Budget 2025: FM proposes New Scheme to ALP on International Transactions for a Block Period of 3 years

It was no regular Saturday while Union Finance Minister Nirmala Sitharaman presented a material-heavy Budget today, the 1st of February, 2025. As a measure aimed to bring about structural reforms to compliance requirements of global trade, the Finance Minister proposed a new scheme for determining the Arm’s Length Price (ALP) of international transactions for a block period of three years.

The intent behind the newly proposed structures is poised to provide greater predictability to multinational enterprises (MNEs) that carry out business operations in India, while creating a pathway for the companies to better align themselves with tax compliance in India.

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It comes as no surprise that all eyes were on the presentation of the Union Budget 2025-26 by Union Finance Nirmala Sitharaman, following the nail-biting election victory secured by the National Democratic Alliance (NDA) spearheaded by Prime Minister Narendra Modi. The Union Budget 2025-26 is the first budget presented by a Narendra Modi led government where the BJP did not have a clear majority and so, the present budget is deemed by many to be a “middle-class friendly” proposal, bringing in major reforms.

Finance Minister Sitharaman, while introducing the proposal, stated:

"To streamline the process of transfer pricing and to provide an alternative to yearly examination, I propose to introduce a scheme for determining arm’s length price of international transactions for a block period of three years. This will be in line with global best practices."

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Under the proposed amendment to Section 92CA of the Income-tax Act, the ALP determination for an international transaction or a specified domestic transaction (SDT) will now be valid for a three-year block period, subject to certain conditions. The scheme allows taxpayers to opt for a multi-year ALP determination, reducing the annual burden of reassessment and disputes.

At present, transfer pricing provisions require an annual assessment of ALP often requiring business to conduct repetitive audits and engage in prolonged disputes with Revenue authorities.

To address this, the Finance Bill 2025 proposes a multi-year ALP determination mechanism, allowing taxpayers to opt for a three-year ALP determination in a prescribed form and timeframe. Taxpayers exercising the option will have the Transfer Pricing Officer (TPO) review and validate it within one month, after which the ALP determined for the base year will automatically apply to similar international transactions or specified domestic transactions (SDTs) for the two consecutive years following the year.

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Once such an option is validated, taxpayers will not be required to issue fresh reference to the TPO for those years, and the Assessing Officer (AO) will recompute total income based on the multi-year ALP determination.

The new reform is expected to reduce administrative burdens to a great extent since many international transactions involve repeated dealings with the same entities under similar conditions, making annual reassessments redundant, modernizing the nation’s tax administration and compliance protocol in sync with India’s trajectory towards global markets.

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