Trading Judicial Restraint for Statutory Certainty: Transfer Pricing Applicability Under the Income-Tax Act 2025

[Sarandeep is a student at Hidayatullah National Law University.]

The question of the applicability of the Indian transfer pricing (TP) regime for almost the past 20 years has revolved around judicial interpretations rather than the provisions of Section 92 of the Income-tax Act 1961 (Old Act). Courts and tribunals, faced with such an expansive deeming provision, have continually read it down, requiring formal evidence of ownership and/or control alongside a determination of an associated enterprise (AE) relationship and thus excluding a huge array of seemingly associated enterprise relationships that lacked formal evidence of ownership or control from the scope of TP. The Income-tax Act 2025 (New Act) will turn the tide on this trajectory by replacing the judiciary’s substance-oriented approach with a more general, independent-condition approach which will be able to encompass economic dependence regardless of equity or control. The question that this blog asks is whether the trade is a net gain and whether the amendments will be a gain for one class of threshold disputes, while at the same time shifting the fight to a more fact-driven and less predictable landscape.

The Old Regime: A Judicially Narrowed Gateway

Section 92A(1) of the Old Act contained a broad definition of an associated enterprise, based on participation in management, control, or capital. Section 92A(2) then lists specific deeming situations as dependence on another enterprise’s intellectual property, supply arrangements, borrowings, and more, any one of which was widely presumed to result in AE status independently. In Pr Commissioner of Income Tax v. Page Industries Limited, the Karnataka High Court has rejected that interpretation. The court stated that Section 92A(2) was not standalone and that, even if a specific deeming condition was factually satisfied (e.g., IP dependence or supply concentration), the Revenue had to establish that the AE was in fact part of the management, control or capital of the other entity before it could be said that an AE relationship existed. The result was to turn Section 92A(2) into mere illuminating gloss on Section 92A(1), and for taxpayers to structure a contract manufacturing or exclusive supply or commercially dictated pricing arrangement that would have provided a reliable threshold defence, there had to be an additional argument of equity-style control.

Around international transaction under Section 92B, a parallel restriction arose that the transaction must have a “bearing on profits, income, losses or assets.” Judicial opinion was split, and taxpayers often based their exclusion on a lack of a tangible profit effect on the TP net; this was the position taken by courts in excluding interest-free corporate guarantees, incidental outstanding receivables, and capital transactions like share issuances from the TP net.

The New Framework: Twelve Independent Gateways

Section 162 of the New Act eliminates the dual-condition architecture in place of Section 92A. It introduces 12 different scenarios, any single one is sufficient, standing alone, to indicate an AE relationship including situations where the enterprise is dependent on the use of the patents, trademarks and know-how of another enterprise, either as a manufacturing dependant or as a business dependant, or where ninety percent or more of the raw materials are supplied by another enterprise, and the price or conditions of supply is influenced by that enterprise, or where the manufactured goods are sold, and the price or conditions of sale are influenced by another enterprise, or where the enterprise makes financial dependants through borrowings of fifty-one percent or more of its total assets, or where the borrowings are guaranteed by another enterprise, or ten percent or more of the borrowings are such. The statute is clear that the conditions are distinct, thereby expressly displacing Page Industries and its progeny.

The New Act also does away with the “bearing on profits, income, losses or assets” qualifier from the definition of international transaction. The cross-border transaction between associated enterprises has also become eligible for TP purposes irrespective of any profit impact, which implies that a guaranteed loan without any commission between an Indian parent company and its overseas subsidiary is now subject to benchmarking and reporting under TP. A third, and more technical amendment deals with a longstanding disagreement on whether the statutory tolerance range for arm’s length pricing applies when only one comparable is used, and confirms that it does.

Substance Over Form or Merely a Different Form

It is important to question, not take for granted, the legislation’s wording as clarificatory changes reinforcing “economic substance” over legal form. There is a true policy argument for the transition: As long as there were no shareholders or the board, no policy case existed for Page Industries to permit multinational groups to organise captive contract manufacture and exclusive-supply arrangements in line with the economic reality of a controlled subsidiary. To this end, Section 162 brings the Indian definition of associated enterprises closer to the functional/conceptual definition of associated enterprises based on dependence, and thus fills an arguably unintentionally left gap in the original deeming definition provided by Parliament.

However, the amendment does not remove threshold questions, it simply moves them from a legal issue to a factual one. The applicability is to be determined at a preliminary stage, mainly through paperwork, and the twelve conditions in Section 162 require detailed fact-based questions. Does the Indian entity have workers and capital facilities for manufacturing, or is it using licensed technology, How much of the manufacturing value is attributable to the Indian entity’s manpower and capital facilities rather than the vendor? They are just the type of questions that are expected to be the ones wrought with the kind of controversy that leads to TP litigations, and the kind the amendment is supposedly designed to stave off. The disagreement has not been eliminated; it’s gone from the threshold stage toward the assessment and appellate phase where taxpayers face arguably more daunting and unpredictable costs.

The migration also changes the liability of uncertainty. In Page Industries, the burden of proving control or participation, a threshold that was hard to meet on the documentary evidence, fell on the assessing officer, and one which could be challenged early, before significant compliance costs. Several conditions depending on specified technology, price or condition “influenced” by a counterparty are drafted in a way that is broadly open to the possibility that they apply, and taxpayers have to disprove them on a fact-intensive basis after the event in their submissions. This change in actual burden is likely more significant than the substantive addition of the AE definition.

Concern is raised due to the elimination of the profits/assets definition in the international transaction definition. Requiring benchmarking of transactions with no demonstrable income element an uncommissioned corporate guarantee being the paradigm case imposes a documentation burden untethered from any prospect of revenue leakage, at least at the point of compliance. This is defensible as a measure of compliance simplification but turns all cross-border intra-group transactions, no matter how insignificant, into a required benchmarking exercise. This materially broadens the scope of documentation and audit exposure when there are other forms of financing, cost-sharing or guarantees within the group.

A Comparative Note: Aligning with, or Overshooting OECD Practice

It is worth considering, however, the government’s characterisation of these amendments as bringing Indian law in line with OECD guidance, since the OECD has a much more limited definition of associated enterprises than the 12 individual gateways contained in Section 162 of the Indian law. Article 9 of the OECD Model Tax Convention provides a foundation for associated enterprise status that is based on participation in management, control, or capital, rather than a more specific definition, and also relies on the arm’s length principle itself rather than a list of dependencies that would serve as a substitute for a definition. In this context, the use of Section 162 is more of a remedy for an Indian-specific problem, i.e., perceived abuse of contract manufacturing or exclusive supply structures to circumvent TP jurisprudence in a jurisdiction expansive where GAAR and judicial anti-abuse doctrine have been lightly tested as other means of resolution. That calibration stands on its own merits, but taxpayers should not presume that the treatment of structures that are not subject to the AE definition in another part of the rules will also apply in Section 162.

Implications for Structuring and Compliance

The New Act takes away what was sometimes the first and most cost-effective line of defence for multinational groups who had set up their Indian captive-service or contractual manufacturing or financing arrangements in a way that was intentional or unintentional beyond the control threshold of Section 92A(1) of the Old Act. The common shareholding test will no longer be enough of the twelve independent tests in Section 162 must be tested independently on the terms of the arrangement. Any group that previously treated an exclusive supply or a technology licensing arrangement as extraneous to the TP analysis should conduct a new factual analysis much before the assessment stage, when records created as part of a dispute may have much less evidentiary value than records created in the normal course of business.

Conclusion

Decision by the legislators to override the judicially created limits on the applicability of TP provisions is an intentional act by the legislators, and there is logic behind that: Economic reliance rather than formal control is more suitable to serve the pricing risk that the TP provisions are meant to police. When the certainty is achieved at the threshold stage, however, a more challenging factual investigation is required downstream. Whether this trade will lead to a reduction in the number of net litigations or simply move them to a place where taxpayers have less “room to manoeuvre” will depend more on the way assessing officers interpret and apply the new 12 gateways in practice than on the language of the statute itself, which is worth revisiting as the first assessments under Section 162 make their way into the public record.