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

Under a TPO order for the tax year 2025-26, the arm's length price of Arya Motors Ltd's component sale to its UAE associate was determined. Arya Motors exercises the option in the prescribed form, manner and time for the next two tax years, and the TPO declares the option valid. Which statement is correct under section 166?

The ALP already determined applies to similar transactions for the two consecutive following tax years, and no reference to the TPO can be made for them once the option is declared valid. Section 166(2) and (9) provide this; the period is two years, not longer.

  1. ANo AO reference can be made for the similar transaction for those two years, and the ALP determined applies to themCorrect
  2. BThe ALP applies to those two years, but the AO may still refer the transaction freely to the TPO
  3. CThe ALP applies for the next five tax years
  4. DThe option is valid only if the assessee obtains the order of the Board

Explanation

Under section 166(9) the ALP determined applies to similar transactions of the two consecutive following tax years if the option is exercised and declared valid. Section 166(2) bars a reference for such transactions, and 166(3) treats any reference made as if not made. The five-year period is wrong, as the law gives two years.

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