Section 166 of the Income-tax Act, 2025 — Reference to the Transfer Pricing Officer (TPO)

In plain language

What Section 166 is about

Section 166 of the Income-tax Act, 2025 lays down when and how the Assessing Officer (AO) can hand over the job of deciding the Arm's Length Price (ALP) of a related-party transaction to a specialist called the Transfer Pricing Officer (TPO). It is the 2025 Act's version of the old Section 92CA of the Income-tax Act, 1961, and it sits inside the transfer-pricing chapter (Sections 162 to 177) that took effect from 1 April 2026.

In plain words: when a company deals with its own group companies abroad (or large domestic group entities), the tax law wants to make sure the price charged is the same as it would be between two unrelated parties. Section 166 is the procedural gateway that lets the AO refer that pricing question to a trained TPO instead of deciding it himself.

Who it applies to

• Any taxpayer who has entered into an international transaction (Section 163) or a specified domestic transaction (Section 164, generally where aggregate value exceeds ₹20 crore in a tax year) with an associated enterprise (Section 162).
• Companies, LLPs, firms and individuals alike — there is no size cut-off for international transactions; even a single cross-border related-party dealing can trigger a reference.
• The TPO must be a Joint Commissioner, Deputy Commissioner or Assistant Commissioner authorised by the CBDT (Section 166(17)).

How the reference works — step by step

• AO's decision + approval: If the AO considers it "necessary or expedient", he may refer the ALP determination to the TPO, but only with the prior approval of the Principal Commissioner or Commissioner (sub-section 1).
• Notice and hearing: The TPO serves a notice asking the taxpayer to produce evidence supporting the price it claims is at arm's length (sub-section 4). The taxpayer gets a fair hearing before any order.
• Catching unreported deals: If the TPO discovers a transaction that was never referred or never reported under Section 172, it is deemed to have been referred and can still be examined (sub-section 5). There is no escaping by simply leaving a transaction out of Form 3CEB.
• Binding order: The TPO passes a written order fixing the ALP and sends it to both the AO and the taxpayer (sub-section 6). The AO must compute total income in conformity with that order (sub-section 11) — he has no discretion to differ.

The time limit for the TPO's order

The TPO's order under sub-section (6) must be made at least 60 days before the expiry of the assessment limitation period (sub-section 7). If less than 60 days are left, the limitation window is automatically extended to 60 days (sub-section 8) so the TPO always has enough time. The TPO can also rectify apparent mistakes in the order using the Section 287 procedure (sub-section 13).

The big new feature — the multi-year ALP option

The genuinely new idea in Section 166 (which did not exist in Section 92CA) is the multi-year option under sub-section (9). Once the ALP of a transaction is settled for one year, the taxpayer can opt to apply that same determination to the next two consecutive tax years for similar transactions, provided conditions are met and the TPO validates the option within one month.

• The option is exercised in Form 46 (filed online only), supported by Form 47, an accountant's certificate confirming compliance with Rule 82.
• Once an option is validated for a year, no fresh reference is made for that year (sub-section 2), and any earlier reference becomes void (sub-section 3).
• The multi-year benefit does not apply to search/requisition proceedings under Chapter XVI-B (sub-section 10).
• For validated options, the TPO determines the price for the two later years and the AO recomputes income accordingly (sub-section 12).

TPO's powers and practical implications

The TPO can use the survey, discovery, inspection and information-gathering powers under Sections 246, 252 and 253 (sub-section 14). Practically, this means taxpayers must keep a robust contemporaneous transfer-pricing study, file the accountant's report (Form 3CEB) on time, and be ready to defend every related-party price. A TPO adjustment increases taxable income and can attract penalties for under-reporting. The multi-year option is a welcome relief — it cuts repetitive litigation and gives 3 years of certainty from a single proceeding.