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CS Professional · Advanced Direct Tax Laws and Practice · Transfer Pricing and General Anti Avoidance Rules (GAAR)

Under the Income-tax Act, 2025, which statement best describes the effect of a valid advance pricing agreement on the determination of the arm's length price of the covered international transaction?

With a valid advance pricing agreement, the arm's length price of the covered transaction is determined as per the agreement itself, irrespective of the methods in sections 165 and 166 or in the rules. The statute overrides the ordinary method selection for that transaction.

  1. AThe price is determined as per the agreement, irrespective of the methods in sections 165 and 166 or the rulesCorrect
  2. BThe price must still be computed by the Transfer Pricing Officer using the most appropriate method under section 165
  3. CThe agreement applies only if the taxpayer's own price is higher than the price under the prescribed methods
  4. DThe agreement is only advisory and the Principal Commissioner may depart from it at will

Explanation

Section 168(3) says that irrespective of sections 165 or 166 or the methods provided by rules, the arm's length price of the transaction covered by the agreement is determined as per the agreement. The option requiring recomputation under section 165 contradicts this override. Section 168(5) also makes the agreement binding on the authorities.

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