Transfer Pricing 2.0: Rethinking India’s Block Period Framework

[Sejal is a student at Hidayatullah National Law University.]

Recently, the Indian budget for the financial year 2025-26 introduced a transformative proposal regarding the process of transfer pricing. Now, as per the current framework, once the arm’s length price (ALP) is determined for a financial year for an international transaction, it will apply to similar transactions for the next 2 consecutive years. Such a forward-thinking approach enhances tax certainty, reduces disputes, and streamlines compliance, leading to a more stable and business-friendly environment. Transfer pricing refers to the pricing of goods, services, and intellectual property exchanged between 2 or more related companies within multi-national companies (MNCs). Since a substantial portion of global trade occurs within such intra-groups, transfer pricing profoundly influences international trade patterns. Central to transfer pricing is ALP, ensuring the transactions between two related companies are priced similarly to the transaction conducted between two independent companies under similar conditions. It aligns the pricing between the parties according to market rates to prevent tax avoidance and price shifting. Moreover, it prevents MNCs from getting an unfair advantage through artificial pricing strategies over a standalone business, which helps in maintaining market integrity.

The 2025 budget came up with a block period approach, allowing the determined ALP to remain valid for the next two consecutive years. This can be a game changer as it eliminates the need for annual reassessments and ensures consistent pricing for multiple years, which brings stability to transactions between companies. However, its success hinges on fair implementation, adaptability to market fluctuations, and safeguarding against its misuse. The following blog examines both the advantages and obstacles to this approach by comparing it to global practices. It proposes innovative solutions to achieve economic and fiscal stability, as well as fair transactions. 

Decoding the Block Period Methodology

The block chain approach establishes a new transfer pricing methodology that allows the Transfer Pricing Officer (TPO) to determine the ALP limits for both international and domestic transactions during a specified financial year. However, the TPO retains the power to evaluate the validity of the option while making sure all the transactions demonstrate comparable value within the 3-year time frame to prevent tax evasion or mispricing. 

Certain conditions need to be met for the application of this approach, which is mentioned under Section 92CA (3B) of the Income-tax Act 1961 (Act). The taxpayer has the option to apply for the ALP in similar transactions for the subsequent 2 years, which should be confirmed by TPO through an order within one month from exercising such option. All this should be done in the form, manner and period as prescribed by the tax authorities. This can be called for review only if there are major deviations from the criterion mentioned, such as the transactions are not similar but different, then the ALP will not be extended for 2 more years. 

This provision aims to minimize the compliance burdens by eliminating the need for annual reassessments because they rely on a pre-determined ALP usage for three years. It helps the MNCs as it eliminates the fear of sudden adjustments or disputes, providing predictability regarding tax planning and reducing the likelihood of unexpected tax adjustments in future. Moreover, the continuity in transfer pricing practices is maintained across multiple years, which helps in mitigating the potential fluctuations in tax positions. The powers given to TPO for validating the option given to be exercised by taxpayers lead to a structured and transparent assessment process between taxpayers and tax authorities. It fosters a business-friendly environment, which is crucial for attracting foreign investments and enhancing India’s global trade competitiveness.

Navigating Global Norms on Transfer Pricing Approaches

The USA follows the advanced pricing and mutual agreement (APMA), which provides companies with the means to anticipate transfer pricing methods employed by the Internal Revenue Service (IRS) over 5 years, thereby promoting consistency and reducing disputes. This constant pricing for 5 years helps to reduce the disputes related to transactions. A report from 2023 shows that due to the APMA program, 156 advanced pricing agreements have been resolved. This APMA approach includes a mutual agreement procedure, avoiding unnecessary audits by tax authorities and allowing for more flexibility and, hence, is a better option than a typical annual transfer pricing report. 

The UK legislation for transfer pricing under Section 146 et seq of Part 4 of the Tax (International and Other Provisions) Act 2010 adopted the APA approach, mandating a stable price for three to five years. Furthermore, it does not have the mandate of regular audit, and its multilateral tax agreements give long-term tax certainty. Instead, according to the new requirement, the transfer pricing documentation should be prepared simultaneously with the corporation tax return and must be submitted within thirty days upon request by HM Revenue and Customs (HMRC), which is responsible for all tax-related matters in the nation.

The Organisation for Economic Co-operation and Development (OECD) also has a separate transfer pricing system, which is followed by many countries along with OECD countries. The OECD Transfer Pricing Guidelines 2022 sets the international standard for the determination of price. Though it is not legally binding, it has become widely recognized and adopted by its members. It has a specific set of principles and rules which govern the ALP.  To ease the compliance burden on taxpayers, tax administrators may allow for the data for comparables to be updated every three years, removing the requirement of calculating it annually through a full benchmarking analysis. The only condition here is that business operations should remain unchanged. However, the financial data for those comparables needs to be updated annually for the accurate application of ALP.

Bridging Global Models with Domestic Realities: India’s Distinct Transfer Pricing Path

India’s block period model has inspiration from foreign models. The USA’s APMA program emphasizes tax certainty by fixing prices for 5 years, whereas India’s 2-year approach aims for the same goal. It focuses on streamlining the process to improve efficiency and reduce administrative burdens, which aligns with the UK system for transfer pricing. Furthermore, even after not being a signatory of the OECD, India’s legislation is broadly based on OECD transfer pricing guidelines.

Though India’s approach aligns with the global practices, it incorporates its unique elements to suit its broader application. The proposed regulation applies to all eligible businesses universally, covering international as well as specific domestic transactions under Sections 92 to 92F of the Act. This model differs from the USA and UK models because it requires compliance of all the eligible entities, whereas in other countries, APAs are applied to specific companies voluntarily. Hence, it ensures inclusivity for the diverse business landscape. Additionally, India’s safe harbor provisions and risk-based selection criteria for audits avoid disputes and enhance transparency in compliance. 

The Flip Side of The Coin: Evaluating the Challenges of India’s Block Model

First, the major issue in this approach is its inability to adapt to dynamic market conditions. Locking ALP for 3 years can enable the companies to manipulate profits by exploiting outdated pricing. They will continue to transact at lower prices and shift profits to low-tax jurisdictions, ultimately leading to revenue loss for the tax authorities. 

Second, India’s model lacks the annual oversight in contrast to a model followed by Singapore and endorsed by OECD, which allows the benchmark analyses to be updated every 3 years. Still, the local files need to be reviewed every year to ensure their accuracy. The absence of such periodic validation can impact the reliability of the transfer pricing assessment in India.

Lastly, a key concern in applying this approach is the risk of embedding errors and biases made by the TPO, who can favor or penalize the taxpayers unfairly over time. In the absence of clear and consistent comparability standards, excessive discretion granted to TPOs can lead to subjective judgments, inconsistencies and increased disputes. It can lead to distortion of fair taxation without a robust checking mechanism. 

Strategic Pathway: Recommendations To Refine India's Block Period Model

First, to ensure fairness and adaptability in this approach, implementing dynamic safeguards is essential. Certain revisions in ALP should be allowed when macroeconomic indicators such as inflation, commodity prices or currency volatility deviate beyond a fixed threshold. It can prevent taxable profits from being distorted by outdated pricing. Adaptive frameworks, modelled on OECD risk-based management strategies, can enhance compliance while supporting transparency, making transfer pricing less susceptible to disruptions in the global economy and fluctuations in business.  

Second, for improving effectiveness, India should have quarterly monitoring systems, especially to deal with highly volatile industries where market dynamics change rapidly. For instance, the USA IRS real-time dashboards and sectoral data are used in its Compliance Assurance Process to track high-risk transactions quarterly. Similarly, the Australian Tax Office’s application of industry-specific reviews for tech companies is similar and requires quarterly risk profiling. India can also learn to have a centralized analytics platform wherein market indices, cost structures and global pricing shifts can trigger ALP reviews. This proactive system would close the compliance gaps, increase responsiveness, and ensure correct transfer pricing for real-time economic conditions. 

Lastly, to address the risk of prolonged disputes and subjectivity, a Specialized Transfer Pricing Tribunal with taxpayers and tax authorities should be established with expert members who specialize in international taxation and have an understanding of specific sectors to reduce disputes and subjectivity in the block period approach. This tribunal can implement a sped-up dispute resolution framework that would handle cases within a fixed timeline. Mexico has created tax courts with expertise that handles transfer pricing matters through specialized tribunals to decrease case delays. India can implement an innovative hybrid dispute resolution model patterned after the UK’s HMRC Alternative Dispute Resolution scheme, which blends qualified mediators with electronic document examination tools to speed up case resolutions. Pricing conflicts would be resolved promptly through an expert-based system which delivers transparency.

Conclusion 

The block period approach implemented by India represents an essential change which gives organizations long-term stability over transfer pricing through a single evaluation cycle. True revolutionary change requires more than just simplifying compliance because system development should evolve with the market. The static ALP, which does not perform adaptive checks over three years, might maintain stability yet quickly lose relevance in such a dynamically changing global business landscape.

India now stands at the crossroad of remaking transfer pricing not merely a regulatory stick, but a strategic tipping stone of fair trade, investment confidence and tax equity. If supported with agility, innovation and foresight, the block period can be a stepping stone.