Section 161 of the Income-tax Act, 2025 — the successor to section 92 of the 1961 Act — requires that any income, expense, interest or cost-sharing arising from an international transaction between associated enterprises be computed with reference to the arm's length price: the price that unrelated parties would have agreed in comparable circumstances. The rule applies from tax year 2026-27 to every Indian company that deals with a foreign group entity, regardless of size, and it cannot be used to reduce Indian taxable income below what was actually booked.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Arm's length requirement | s. 92, Income-tax Act 1961 | s. 161, Income-tax Act 2025 | No monetary threshold for applicability | Tax year 2026-27 onwards | — |
| Associated enterprise (AE) | s. 92A | s. 162 | Includes 26% voting power, board control, loan/guarantee and dependency tests | Tested each tax year | — |
| International transaction | s. 92B | s. 163 | Any transaction between AEs where at least one is a non-resident; deemed transactions included | — | — |
| Specified domestic transaction | s. 92BA | s. 164 | Aggregate above ₹20 crore (carried over) | — | — |
| Methods and most appropriate method | s. 92C; Rules 10B–10C | s. 165; Rules 79–80 | Six methods incl. 'other method' | — | — |
| Definitions (ALP, enterprise, transaction) | s. 92F | s. 173 | — | — | — |
| Accountant's report | s. 92E; Rule 10E; Form 3CEB | s. 172; Rule 85; Form 48 | Required for every international transaction, whatever the value | One month before the return due date (31 October) | Form 48 |
What the provision actually says
Chapter X of the Income-tax Act, 2025 (sections 161 to 173) is a near-verbatim carry-over of Chapter X of the 1961 Act (sections 92 to 92F). The drafting was consolidated and renumbered; the substantive tests were not changed. Three building blocks decide whether section 161 applies to you:
- Associated enterprises (section 162, old 92A). Two enterprises are associated where one participates, directly or indirectly, in the management, control or capital of the other — or where the same persons participate in both. The deeming tests are mechanical: 26% or more of voting power; a loan of 51% or more of book value of assets; a guarantee of 10% or more of borrowings; appointment of more than half the board; dependence on know-how or on 90% of raw material supply, among others. A wholly owned Indian subsidiary of a foreign company is an AE of its parent and of every sister company in the group.
- International transaction (section 163, old 92B). A transaction between two or more AEs, at least one of which is a non-resident, in the nature of purchase, sale, lease, services, lending, borrowing, guarantee, cost-sharing or anything else with a bearing on profits, income, losses or assets. Business restructurings are expressly included. A transaction with an unrelated party can be treated as an international transaction if its terms are determined in substance by the AE.
- Arm's length price (section 173, old 92F). The price applied, or proposed to be applied, in a transaction between persons other than associated enterprises, in uncontrolled conditions.
Where all three are present, section 161 requires the income from the transaction to be computed having regard to the arm's length price. Section 165 (old 92C) then prescribes how that price is determined — see the methods page.
Three features people miss
1. It is a one-way street
Section 161 cannot be invoked by the taxpayer to reduce Indian income. If your Indian subsidiary charged its parent a 25% markup when arm's length was 15%, the Assessing Officer will not refund the difference. The provision exists to protect the Indian tax base. Over-charging the parent is therefore a foreign-tax problem, not an Indian one — and still worth fixing, because the parent's tax authority will have the mirror-image concern.
2. There is no small-company exemption
Unlike many jurisdictions, India has no turnover threshold below which transfer pricing stops applying to international transactions. A two-person subsidiary billing its parent ₹40 lakh a year is inside section 161, must price at arm's length and must file the accountant's report in Form 48 (old Form 3CEB) by 31 October. The relaxation that exists is in the depth of documentation, not in the applicability of the rule.
3. Conduct beats contract
The intercompany agreement is the starting point, but the Transfer Pricing Officer will characterise the Indian entity by what it actually does — who takes decisions, who bears risk, who owns the outcome. A "limited-risk service provider" whose Indian team in fact runs product strategy will be re-characterised, and the arm's length return re-set accordingly. This is why the agreement and the operating reality need to match.
How the rule is enforced
The Assessing Officer may refer the international transactions to a Transfer Pricing Officer (section 166, old 92CA), who determines the arm's length price after calling for the documentation maintained under section 171 (old 92D). Any upward adjustment is added to income; where the adjustment exceeds the prescribed amount, a secondary adjustment under section 170 may follow. Disputes go to the Dispute Resolution Panel or the Commissioner (Appeals), then the Tribunal. For taxpayers who want certainty in advance, the Act offers safe harbour (section 167) and advance pricing agreements (section 168).
Worked example
A Singapore company owns 100% of an Indian private limited company that employs 40 engineers. The Indian company bills the parent for software development on a cost-plus basis. In tax year 2026-27 its operating cost is ₹18 crore and it charged ₹19.8 crore (a 10% markup).
- Parent and subsidiary are AEs under section 162 (100% shareholding, well above the 26% test).
- The service billing is an international transaction under section 163 (one party non-resident; provision of services).
- Section 161 requires the ₹19.8 crore to be tested against the arm's length price. A benchmarking study using TNMM finds comparable independent service providers earn 14% to 19% on cost, with a median of 16.5%.
- 10% is below the range. The TPO can substitute the median: ₹18 crore × 16.5% = ₹2.97 crore markup, so ₹20.97 crore of income — an adjustment of ₹1.17 crore, taxed at the company's rate, plus interest and potential penalty.
Had the company priced at 16.5% from the start, or opted into the 15.5% safe harbour, there would have been nothing to adjust.
Common mistakes we see
- Assuming transfer pricing starts only above some turnover. It does not — the first intercompany invoice is inside section 161.
- Treating the parent's global transfer pricing policy as Indian compliance. India requires its own benchmarking against Indian comparables and its own Form 48.
- Describing the Indian entity as 'low risk' in the agreement while its leadership team sets product direction. The TPO prices the conduct, not the label.
- Forgetting deemed international transactions — for example, a loan from an Indian bank guaranteed by the foreign parent, or purchases from a third party on terms dictated by the parent.
- Netting receivables and payables with the parent for years without charging interest. Outstanding intercompany balances beyond normal credit terms are themselves an international transaction.
Frequently asked questions
Does section 161 apply if my Indian company is loss-making?
Yes. Applicability depends on the existence of an international transaction between associated enterprises, not on profitability. A loss-making captive service provider is in fact a classic transfer pricing adjustment case, because an independent service provider would not work at a loss for years.
Is there any minimum value below which transfer pricing does not apply?
No minimum applies to the arm's length requirement or to the accountant's report in Form 48 for international transactions. The ₹20 crore threshold applies only to specified domestic transactions under section 164.
What changed between section 92 of the 1961 Act and section 161 of the 2025 Act?
The substance is unchanged. The 2025 Act renumbered the chapter (sections 92 to 92F became 161 to 173), replaced 'previous year' and 'assessment year' with a single 'tax year', and consolidated the related rules into the Income-tax Rules, 2026 (Rules 77 to 124 for transfer pricing matters).
Can two Indian companies be associated enterprises for this purpose?
Yes, but transactions between two Indian residents are domestic transactions. They are covered only as 'specified domestic transactions' under section 164 (old 92BA) above the ₹20 crore aggregate threshold, and only for the categories listed there.
Who determines the arm's length price — the company or the department?
The company must determine and document it first, and report it in Form 48. The Assessing Officer or Transfer Pricing Officer may then test it and substitute their own determination if the company's is not supported by the documentation.
Does an advance pricing agreement or safe harbour switch off section 161?
No. Both are methods of determining the arm's length price under the same chapter. Safe harbour (section 167) deems a declared margin to be arm's length if conditions are met; an APA (section 168) fixes the method or price by agreement for up to five years. The computation under section 161 and the Form 48 filing continue.
Sources
Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.
- Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
- FAQs and guidance notes on forms under the Income-tax Rules, 2026 — Income Tax Department
- Income-tax e-filing portal — Forms 48, 49, 128, 145 and 146
- e-Gazette of India — Finance Act, 2026; Income-tax Rules, 2026; FEMA notifications
Last reviewed on 1 November 2026 by Suchit Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.
