Two Questions Decide Transfer Pricing Applicability

Transfer pricing applicability turns on two questions, asked in order. Is the counterparty an associated enterprise under section 162 of the Income-tax Act 2025? If it is, did a transaction take place with an associated enterprise outside India under section 163, or does the domestic aggregate cross twenty crore rupees under section 164? Turnover decides neither.

Most finance teams arrive with a different instinct, that size settles the question. It does not, and the two mistakes run in opposite directions. An Indian subsidiary with three employees, paying one royalty to its parent, is inside the chapter on that payment alone. A domestic group turning over a thousand crore rupees, buying and selling only with unconnected parties, sits outside it.

This note takes each question in turn, sets out the clauses that answer it, and gives the order in which to run them. The order earns its place, because the second question only arises once the first has been answered yes.

• Section 162 deems a counterparty associated at 26% of voting power, a loan of 51% of the borrower’s total assets, or a guarantee of 10% of its borrowings.

• The international limb has no value threshold: one associated enterprise outside India and one transaction are enough.

• The twenty crore rupee figure belongs to section 164 and tests the domestic aggregate for a tax year.

• Under section 162(2), an assessee’s own units can be associated enterprises for a domestic transaction.

• The 2025 Act applies from 1 April 2026, so tax year 2026-27 is the first year the twenty crore test governs.

Transfer pricing applicability: the two questions, asked in order

Question one examines the counterparty. Question two asks what passed between the enterprises, once the first answer is yes. Both questions ignore the size of the company and the size of an individual invoice.

The first question ends the analysis when the answer is no. A payment to an unconnected supplier in Singapore, priced on a quotation, raises nothing under Chapter X whatever its value, because the chapter reaches transactions between associated enterprises and a counterparty that is not one stands outside it.

When the answer is yes, the second question splits into the two limbs. On the international side, section 163 asks whether a transaction took place between associated enterprises and whether one of them is a non-resident, then lists the kinds of transaction that count. On the domestic side, section 164 asks whether the domestic aggregate for the tax year exceeds twenty crore rupees.

The limbs then differ on money. The international limb carries no figure at all. The domestic limb carries one, and it sits on the aggregate rather than on any single payment.

That asymmetry makes the order worth keeping. Run the clauses first and the population is small and specific. Run them after a documentation exercise has begun, and the exercise has usually been priced on every related-party line in the ledger, including the ones the chapter never reached.

Question one: is the counterparty an associated enterprise?

Section 162(1)(a) begins with participation. An enterprise is associated with another where it takes part in the other’s management, control or capital, whether directly, indirectly or through intermediaries. Those three are alternatives, so control alone will do, and so will capital alone with no management role in either direction.

The statute then gives that participation a shape. One or more persons who take part in one enterprise must also take part in the other; or shares giving 26% or more of the votes in the other must be held at some point in the tax year, directly or indirectly; or one person or enterprise must hold that much of both.

Timing catches readers first. The shareholding is tested at any point in the year, so a stake sold in September made the two companies associated in April. The transactions of those spring months are tested against the arm’s length standard, even where no shareholding survives on the date the return is signed.

The clauses are alternatives as well, each read on its own terms. A group that fails the voting-power test at the top can still be caught a level down, where a lender’s advance covers more than half of a subsidiary’s balance-sheet assets, or where a guarantee covers a tenth or more of its borrowings. Those limbs decide most scope questions in practice, and they repay reading before the shareholding chart is opened.

How the definition carried across from section 92A of the 1961 Act is set out in section 92A compared with section 162. This note needs something narrower: whether each counterparty in the ledger meets one of the clauses.

Deeming clauses that catch a counterparty you would not call related

Section 162 lists the clauses that deem a relationship, and each one stands as a test in its own right. The relationship exists because the statute says so, whatever the parties call it and whatever the minutes record. A company can meet one of these clauses with no shareholding in either direction.

The guarantee is the limb least often checked. Suppose a promoter company guarantees 15% of a supplier’s borrowings, holds no shares in the supplier and shares no director with it. Clause (c) makes them associated enterprises anyway, and every transaction between them is then tested, by section 163 where one of them sits outside India and by the listed items in section 164 where both are resident.

The percentages mark the points at which the statute stops asking and deems the answer yes, and a counterparty below them can still be associated under clause (a) or under another limb. Clause (l) also keeps the list open, by allowing a relationship of mutual interest that the rules may prescribe.

Question two: the ₹20 crore figure and the year it applies from

The two limbs answer the money question differently, and mixing them produces most of the misplaced scope decisions.

Section 163 defines an international transaction with no reference to value: a dealing in which at least two associated enterprises are parties and at least one of them sits outside India. It then lists what counts, and the list is wide. It takes in the purchase, sale, lease or use of tangible and intangible property, capital financing including any borrowing, lending or guarantee, the provision of services, business restructuring or reorganisation, and any mutual agreement for allocating a cost.

A transaction with an outsider can also be treated as international where a prior agreement about it exists between that outsider and the associated enterprise, or where its terms are determined, in substance, between them and one of the enterprises sits outside India. That outsider’s own residence does not matter.

The international limb therefore carries no figure, no turnover test and no exemption by size. A royalty of a few lakh rupees from an Indian subsidiary to its parent is an international transaction on the same footing as a hundred crore of purchases from it.

The domestic limb has a figure, and it is the only transfer pricing threshold in the chapter. Section 164 applies where the qualifying items listed in it add up to more than twenty crore rupees in a tax year. Each of those items is expressly not an international transaction, so nothing can be counted in both aggregates.

The date comes from section 1(3), which brings the 2025 Act into force on 1 April 2026. Tax year 2026-27 is therefore the first year section 164 governs, and earlier years stay under the 1961 Act, including section 92BA. Two amendments took effect on the same date: section 162(2)(c) was substituted, and section 164(d) lost its reference to section 144.

The comparison in section 92BA compared with section 164 sets out what moved between the two provisions.

The figure has moved more slowly in commentary than in the statute. The International Bar Association’s analysis of 2024 gives the domestic figure as it stood before the 2025 Act, and a reader working from it should check section 164 directly.

What counts in the aggregate, and how it is built

Section 164 lists six items, and each is tied to a provision under which a price affects a deduction or a concessional rate. That tie explains why the chapter reaches domestic transactions at all.

The first is a transaction referred to in section 122, which values transfers of goods or services between an assessee’s own units and businesses where a deduction under the deductions chapter is claimed. The second is a transfer referred to in section 140(9), which does the same for an eligible start-up’s business. The third is business transacted with a closely connected person under section 140(13), where the arrangement produces more than ordinary profits.

The fourth picks up any other Chapter VIII transaction to which section 140(9) or (13), or section 80-IA(8) or (10) of the 1961 Act, applies. The fifth is business transacted between the persons referred to in section 205(4), the close-connection provision for companies and co-operative societies taxed under the new regime. The sixth is any other transaction the rules may prescribe.

Section 162(2) then widens the counterparty for the domestic limb. For a specified domestic transaction, associated enterprise also includes the assessee’s other units, undertakings and businesses, and the persons named in sections 140(13) and 205(4). An Indian company with two units can be associated with itself for this purpose, and a transfer between its own divisions becomes a transaction to be priced.

The aggregate is built for the tax year, not per invoice, not per counterparty and not against turnover. The statute adds up the qualifying items for the year and compares that total with twenty crore rupees. A year that carries an eleven crore rupee payment and a ten crore rupee payment crosses the line, though neither would do so alone.

Grouping matters as much as adding does. One arrangement spread across four invoices is still one arrangement, so a schedule showing four small payments may describe a single transaction well above the line. The grouping follows the facts of the arrangement, whatever the ledger shows.

The figure decides one thing, whether the chapter applies to the domestic items. It says nothing about whether a price is at arm’s length once the chapter applies. It is neither a tolerance band nor a safe harbour.

Running the test counterparty by counterparty, and what follows a yes

The test runs in a fixed order, and the order is the point.

1. List every counterparty for the tax year, including guarantors, lenders and anyone who absorbed a cost on your behalf. A guarantee creates association without a shareholding, and a cost allocation creates a transaction without an invoice crossing a border.

2. Apply each clause of section 162 to each counterparty, and record which clause was met and what the figure was: the holding percentage, the loan against total assets, the guarantee against total borrowings.

3. Ask whether any associated enterprise sits outside India, and whether any transaction took place between them. If both answers are yes, the international limb applies and no further money test is needed.

4. Add the domestic items for the year and compare the total with twenty crore rupees.

5. Write the conclusion down, including a conclusion that the chapter does not apply. A record of it is the artefact that ends the question for the year.

A yes carries two obligations. Section 171 requires anyone with a covered transaction to keep and maintain the information and documents the rules prescribe. Section 172 requires an accountant’s report in the prescribed form. Under the 1961 Act that report was made in Form 3CEB, and under the 2025 Rules it is made in Form 48, with the last Form 3CEB season and what Form 48 changes covering the dates and the mechanics.

What to put in front of an adviser at the first meeting

Scope settles in one conversation when the papers answer the clauses instead of describing the business. The list is short:

• An entity chart showing every holder’s percentage and the dates each holding was in place, since voting power is tested at any point in the year.

• A schedule of loans and guarantees, each set against the borrower’s balance-sheet assets or the guaranteed party’s borrowings.

• A note on dependence: know-how, brand and licences, and whether one supplier or buyer sets the terms of your trade.

• The ledger of domestic items for the year, with its total, built from the six lines in section 164.

• Last year’s conclusion, whether it said yes or no.

An adviser will ask which entities sit outside India before reading anything else, because that answer decides which limb is in play. The next question is usually who guarantees whom, since the guarantee limb is the one finance teams leave off the chart.

A negative conclusion is worth having in writing. It is the document that stops the question being reopened when an audit notice arrives or a new tax head joins the team.

Where the answer is yes, and the work has to be planned, transfer pricing strategy support sets out how method selection, benchmarking and documentation fit together.

The questions finance teams ask about applicability

What is the threshold for transfer pricing?

Twenty crore rupees, and only on the domestic side. Section 164 applies where the domestic aggregate for a tax year exceeds that sum. The international limb in section 163 carries no value figure, so an associated enterprise outside India and a transaction are enough.

Who needs to do transfer pricing?

Anyone who has entered a covered transaction, whatever the size of the company. Sections 171 and 172 attach the record-keeping and the accountant’s report to the transaction, so the question is which transactions passed through the year.

Is transfer pricing mandatory in India?

Yes, where the two questions answer yes. There is no election and no application to make. The requirement follows from the transaction: a royalty, a loan, a guarantee, a cost allocation or a restructuring between associated enterprises where one sits outside India.

What happened to section 92E?

Section 92E of the 1961 Act required anyone who had entered a covered transaction to obtain an accountant’s report. For tax year 2026-27 the same obligation sits in section 172 of the 2025 Act, with the record-keeping duty in section 171. Both attach to the transaction, not to turnover.

If the counterparty list is the part you would rather not build alone, contact us; I will begin there, before any documentation is discussed.

This note rests on sections 1(3), 162, 163 and 164 of the 2025 Act, read with sections 171 and 172, on the India Code text as reproduced by Mera Samvidhaan, and on the 1961 Act for earlier tax years. Research closed on 6 November 2026.