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CA Final · Direct Tax Laws & International Taxation · Transfer Pricing

The TPO determined the arm's length price of a royalty transaction of Kaveri Auto Ltd for a tax year by an order under section 166(6). Kaveri Auto exercises, in the prescribed form, manner and time, an option for the two consecutive tax years immediately following, for a similar transaction. Which statement is correct under section 166?

The earlier ARP applies to the two consecutive following tax years only if the assessee exercises the option as prescribed and the TPO, by written order within one month from the end of the month of exercise, declares the option valid. Mere filing of the option is insufficient.

  1. AThe ARP automatically applies to the next five years without any option
  2. BThe ARP applies to the two following tax years only if the TPO, by written order within one month from the end of the month of exercise, declares the option validCorrect
  3. CThe ARP applies to the two following years once the option is filed, with no order from the TPO needed
  4. DThe ARP applies to the following three tax years if the AO agrees

Explanation

Section 166(9) requires the assessee to exercise the option in the prescribed manner and time, and the TPO must within one month from the end of the month of exercise declare by written order that the option is valid. Without that declaration the ARP does not carry forward, so filing alone is not enough.

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