee in sub-section (9) in relation to such transaction is valid for such tax year.
Section 166(3) of Income Tax Act 2025
166(3) If any reference for an international transaction or a specified domestic transaction under sub-section (1), in respect of a tax year, for which the option is declared valid under sub-section (9) is made before or after such declaration by the Transfer Pricing Officer, the provisions of sub-section (1) shall have the effect as if no reference is made for such transaction.
Section 166(4) of Income Tax Act 2025
166(4) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date specified therein, any evidence on which the assessee may rely in support of the determination made by him of the arm’s length price in relation to such transaction.
Section 166(5) of Income Tax Act 2025
166(5) Where,—
- (a) any international transaction or specified domestic transaction, other than an international transaction or a specified domestic transaction referred under sub-section (1); or
- (b) any international transaction or a specified domestic transaction that the assessee has not included in the report under section 172,
comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such transaction is a transaction referred to him under sub-section (1).
Section 166(6) of Income Tax Act 2025
166(6) On the date specified in the notice under sub-section (4), or as soon thereafter as may be,––
- (a) after hearing such evidence as the assessee may produce, including any information or documents referred to in section 171(2);
- (b) after considering such evidence as the Transfer Pricing Officer may require on any specified points; and
- (c) after taking into account all relevant materials which he has gathered,
the Transfer Pricing Officer shall, by order in writing, determine the arm’s length price in relation to the international transaction or specified domestic transaction as per section 165(4) and send a copy of his order to the Assessing Officer and to the assessee.
Section 166(7) of Income Tax Act 2025
166(7) Where a reference was made under sub-section (1), an order under sub-section (6) may be made at any time before sixty days before the expiry of limitation period referred to in section 286, or 296, for making the order of assessment or reassessment or recomputation or fresh assessment.
Section 166(8) of Income Tax Act 2025
166(8) If the period of limitation available to the Transfer Pricing Officer for making an order under sub-section (6) is less than sixty days in the circumstances referred to in section 286(3)(b) or (i) ,such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to have been extended accordingly.
Section 166(9) of Income Tax Act 2025
166(9) The arm’s length price, being determined in relation to the international transaction or the specified domestic transaction under sub-section (6) for any tax year shall apply to similar international transaction or specified domestic transaction for the two consecutive tax years immediately following such tax year, on fulfilment of the following conditions:––
- (a) the assessee exercises an option or options to the above effect for the said two consecutive tax years;
- (b) such option or options are exercised in such form, manner and within such period as prescribed; and,
- (c) the Transfer Pricing Officer shall, within one month from the end of the month in which such option or options are exercised, by an order in writing, declare that such option or options are valid subject to the conditions, as prescribed.
Section 166(10) of Income Tax Act 2025
166(10) The provisions of sub-section (9) shall not apply to any proceedings under Chapter XVI-B.
Section 166(11) of Income Tax Act 2025
166(11) On receipt of the order under sub-section (6), the Assessing Officer shall compute the total income of the assessee under section 165(6) in conformity with the arm’s length price as so determined by the Transfer Pricing Officer.
Section 166(12) of Income Tax Act 2025
166(12) Irrespective of anything contained in sub-section (11), where the Transfer Pricing Officer has declared an option exercised by the assessee as valid option under sub-section (9), he shall examine and determine the arm’s length price in relation to such similar transaction for two consecutive tax years immediately following such tax year, in the order referred to in sub-section (4) and on receipt of such order, the Assessing Officer shall proceed to recompute the total income of the assessee for the said two consecutive tax years as per the provisions of section 288.
Section 166(13) of Income Tax Act 2025
166(13) For rectifying any mistake apparent from the record, the Transfer Pricing Officer,––
- (a) may amend any order passed by him under sub-section (6), and the provisions of section 287 shall, so far as may be, apply accordingly; and
- (b) shall send a copy of such order to the Assessing Officer who shall thereafter amend the order of assessment in conformity with such order of the Transfer Pricing Officer.
Section 166(14) of Income Tax Act 2025
166(14) The Transfer Pricing Officer may exercise all or any of the powers specified in section 246(1)(a) to (d) or 252(1)(a) or 253 for the purposes of determining the arm’s length price under this section.
Section 166(15) of Income Tax Act 2025
166(15) If any difficulty arises in giving effect to the provisions of sub-sections (9) and (12), the Board may, with the prior approval of the Central Government, issue guidelines for the purpose of removing such difficulty.
Section 166(16) of Income Tax Act 2025
166(16) No guideline under sub-section (15) shall be issued after the expiration of two years from the 1st April, 2026.
Section 166(17) of Income Tax Act 2025
166(17) Every guideline issued by the Board under sub-section (15) shall be laid before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive session aforesaid, both houses agree in making any modification in such guideline or both Houses agree that the guideline, should not be issued, the guideline shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that guideline.
Section 166(18) of Income Tax Act 2025
166(18) In this section, “Transfer Pricing Officer” means a Joint Commissioner or 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.
FAQs on Section 166 of Income Tax Act 2025
What is the purpose of Section 166 of the Income Tax Act, 2025?
Section 166 provides the legal framework for referring cases to the Transfer Pricing Officer (TPO) to determine the arm’s length price in international or specified domestic transactions.
When can the Assessing Officer refer a transaction to the Transfer Pricing Officer?
The Assessing Officer may refer a transaction if the assessee has entered into an international or specified domestic transaction and it is considered necessary or expedient, with prior approval from the Principal Commissioner or Commissioner.
Can a reference to the TPO be made if the assessee has exercised the option under Section 166(9)?
No, a reference under sub-section (1) cannot be made if the TPO has declared the assessee’s option under sub-section (9) to be valid for that tax year.
What happens if a reference is mistakenly made despite a valid option under Section 166(9)?
Such a reference will be treated as if it was never made for that transaction.
What is the TPO required to do upon receiving a valid reference?
The TPO must issue a notice to the assessee asking for evidence to support the assessee’s determination of the arm’s length price.
Can the TPO examine other transactions not originally referred?
Yes, if during the proceedings the TPO discovers other relevant international or specified domestic transactions, the same provisions will apply as if those were referred under sub-section (1).
How does the TPO determine the arm’s length price?
The TPO considers evidence from the assessee, collects further information if needed, and determines the arm’s length price in writing as per Section 165(4), sending the order to both the Assessing Officer and the assessee.
By when must the TPO pass an order under Section 166(6)?
The TPO must pass the order at least sixty days before the expiry of the time limit under Section 286 or 296 for making the relevant assessment-related order.
What happens if the remaining period is less than sixty days?
In such cases, the period is extended to sixty days and is deemed so for legal purposes.
Can the arm’s length price determined for one year apply to future years?
Yes, if the assessee exercises an option, the same price can apply to the next two years for similar transactions, subject to conditions and the TPO’s declaration of validity.
Can the option under Section 166(9) be applied to proceedings under Chapter XVI-B?
No, the provisions of sub-section (9) do not apply to proceedings under Chapter XVI-B.
What should the Assessing Officer do after receiving the TPO’s order?
The Assessing Officer must compute the total income in conformity with the arm’s length price determined by the TPO.
Is the TPO required to determine the arm’s length price in future years if a valid option is declared?
Yes, the TPO must determine the arm’s length price for two consecutive years and the Assessing Officer must recompute the income accordingly under Section 288.
Can the TPO rectify mistakes in his order?
Yes, the TPO may amend any order under sub-section (6) to rectify mistakes apparent from the record, and the Assessing Officer must amend the assessment order accordingly.
What powers does the TPO have under this section?
The TPO may exercise the powers specified in Section 246(1)(a) to (d), 252(1)(a), or 253.
Can the Board issue guidelines to resolve difficulties in applying sub-sections (9) and (12)?
Yes, with prior approval of the Central Government, the Board may issue such guidelines.
Is there a time limit for issuing guidelines under Section 166(15)?
Yes, guidelines cannot be issued after 1st April, 2028.
Are the Board’s guidelines subject to Parliamentary review?
Yes, every guideline must be laid before both Houses of Parliament and may be modified or annulled based on their consensus.
Who qualifies as a Transfer Pricing Officer under this section?
A TPO is a Joint Commissioner, Deputy Commissioner, or Assistant Commissioner authorised by the Board to perform functions related to Sections 165 and 171.
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