Section 92 — Computation of Income from International Transaction at ALP

Case Laws & Commentary

SECTION 92 — COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION HAVING REGARD TO ARM'S LENGTH PRICE

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

A. SECTION COMMENTARY

A.1 Structural position & legislative purpose

Section 92 is the charging gateway of the Indian transfer pricing (TP) code. It mandates that any income arising from an 'international transaction' be computed having regard to the 'arm's length price' (ALP) — i.e. the price that would have obtained between independent enterprises in comparable uncontrolled conditions. The section is the operative hinge on which the definitional sections (92A, 92B, 92BA, 92F), the computational machinery (92C, 92CA), the documentation and reporting obligations (92D, 92E) and the procedural overlays (92CB-92CE) all depend.

The present TP regime was substituted for the old single-section 92 by the Finance Act, 2001 with effect from 1 April 2002 (AY 2002-03), aligning Indian law broadly with the OECD Transfer Pricing Guidelines and the arm's length principle of Article 9 of the OECD/UN Model Conventions. Sub-section (2) extends the principle to cost- or expense-sharing arrangements and the allocation of any cost or expense in connection with a benefit, service or facility; sub-section (2A) (FA 2012) extends the same machinery to 'specified domestic transactions' (SDTs). Sub-section (3) preserves the anti-abuse rule that a TP computation must not operate to reduce the income chargeable to tax or to increase a loss.

A.2 Sub-section / clause taxonomy

Sub-section (1): Any income arising from an international transaction shall be computed having regard to the arm's length price. The Explanation (inserted by FA 2012, retrospectively w.e.f. 1-4-2002) clarifies that the allowance for any expense or interest arising from an international transaction is likewise to be determined having regard to the ALP.

Sub-section (2): Where two or more associated enterprises (AEs) enter into a mutual agreement or arrangement for the allocation or apportionment of, or contribution to, any cost or expense incurred in connection with a benefit, service or facility provided to any one or more of them, such cost/expense allocation must itself be determined having regard to the ALP of such benefit, service or facility.

Sub-section (2A): Inserted by FA 2012 w.e.f. 1-4-2013. Any allowance for an expenditure or interest, or any allocation of cost/expense, or any income, in relation to a specified domestic transaction is to be computed having regard to the ALP — extending the ALP standard from cross-border to qualifying domestic related-party dealings.

Sub-section (3): The section's machinery does not apply where its application would reduce the income chargeable to tax, or increase the loss, as computed on the basis of entries in the books of account. This is the cardinal 'one-way street' / no-base-erosion safeguard: TP cannot be used by the assessee to manufacture a deduction or a loss.

A.3 Core doctrinal themes

Theme (1) — Existence of income is a jurisdictional fact. Chapter X is a computation (not a charging) provision; it presupposes income chargeable under the Act. Where the transaction is on capital account and yields no income (e.g. issue of shares at a premium), the ALP machinery does not get triggered (Vodafone India Services; Shell India).

Theme (2) — ALP determination is not the last word on allowability. The TPO/AO determines the arm's length price; questions of whether an expenditure is deductible at all (s.37, s.40A) remain governed by the substantive provisions and the commercial-expediency test (EKL Appliances; Cushman & Wakefield).

Theme (3) — Reviewability. After SAP Labs India (SC, 2023), the determination of ALP and the selection/rejection of comparables can give rise to a substantial question of law under s.260A; the High Court is not precluded from examining whether the Rules and guidelines were followed.

Theme (4) — Anti-abuse one-way operation. Sub-section (3) ensures the regime protects the revenue base and cannot be invoked by the taxpayer to lower taxable income.

A.4 Legislative evolution / Finance Act amendment trail

FA 1991 / 1991-2001 (old s.92): The pre-2002 section was a narrow rule allowing the AO to determine reasonable profits where a 'close connection' produced less-than-ordinary profits — without a structured ALP methodology.

FA 2001 (w.e.f. 1-4-2002): Complete substitution — introduction of the modern ALP-based TP code (ss.92 to 92F), the five prescribed methods and Rules 10A-10E.

FA 2002 / 2006 / 2007: Refinements to the proviso and to s.92CA (TPO reference and binding effect).

FA 2012 (w.e.f. 1-4-2013): Insertion of sub-section (2A) and Explanation to (1); extension to specified domestic transactions; retrospective clarification on allowances.

FA 2017 onward: No change to the core text of s.92 itself; the SDT field was narrowed by omission of s.92BA(i).

FA 2026: No amendment to s.92. Within the TP provisions, the Finance Act, 2026 amends only s.92CA (new sub-section (3AA)).

A.5 CA practitioner pointers

(1) Before any TP analysis, confirm the threshold facts: (a) are the parties AEs under s.92A; (b) is the dealing an 'international transaction' under s.92B (or an SDT under s.92BA); (c) does it give rise to income/an allowance. If any limb fails, Chapter X does not apply.

(2) Remember the s.92(3) bar — never let a TP computation reduce income or enlarge a loss; the regime is one-directional in favour of the revenue.

(3) Maintain contemporaneous documentation (s.92D / Rule 10D) and file Form 3CEB (s.92E) by the due date; both are conditions precedent to a defensible position and to avoiding s.271AA / 271BA penalties.

(4) Post-SAP Labs, draft TPO/DRP submissions and Tribunal grounds with the comparability analysis fully evidenced on record — perversity or non-application of the Rules is now squarely a High Court issue.

B. FA 2026 IMPACT NOTE

Section 92 of the Income-tax Act, 1961 is not amended by the Finance Act, 2026. The only Finance Act, 2026 change within the Transfer Pricing provisions (ss. 92 to 92F) is the insertion of sub-section (3AA) in s.92CA, deemed inserted with effect from 1 June 2007, which fixes how the sixty days for the Transfer Pricing Officer's order are counted.

Consequence for case law: every decision in Part C continues to be good law up to AY 2026-27. Practitioners migrating analysis to the Income-tax Act, 2025 should map s.92 of the 1961 Act to its successor TP provisions, but for all assessments governed by the 1961 Act the propositions below apply unchanged.

C. CASE LAW — CLUSTERED BY ISSUE

Cluster C-1 : Existence of income / capital-account transactions — jurisdictional threshold

1. Vodafone India Services (P) Ltd. v. Union of India (2014) 368 ITR 1 (Bom.)

Facts: The assessee, an Indian company, issued equity shares at a premium to its non-resident holding company. The premium was alleged by the Revenue to be under-priced; a TP adjustment of about Rs.1,397 crore was proposed on the shortfall in premium and a notional interest on the deemed under-payment.

Issue: Whether the issue of shares at a premium to an AE is an 'international transaction' that gives rise to 'income' chargeable under Chapter X.

Held: The Bombay High Court held that the issue of shares at a premium is on capital account and gives rise to no income; in the absence of express statutory language bringing a capital receipt to charge, the TP machinery in Chapter X cannot be applied to the share-premium shortfall or to a notional interest on it. The petition was allowed.

Ratio: The existence of income arising from the international transaction is a jurisdictional pre-condition to the operation of s.92. Chapter X is a computation provision, not a charging provision; it cannot create income where none arises.

Relevance: Leading authority on the income-threshold limb of s.92. The Revenue accepted the decision (no SLP pursued on the capital-account point); CBDT Instruction/clarifications followed accepting that TP does not apply to share issuances.

2. Shell India Markets (P) Ltd. v. ACIT (2014) 369 ITR 516 (Bom.)

Facts: Similar facts to Vodafone — alleged under-valuation of shares issued by an Indian company to its overseas AE, with a large TP adjustment on the premium shortfall.

Issue: Whether the share-issue premium shortfall could be subjected to TP adjustment as an international transaction.

Held: Following Vodafone India Services, the Bombay High Court quashed the adjustment, holding that a capital-account share issuance yields no income and is outside the TP net.

Ratio: Reaffirms the Vodafone income-threshold ratio for share-capital transactions.

Relevance: Together with Vodafone, settles that TP does not reach equity-capital infusions.

Cluster C-2 : Reviewability of ALP determination — substantial question of law

3. SAP Labs India (P) Ltd. v. ITO (2023) 454 ITR 121 (SC)

Facts: A batch of TP appeals in which High Courts (notably the Karnataka High Court in Softbrands India) had declined to entertain appeals against ITAT orders on comparable selection, treating ALP determination as a pure question of fact not raising a substantial question of law under s.260A.

Issue: Whether the determination of ALP / selection-rejection of comparables by the Tribunal is final, or whether it can be examined by the High Court under s.260A as a substantial question of law.

Held: The Supreme Court (decided 19 April 2023) held that there is no absolute proposition that whenever the Tribunal determines ALP it is final. The High Court can and must examine whether the ALP has been determined in accordance with Chapter X and the Rules — including whether comparables were selected/rejected judiciously, the correct method applied, and relevant filters and material considered. Such questions are substantial questions of law under s.260A. The matters were remitted.

Ratio: ALP determination is not immune from High Court scrutiny; non-application of the statutory guidelines, perversity, or ignoring relevant material in comparability analysis raises a substantial question of law.

Relevance: The most important recent TP procedural authority. It impliedly overruled Softbrands India (2018) 406 ITR 513 (Kar) and the Karnataka/Delhi line that treated ALP as always a question of fact. Re-shapes appellate strategy for AY 2026-27 disputes.

Cluster C-3 : ALP determination vs. allowability / commercial expediency

4. CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi)

Facts: The TPO determined the ALP of certain payments (including a brand/royalty payment) at nil on the basis that the assessee was incurring losses and the expenditure produced no benefit, effectively disallowing the expenditure.

Issue: Whether the TPO can determine ALP at nil by questioning the commercial wisdom of incurring the expenditure or by substituting his own judgment on whether a benefit accrued.

Held: The Delhi High Court held that the TPO's function is to determine the ALP of a transaction actually entered into, not to decide whether the expenditure was justified or whether the assessee should have incurred it. The commercial expediency of a business decision is for the businessman; the TPO cannot disallow on that ground or re-characterise the transaction except in the limited situations recognised by the OECD Guidelines.

Ratio: ALP benchmarking is distinct from allowability; the TPO cannot use TP to disallow expenditure on commercial-expediency or 'no benefit' reasoning.

Relevance: Foundational on the limits of the TPO's jurisdiction; routinely cited against nil-ALP determinations.

5. CIT v. Cushman & Wakefield (India) (P) Ltd. (2014) 367 ITR 730 (Delhi)

Facts: The TPO determined the ALP of intra-group services at nil on the footing that no real services were rendered; the AO disallowed the corresponding expenditure.

Issue: Whether a nil-ALP determination by the TPO automatically results in disallowance, and the respective roles of the TPO and AO.

Held: The Delhi High Court held that the TPO's authority is confined to determining the ALP; the question of whether expenditure was incurred and is allowable under the Act is for the AO, who must independently apply the substantive provisions. A nil ALP does not, by itself, foreclose allowability, and the AO cannot abdicate his function to the TPO.

Ratio: Bifurcation of functions: TPO determines ALP; AO determines deductibility. Each must apply its own jurisdiction.

Relevance: Frequently invoked where the Revenue treats a nil ALP as a self-executing disallowance.

D. PRACTITIONER'S NOTE

Step-checklist for a s.92 position: (1) Identify AE status (s.92A) and the nature of the dealing (s.92B / 92BA). (2) Confirm income or an allowance arises — if the transaction is purely capital-account with no income, cite Vodafone India Services. (3) Select the most appropriate method (s.92C r/w Rule 10B-10C) and build a documented comparability analysis. (4) Apply the s.92(3) bar — the computation must not reduce income or increase loss. (5) File Form 3CEB (s.92E) and maintain Rule 10D documentation by the due date.

Litigation note: after SAP Labs, ensure the comparability record (filters, FAR analysis, rejection reasons) is complete at the TPO/DRP stage — the High Court will now scrutinise whether the Rules were followed, so a thin record is a liability.

Caveat: This material is treatise-style commentary for practitioners and academic use. It is not legal opinion. Verify the current text, the latest CBDT circulars/notifications and the most recent appellate position before relying on any proposition in assessment, audit (Form 3CEB) or litigation.