Clause 164 Meaning of specified domestic transaction.

Income Tax Bill, 2025

Introduction

Clause 164 of the Income Tax Bill, 2025 and Section 92BA of the Income-tax Act, 1961 both address the concept of "specified domestic transaction" within the framework of Indian transfer pricing law. These provisions are part of the broader legislative scheme to prevent tax avoidance through transactions between related parties within India, by subjecting such transactions to arm's length pricing norms that were historically applied to international transactions. The introduction and subsequent evolution of these provisions reflect the legislature's response to the need for curbing profit shifting and tax base erosion not only across borders but also within domestic group entities and specified relationships.

This commentary provides an in-depth analysis of Clause 164 as proposed in the Income Tax Bill, 2025, explores its objectives, structure, and practical implications, and then undertakes a comparative analysis with the existing Section 92BA of the Income-tax Act, 1961. The purpose is to elucidate the legislative intent, highlight the changes and continuities, and assess the potential impact on taxpayers and administration.

Objective and Purpose

The primary objective behind introducing and maintaining provisions like Clause 164 and Section 92BA is to extend the transfer pricing regime to certain high-value domestic transactions between related parties or specified persons. Traditionally, transfer pricing regulations were limited to international transactions, aimed at preventing profit shifting to low-tax jurisdictions. However, the Indian legislature recognized that similar tax avoidance risks arise from transactions between related domestic entities, especially when one enjoys tax benefits (such as tax holidays, lower tax rates, or deductions) and the other does not.

The legislative intent is thus to ensure that such specified domestic transactions are conducted at arm's length prices, thereby preventing manipulation of profits and tax base erosion within India. The threshold of Rs. 20 crore for the aggregate value of such transactions ensures that only significant transactions are covered, balancing compliance burden with anti-avoidance objectives.

The historical context stems from recommendations of the Tax Administration Reform Commission and the Supreme Court's observations in various cases relating to profit shifting within group entities, leading to the introduction of Section 92BA by the Finance Act, 2012, and its subsequent modifications. Clause 164 in the Income Tax Bill, 2025, represents a continuation and potential streamlining of this policy.

Detailed Analysis of Clause 164 of the Income Tax Bill, 2025

Text of the Provision

Clause 164 defines "specified domestic transaction" for the purposes of the chapter on avoidance of tax. The clause enumerates several types of transactions, not being international transactions, that fall within its ambit if the aggregate value exceeds twenty crore rupees in a tax year.

1. Any transaction referred to in section 122;
2. Any transfer of goods or services referred to in section 140(9);
3. Any business transacted between the assessee and other person as referred to in section 140(13);
4. Any transaction, referred to in any other section under Chapter VIII or section 144, to which provisions of section 140(9) or (13) are applicable;
5. Any business transacted between the persons referred to in section 205(4);
6. Any other transaction as prescribed.

The provision also specifies that for a transaction to qualify as a "specified domestic transaction," the aggregate value in a tax year must exceed Rs. 20 crore.

Breakdown and Interpretation of Key Clauses

a) Transactions referred to in section 122

Section 122 (as per the Bill) likely deals with certain specified relationships or arrangements between entities, possibly akin to related party transactions. The inclusion ensures that transactions falling under the purview of section 122 are subject to transfer pricing norms if they cross the prescribed threshold. The specifics of section 122 would determine the breadth of this clause.

b) Transfer of goods or services u/s 140(9)

Section 140(9) appears to address the transfer of goods or services between certain entities or under specified circumstances. By covering such transfers, Clause 164 seeks to prevent manipulation of prices in intra-group transactions, especially where differential tax treatment is possible.

c) Business transacted u/s 140(13)

Section 140(13) likely pertains to business dealings between an assessee and specified persons, possibly involving arrangements that could affect the computation of taxable income. The reference ensures that such dealings are brought within the transfer pricing framework.

d) Transactions under Chapter VIII or section 144, to which section 140(9) or (13) applies

This clause serves as a catch-all, ensuring that any transaction under Chapter VIII (which may deal with deductions, incentives, or special tax regimes) or section 144 (possibly relating to assessment procedures) that invokes section 140(9) or (13) is covered. This broadens the scope to capture transactions that might otherwise escape scrutiny.

e) Business between persons u/s 205(4)

Section 205(4) likely addresses transactions between specified persons, possibly under new tax regimes or concessional tax rates. Bringing such transactions within the definition aims to prevent misuse of such regimes through non-arm's length dealings.

f) Any other transaction as prescribed

This residual clause empowers the Central Board of Direct Taxes (CBDT) or the government to notify additional transactions as "specified domestic transactions" through rules or notifications. This provides flexibility to respond to emerging avoidance schemes or policy needs.

g) Threshold Condition

The threshold of Rs. 20 crore ensures that only high-value transactions are covered, reducing compliance burden for smaller entities while targeting transactions with significant tax impact.

Ambiguities and Issues in Interpretation

While Clause 164 is comprehensive, its reliance on cross-references to other sections (such as 122, 140(9), 140(13), 205(4)) means that the precise scope depends on the content and interpretation of those sections. Any ambiguity or lack of clarity in those cross-referenced sections could lead to interpretational disputes.

The phrase "any other transaction as prescribed" is intentionally broad, giving significant discretion to the administration. While this enables flexibility, it also raises concerns about potential overreach or uncertainty for taxpayers.

Further, the clause does not expressly refer to any specific tax benefit or differential tax treatment as a precondition, unlike some earlier domestic transfer pricing provisions. This could potentially widen the net to transactions without a clear tax arbitrage motive.

Practical Implications

Businesses: Large corporate groups, especially those with multiple entities availing tax incentives, will need to review intra-group transactions to ensure compliance with arm's length pricing. The Rs. 20 crore threshold means that medium and large enterprises are primarily affected. Compliance will involve documentation, benchmarking, and potentially transfer pricing audits.

Tax Authorities: The provision equips tax authorities with the legal basis to scrutinize high-value domestic transactions for arm's length compliance, thereby safeguarding the tax base. However, it also imposes a burden to develop expertise in domestic transfer pricing, which can be more complex due to the lack of external comparable data.

Tax Advisors and Professionals: The evolving scope and periodic changes in covered transactions necessitate continuous monitoring and advisory services, increasing demand for specialized transfer pricing expertise.

Compliance Requirements and Procedural Aspects

Entities engaging in specified domestic transactions above the threshold must maintain transfer pricing documentation, file Form 3CEB (or its equivalent), and be prepared for scrutiny. The requirement for contemporaneous documentation and benchmarking against arm's length standards increases compliance costs and administrative workload.

The residual power to prescribe further transactions adds a layer of uncertainty, requiring businesses to stay updated with notifications and amendments.

Comparative Analysis: Clause 164 vs. Section 92BA

Key Points of Similarity

• Both provisions exclude international transactions, focusing only on domestic transactions.
• Both set the aggregate value threshold at Rs. 20 crore.
• Both empower the government to prescribe further transactions by notification/rule.
• Both aim to bring specified high-value domestic transactions within transfer pricing regulations to prevent tax avoidance.

Key Points of Divergence

• Reference Structure: Section 92BA uses explicit references to sections dealing with tax holidays (80A, 80-IA, 10AA, 115BAB, 115BAE), while Clause 164 uses indirect references (e.g., sections 122, 140(9), 140(13), 205(4)), possibly reflecting a renumbering or restructuring in the new Bill.
• Scope and Breadth: Clause 164's reliance on cross-references and a residual clause may allow for a broader and more flexible scope, depending on how the referenced sections are drafted and interpreted.
• Omissions and Additions: Section 92BA originally covered payments to related persons u/s 40A(2)(b), but this was omitted in 2017. Clause 164 does not explicitly mention such payments, possibly indicating a policy shift or a different approach in the new Bill.
• Alignment with New Regimes: Section 92BA was amended over time to cover new concessional tax regimes (e.g., 115BAB, 115BAE). Clause 164's reference to section 205(4) may serve a similar purpose in the new legislative framework.

Policy Evolution and Rationale for Changes

The shift from explicit references in Section 92BA to more generalized or cross-referenced clauses in Clause 164 could be interpreted as an attempt to modernize and streamline the legislative framework, making it adaptable to future changes without frequent amendments. The residual clause in both provisions is a common legislative device to future-proof the law against evolving tax avoidance schemes.

The omission of explicit reference to section 40A(2)(b)-type payments (i.e., related party expenditure) in Clause 164 may reflect an assessment that such payments are better addressed through disallowance provisions rather than transfer pricing rules, especially after practical difficulties and litigation experienced u/s 92BA.

Potential Issues and Challenges

The move towards broader and more flexible definitions in Clause 164, while administratively convenient, may create interpretational uncertainties for taxpayers. The practical scope of "specified domestic transaction" will depend heavily on the content and interpretation of the cross-referenced sections. Unless accompanied by clear guidance and rules, this may increase litigation and compliance uncertainty.

Another challenge is the continued burden of documentation and compliance for large business groups, especially in the absence of robust domestic comparables for benchmarking. The administration must balance anti-avoidance objectives with the need to avoid excessive compliance costs.

Conclusion

Clause 164 of the Income Tax Bill, 2025, marks a continuation and possible evolution of India's domestic transfer pricing regime, aiming to prevent tax avoidance through high-value transactions between specified domestic entities. Its structure, relying on cross-references and residual clauses, seeks to provide flexibility and future-proofing, but may also increase interpretational complexity. The threshold and types of transactions covered largely mirror the intent and scope of Section 92BA, though with some structural and policy shifts reflecting legislative experience and changing economic realities.

As the Indian tax system continues to evolve, clarity in the referenced provisions, detailed guidance, and stakeholder engagement will be crucial to ensure that the anti-avoidance objectives are met without imposing disproportionate compliance burdens or fostering uncertainty. Future reforms may focus on refining the scope, improving comparability analysis, and providing administrative clarity to balance the interests of the exchequer and taxpayers.

Full Text:

Clause 164 Meaning of specified domestic transaction.