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Direct Tax Laws and International Taxation · Transfer Pricing

Reference to Transfer Pricing Officer under Section 166

Updated 11 October 2026 · Fact-checked

Under section 166 of the Income-tax Act, 2025, the Assessing Officer may refer the arm's length price of an international or specified domestic transaction to the Transfer Pricing Officer (TPO), if he considers it necessary or expedient and has prior approval of the Principal Commissioner or Commissioner. The TPO hears the assessee, passes an order, and the Assessing Officer computes income accordingly.

Understand Reference to Transfer Pricing Officer

Transfer pricing asks one question: was a transaction between related parties priced as independent parties would have priced it? That price is the arm's length price (ALP). Section 166 covers who decides it when the tax officer doubts the assessee's price.

The assessing officer (AO) does not decide ALP himself in such cases. He may refer it to a specialist, the Transfer Pricing Officer (TPO). The TPO is a Joint Commissioner, Deputy Commissioner or Assistant Commissioner authorised by the Board to perform the AO's functions under sections 165 and 171 for a person or class of persons.

A reference needs two things: the assessee has entered into an international transaction or specified domestic transaction in the tax year, and the AO considers a reference necessary or expedient. He must also obtain the previous approval of the Principal Commissioner or Commissioner. The word is "may", so reference is discretionary.

Once referred, the TPO serves a notice asking the assessee to produce evidence supporting his ALP. On the date specified, he hears the evidence, considers what he requires on specific points and all relevant material, and passes a written order fixing the ALP as per section 165(4). A copy goes to the AO and the assessee. The AO then computes total income in conformity with that ALP.

The TPO can also widen the inquiry. If he finds another international or specified domestic transaction, or one the assessee left out of the report under section 172, he treats it as if it had been referred to him. The section also links to the two-year roll-forward option and has time limits for the order.

Key rules to remember

Conditions for reference (s.166(1))
Transaction in tax year (international / specified domestic) + AO considers it necessary or expedient + previous approval of Pr. CIT / CIT
The AO may refer; reference is not automatic.
Time limit for TPO order (s.166(7))
Order on or before one month prior to the month in which the assessment limitation expires
If limitation expires on 31 March, order by 31 January; if on 31 December, order by 31 October. This replaced the earlier 60-days-before rule from 1-4-2026.
Minimum time for TPO (s.166(8))
If remaining time is under 60 days in cases under s.286(3)(b) or (h), extended to 60 days
Applies to the TPO's limitation period.
Roll-forward of ALP (s.166(9))
ALP fixed for a tax year applies to similar transactions of the next 2 consecutive tax years
Needs the assessee's option in prescribed form, manner and time, and a TPO order within one month from the end of the month of option declaring it valid.
Bar on reference (s.166(2))
No reference if TPO has declared the s.166(9) option valid for that tax year
Under s.166(3), a reference made before or after the declaration is treated as not made.
Rectification (s.166(13))
TPO may amend his own order for mistake apparent from record; s.287 applies; copy to AO, who amends assessment
Rectification, not re-opening on merits.

How to solve Reference to Transfer Pricing Officer questions

For any question on reference to the TPO, test the facts against the section in order and then follow the process to the final assessment.

  1. 1Identify the transaction. Check that it is an international transaction or a specified domestic transaction entered into in the tax year.
  2. 2Check whether the roll-forward option under section 166(9) has been declared valid by the TPO for that year. If yes, no reference can stand.
  3. 3Check the reference conditions: AO considers it necessary or expedient, and previous approval of the Principal Commissioner or Commissioner is obtained.
  4. 4Record the TPO's notice under section 166(4) and the hearing: evidence by the assessee, evidence the TPO requires, and other material gathered.
  5. 5State the TPO's written order determining ALP as per section 165(4), copies to the AO and the assessee.
  6. 6Check the time limit under section 166(7) and the 60-day extension in section 166(8) if relevant.
  7. 7Apply the order: the AO computes total income in conformity with ALP. Mention extension to other transactions under section 166(5) and rectification under section 166(13) if the facts call for them.
  8. 8Give a clear conclusion with the figure or the validity of the reference.

Quickest way: Five-point reference checklist

When to use it: For short-answer or MCQ questions asking whether a reference is valid or what happens next.

  1. Transaction type: international or specified domestic?
  2. Option valid under s.166(9)? If yes, reference is treated as not made.
  3. AO's opinion plus Pr. CIT / CIT approval present?
  4. TPO notice, hearing, then written order within the s.166(7) deadline.
  5. AO computes income per TPO's ALP; a copy of the order goes to the assessee too.

Common mistakes in Reference to Transfer Pricing Officer

  • Saying the AO must refer every international transaction to the TPO.

    Students assume transfer pricing cases automatically go to the TPO.

    Fix: The section says the AO "may" refer when he considers it necessary or expedient. It is discretionary.

  • Forgetting the approval of the Principal Commissioner or Commissioner.

    The approval is a short phrase at the end of sub-section (1).

    Fix: Always list approval as a condition of a valid reference.

  • Using the old rule that the TPO's order is due 60 days before limitation expires.

    Older notes carry the earlier wording.

    Fix: Under the amended sub-section (7), the deadline is one month before the month in which limitation expires: 31 January for 31 March, 31 October for 31 December.

  • Thinking the TPO is limited to the transaction referred.

    Students read the reference as a closed scope.

    Fix: Under section 166(5), other transactions noticed during proceedings, or ones not reported under section 172, are treated as referred.

  • Treating the TPO's order as final assessment.

    The TPO's order looks like an assessment order.

    Fix: The TPO only determines ALP. The AO then computes total income under section 165(6) in conformity with it.

  • Applying the roll-forward automatically to the next two years.

    Students overlook the conditions.

    Fix: It needs the assessee's option in the prescribed form and time, and the TPO's order declaring it valid within one month from the end of the month of the option.

Worked examples

Example 1

The assessment limitation for a tax year of Rapid Components Ltd. expires on 31 March 2028. The AO referred its royalty payment to its Singapore associate to the TPO. By which date must the TPO pass the order under section 166(6)? Would your answer differ if the limitation expired on 31 December 2027?

Show the solution
  1. Section 166(7) requires the order at any time before one month prior to the month in which the limitation expires.
  2. Limitation expiring on 31 March: the order is due on or before 31 January of that year, so 31 January 2028.
  3. Limitation expiring on 31 December: the order is due on or before 31 October of that year, so 31 October 2027.
  4. Check the 60-day floor in section 166(8) only if the case falls under section 286(3)(b) or (h); it does not on these facts.

Answer: The TPO must pass the order on or before 31 January 2028. If limitation expired on 31 December 2027, the date would be 31 October 2027.

Example 2

For tax year 2026-27, Bharat Auto Ltd. had an international transaction. In its case the TPO had earlier declared valid the assessee's option under section 166(9) for that year. The AO nevertheless refers the transaction to the TPO with approval of the Commissioner. Is the reference sustainable?

Show the solution
  1. Section 166(2) bars a reference where the TPO has declared the option valid for that tax year in relation to that transaction.
  2. Section 166(3) covers a reference made before or after the declaration: the effect is as if no reference was made.
  3. Approval of the Commissioner does not cure the bar.
  4. Under section 166(12), the TPO instead determines ALP for the two following years through the order under sub-section (6), and the AO recomputes income under section 288(2).

Answer: The reference is not sustainable. It is treated as if no reference was made for that transaction.

Exam tips

  • Tie each point to a sub-section number: (1) reference, (4) notice, (6) order, (7) time, (9) roll-forward, (13) rectification.
  • Write the amended section 166(7) deadlines in full; examiners like dates such as 31 January and 31 October.
  • In case-based questions, list the conditions of reference first, then judge the facts against them.
  • Remember that the TPO may exercise powers under sections 246(1)(a) to (d), 252(1)(a) and 253 for determining ALP.
  • Close with the AO's action: computing income in conformity with the TPO's ALP.

Practice questions from Transfer Pricing

Reference to Transfer Pricing Officer in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Reference to Transfer Pricing Officer: frequently asked questions

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

When the assessee has entered into an international or specified domestic transaction in the tax year and the AO considers a reference necessary or expedient. He needs the previous approval of the Principal Commissioner or Commissioner.

Who is a Transfer Pricing Officer?

A Joint Commissioner, Deputy Commissioner or Assistant Commissioner authorised by the Board to perform the AO's functions under sections 165 and 171 for a person or class of persons.

What does the TPO do after receiving a reference?

He serves a notice asking the assessee for evidence, hears it, considers other evidence and material, and passes a written order determining ALP as per section 165(4). He sends copies to the AO and the assessee.

Can the TPO correct his own order?

Yes, for a mistake apparent from the record. Section 287 applies so far as may be, and the AO then amends the assessment order in conformity.