When it comes to cross-border transactions, taxation becomes a whole different ballgame. This is where Section 92 of the Income Tax Act comes into the spotlight. It acts as a cornerstone for computing income from international transactions & lays the foundation for India’s transfer pricing regulations. But what exactly does it say? And why is it so crucial for businesses involved in global dealings?
Let’s decode.
What is Section 92?
Section 92 of the Income Tax Act deals with the computation of income from international transactions between associated enterprises. The primary purpose? To ensure that profits arising from such dealings are calculated as if the transaction had occurred between unrelated parties, this is known as the arm’s length principle.
In simpler words, it aims to prevent companies from manipulating their profits by shifting them across borders (to lower-tax jurisdictions) through artificially priced transactions.
Why Arm’s Length Price Matters
The arm’s length price is the price at which two unrelated parties would transact in an open market. Section 92 mandates that income from international transactions between associated enterprises must be computed using this principle.
This rule applies to both:
- Inbound transactions (when an Indian entity deals with a foreign associate)
- Outbound transactions (when a foreign entity deals with its Indian counterpart)
This ensures that India doesn’t lose tax revenue through profit shifting or base erosion."
Who Does Section 92 Apply To?
Section 92 applies to:
- Any Indian company or entity entering into transactions with a foreign associated enterprise
- Foreign companies with Indian subsidiaries, joint ventures, or permanent establishments
- Firms that deal in cross-border services, technology transfers, shared costs, loans, or asset transfers
In short, if you're engaged in international business, chances are you fall under the scope of Section 92.
Types of Transactions Covered
The section covers a broad spectrum of international dealings, including:
- Purchase or sale of goods
- Provision of services
- Lending or borrowing of money
- Cost-sharing arrangements
- Transfer of intangible assets such as patents or trademarks
- Guarantees, reimbursements, etc.
It also extends to domestic transfer pricing under certain conditions, as outlined in Section 92BA."
Transfer Pricing Methods under Section 92
To determine whether the transaction is at arm’s length, the Income Tax Rules specify five methods under Rule 10B:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transactional Net Margin Method (TNMM)
The most appropriate method depends on the nature of the transaction & the availability of reliable data.
Sub-sections & Related Provisions
Apart from the main clause, there are several important subsections & related rules:
- Section 92A defines what constitutes an "associated enterprise"
- Section 92B defines "international transaction"
- Section 92C specifies the methods for calculating the arm’s length price
- Section 92CA deals with the Transfer Pricing Officer (TPO) for scrutiny
All these work in tandem to form India’s transfer pricing framework.
Section 92 & Penalty Provisions
Non-compliance with Section 92 can be costly. If the taxpayer fails to maintain adequate documentation, report transfer pricing details, or makes incorrect declarations, they can face severe penalties under:
- Section 271AA for failure to maintain records
- Section 271G for non-submission of information
- Section 270A for underreporting/misreporting of income
Hence, maintaining transparent & well-documented pricing arrangements is not just good practice—it’s legally necessary."
Real-Life Example
Let’s say an Indian IT company provides software development services to its U.S.-based parent company. The Indian arm charges ₹10,000 per man-hour, but similar services in the market are priced at ₹15,000. Here, the tax authorities may invoke Section 92 & compute income as if ₹15,000 was charged, applying the arm’s length price.
This additional income would then be taxed in India, increasing the tax liability of the Indian entity.
Common Misunderstandings
- Section 92 only applies to international business, not to local transactions, unless specified under domestic transfer pricing.
- It’s not limited to tangible goods. Services, intangibles, & cost contributions also fall under its purview.
- Even interest-free loans to foreign subsidiaries can trigger Section 92 scrutiny.
Final Thoughts
Section 92 isn’t just another tax provision—it’s a powerful tool to ensure tax fairness in a globalised economy. Whether you're a CFO, a tax consultant, or a startup founder eyeing international growth, understanding this section can save you from unexpected tax liabilities.
And if you’re still unsure how this applies to your business or want expert help in filing accurate transfer pricing reports, don’t worry—we’ve got your back.
👉 Let our experts at Callmyca.com help you stay compliant while you focus on scaling your business globally.
