With globalization, cross-border trade and business transactions have become the backbone of modern economies. But these transactions often occur between related parties, raising questions about fairness in pricing. To ensure that profits are not artificially shifted to low-tax jurisdictions, India’s Income Tax Act includes detailed transfer pricing provisions.
One of the most important provisions here is Section 92C of the Income Tax Act, which provides the legal framework for the computation of arm’s length price (ALP) in international and specified domestic transactions. By ensuring that related-party transactions reflect market-based prices, Section 92C prevents tax evasion and promotes transparency.
What is Section 92C of the Income Tax Act?
Section 92C provides the mechanism for computing the arm’s length price (ALP) of transactions between associated enterprises. Simply put, the ALP is the price that would be charged between unrelated parties in the open market under similar conditions.
This section ensures that if two related entities—say, a parent company in India & its foreign subsidiary—enter into a transaction, the price used must not be manipulated to reduce taxable income. Instead, it should be aligned with fair market value.
Thus, Section 92C is central to India’s transfer pricing laws, ensuring transparency in cross-border as well as specified domestic dealings.
Computation of Arm’s Length Price
The computation of arm’s length price under Section 92C is not arbitrary. The Income Tax Act prescribes specific rules & methodologies. Authorities look at comparable market prices and other factors to determine whether the transaction reflects fairness.
By computing ALP, tax authorities can adjust the reported income of a company if it deviates significantly from the benchmark. This ensures that profits are taxed appropriately in India, instead of being shifted to tax havens through manipulated pricing.
Methods for Determining the Arm’s Length Price
Section 92C and the accompanying rules define various methods to determine the ALP. These include:
- Comparable Uncontrolled Price (CUP) Method – Compares the price charged in a controlled transaction with that in an uncontrolled transaction.
- Resale Price Method (RPM) – Works backward from the resale price to arrive at ALP."
- Cost Plus Method (CPM) – Adds a reasonable profit margin to the costs incurred.
- Profit Split Method (PSM) – Splits the combined profits from transactions among associated enterprises based on contributions.
- Transactional Net Margin Method (TNMM) – Compares profit margins relative to costs, sales, or assets.
- Other Method – Allows flexibility to use any method that best reflects fair pricing.
Taxpayers must justify the method chosen, and authorities have the power to review & challenge it.
Also Read: Understanding Secondary Adjustment in Transfer Pricing
Computation of Income from International Transactions Having Regard to ALP
One of the most critical aspects of Section 92C is the computation of income from international transactions having regard to arm’s length price.
If a company imports raw materials from its foreign subsidiary at an inflated price to reduce profits in India, tax authorities can recompute income by applying the correct ALP. Similarly, if services are undercharged to shift profits abroad, adjustments are made.
This ensures that India receives its fair share of tax on profits actually generated in the country.
Role of Advance Pricing Agreement (APA)
To reduce disputes, India introduced the concept of an advance pricing agreement (APA). Under this mechanism, taxpayers can agree in advance with the tax authorities on the methods and principles to be applied in determining ALP for future transactions."
APAs provide certainty, minimize litigation, and create a cooperative environment between businesses & tax authorities. They are particularly useful for multinational enterprises that engage in complex cross-border dealings.
By linking advance pricing agreement to Section 92C, India provides taxpayers with a forward-looking, transparent compliance tool.
Practical Challenges in Implementing Section 92C
While Section 92C sets out a clear framework, its practical implementation comes with challenges:
- Data availability – Finding reliable comparable transactions is not always easy.
- Documentation burden – Companies must maintain detailed records to justify their ALP calculations.
- Frequent disputes – Transfer pricing remains one of the most litigated areas in Indian tax law.
- Dynamic markets – Prices in global markets fluctuate, making it difficult to fix an exact ALP.
Despite these challenges, the framework ensures fairness and protects India’s tax base.
Global Relevance of Section 92C
Transfer pricing regulations, including Section 92C, align India with international standards laid out by the OECD. Countries across the globe follow similar principles to prevent profit shifting & base erosion.
By having robust ALP rules, India builds credibility as a fair tax jurisdiction and reassures foreign investors. It also protects the country’s revenue interests at a time when multinational enterprises are increasingly globalizing their operations."
Also Read: Documentation for International and Domestic Transactions
Importance for Businesses and Taxpayers
For businesses, compliance with Section 92C is not optional—it is mandatory. Proper determination of ALP avoids costly disputes, penalties, and reputational damage.
Multinationals must invest in robust transfer pricing documentation, seek professional advice, and consider APAs where applicable. For Indian subsidiaries of foreign companies, this provision is particularly critical since cross-border pricing is often under the scanner.
Taxpayers who ignore these requirements risk large adjustments, interest, and penalties, which can be financially & reputationally damaging.
Conclusion
Section 92C of the Income Tax Act is a cornerstone of India’s transfer pricing regime. By laying down the computation of arm’s length price, defining methods for determining the arm’s length price, and linking income computation with ALP, it ensures fairness and transparency in international and specified domestic transactions.
With mechanisms like advance pricing agreement, the law also offers clarity & dispute resolution pathways. While challenges exist, the importance of Section 92C cannot be overstated—it protects India’s tax revenue, enforces global standards, and creates accountability in cross-border dealings.
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