Rule 120 of the Income-tax Rules, 2026

Where this rule sits

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What this rule does

Sub-rule (1) provides that the mere filing of an application for an agreement under these rules shall not prevent the operation of Chapter X of the Act for determination of arms' length price under that Chapter till the agreement is entered into.

Sub-rule (2) provides that in the case of a bilateral or multilateral agreement, the negotiation between the competent authority of India and the competent authority of the other country or countries shall be carried out in accordance with the provisions of the tax treaty between India and that country or those countries.

Why it is there

Two assumptions could otherwise be made about an application in progress, and the rule refuses both. The first is that filing buys immunity: it does not, and transfer pricing determination under Chapter X continues until the agreement is actually entered into. The second is that the negotiation between competent authorities is a matter of administrative practice; sub-rule (2) ties it to the tax treaty with the country concerned.

Who it applies to

• An applicant who has filed an application for an agreement
• The competent authority of India in a bilateral or multilateral agreement
• The Transfer Pricing Officer and Assessing Officer applying Chapter X while an application is pending

What this means in practice

A pending application is not a stay. Transfer pricing proceedings for the years in question go on under Chapter X, and the applicant must continue to comply with them; the protection of the agreement begins when the agreement is entered into, not when the application is filed. In a bilateral or multilateral case, the negotiation is conducted under the tax treaty between India and the other country or countries, so the mutual agreement machinery of that treaty, and not this rule, governs how the two administrations deal with each other.

An example

A company files an application for a bilateral agreement covering its export transactions and expects its pending transfer pricing proceedings to be held over. Sub-rule (1) does not allow that: until the agreement is entered into, Chapter X continues to operate for determination of the arm's length price, and the Transfer Pricing Officer proceeds. Meanwhile the negotiation with the other country's competent authority is conducted in accordance with the tax treaty between India and that country.

Where you meet this rule

An applicant meets it in the gap between filing and signature, when transfer pricing proceedings for the same years continue notwithstanding the pending application.

The words themselves

What people get wrong

• Treating a pending application as suspending transfer pricing proceedings. Sub-rule (1) keeps Chapter X operating till the agreement is entered into.
• Dating the agreement's protection from the application. Sub-rule (1) marks the point as the agreement being entered into.
• Assuming competent authority negotiation follows domestic procedure. Sub-rule (2) requires it to be carried out in accordance with the tax treaty between India and the other country or countries.