VSTN – Income Tax Rules Alert – Block Assessment and others

Legislative Background

The Indian Transfer Pricing (TP) regime has undergone a reformatory change as part of the introduction of the Income-tax Act, 2025 (Act) and the accompanying Draft Income-tax Rules, 2026 (Draft Rules) issued by the Central Board of Direct Taxes (CBDT) for stakeholder feedback. These provisions are to be effective from 01 April 2026 (Assessment Year 2026-27) and aim to modernise and streamline TP compliance, reduce disputes and align with the best practices.

The Draft Rules incorporates the following major concepts and key changes that brings shifts in the current TP landscape:

Block Transfer Pricing Assessments Harmonisation amendments

Block Assessment Mechanism

The Block Assessment mechanism is to streamline multiple tax-year TP proceedings and reduce repetitive annual TP litigation. The framework is governed by Section 166(9) of the Act (amended), read with Rule 82 of the Draft Rules for determining the Arm’s Length Price (ALP) for multiple tax years in a single year proceeding, subject to prescribed conditions.

This concept aims to bring procedural efficiency, consistency in TP determinations, and reduced compliance burden for taxpayers engaged in recurring International Transactions or Specified Domestic Transactions (SDT).

Block Assessment Period = Tax Year under scrutiny + 2 Consecutive Years

Conditions for opting Block Assessment Mechanism

Nature of Documentation

• Similar International Transactions / SDTs for the Block Assessment Period
• Application of methodology for determining ALP should be unchanged
• FAR, business model, accounting, and tax treatment remain materially unchanged
• Contractual terms, responsibilities and benefits between entities remain unchanged
• Applicable even if there is a change in business results or holding structure or AE ownership, provided no material change in transaction character or FAR profile

Compliance Requirements

• Assessee declaration in Form 46 and Certification by an Accountant in Form 47
• Accountant’s report (i.e. Form 48) under Section 172 of the Act to be filed for first and second years within the specified due dates
• Return of Income (RoI) to be filed within due dates referred to under Section 263(1) of the Act
• Undertaking to furnish the required Accountant Report and Return of Income for third year within the due dates

Exceptions

• Case not covered under Chapter XVI-B (special audit / search-related block provisions)
• Associate Enterprises are not resident of a jurisdiction notified under Section 176 of the Act

Harmonisation Amendments

The draft rules have structured the TP documentation standards from a compliance perspective through many clarificatory amendments, to refine ALP methodologies, safe harbor provisions, tighten documentation standards, and align the secondary adjustment benchmark and accountant’s report requirements with current practice.

Methodology Changes: RPM and PSM

Under the application of Resale Price Method (RPM) the taxpayer must now re-examine the cost allocation methodologies to ensure only expenses incurred directly in connection with the purchase of property or obtaining of services may now be deducted when calculating the ALP

Under the application of Profit Split Price Method (PSM), two sub-methods have been formally introduced (A) Contribution Profit Split Method and (ii) Residual Profit Split Method. Further under residual profit split method it is specifically mentioned that the arm’s length return can be reliably benchmarked using comparable uncontrolled transactions’ thereby implies that the taxpayers need to undertake comparability analysis for benchmarking the routine returns

Further, the PSM scope is now expanded and explicitly applicable to the transactions involving “unique and valuable contributions by each enterprise”, not limited to unique intangible transfers

Definitional changes made under Sub Rules 1 to 5 of Rule 79

• Under Rule 10B(2) it was mentioned that “comparability of an International Transaction/SDT shall be judged with reference to certain conditions” and the conditions were listed down in the Rule. However, Under Rule 79(2), the term “comparability factors” is added after the conditions which needs to be considered in determining the ALP, providing clearer guidance for relevant parameters for TP analysis
• Under Sub Rule 2(a), the term “Specific” has been removed from the reference to characteristics of property or services, which slightly broadens the scope of comparability parameters
• Under Sub Rule 2(d), the term “Depth” is added as a market conditions comparability factor, which enhances the assessment of economic circumstances affecting the transactions
• Under Sub Rule 4, the provisos (referring about the allowability to use the data relating to 2 years prior to the current year on or before April 2014) have now been deleted, as it became redundant pursuant to the introduction of multiple year data and weighted average computation
• The term “assessment year” has been replaced with “tax year”
• The phrase “financial year immediately preceding the current year” has been shortened to “first preceding year” for clarity and concise

Rule 83 – Secondary Adjustment: Interest Benchmark

Benchmarking to compute imputed interest income on unrepatriated excess money in foreign currency transactions has changed from LIBOR based rates. The reference rate of the relevant foreign currency mentioned under Rule 89(3) – As on 30th September of the relevant year, + 300 basis points (spread unchanged) is the new benchmark.

Rule 84 & 85 – TP Compliance Impact

• Documentation Must Precede Filing: TP documentation can no longer be deferred to the point of scrutiny. It must be prepared before Form 48 is filed, with Form 48 itself due at least one month prior to the return of income deadline
• Multi-Year TP Certainty: The MNEs may now opt to have the ALP determined across three consecutive years in a single proceeding, significantly reducing the burden of repetitive annual TP litigation for the recurring transactions
• Broadening the scope of Profit Split Method: All the Indian entities that are part of MNEs, involved in unique and valuable contributions need to the revisit their transfer pricing policy in relation to such contributions in light of the broadened scope
• Email Communications recognized as Audit Evidence: Broadens the evidentiary base available to taxpayers when substantiating their positions during audit or litigation
• Secondary adjustment – interest benchmark: Introduction of reference rate of the relevant foreign currency under Rule 89(3) is a welcome move to avoid the litigation and ambiguity around the interest rates applicability
• Documentation Retention Period Extended to Nine Years: MNEs are required to retain all transfer pricing documentation for a period of nine years from the end of the relevant tax year, necessitating a review of existing document management and record retention frameworks