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TMI BlogComputation of income arising from international transactions and specified domestic transactions : Clause 161 of the Income Tax Bill, 2025 vs. Section 92 of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions, with a particular focus on ensuring that such computations are made with reference to the arm's length price. This clause is situated within Chapter X of the Bill, which is dedicated to special provisions relating to the avoidance of tax-a theme that has been central to Indian transfer pricing law since the early 2000s. Section 92 of the Income-tax Act, 1961, as amended over the years, currently serves as the cornerstone for transfer pricing regulations in India. It provides a framework for the computation of income from international transactions, and, following subsequent amendments, from specified domestic transactions as well, with reference to the arm's length price. Both Clause 161 and Section 92 reflect India&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law with international best practices and obligations under various tax treaties. The historical background for such provisions can be traced to the increasing globalization of businesses, the proliferation of multinational enterprises, and the resultant challenges in ensuring fair taxation of profits attributable to Indian operations. The inclusion of specified domestic transactions in the ambit of transfer pricing rules reflects the recognition that profit shifting can occur not only across borders but also within domestic group entities, especially where tax incentives or exemptions are involved. Detailed Analysis of Clause 161 of the Income Tax Bill, 2025 Computation of Income from International and Specified Domestic Transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses situations where associated enterprises share costs or expenses under mutual agreements or arrangements, such as cost-sharing agreements (CSAs), cost contribution arrangements (CCAs), or shared services arrangements. The law mandates that the allocation, apportionment, or contribution to such costs or expenses must be at arm's length, i.e., reflective of what independent parties would have agreed to in similar circumstances. This is a significant provision as it covers a wide variety of intra-group arrangements, including shared R&D costs, group management services, and centralized procurement. It ensures that cost allocations are not used as a vehicle for profit shifting or base erosion. Restriction on Application in Case of Reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d cost allocations of taxpayers to ensure compliance with the arm's length standard. * Compliance and Litigation: The breadth of the provision may lead to increased compliance burdens and potential litigation, especially in complex cases involving cost-sharing or intangible assets. * Anti-abuse Safeguards: The restriction on using transfer pricing adjustments to reduce taxable income or increase losses is a clear anti-abuse safeguard, but may also give rise to disputes regarding the interpretation and application of this restriction. Comparative Analysis with Section 92 of the Income-tax Act, 1961 Section 92 of the Income-tax Act, 1961, forms the existing legal framework for transfer pricing in India. It has evolved through variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Expenses and Interest Section 92, through its Explanation and subsection (2A), and Clause 161(2), both extend the arm's length requirement to the allowance of expenses and interest. The approach is consistent, although Clause 161 integrates this requirement more seamlessly into the main text, possibly for greater clarity. 5. Anti-Abuse Provision (Restriction on Reduction of Income or Increase in Loss) Section 92(3) and Clause 161(4) contain essentially the same restriction: transfer pricing adjustments cannot be used to reduce taxable income or increase losses. The language is functionally identical, preserving the anti-abuse intent. 6. Structural and Drafting Differences Clause 161 is drafted in a more concise and integrated man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be complex, particularly where intangibles or synergies are involved. Practical Impacts and Compliance Requirements Clause 161, like Section 92, places significant compliance obligations on taxpayers: * Transfer Pricing Documentation: Taxpayers must maintain contemporaneous documentation justifying the arm's length nature of their transactions, including benchmarking studies, inter-company agreements, and functional analyses. * Reporting Requirements: Annual transfer pricing reports and disclosures must be made in the prescribed forms. * Risk of Adjustments and Penalties: Non-compliance or inadequate documentation may result in transfer pricing adjustments, penalties, and protracted litigation. * Advance Pricing Agreements (A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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