CHAPTER X — SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX

Section 161 — Computation of Income from International Transaction having regard to Arm's Length Price

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Computation of income from international transaction and specified domestic transaction having regard to arm's length price.

161. (1) Any income arising from an international transaction or a specified domestic transaction shall be computed having regard to the arm's length price.

(2) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed and other relevant factors.

(3) The most-appropriate method shall be selected from: (a) Comparable Uncontrolled Price method; (b) Resale Price method; (c) Cost Plus method; (d) Profit Split method; (e) Transactional Net Margin method; (f) such other method as may be prescribed by the Board.

(4) Where more than one ALP is determined by the most-appropriate method, the arithmetic mean of such prices shall be the ALP. Tolerance band: 1% (wholesale trading) / 3% (other) — preserved.

(5) Provisos for benefit of tolerance band, definitions of 'international transaction', 'associated enterprise', and 'specified domestic transaction', etc.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 92, 92C of the 1961 Act — Computation of income from international transaction having regard to ALP

Section 92 — Computation of income from IT having regard to ALP. Section 92C — Methods for determining ALP: CUP, RPM, CPM, PSM, TNMM, other (FA 2012). Tolerance band 3% (other) / 1% (wholesale trading).

BLOCK 3 : COMMENTARY

Section 161 is the heart of the Indian transfer pricing regime. It mandates that income from any 'international transaction' (defined in s. 162 / formerly s. 92B) between 'associated enterprises' (defined in s. 163 / formerly s. 92A) shall be computed at arm's length. Failure to do so triggers Adjustment under s. 92CA reference and corresponding Penalty under Chapter XXI.

Six methods. The five OECD-aligned methods plus 'other method' (FA 2012 — covers situations where data on comparables is not amenable to traditional methods, e.g., shareholder services, management fees with thin comparable data) are preserved. Method selection is fact-driven; the Functions, Assets, Risks (FAR) analysis is the gating exercise.

Tolerance band. The ±1% / ±3% range around the arithmetic mean of comparables — preserved. CBDT notification issued annually under Rule 10CA prescribes the precise band; FY 2024-25 notification: 1% for wholesale trading, 3% for other transactions. Where the actual transfer price is within the band, no adjustment.

Specified Domestic Transactions (SDT). FA 2017 narrowed the SDT regime — earlier any transaction with a related party of value > Rs 5 crore (s. 40A(2)(b) related parties) attracted SDT-TP rules. Post-FA 2017, only transactions involving SEZ/EOU eligible-business profit allocation, and certain specified power-sector transactions, attract SDT. The 2025 Act preserves this narrower scope.

Continuity of jurisprudence. Maruti Suzuki India Ltd. v. CIT (2010) 328 ITR 210 (Del.) — bright-line test for AMP; CIT v. Vodafone India Services (P) Ltd. (2014) 369 ITR 511 (Bom.) — share issuance not international transaction; Sony Ericsson Mobile Communications India (P) Ltd. v. CIT (2015) 374 ITR 118 (Del.) — bundled vs separate transaction analysis; Watson Pharma (P) Ltd. v. ACIT (2015) 376 ITR 21 (Bom.) — TNMM application. All continue to apply.

Practical takeaways. (i) Annual TP study + Form 3CEB filing for every assessee with international transactions / SDT. (ii) For new structures: pre-empt with APA (s. 165 / formerly s. 92CC) — bilateral or unilateral. (iii) For litigation: leverage Mutual Agreement Procedure (MAP) under s. 158 (DTAA) for cross-border disputes. (iv) For Master File / Local File / CbCR: post-FA 2016 requirements — comply with Form 3CEAA / 3CEAB / 3CEAC / 3CEAD.

Sections 162 to 165 — Definitions / Reference to TPO / APA

NEW ACT 2025

Section 162 (formerly s. 92B) — Definition of 'international transaction': any transaction between two or more AEs, in respect of purchase / sale / lease of tangible / intangible property, provision of services, lending or borrowing, business restructuring, etc.

Section 163 (formerly s. 92A) — Definition of 'associated enterprises': enterprises in which one participates in management, control or capital of the other; or both are under common control. 13 deeming criteria including 26% voting power, 51% loan/guarantee, common board members etc.

Section 164 (formerly s. 92BA) — Definition of 'specified domestic transaction': narrowed post-FA 2017 to SEZ/EOU profit allocation and specified power-sector transactions; aggregate threshold Rs 20 crore.

Section 165 (formerly s. 92CC / 92CD) — Advance Pricing Agreement: unilateral / bilateral / multilateral; rollback up to 4 prior years; binding for 5 future years.

OLD ACT 1961

Sections 92A (AE), 92B (IT), 92BA (SDT), 92CC (APA), 92CD (effect of APA).

COMMENTARY

Sections 162-165 of the new Act preserve the definitional and APA architecture of the 1961 Act. The 13 AE-deeming criteria of s. 92A(2) are preserved verbatim. The APA regime — the most successful taxpayer-friendly innovation of FA 2012 — is preserved with the 5-year prospective + 4-year rollback structure (FA 2014 amendment).

Practical takeaway. APA pipeline: India has signed 600+ APAs since 2013; for any cross-border MNC with intercompany pricing exposure of Rs 25+ crore annually, APA is the recommended path — eliminates audit risk, provides 9-year (5+4) certainty. Engage early — typical APA cycle is 3-4 years.

Sections 166-170 — Documentation, Country-by-Country Reporting, Penalty cross-references

NEW ACT 2025

Section 166 (formerly s. 92D) — Documentation requirement: assessee with IT > Rs 1 crore must maintain TP documentation; preserve for 8 years; produce on demand.

Section 167 (formerly s. 286) — CbCR: international group with consolidated revenue > Rs 6,400 crore (or Euro 750 million) must file CbCR Form 3CEAD by parent / surrogate parent.

Section 168 (formerly s. 92CB) — Safe Harbour: prescribed margins for specified categories (IT, ITeS, contract R&D, KPO, financial guarantees, intra-group loans, manufacturing) — assessee opting in is shielded from TP audit.

Section 169 — Reference to TPO under section 92CA — the AO refers the matter to the TPO for ALP determination. TPO's order is binding on AO.

Section 170 — Adjustments arising from TPO order, time-limit for assessment, penalties under section 270A.

OLD ACT 1961

Sections 92D, 92E (Form 3CEB), 286 (CbCR), 92CB (Safe Harbour), 92CA (TPO reference).

COMMENTARY

Sections 166-170 of the new Act preserve the documentation, CbCR, safe harbour, and TPO reference architecture. Form 3CEB (TP audit report by accountant) and Master File / Local File / CbCR forms (post-FA 2016) carry forward. The CbCR threshold of Rs 6,400 crore consolidated group revenue (under post-FA 2024 amendments) is preserved.

Safe Harbour. Useful for IT / ITeS / KPO sectors. The prescribed margin (e.g., 17% on IT services with employee cost up to Rs 200 crore) shields the assessee from TPO audit. Limited time window for opting in.

Sections 171-177 — Anti-avoidance Specific Provisions

NEW ACT 2025

Section 171 (formerly s. 93) — Avoidance of income tax by transactions resulting in transfer of income to non-residents: deemed taxation in transferor's hands.

Section 172 (formerly s. 94) — Avoidance of tax by certain transactions in securities: dividend stripping, bond stripping anti-abuse rules.

Section 173 (formerly s. 94A) — Special measures in respect of transactions with persons located in notified jurisdictional area (originally Cyprus / Iran). FA 2017 amendment — high-risk-low-cooperation treatment.

Section 174 (formerly s. 94B) — Limitation on interest deduction: thin-capitalisation rule, BEPS Action 4. Interest > Rs 1 crore paid to non-resident AE deductible only up to 30% of EBITDA. Excess carried forward 8 years.

Section 175 (formerly s. 92E) — Report from accountant — Form 3CEB.

Section 176-177 — Definitions, transitional provisions, savings for old TP cases.

OLD ACT 1961

Sections 93, 94, 94A, 94B (BEPS thin cap), 92E.

COMMENTARY

Sections 171-177 preserve the specific anti-avoidance regime of the 1961 Act:

Section 171 (formerly s. 93) — Vodafone-style transfers: where an Indian resident transfers income to a non-resident through a structure designed to avoid Indian tax, the income is deemed to be the resident's. Largely overshadowed by the broader GAAR / indirect-transfer rules.

Section 172 (formerly s. 94) — Dividend stripping (sub-section (7)) and bond stripping (sub-section (8)): timing-based anti-abuse rules to prevent assessees from converting taxable interest / dividend into tax-favoured capital loss through wash sales.

Section 173 (formerly s. 94A) — Notified Jurisdictional Areas: India can notify a non-cooperative jurisdiction; transactions with NJA persons attract higher TDS rates and treaty-benefit denial. Cyprus was de-notified in 2016 after MAP-resolved cooperation.

Section 174 (formerly s. 94B) — Interest deduction cap (BEPS Action 4 implementation, FA 2017): cross-border interest paid to non-resident AE > Rs 1 crore is deductible only up to 30% of EBITDA. Excess interest carries forward for 8 years to be set off against future EBITDA-headroom. Critical for highly-leveraged MNC subsidiaries.

Practical takeaway. Section 174 thin-cap rule is a significant constraint on cross-border financing structures. Always model the EBITDA headroom for the 30% cap before structuring intercompany debt; consider equity / preferred-stock alternatives where the cap will bind.

Chapter X — At a Glance

Practitioner notes

• Annual TP compliance: Form 3CEB by 31 October; Local File / Master File by 30 November / 31 March; CbCR (where applicable) within 12 months of fiscal year-end.
• APA: pre-emptive 9-year (5 prospective + 4 rollback) certainty — ideal for IT/ITeS/KPO/contract R&D/manufacturing exporters.
• Safe Harbour: lock-in for 3+ years; review margin annually.
• Section 174 thin-cap: model EBITDA headroom for cross-border interest deductibility.
• Section 173 NJA: monitor CBDT notifications; current list does not include any major jurisdiction.