Income Tax Act

Official PDF pages 221–225

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CHAPTER X
SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
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 determined having regard to the arm’s length
price.
(2) Any allowance for any expense or interest arising from an international trans -
action or a specified domestic transaction shall also be determined having regard
to the arm’s length price.
(3) If in an international transaction or specified domestic transaction, two or more
associated enterprises enter into a mutual agreement or arrangement for—
( a )   allocation or apportionment of any cost or expense incurred or to be
incurred in connection with a benefit, service or facility provided or to
be provided to any one or more of such enterprises; or
( b )   any contribution to any cost or expense incurred or to be incurred in
connection with a benefit, service or facility provided or to be provided
to any one or more of such enterprises,
the cost or expense allocated or apportioned to, or, contributed by, any such enter -
prise shall be determined having regard to the arm’s length price of such benefit,
service or facility.
(4) The provisions of this section shall not apply if the determination under sub-sec -
tion (1) or (2) or (3) has the effect of reducing the income chargeable to tax or
increasing the loss, computed on the basis of entries made in the books of account in
respect of the tax year in which the international transaction or specified domestic
transaction was entered.
Meaning of associated enterprise.
162.   (1) For the purposes of this Chapter, the expression “associated enterprise”,
in relation to another enterprise, means an enterprise—
( a )   which participates, directly or indirectly, or through one or more interme -
diaries, in the management or control or capital of the other enterprise
in the following manner,—
( i )   one or more persons who participate, directly or indirectly, or
through one or more intermediaries, in management or control or
capital of one enterprise, also participate, directly or indirectly, or
through one or more intermediaries, in the management or control
or capital of the other enterprise; or
( ii )   one enterprise holds, at any time during the tax year, directly or
indirectly, shares carrying not less than 26% of the voting power
in the other enterprise; or
( iii )   any person or enterprise holds, at any time during the tax year,
directly or indirectly, shares carrying not less than 26% of the voting
power in each of such enterprises; or

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( b )   which has advanced a loan to the other enterprise and such loan consti -
tutes not less than 51% of the book value of the total assets of the other
enterprise; or
( c )   which guarantees not less than 10% of the total borrowings of the other
enterprise; or
( d )   whose more than half of the board of directors or members of the gov -
erning board, or one or more executive directors or executive members
of the governing board, are appointed by the other enterprise; or
( e )   whose more than half of the directors or members of the governing board,
or one or more of the executive directors or members of the governing
board, are appointed by the same person or persons, who has or have
done so for the other enterprise; or
( f )   in case of which, manufacturing or processing of goods or articles or
business carried out by such enterprise is wholly dependent on the use
of know-how, patents, copyrights, trademarks, licences, franchises or
any other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process, of which the other enterprise
is the owner or in respect of which the other enterprise has exclusive
rights; or
( g )   in case of which, 90% or more of the raw materials and consumables
required for the manufacture or processing of goods or articles carried
out by such enterprise, are supplied by the other enterprise, or by persons
specified by the other enterprise, and the prices and other conditions
relating to the supply are influenced by such other enterprise; or
( h )   in case of which, the goods or articles manufactured or processed by such
enterprise, are sold to the other enterprise or to persons specified by the
other enterprise, and the prices and other conditions relating thereto are
influenced by such other enterprise; or
( i )   which is controlled by an individual, and the other enterprise is also
controlled by such individual or his relative or jointly by such individual
and relative of such individual; or
( j )   which is controlled by a Hindu undivided family, and the other enter -
prise is controlled by a member of such Hindu undivided family or by a
relative of a member of such Hindu undivided family or jointly by such
member and his relative; or
( k )   which is a firm, association of persons or body of individuals, and the
other enterprise holds not less than 10% interest in such firm, association
of persons or body of individuals; or
( l )   which has any relationship of mutual interest with the other enterprise,
as may be prescribed.
(2) In relation to a specified domestic transaction entered into by an assessee,
associated enterprise shall also include—
( a )   other units or undertakings or businesses of such assessee in respect of
a transaction referred to in section 122 or 140(9);

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( b )   any other person referred to in section 140(13) or 205(4)
32  
in respect of
a transaction referred to therein; and
19
[ ( c )   other units, undertakings, enterprises or business of such assessee, or other
person referred to in section 140(13) in respect of transactions referred   to
in Chapter VIII, to which the provisions of section 140(9) or (13) of this
Act or section 80-IA(8) or (10) of the Income-tax Act, 1961 (43 of 1961)
are applicable. ]
Meaning of international transaction.   [ S. 92B of the 1961 Act ]
163.   (1)   For   the   purposes   of   this   Chapter,   the   expression   “international
transaction” means a transaction between two or more associated enterprises,
one of which is necessarily a non-resident, and includes—
( a )   the purchase, sale, transfer, lease or use of tangible property, including
building, transportation vehicle, machinery, equipment, tools, plant,
furniture, commodity or any other article, product or thing;
( b )   the purchase, sale, transfer, lease or use of intangible property, including
the transfer of ownership or the provision of use of rights regarding land
use, copyrights, patents, trademarks, licences, franchises, customer list,
marketing channel, brand, commercial secret, know-how, industrial
property right, exterior design or practical and new design or any other
business or commercial rights of similar nature;
( c )   capital financing, lending or borrowing of money, including,—
( i )   any type of long-term or short-term borrowing, lending or guarantee;
or
( ii )   purchase or sale of marketable securities; or
( iii )   any type of advance, payments or deferred payment or receivable
or any other debt arising during the course of business;
( d )   provision of services, including provision of market research, market
development, marketing management, administration, technical ser -
vice, repairs, design, consultation, agency, scientific research, legal or
accounting service;
( e )   a transaction of business restructuring or reorganisation, entered into
by an enterprise with an associated enterprise, irrespective of the fact
that it has any bearing on the profit, income, losses or assets of such
enterprises at the time of the transaction or at any future date;
( f )   a mutual agreement or arrangement between two or more associated
enterprises for the allocation or apportionment of, or any contribution
19.   Substituted by the Finance Act, 2026, w.e.f.   1-4-2026 . Prior to its substitution, clause ( c ) read
as under :
“( c )   other units, undertakings, enterprises or business of such assessee, or other person
referred to in section 140(13) in respect of a transaction referred to in section 144 or
the transactions referred to in Chapter VIII to which the provisions of section 140(9)
or (13) of this Act or section 80-IA(8) or (10) of the Income-tax Act, 1961 (43 of 1961)
are applicable.”

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to, any cost or expense incurred or to be incurred in connection with a
benefit, service or facility provided or to be provided to any one or more
of such enterprises;
( g )   any other transaction having a bearing on the profits, income, losses or
assets of such enterprises.
(2) A transaction entered into by an enterprise with a person other than an associ-
ated enterprise (“other person”) shall, for sub-section (1), be deemed to be an
international transaction entered into between two associated enterprises, if—
( a )   there exists a prior agreement in relation to the relevant transaction
between such other person and the associated enterprise; or
( b )   the terms of the relevant transaction are determined, in substance,
between such other person and the associated enterprise,
and the enterprise or the associated enterprise or both of them are non-residents,
irrespective of whether the other person is a non-resident or not.
(3) The expression “intangible property” shall include:—
( a )   marketing related intangible assets, such as, trademarks, trade names,
brand names, logos;
( b )   technology related intangible assets, such as, process patents, patent
applications, technical documentation such as laboratory notebooks,
technical know-how;
( c )   artistic related intangible assets, such as, literary works and copyrights,
musical compositions, copyrights, maps, engravings;
( d )   data processing related intangible assets, such as, proprietary computer
software, software copyrights, automated databases, and integrated
circuit masks and masters;
( e )   engineering related intangible assets, such as, industrial design, product
patents, trade secrets, engineering drawing and schematics, blueprints,
proprietary documentation;
( f )   customer related intangible assets, such as, customer lists, customer
contracts, customer relationship, open purchase orders;
( g )   contract related intangible assets, such as, favourable supplier, contracts,
licence agreements, franchise agreements, non-compete agreements;
( h )   human capital related intangible assets, such as, trained and organised
work force, employment agreements, union contracts;
( i )   location related intangible assets, such as, leasehold interest, mineral
exploitation rights, easements, air rights, water rights;
( j )   goodwill related intangible assets, such as, institutional goodwill, pro -
fessional practice goodwill, personal goodwill of professional, celebrity
goodwill, general business going concern value;
( k )   methods, programmes, systems, procedures, campaigns, surveys, studies,
forecasts, estimates, customer lists, or technical data;

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( l )   any other similar item that derives its value from its intellectual content
rather than its physical attributes.
Meaning of specified domestic transaction.
164.   For the purposes of this Chapter, the expression “specified domestic
transaction” in case of an assessee means any of the following transactions
(not being an international transaction),—
( a )   any transaction referred to in section 122;
( b )   any transfer of goods or services referred to in section 140(9);
( c )   any business transacted between the assessee and other person as referred
to in section 140(13);
( d )   any transaction, referred to in any other section under Chapter VIII
20
[ *** ] , to which provisions of section 140(9) or (13) of this Act or
section 80-IA(8) or (10) of the Income-tax Act, 1961 (43 of 1961) are
applicable;
( e )   any business transacted between the persons referred to in section 205(4);
( f )   any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in a tax
year exceeds a sum of twenty crore rupees.
Determination of arm’s length price.
165.   (1) The arm’s length price in relation to an international transaction
or   specified   domestic   transaction   shall   be   determined by any of the
following methods, being the most appropriate method—
( 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.
(2) The most appropriate method referred to in sub-section (1) shall be,—
( a )   selected having regard to the nature of transaction or class of transaction
or class of associated enterprise or functions performed by such enter -
prises or such other relevant factors as the Board may prescribe;
( b )   applied for determination of arm’s length price in such manner as may
be prescribed.
(3) The arm’s length price shall be—
( a )   in case, only one price is determined by the most appropriate method,—
( i )   the price determined by that method; or
( ii )   the price at which the international transaction or specified
domestic transaction has actually been undertaken, if the variation
20.   Words “or section 144” omitted by the Finance Act, 2026, w.e.f.   1-4-2026 .