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TMI BlogReframing Arm's Length Pricing in India's Evolving Transfer Pricing Regime : Clause 165 of the Income Tax Bill, 2025 Vs. Section 92C of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... objectives, mechanisms, and implications, and situates its provisions within the broader context of existing law and regulatory practice. A comparative analysis with Section 92C and Rule 10B is also undertaken, highlighting both continuity and change in the legislative approach to transfer pricing in India. Objective and Purpose The legislative intent behind Clause 165 is to codify and refine the process of determining the arm's length price in order to curb tax avoidance through transfer pricing manipulation. The provision aims to align Indian transfer pricing regulations with international standards, notably those set by the OECD, while incorporating lessons from over two decades of Indian transfer pricing administration. The clause seeks to provide clarity, procedural fairness, and administrative efficiency in the determination of ALP, thereby fostering greater compliance and certainty for taxpayers and tax authorities alike. Historically, transfer pricing rules were introduced in India in 2001, following global trends and the increasing volume of cross-border transactions involving multinational enterprises. The legislative evolution has been marked by a continuous effo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to practical challenges, but also introduces potential uncertainty as detailed rules may change over time. 3. Determination of Arm's Length Price Clause 165(3) addresses scenarios where the most appropriate method yields either a single price or multiple prices: * If only one price is determined, it shall be the ALP, unless the actual transaction price is within a prescribed tolerance band (not exceeding 3%), in which case the actual price will be deemed the ALP. * If more than one price is determined, the ALP is to be determined in a prescribed manner. This closely tracks the approach in Section 92C(2), which previously relied on the arithmetical mean of multiple prices and provided for a tolerance range. The 2025 Bill's reference to a "prescribed manner" for cases with multiple prices indicates a move towards more detailed rule-making, potentially allowing for methods such as interquartile ranges, as seen in OECD guidelines and in recent Indian administrative practice. The provision for a tolerance band (not exceeding 3%) aligns with current law and serves to reduce disputes over minor pricing differences, acknowledging the inherent imprecision in transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This provision prevents the same income from being taxed twice within the group, reflecting a principle of single taxation and aligning with international norms. Practical Implications For Taxpayers Clause 165 imposes significant compliance obligations on taxpayers engaged in international or specified domestic transactions with associated enterprises. Key implications include: * Requirement to select and apply the most appropriate transfer pricing method based on detailed functional and economic analysis * Maintenance of robust documentation and data to substantiate the ALP * Exposure to adjustments and penalties if compliance is lacking or if the AO determines that the ALP has not been properly established * Potential denial of tax incentives on enhanced income resulting from transfer pricing adjustments The procedural safeguards, such as the show-cause notice, provide some protection against arbitrary adjustments, but the overall regime remains rigorous and exacting. For Tax Authorities The provision empowers tax authorities to scrutinize transfer pricing documentation and challenge the taxpayer's ALP determination where warranted. The AO's authority is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not furnished in time. While Section 92C refers to Section 92D for documentation requirements, Clause 165 refers to section 168(1) (presumably the new documentation provision in the 2025 Bill). Rule 10B provides detailed guidance on comparability analysis, data selection (including the use of multi-year data), and adjustments for differences. Clause 165 leaves these matters to prescription, ensuring flexibility but also placing a premium on the quality and clarity of future rules. 4. Procedural Safeguards The requirement for a show cause notice before making an ALP adjustment is found in both Clause 165(5) and the proviso to Section 92C(3). This procedural safeguard is essential to uphold the principles of natural justice and to provide taxpayers with an opportunity to explain or defend their pricing. 5. Restrictions on Deductions and Double Taxation The restriction on deductions for enhanced income and the safeguard against double adjustment of associated enterprises are common features of both Clause 165 and Section 92C(4). These provisions ensure that the purpose of transfer pricing adjustments-to prevent profit shifting-is not undermined, while also preventing unfair do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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