Locking In the Arm's Length Price for Three Years

1. Why This Matters

Every Transfer Pricing Officer reference under the erstwhile Income-tax Act, 1961 ran on an annual clock, with a fresh TPO proceeding possible every single year — even for a transaction that had not changed in substance. Section 166(9), read with Rule 82, changes that for the first time: once a TPO has determined the ALP for a stable, low-risk, recurring transaction, a taxpayer can carry that determination forward to the two tax years immediately following it, and take the pricing question off the table for those years.

The transaction type this suits best is not exotic. It is the captive, cost-plus service arrangement that a Global Capability Centre (GCC) — the India-based, group-owned unit delivering IT, engineering, analytics, or finance-and-accounting services to an overseas parent — runs with its group year after year, largely unchanged. Small and mid-size GCCs in particular tend to have exactly the stable functional profile the multi-year option was built for.

But — and this is the point we want to make clearly, because it is easy to read more relief into the provision than it actually gives — the option does not remove the taxpayer's own annual benchmarking and documentation obligation. The practical and risk considerations mean the underlying TP work should continue every year of the block, regardless of whether the option is exercised. What the provision genuinely saves is the repeat TPO dispute, not the taxpayer's own compliance effort. This note works through both halves of that picture: the mechanics of the option, and the practical limits on what it actually relieves.

2. The Provision, in Plain English

Section 166 of the Income-tax Act, 2025 is the Act's TPO-reference provision — the direct successor to section 92CA of the 1961 Act, carrying forward the mechanics of an Assessing Officer referring the computation of ALP to a TPO. Sub-section (9) lays down as follows:

Rule 82 is where "prescribed form, manner, time" and "prescribed conditions" are actually defined — and it is considerably more detailed than the section itself. The rest of this note works through it.

3. Not an APA, Not a Safe Harbour — a Third Route

India's transfer pricing toolkit already had two routes to multi-year certainty: the Advance Pricing Agreement (APA — section 168 of the 2025 Act, carried forward from section 92CC of the 1961 Act) and Safe Harbour Rules (section 167, carried forward from section 92CB). Section 166(9) is neither. It is a third, distinct route, and the distinction matters for planning:

4. The Mechanics — From TPO Reference to a Locked-In Price

• A reference is made to the TPO under section 166(1) for the first tax year, and the TPO determines the ALP under section 166(6).
• The assessee decides to exercise the option under section 166(9) for the second and third tax years — the two tax years immediately following the first.
• Through the second and third tax years, the assessee continues to file its return of income and its annual section 172 accountant's report (Form No. 48) exactly as it would have without the option. Because Form No. 48 itself calls for the ALP or ALP range to be reported for that year's transactions, the underlying benchmarking exercise continues too, in substance, whether or not the option is ever exercised — see Question B1 below.
• Only after the third tax year ends does the assessee formally exercise the option, by filing Form No. 46, accompanied by Form No. 47 — the window runs from the end of the third tax year to 30 June following.
• The TPO has one month from the end of the month in which the option is exercised to pass a written order declaring the option valid or invalid, against the Rule 82(5) conditions.
• If declared valid, the ALP determined for the first tax year now stands as the ALP for the second and third tax years too — no separate TPO proceeding is required for those years on the same transactions.

5. Form No. 46 and Form No. 47 — What Each One Does

6. The Five-Limb Similarity Test — Rule 82(5)(b)

The entire facility turns on one word: similar. The transactions in the second and third tax years must be "similar" to the transaction in the first tax year, and Rule 82(5)(b) defines similarity through five cumulative conditions:

• No change in method — the same method used to determine the ALP for the first tax year continues to apply.
• Materially consistent FAR — the functions performed, assets employed, and risks assumed by the parties remain materially consistent.
• Materially the same classification — business activity, and the relevant financial, tax, and accounting treatment (and, for a company, its classification) remain materially the same.
• Structural changes at the AE do not, by themselves, break similarity — a change in the associated enterprise's business results, holding structure, or even a change in the associated enterprise itself, does not defeat the option, provided there is no material change in the transaction and no material change in FAR.
• No change in contractual terms — the (formal or informal) allocation of responsibilities, risks, and benefits between the parties stays the same.

Read together, this is a continuity test, not an identity test — the rule tolerates ordinary commercial evolution (a change in reported profit, a group reorganisation) so long as the transaction being priced, and the FAR and contractual terms behind it, have not materially moved.

7. The Remaining Eligibility Gates

Beyond the similarity test, Rule 82(5) layers on three further conditions that are easy to overlook.

7.1 A Clean Compliance Record, Including for the Year Not Yet Filed

For the first and second tax years, the assessee must already have furnished the section 172 accountant's report (Form No. 48) by the specified date, and the return of income by the due date under section 263(1). For the third tax year, the assessee must undertake to do the same — since Form No. 46 is filed before, or around, the third year's own compliance deadlines fall due.

7.2 Not a Case Covered Under Chapter XVI-B

Rule 82(5)(e) excludes any case where the assessee's proceedings for the first, second, or third tax year fall under Chapter XVI-B of the Act. The Act's published chapter index does not carry this exact label against the transfer pricing provisions themselves (which sit in Chapter X), which tells us Chapter XVI-B is a different, procedurally distinct chapter — on the most defensible reading available at the time of writing, the chapter governing special assessment procedure in search cases (the successor to the erstwhile block-assessment framework). In practical terms: where a taxpayer's assessment for any of the three years is being handled through the search-assessment route rather than the ordinary assessment route, the section 166(9) multi-year option is not available for that case. We would treat this reading as our working interpretation pending clearer administrative guidance, and would verify it independently before it drives a filing position.

7.3 No Associated Enterprise in a Notified Jurisdiction

Rule 82(5)(f) shuts the door entirely if any associated enterprise relevant to the transaction is resident of a jurisdiction notified under section 176 (the successor to the erstwhile section 94A notified-jurisdictional-area provision). Global Capability Centres, being subsidiaries of overseas groups typically headquartered in the US, UK, EU, and similarly placed jurisdictions, are unlikely to encounter this exclusion in practice — but the notified-jurisdiction list should still be checked as part of the annual compliance exercise, since it changes by notification.

8. The TPO's Order, Objections, and What Happens If It Unravels

• The TPO's validation (or rejection) order under Rule 82(4) must be passed within one month of the end of the month in which the option is exercised.
• If the TPO declares the option invalid, the assessee may object to the jurisdictional Commissioner within 15 days of receiving the order; the Commissioner must hear the assessee and pass a reasoned order, copied to both the assessee and the TPO.
• An order already declaring the option valid can still be cancelled — if, during the section 166 proceedings, the information in Form No. 46 is found inaccurate or not bona fide, if the accountant's Form No. 47 certificate is found to the same effect, or if the Rule 82(5) conditions are otherwise not met. Cancellation requires the TPO to give the assessee a hearing and obtain the Commissioner's prior approval — it is not a unilateral step.
• Where the option is declared invalid, or an order is cancelled, the TPO simply reverts to determining the ALP for the first tax year alone, under the ordinary section 166(1) reference — years two and three fall back to being assessed on their own footing.

9. Frequently Asked Questions

A. Interpreting Section 166(9) and Rule 82

A1. What exactly does Section 166(9) allow? In plain terms: once a TPO determines the ALP for a taxpayer's international transaction or specified domestic transaction for a given tax year (the "first tax year"), section 166(9) lets that same ALP apply to similar transactions for the two tax years immediately following — without a fresh TPO proceeding for each of those years — provided the taxpayer opts in and the TPO validates the option.

A2. Is this an automatic entitlement, or does it need approval? Exercising the option is entirely the taxpayer's choice, but its validity is not automatic — the TPO must pass a written order within one month of the option being exercised, testing it against the Rule 82(5) conditions. It behaves more like an application than a self-executing right.

A3. Which transactions qualify? Both international transactions and specified domestic transactions referred to the TPO under section 166(1) are eligible — the provision is not restricted to cross-border dealings alone.

A4. Can a taxpayer choose to skip the second tax year and only carry the price into the third? No. The rule speaks of "two consecutive tax years" immediately following the first — the second and third tax years are taken together, as a block; there is no mechanism to opt in for one and not the other.

A5. Does the option have to be exercised before the second tax year begins? No — and this is a genuinely taxpayer-friendly design feature. Form No. 46 is filed only after the third tax year has ended, in the window up to 30 June following. In practice, the taxpayer files its returns and section 172 reports for the second and third years in the normal course, on the normal due dates, and only formalises the multi-year option retrospectively — once the full three-year record exists and can be certified as similar. Practically, the assessee will opt for this option only once its assessment is completed for the first tax year, as the due date to opt for this option falls after the limitation period for the TPO to pass its order for the first tax year ends.

A6. Can the option be challenged if the TPO rejects it? Yes. The assessee may object to the jurisdictional Commissioner within 15 days of receiving the TPO's order; the Commissioner must hear the assessee and pass a reasoned order, with a copy to both sides.

A7. What happens to years two and three if the option is rejected or later cancelled? The TPO reverts to determining the ALP for the first tax year alone, under the ordinary section 166(1) reference. Years two and three then fall back to being assessed independently — the multi-year shortcut simply falls away; it does not create any adverse presumption for those years.

B. Transfer Pricing Documentation and the Section 172 Certificate — Every Year, or Only Once?

B1. Do we still need to run a fresh benchmarking study and full Transfer Pricing documentation for the second and third tax years, or does the TPO's original determination cover us? In practice, yes — and this is where the option is more limited than its framing suggests. Two things point the same way. First, Form No. 48 — the annual section 172 report every taxpayer must file for every year of the block, option or no option — itself requires the ALP or ALP range to be reported for that year's transactions. Completing it means the underlying benchmarking work has to be done, or at minimum updated and re-run, whether or not section 166(9) is ever invoked. Second, and more important from a risk standpoint: Form No. 46 can only be filed after the third tax year has already closed, and the TPO's validation can still be rejected, or an earlier order later cancelled under Rule 82(8). Until that validation comes through, there is no confirmed multi-year ALP for years two and three. A taxpayer that skips benchmarking for those years on the assumption the option will be accepted, and then has it rejected at the end of year three, is left with two years of transactions and no contemporaneous benchmarking to fall back on — exactly when a standalone TPO reference for those years becomes live again. Our recommendation: treat every year of the block as though it will be assessed on its own footing, because until the option is validated, that is precisely the legal position you are in.

B2. So does the option genuinely reduce the annual TP documentation and benchmarking burden? Less than it first appears to. FAR analysis has to be performed every year regardless — both to complete Form No. 48 and to support the "similarity" certification an accountant will eventually have to give in Form No. 47 — so the documentation-preparation effort is not meaningfully reduced by exercising the option. What is genuinely saved is procedural, not documentary: once validated, the TPO does not reopen the pricing question or issue a fresh adjustment order for years two and three on the same transactions — and that is where the real cost of a TP audit, the enquiry, the show-cause notice, the potential dispute, actually sits. We would position this to clients as dispute-avoidance relief, not documentation relief, and plan the compliance calendar accordingly.

B3. Is the accountant's certificate under section 172 required for every year covered by the option, or only for one year? Every year — and this is the point most often misread. There are, in fact, two distinct accountant certifications, and they should not be conflated. First, the section 172 report (Form No. 48, the successor to the erstwhile Form 3CEB) is the ordinary, annual transfer pricing audit report every taxpayer with reportable transactions above threshold must file, year on year, whether or not the section 166(9) option is ever exercised — and, as Question B1 sets out, it requires that year's ALP to be stated, which is precisely why the benchmarking effort cannot really stop. Rule 82(5)(c) and (d) make timely filing of this report — together with the return of income — for the first and second tax years, and an undertaking to do the same for the third tax year, an express precondition of eligibility. Miss or delay the annual section 172 report in any of the three years, and the multi-year option is off the table. Second, Form No. 47 is a separate, one-time certificate, filed only once, alongside Form No. 46, in the window ending 30 June after the third tax year — specifically certifying that the Rule 82(5) similarity conditions have held across the block. It is the capstone certification for the whole three-year period, not an annual filing.

B4. Does Form No. 46 need to be accompanied by the full TP study or benchmarking set for years two and three? No. Under Rule 82(3), Form No. 46 need only be accompanied by the Form No. 47 certificate — no benchmarking report, comparables set, or agreements bundle is a prescribed attachment. Do not read that as licence to skip the underlying work, though: the TPO retains the power to call for it during the section 166 proceedings, and the entire order can be cancelled under Rule 82(8) if the underlying information — including what the accountant certified — turns out to be inaccurate or not bona fide. Given the risk set out in Question B1, we would keep the complete benchmarking and documentation trail on file and audit-ready every year, even though it does not travel with the form itself.

B5. Should the same accountant sign the annual section 172 reports and the eventual Form No. 47? The rule does not compel it, but as a matter of practice we recommend continuity. Certifying Form No. 47 means comparing FAR, method, classification, and contract terms across three years of section 172 reports — an accountant who has signed those reports each year, and has lived with the transaction through the block, is simply better placed to certify continuity defensibly than one certifying it retrospectively without that first-hand familiarity.

C. Global Capability Centres (GCCs) and Captive Service Arrangements

C1. We run — or advise — a Global Capability Centre in India that delivers IT, engineering, analytics, or F&A services to an overseas parent. Is this the kind of case Section 166(9) is built for? Very much so — arguably more than any other transaction type. A typical GCC is a low-risk captive service provider: it is remunerated on a cost-plus basis by its overseas group, it does not carry market, credit, or product risk (the parent does), and its functional profile — deliver the service, recharge cost plus an agreed mark-up — is designed to stay constant year on year almost by definition. Where the mark-up, cost base, and scope of services genuinely have not shifted, a GCC's TPO reference is close to the ideal candidate for the multi-year option: predictable, low dispute-value, and repeated identically every year.

C2. GCCs tend to scale fast — headcount growth, new service lines, and sometimes a move from transaction processing into higher-value analytics, decision-support, or IP-adjacent work within a few years. Does that kind of maturity curve break "similarity" under Rule 82(5)(b)? It can, and this is the single biggest practical risk for a GCC using this option. Growth in headcount or cost base alone does not break similarity — Rule 82(5)(b)(iv) tolerates changes in business results. But a genuine shift in the functions performed — moving from routine, low-judgment processing into functions carrying real decision-making authority, or into work that creates valuable IP or marketing intangibles — is exactly the kind of FAR change the similarity test is built to catch, and would defeat the option for the year in which it happens. A GCC expecting to mature its mandate within the three-year window should either scope the option narrowly to the service lines that will genuinely stay static, or not exercise it at all for lines expected to evolve, rather than risk a Form No. 47 certification the facts won't support by year three.

C3. Our GCC's cost-plus mark-up is benchmarked against a set of comparable Indian captive service providers. Does the mark-up itself have to stay frozen for the option to apply? The rule requires no change in method (Rule 82(5)(b)(i)), not a frozen percentage held in perpetuity. In practice, since a comparables set is typically refreshed for contemporaneous data even where the method is unchanged, we would still expect the accountant to re-verify — every year — that the range the GCC is pricing into remains consistent with what the TPO originally accepted. Which, again, means the benchmarking work continues rather than stops (see Question B1).

C4. Does a change in the overseas parent's holding structure — common for GCCs, given how often global groups restructure their India entity's reporting line — affect eligibility? Not by itself. Rule 82(5)(b)(iv) expressly says a change in the associated enterprise, or in its holding structure or business results, does not defeat similarity — provided the transaction the GCC is actually pricing, and its FAR, remain unaffected. A change in which overseas group entity invoices the GCC, or a re-domiciliation of the ultimate parent, is a routine event for GCC structures and does not by itself put the option at risk; we would still document the change and record, contemporaneously, that the service scope and FAR were unaffected.

C5. We're setting up a smaller GCC now, in Tax Year 2026-27 — this is exactly MKA's own focus area. Is there a first-year planning point? Yes, and it's the discipline we'd recommend for any first-year filer: build the FAR write-up, the intercompany service agreement, and the benchmarking analysis to a standard that can still be read, unchanged, three years later — because "similarity" is tested by looking back at year one from the vantage point of year three. For a smaller or newly set-up GCC, resist the temptation to keep the service agreement informal or the cost-allocation methodology loosely documented in the early years; the option only rewards a GCC whose year-one record was built cleanly enough to still hold up as the baseline three years on.

C6. Given the caution in the FAQs above, is the multi-year option actually worth exercising for a GCC, or does it create more risk than it removes? For a genuinely stable, single-service-line GCC — a captive IT support or F&A processing centre with an unchanging mandate — it is worth exercising, precisely because the downside is contained: if rejected, the taxpayer is no worse off than if it had never applied (Rule 82(10) simply reverts to a standalone determination for the first tax year), provided — as covered in Question B1 — the benchmarking and FAR documentation for years two and three were maintained regardless of the option's outcome. For a GCC on a growth or service-expansion trajectory, we would weigh the option year by year rather than assume it at the outset; the risk is not in applying, it is in relying on the option in place of the underlying documentation work.

10. MKA's View — What We Would Do Now

This provision is not, as such, a compliance relief or a documentation relief for the assessee. It is an assessment relief — aimed at taxpayers who would otherwise fall into the trap of continuous TP litigation year after year, answering the same questions to the TPO each time. Rather than falling into that cycle, an assessee can club its TP assessment for three years into one proceeding, and provide its answers and clarifications to the TPO in a single go.

The GCCs / IT / ITES businesses best placed to benefit are not the largest or most complex — they are a single, stable service line, a cost-plus mark-up that has not moved, a scope of work that has not expanded. If that describes a transaction already under, or likely headed for, a TPO reference for Tax Year 2026-27, we would still run the full benchmarking and FAR exercise every year of the block — not because the law demands a fresh TPO determination each year, but because Form No. 48 itself calls for that year's ALP to be reported, and because the option's validity is only confirmed after the third tax year has already closed. A GCC that skips its own benchmarking in years two and three, on the assumption the option will be accepted, has no fallback if it is not.

Concretely, that means: running and retaining a full benchmarking update every year of the block, regardless of the option's status; flagging any service-scope expansion — a GCC moving from transaction processing into analytics, decision-support, or IP-adjacent work — to the TP team the moment it is planned, not at year-end, so its effect on "similarity" can be assessed and documented in real time; and treating the option as a bet with a contained downside — a rejection simply reverts to a standalone first-year determination — rather than as a reason to lighten the annual documentation programme.

Because Chapter XVI-B's precise scope, the interplay with ongoing APA applications, and the first wave of TPO practice under Rule 82 are all still to be tested, we would treat this as a live area — one worth a specific conversation with your TP advisor before the first Form No. 46 filing window opens in mid-2029, rather than an assumption to carry unchecked.

This note is intended to explain the law as introduced and is not, and should not be treated as, tax or legal advice for any specific fact pattern. Several interpretive points — most notably the precise scope of the Chapter XVI-B exclusion under Rule 82(5)(e) — remain to be settled by administrative guidance or judicial interpretation. Please speak with us before relying on this note for a filing position.