The Indian Government on 1 February 2025 announced the Union Budget 2025, which introduced many taxpayer and investor-friendly changes to the existing Income tax law. The budget focused on providing additional impetus to foreign investors, devising ways to reduce transfer pricing disputes, and giving a boost to middle-class individual taxpayers.
This article focuses on the budget’s key proposals that relate to the Indian transfer pricing landscape.
Under the current scheme, a Tax Officer initiates a corporate tax audit proceeding for a particular company. Wherever the Tax Officer finds reasonable reasons to scrutinise the pricing of related party transactions, the Tax Officer refers the case to a different designated officer, the Transfer Pricing Officer. Thereafter, the Transfer Pricing Officer reviews the related-party transactions, and expresses the officer’s views on arm’s length pricing by issuing a Transfer Pricing Order.
It is important to note that if a company’s transfer pricing is scrutinised in a particular year, it can be assumed that the company will face similar scrutiny in subsequent years as well. The company gets broadly similar queries year-on-year from the Transfer Pricing Officer, submits responses reflecting year-specific facts, discusses matter with the Transfer Pricing Officer, and eventually the Transfer Pricing Officer issues the order. The same process is repeated year after year.
India’s transfer pricing regime is now more than two decades old; during that time, the Indian transfer pricing landscape has matured, and the tax authorities have gained experience regarding best practices around the globe. One such best practice, as the Indian government has acknowledged, relates to conducting transfer pricing audits for a block of years.
To ensure administrative expedience, the Indian Union Budget 2025 proposed the use of a “block of years” to conduct transfer pricing audits, when the nature of the related-party transactions and the fact pattern for various years is similar. The budget proposal states that the arm’s length price determined by the Transfer Pricing Officer for a particular year would apply to similar transactions for the two consecutive years immediately following such year. This would only be possible if the taxpayer exercises this option and the Transfer Pricing Officer accepts it upon review, within a stipulated time frame.
Once the Transfer Pricing Officer passes an order declaring the option valid, no further reference would be made by the Tax Officer to the Transfer Pricing Officer for scrutiny of the years covered by the option.
This proposal would be effective from 1 April 2026, and the detailed application form and the way in which the option can be exercised by the taxpayer would be prescribed in due course.
Given that transfer pricing is one of the most litigated topics in India, the aforesaid proposal seeks to align this particular aspect to the global best practice and rationalise transfer pricing provisions to help reduce the multiplicity of transfer pricing audits.
Safe harbour provisions were introduced into the Indian transfer pricing landscape in 2013. The primary objective of introducing these provisions was to reduce the number of transfer pricing disputes and provide certainty to businesses. The safe harbour provisions have been subject to various amendments in the past, relating to applicability, newer related-party transactions added, and rate updates
The safe harbour provisions currently apply to software development providers, IT-enabled service providers, knowledge process outsourcing providers, contract R&D service providers, financial transactions such as corporate guarantees and loans, and auto manufacturing, among others.
The Indian government has now proposed to further expand the scope of the safe harbour provisions. Though neither the budget nor its underlying memorandum provide any specific proposals, an announcement is expected soon regarding this expansion in terms of covering newer classes of transactions, changing the applicability thresholds, and altering the rates for covered transactions.
The objective behind expanding the scope of the safe harbour provisions is to make these provisions more lucrative and economically feasible for a larger base of taxpayers, which is a welcome notion.
The proposals made in the Indian Union Budget 2025 to adopt the concept of block transfer pricing audits and to expand the existing safe harbour provisions are welcome moves aimed at reducing the number of transfer pricing disputes and lowering litigation costs for taxpayers. However, the success of these proposals will depend on their administrative implementation.
Rajiv Bhutani
BDO in India
This article focuses on the budget’s key proposals that relate to the Indian transfer pricing landscape.
Block Transfer Pricing Audit Scheme
Under the current scheme, a Tax Officer initiates a corporate tax audit proceeding for a particular company. Wherever the Tax Officer finds reasonable reasons to scrutinise the pricing of related party transactions, the Tax Officer refers the case to a different designated officer, the Transfer Pricing Officer. Thereafter, the Transfer Pricing Officer reviews the related-party transactions, and expresses the officer’s views on arm’s length pricing by issuing a Transfer Pricing Order.It is important to note that if a company’s transfer pricing is scrutinised in a particular year, it can be assumed that the company will face similar scrutiny in subsequent years as well. The company gets broadly similar queries year-on-year from the Transfer Pricing Officer, submits responses reflecting year-specific facts, discusses matter with the Transfer Pricing Officer, and eventually the Transfer Pricing Officer issues the order. The same process is repeated year after year.
India’s transfer pricing regime is now more than two decades old; during that time, the Indian transfer pricing landscape has matured, and the tax authorities have gained experience regarding best practices around the globe. One such best practice, as the Indian government has acknowledged, relates to conducting transfer pricing audits for a block of years.
To ensure administrative expedience, the Indian Union Budget 2025 proposed the use of a “block of years” to conduct transfer pricing audits, when the nature of the related-party transactions and the fact pattern for various years is similar. The budget proposal states that the arm’s length price determined by the Transfer Pricing Officer for a particular year would apply to similar transactions for the two consecutive years immediately following such year. This would only be possible if the taxpayer exercises this option and the Transfer Pricing Officer accepts it upon review, within a stipulated time frame.
Once the Transfer Pricing Officer passes an order declaring the option valid, no further reference would be made by the Tax Officer to the Transfer Pricing Officer for scrutiny of the years covered by the option.
This proposal would be effective from 1 April 2026, and the detailed application form and the way in which the option can be exercised by the taxpayer would be prescribed in due course.
Given that transfer pricing is one of the most litigated topics in India, the aforesaid proposal seeks to align this particular aspect to the global best practice and rationalise transfer pricing provisions to help reduce the multiplicity of transfer pricing audits.
Expansion of Scope of Safe Harbour Provisions
Safe harbour provisions were introduced into the Indian transfer pricing landscape in 2013. The primary objective of introducing these provisions was to reduce the number of transfer pricing disputes and provide certainty to businesses. The safe harbour provisions have been subject to various amendments in the past, relating to applicability, newer related-party transactions added, and rate updatesThe safe harbour provisions currently apply to software development providers, IT-enabled service providers, knowledge process outsourcing providers, contract R&D service providers, financial transactions such as corporate guarantees and loans, and auto manufacturing, among others.
The Indian government has now proposed to further expand the scope of the safe harbour provisions. Though neither the budget nor its underlying memorandum provide any specific proposals, an announcement is expected soon regarding this expansion in terms of covering newer classes of transactions, changing the applicability thresholds, and altering the rates for covered transactions.
The objective behind expanding the scope of the safe harbour provisions is to make these provisions more lucrative and economically feasible for a larger base of taxpayers, which is a welcome notion.
BDO Insight
The proposals made in the Indian Union Budget 2025 to adopt the concept of block transfer pricing audits and to expand the existing safe harbour provisions are welcome moves aimed at reducing the number of transfer pricing disputes and lowering litigation costs for taxpayers. However, the success of these proposals will depend on their administrative implementation.Rajiv Bhutani
BDO in India