Section 166 Income Tax Act 2025: When Can a Case Be Referred to the Transfer Pricing Officer?

Section 166 provides the procedure for referring international transactions and specified domestic transactions to the Transfer Pricing Officer (TPO) for determination of the arm's length price (ALP). It also governs notices, evidence, orders, time limits and a multi-year option for similar transactions.

Current legal position: The Income-tax Act, 2025 applies from 1 April 2026. Section 166 corresponds broadly to section 92CA of the Income-tax Act, 1961. Read the applicable amended text and procedural rules for the relevant tax year; older proceedings may remain governed by the earlier law.

When can the Assessing Officer refer a transaction to the TPO?

Under section 166(1), where an assessee enters into an international transaction or specified domestic transaction in a tax year, the Assessing Officer (AO) may refer determination of the arm's length price to the TPO if the AO considers the reference necessary or expedient. Prior approval of the Principal Commissioner or Commissioner is required. A reference is not automatic merely because a covered transaction exists.

Sections 166(2) and 166(3) address transactions covered by a valid multi-year option under section 166(9). A reference must not be made for such a transaction for the covered year, and a reference made before or after validation is treated as not having been made for that transaction.

What happens after a reference is made?

Notice, evidence and undisclosed transactions - sections 166(4) to 166(6)

The TPO issues a notice requiring the assessee to produce evidence supporting its ALP determination. The TPO may consider documents and information, request evidence on specified points and take account of relevant material collected during the proceedings.

If the TPO discovers another international or specified domestic transaction, including one omitted from the accountant's report under section 172, section 166(5) permits examination as though it had been referred. After considering the evidence, the TPO makes a written order determining the ALP and sends copies to the AO and the assessee.

What is the time limit for a TPO order?

Section 166(7), as amended, ties the deadline to the limitation period for assessment or reassessment under sections 286 or 296. The provision requires the TPO order before the statutory cut-off, generally one month prior to the month in which the relevant assessment limitation expires. For example, where the limitation expires on 31 March, the TPO order is due by 31 January; where it expires on 31 December, the order is due by 31 October. The precise deadline must be checked against the applicable statutory text and any extension.

Section 166(8) provides a minimum 60-day period in specified situations under section 286(3)(b) or (h) where the remaining period would otherwise be shorter.

Can one ALP determination apply to the next two tax years?

Yes, subject to conditions. Section 166(9) permits the ALP determined for a tax year to apply to similar international or specified domestic transactions in the immediately following two tax years if the assessee exercises the prescribed option and the TPO validates it by written order within one month from the end of the month in which the option is exercised.

The option is subject to prescribed conditions and does not apply to proceedings under Chapter XVI-B (section 166(10)). Under section 166(12), the TPO examines and determines the ALP for similar transactions in those subsequent years, and the AO recomputes income under section 288(2), as applicable. It is not an unconditional exemption from transfer pricing scrutiny.

Effect of TPO order, rectification and powers

Section 166(11): The AO computes total income in conformity with the ALP determined by the TPO, subject to the statutory framework.
Section 166(13): The TPO may rectify an apparent mistake in an order; the AO makes the corresponding amendment.
Section 166(14): The TPO may exercise specified statutory powers for obtaining information and evidence.
Sections 166(15) and 166(16): Provide for Board guidelines to remove difficulties relating to the multi-year option, with parliamentary oversight.
Section 166(17): Defines the authorised officers who may function as a TPO.

Relevant definitions and statutory connections

Arm's length price: A price applied or proposed between persons other than associated enterprises in uncontrolled conditions; see section 173.

Associated enterprise: An enterprise connected with another by the participation, management, control or capital criteria in section 162.

International transaction: A transaction falling within the scope of section 163, including applicable deemed transactions.

Specified domestic transaction: A qualifying domestic transaction covered by section 164.

Transfer Pricing Officer: A Joint Commissioner, Deputy Commissioner or Assistant Commissioner authorised by the Board to exercise the specified functions under section 166(17).

Related provisions include section 165 (ALP methods), sections 171 and 172 (documentation and accountant's report), section 167 (safe harbour) and sections 168-169 (advance pricing agreements).

Practical illustration

An Indian company pays its overseas associated enterprise for technical support. During assessment, the AO considers an ALP review necessary and obtains the prescribed approval before referring the transaction to the TPO. The TPO issues a notice, examines the service agreement, invoices, benchmarking study and evidence of services rendered, and determines the ALP in a written order. The AO then applies that determination when computing income under the Act. The outcome depends on the evidence and applicable method, not simply on the fact that the parties are associated.

Compliance checklist: Maintain contemporaneous transfer pricing records, identify all covered transactions, reconcile the accountant's report with books and agreements, preserve comparables and functional analysis, and respond to notices within prescribed time.

Frequently asked questions

Is every international transaction automatically referred to the TPO?

No. Section 166(1) requires the AO to consider a reference necessary or expedient and obtain prior approval.

Can the TPO examine a transaction omitted from the transfer pricing report?

Yes. Section 166(5) addresses transactions noticed during proceedings, including those not reported under section 172.

Does the multi-year option apply to all future years?

No. It concerns the two immediately following tax years and depends on a valid option, similar transactions and prescribed conditions.

What was the corresponding provision under the Income-tax Act, 1961?

Section 92CA dealt with references to the Transfer Pricing Officer. The wording and time limits applicable to a particular tax year should be checked separately.

Official statutory sources

Income Tax Department: Section 166 Income-tax Act 2025 (amended text)

Updated: 10 November 2026. Educational explanation; consult the operative law, notifications and rules for the relevant facts and tax year.