Section 166 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 166 lets an Assessing Officer, with the previous approval of a Principal Commissioner or Commissioner, refer the determination of the arm's length price of an international transaction or specified domestic transaction to the Transfer Pricing Officer. It then sets the notice, hearing, order, time limit, option and rectification rules for that officer. This article reads it as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
The Assessing Officer may refer a transaction to the Transfer Pricing Officer if he considers it necessary or expedient, with the previous approval of the Principal Commissioner or Commissioner. The Transfer Pricing Officer serves a notice, hears the assessee and passes a written order, which must be made before one month prior to the month in which the assessment limitation expires. An assessee may opt to have the price apply to the two consecutive tax years that follow.
Scope and the amendment by the Finance Act, 2026
Section 166 is in Chapter X. Sub-section (7) was substituted by section 53 of the Finance Act, 2026, with effect from 1 April 2026; the deadline described below is the text as it now stands. The Act came into force on the 1st April, 2026 (section 1(3)). Later amendments, rules and notifications should be checked.
The price is determined under section 165; the transactions are defined in sections 163 and 164. If you have received a reference or a notice from a Transfer Pricing Officer, our legal dispute resolution team can help with the response.
Section 166(1): the reference
Where (a) the assessee has entered into an international transaction or specified domestic transaction in any tax year, and (b) the Assessing Officer considers it necessary or expedient so to do, he may refer the determination of the arm's length price in relation to that transaction to the Transfer Pricing Officer, with the previous approval of the Principal Commissioner or Commissioner.
Section 166(2) and (3): when no reference can be made
A reference cannot be made for a transaction if the Transfer Pricing Officer has declared the assessee's option under sub-section (9) valid for that tax year. If a reference is made before or after such a declaration, sub-section (1) has effect as if no reference had been made for that transaction.
Section 166(4): notice
On a reference, the Transfer Pricing Officer serves a notice on the assessee requiring him to produce, on a date specified in it, any evidence on which the assessee may rely in support of his determination of the arm's length price.
Section 166(5): other transactions that come to notice
If an international transaction or specified domestic transaction, (a) other than one referred under sub-section (1), or (b) that the assessee has not included in the report under section 172, comes to the Transfer Pricing Officer's notice during the proceedings before him, the Chapter applies as if that transaction had been referred to him under sub-section (1). The reference does not have to be re-made for it.
Section 166(6): the hearing and the order
On the date specified in the notice, or as soon thereafter as may be:
- after hearing such evidence as the assessee may produce, including any information or documents referred to in section 171(2);
- after considering such evidence as the Transfer Pricing Officer may require on any specified points; and
- after taking into account all relevant materials he has gathered,
the Transfer Pricing Officer shall, by order in writing, determine the arm's length price as per section 165(4) and send a copy of the order to the Assessing Officer and to the assessee.
Section 166(7): time limit for the order
Where a reference was made under sub-section (1), the order under sub-section (6) may be made at any time before one month prior to the month in which the period of limitation referred to in section 286 or 296 for making the order of assessment, reassessment, recomputation or fresh assessment expires. The sub-section gives two examples:
| Limitation expires on | Order under sub-section (6) to be made |
|---|---|
| (a) the 31st March of any year | on or before the 31st January of that year |
| (b) the 31st December of any year | on or before the 31st October of that year |
Sub-section (7) was substituted by the Finance Act, 2026. Sections 286 and 296 set the periods referred to, and sub-section (8) below names section 286(3)(b) and (h).
Section 166(8): minimum sixty days
If the period of limitation available to the Transfer Pricing Officer for making an order under sub-section (6) is less than sixty days in the circumstances referred to in section 286(3)(b) or (h), the remaining period is extended to sixty days, and the period of limitation is deemed to be extended accordingly.
Section 166(9) and (10): the two-year option
The arm's length price determined under sub-section (6) for a tax year applies to similar transactions for the two consecutive tax years immediately following that year, on fulfilment of these conditions:
- (a) the assessee exercises an option or options to that effect for the two consecutive tax years;
- (b) the option or options are exercised in such form, manner and within such period as may be prescribed; and
- (c) the Transfer Pricing Officer, within one month from the end of the month in which the option or options are exercised, declares by order in writing that they are valid, subject to the conditions as may be prescribed.
The form, manner, period and conditions are left to the Income-tax Rules, 2026; see our rule-wise guides. Sub-section (9) does not apply to any proceedings under Chapter XVI-B (sub-section (10)).
Section 166(11) and (12): after the order
On receipt of the order under sub-section (6), the Assessing Officer computes the total income under section 165(6) in conformity with the arm's length price determined by the Transfer Pricing Officer. Irrespective of that, where the Transfer Pricing Officer has declared an option valid under sub-section (9), he examines and determines the price for such similar transactions for the two consecutive tax years immediately following, in the order referred to in sub-section (6), and on receipt of that order the Assessing Officer recomputes the total income for those two years as per section 288(2).
Section 166(13) and (14): rectification and powers
For rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend an order under sub-section (6), and section 287 applies so far as may be; he sends a copy to the Assessing Officer, who then amends the assessment order in conformity. Our post on section 287 (rectification) covers that section. The Transfer Pricing Officer may exercise all or any of the powers in section 246(1)(a) to (d) or 252(1)(a) or 253 for determining the price; see our post on section 246 (summons powers).
Section 166(15) to (17): guidelines and the officer
If any difficulty arises in giving effect to sub-sections (9) and (12), the Board may, with the prior approval of the Central Government, issue guidelines. Every such guideline is laid before each House of Parliament for a total period of thirty days, and takes effect only in modified form or not at all if both Houses so agree, without prejudice to anything previously done. "Transfer Pricing Officer" means a Joint Commissioner, Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 165 and 171 in respect of any person or class of persons.
A worked example
Names and dates are invented; the deadlines are those printed in sub-section (7).
For a tax year, the period of limitation for the assessment of Crescent Pharma Private Limited expires on the 31st March. The Assessing Officer, with the previous approval of the Principal Commissioner, refers the arm's length price of its sale to a non-resident associated enterprise to the Transfer Pricing Officer. The Transfer Pricing Officer serves a notice, hears Crescent and must make the order under sub-section (6) on or before the 31st January of that year. If the limitation period instead expired on the 31st December, the order would be due on or before the 31st October.
Crescent also exercised an option, in the prescribed form and manner, for the two consecutive tax years that follow, and the Transfer Pricing Officer declared it valid within one month from the end of the month of exercise. The same price applies to the similar transactions of those two years, and the Assessing Officer recomputes income for them under section 288(2).
Need help with a Transfer Pricing Officer reference?
The notice, evidence, hearing and option windows all run to dates. Our legal dispute resolution service can help you plan the response and track the deadlines in section 166.
Key takeaways
- The reference needs the previous approval of the Principal Commissioner or Commissioner.
- The Transfer Pricing Officer serves a notice, hears evidence and passes a written order.
- The order is due before one month prior to the month in which the assessment limitation expires (31 January for a 31 March expiry).
- The price can apply to the next two consecutive tax years if the assessee opts and the Transfer Pricing Officer declares the option valid.
- Section 166(7) was substituted by the Finance Act, 2026, with effect from 1 April 2026.
Read next
- Section 165: determination of arm's length price
- Sections 167 to 169: safe harbour rules and advance pricing agreement
- Section 287: rectification
- Chapter X of the Income-tax Act, 2025
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.