Comparison of Section 165 of the Income Tax Bill 2025 with Section 92C of the Income Tax Act 1961

The determination of arm’s length price (ALP) is a cornerstone of transfer pricing regulations in India, ensuring that transactions between associated enterprises (AEs) are conducted fairly and without tax manipulation. Section 92C of the Income Tax Act, 1961, and Section 165 of the Income Tax Bill, 2025, both deal with this crucial aspect of transfer pricing.

While both sections serve the same purpose, the 2025 Bill brings structural clarity while largely retaining the methods and compliance framework from the previous law. Below is a detailed comparison of the two sections.

1. Purpose and Scope

Both Section 92C (1961 Act) and Section 165 (2025 Bill) establish the rules for determining arm’s length price (ALP) in international transactions and specified domestic transactions between associated enterprises.

The goal is to ensure fair pricing and prevent tax evasion by requiring related-party transactions to be priced as they would be in an open-market transaction between independent parties.

2. Key Provisions and Comparisons

Methods for Determining Arm’s Length Price (ALP)

Both sections outline six methods for computing ALP. These remain unchanged between Section 92C and Section 165:

? Comparable Uncontrolled Price (CUP) Method – Compares the transaction price with a similar uncontrolled transaction. ? Resale Price Method (RPM) – Determines price based on resale margins in uncontrolled transactions. ? Cost Plus Method (CPM) – Adds an appropriate markup to costs incurred by the supplier. ? Profit Split Method (PSM) – Allocates total profit between associated enterprises based on their contributions. ? Transactional Net Margin Method (TNMM) – Compares the net profit margins of controlled and uncontrolled transactions. ? Other Prescribed Methods – Any other method as notified by the Central Board of Direct Taxes (CBDT).

Thus, the approach to selecting the most appropriate method remains the same in both the old and new provisions.

Selection and Application of ALP Method

• Section 92C (1961 Act): The most appropriate method should be applied based on the nature of the transaction, class of transaction, associated enterprises, or other relevant factors.
• Section 165 (2025 Bill): The same principle applies, but with improved wording and referencing to provide better clarity.

Tolerable Range for ALP Variations

• Section 92C allowed a variation of up to 3% from the computed arm’s length price.
• Section 165 retains this 3% tolerance range, unless notified otherwise by the Central Government.

This provision helps businesses by minimizing disputes over minor price fluctuations.

Role of the Assessing Officer (AO) in ALP Determination

Both sections allow the Assessing Officer (AO) to intervene and determine ALP if: ? The price used by the taxpayer does not follow the prescribed ALP methods. ? The data used in ALP determination is incorrect or unreliable. ? The taxpayer fails to submit necessary documentation (such as transfer pricing reports).

The AO must issue a notice to the taxpayer, allowing them to explain their pricing before making adjustments.

Consequences of ALP Adjustments

• Both sections state that if the AO recomputes ALP, it may increase taxable income.
• No additional deductions under Chapter VIII or Section 144 will be allowed on the increased income.
• If an associated enterprise has already deducted tax (TDS) on an adjusted amount, double taxation will be avoided for the payee entity.

3. Key Differences Between Section 92C and Section 165

1. Structural Reorganization for Clarity

• Section 92C was part of Chapter X in the Income Tax Act, 1961, which contained multiple transfer pricing provisions.
• Section 165 in the Income Tax Bill, 2025, is part of a newly structured framework, making it easier to interpret and cross-reference with other sections.

2. Improved Definition of ALP Selection Criteria

• Section 92C referenced various factors but did not clearly define how to choose the most appropriate method.
• Section 165 improves this by explicitly stating that the selection must be based on the transaction nature, associated enterprises, and functions performed.

3. Explicit Protection Against Double Taxation

• Section 165 explicitly states that if the income of one associated enterprise is adjusted, the corresponding income of the other AE will not be recomputed, preventing duplicate taxation.
• This was implied in Section 92C, but Section 165 makes it more direct and clear.

4. Cross-Referencing with New Compliance Sections

• Section 92C referenced Sections 92D & 92E for documentation and reporting.
• Section 165 now references new sections (e.g., Section 168 & 171), ensuring alignment with the revised tax code.

4. Implications for Businesses

For multinational corporations (MNCs), foreign subsidiaries, and Indian companies engaging in related-party transactions, the transition from Section 92C to Section 165 means:

? No major change in compliance requirements—the same ALP methods and rules apply. ? More clarity on ALP selection criteria, reducing ambiguity in choosing the most appropriate method. ? Continued flexibility with a 3% tolerance limit, minimizing disputes over small deviations. ? Stronger safeguards against double taxation, ensuring fair tax treatment of associated enterprises. ? Easier legal interpretation due to better structuring and cross-referencing with the new tax framework.

5. Final Thoughts

The shift from Section 92C (1961 Act) to Section 165 (2025 Bill) does not introduce major changes in substance but refines and modernizes the structure for better clarity and ease of compliance.

For businesses dealing with international and specified domestic transactions, the ALP determination rules remain the same, ensuring continuity and stability in transfer pricing regulations.