Recent Transfer Pricing amendments – Expanding applicability?

Introduction

Historically, the transfer pricing (‘TP’) regime under Indian tax law has been shaped as much by judicial interpretation as by legislation. Over the years, courts and tribunals played a pivotal role in narrowing the scope of TP applicability by insisting on substantive tests of ownership, control, and demonstrable profit impact. The Income-tax Act, 2025 (‘New Act’), however, marks a conscious departure from this approach.

Through a series of amendments, though portrayed as mere clarificatory, the legislature has sought to expand the applicability of TP provisions and bring within the TP net a wider range of cross-border arrangements that reflect economic dependence rather than legal form. These changes are particularly significant for multinational groups operating through contract manufacturing, captive service, and financing structures.

This article examines the key amendments impacting TP applicability by analysing each amendment holistically, first setting out the position under the Income-tax Act, 1961 (‘Old Act’), followed by the amendment introduced, and finally evaluating its impact with practical illustrations.

Amendment 1: Redefining ‘Associated Enterprise’

Position under the Old Act

Under the Old Act, the definition of ‘associated enterprise’ (‘AE’) was contained in Section 92A. While the provision listed several specific situations under Section 92A(2), Courts consistently held that these deeming clauses could not operate in isolation.

The Karnataka High Court, in PCIT v. Page Industries Ltd., authoritatively held that both Section 92A(1) and Section 92A(2) must be satisfied to establish an AE relationship. In other words, even if one of the specific thresholds, such as dependence on IP, loan dependency or supply arrangements, was met, the Revenue still had to demonstrate participation in management, control, or capital.

This interpretation significantly restricted the scope of AE relationships and provided a strong defence for taxpayers in cases involving:

• contract manufacturing arrangements,
• exclusive supply relationships, and
• commercially dictated pricing arrangements.

As a result, TP applicability was often defeated at the threshold level itself, without proceeding to benchmarking.

Amendment under the New Act

The New Act replaces Section 92A with Section 162, which fundamentally restructures the AE determination framework. The most consequential change is the complete removal of the dual-condition requirement.

Section 162 now sets out twelve independent scenarios, each of which, if satisfied, is sufficient to constitute an AE relationship. These conditions cover, among others:

• manufacturing or business dependence on the use of patents, copyrights, trademarks, know-how, licenses or any other business or commercial rights of similar nature of another enterprise [Section 162(1)(f) of New Act]
• supply of 90% or more of raw materials by the other enterprise or persons specified by it, where pricing is influenced [Section 162(1)(g) of New Act]
• sale of manufactured goods to another enterprise with price or condition influence [Section 162(1)(h) of New Act]
• financial dependence through loans exceeding 51% of total assets from other enterprise [Section 162(1)(b) of New Act]
• 10% or more borrowings guaranteed by other enterprise [Section 162(1)(c) of New Act]

Importantly, the provision makes it explicit that each condition operates independently, thereby legislatively confining the application of judicial interpretation under the Old Act. 

Impact analysis 

The redefinition of AE represents a paradigm shift in TP applicability. Relationships that were earlier excluded due to absence of equity ownership or formal control may now be captured purely on the basis of economic or contractual dependence.

Illustration – Contract Manufacturing Arrangement

An Indian company manufactures electronic goods exclusively for a foreign customer. The foreign entity:

• licenses proprietary technology to the Indian entity,
• specifies approved vendors for procurement of key components, and
• influences pricing of finished goods sold back to it.

There is no common shareholding or board representation.

• Under the Old Act: Taxpayers could credibly argue that Section 92A(1) was not satisfied, relying on Page Industries, thereby excluding the arrangement from TP provisions.
• Under the New Act:  Each condition will have to be evaluated independently, having regard to the overall factual matrix. In situations where a contract manufacturer relies on technology provided by the principal manufacturer, procures raw materials from vendors identified by the principal, and undertakes dedicated sales to the principal, several of the conditions discussed above may merit closer examination. Whether such conditions are ultimately met would depend on the specific facts and circumstances of each case.

For instance, the extent to which manufacturing activities are attributable to the contract manufacturer’s own manpower, infrastructure, and operational capabilities, as opposed to the technology provided by the principal, could be a relevant consideration. Likewise, the degree of commercial flexibility available to the contract manufacturer in sourcing raw materials or servicing other customers, including the manner in which pricing and contractual terms are arrived at, may also assume significance. These and other factors would need to be assessed holistically, and no single parameter can be regarded as determinative in isolation.

Amendment 2: Expansion of the Scope of ‘International Transaction’

Position under the Old Act

Section 92B of the Old Act defined an ‘international transaction’ to include transactions having a bearing on profits, income, losses or assets. This phrase became the subject of extensive litigation.

Judicial views diverged on whether the ‘bearing on profits’ test was:

• a mandatory precondition, or
• merely illustrative in nature.

Taxpayers often succeeded in excluding transactions such as:

• corporate guarantees issued without consideration,
• outstanding receivables treated as incidental to sales, and
• capital transactions like share issuances,

by arguing that no real income impact arose.

Amendment under the New Act

The New Act removes the requirement that an international transaction must have a bearing on profits, income, losses or assets. Consequently, any cross-border transaction between AEs, irrespective of immediate profit impact, can now be subjected to TP provisions.

This amendment reflects a clear legislative intent to eliminate threshold disputes and ensure that TP provisions apply uniformly across transaction categories.

Impact and Illustration

The practical implication of this amendment is that economic impact arguments lose much of their relevance at the applicability stage.

Illustration – Corporate Guarantee

An Indian parent company provides a corporate guarantee to its overseas subsidiary for availing external borrowings, without charging a guarantee commission.

• Under the Old Act: Taxpayers frequently relied on judicial precedents to argue that in the absence of any impact on profit, there is no international transaction.
• Under the New Act: The transaction itself qualifies as an international transaction, mandating benchmarking and reporting, irrespective of whether income is earned.

From a compliance perspective, taxpayers must now proactively evaluate and document arm’s length pricing for financial and capital transactions, even where commercial rationale suggests no income element. This significantly increases documentation and audit exposure.

Amendment 3: Clarification on Tolerance Range in Single Comparable Cases

Position under the Old Act

Section 92C(2) provided for a tolerance range of ±3% (±1% in certain cases). However, courts differed on whether this benefit applied where ALP was determined using a single comparable.

Conflicting rulings resulted in uncertainty and often led to full TP adjustments even for marginal deviations.

Amendment under the New Act

The New Act expressly clarifies that the tolerance range applies even in cases involving a single comparable. This amendment resolves a long-standing controversy and aligns the statute with a more pragmatic approach.

Conclusion

The amendments affecting transfer pricing applicability under the Income‑tax Act, 2025 signal a clear legislative intent to broaden the scope of the transfer pricing framework and limit threshold disputes. By revisiting the parameters of associated enterprise relationships, enlarging the ambit of international transactions, and statutorily addressing certain judicial interpretations, the amendments reinforce the primacy of economic substance.

For taxpayers, this may warrant a closer review of intercompany arrangements that were historically considered outside the transfer pricing regime, particularly in cases lacking direct equity participation. The factual matrix of each arrangement is likely to assume enhanced relevance, including the nature and degree of technological reliance, economic influence, and contractual dependencies in relation to procurement and sales. In this evolving context, rigorous economic and functional analysis, supported by contemporaneous documentation, is expected to assume increased significance.

[The authors are Associate Partner and Executive Partner, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]