Section 165 Determination of arm’s length price.

Income-tax Act, 2025

At a Glance

The document is Clause 165 of the Income Tax Bill, 2025 (Old Version), titled "Determination of arm's length price." It sets out methods and procedures for ascertaining the arm's length price for international and specified domestic transactions, and empowers the Assessing Officer (AO) to determine such price in assessment proceedings. The provision principally affects taxpayers engaged in related-party cross-border or specified domestic transactions and the tax department. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 165 (Bill) sits under "Special Provisions Relating to Avoidance of Tax" within the Income Tax Bill, 2025. The clause deals with determination of the arm's length price for international and specified domestic transactions. Definitions or explanatory notes: Not stated in the document. The clause lists the recognised transfer-pricing methods, prescribes selection and application principles for the "most appropriate method," and prescribes the AO's powers and procedure to determine arm's length price during assessment proceedings. Cross-references in the Bill: section 168(1) and section 171(2) are cited in the Old Version.

Statutory Provision Mode

Text & Scope

Clause 165 provides as follows (summary of structure):

• Sub-section (1): Lists methods for determining the arm's length price; the prescribed methods are: (a) comparable uncontrolled price (CUP); (b) resale price method (RPM); (c) cost plus method; (d) profit split method; (e) transactional net margin method (TNMM); and (f) "such other method as prescribed by the Board."
• Sub-section (2): Requires selection of the "most appropriate method" by reference to the nature of the transaction, class of transaction, class of associated enterprise, functions performed, or other relevant factors as the Board may prescribe; and mandates that the selected method be applied "in such manner as prescribed."
• Sub-section (3): Specifies how the arm's length price is to be fixed where one or more prices are determined by the most appropriate method. If only one price is determined, the arm's length price shall be either (i) that price, or (ii) the actual transaction price if the variation between the method-determined ALP and the actual price does not exceed a percentage (not exceeding 3%) notified by the Central Government. If more than one price is determined by the most appropriate method, the price is to be determined in such manner as prescribed.
• Sub-section (4): Grants the Assessing Officer power, during assessment proceedings, to determine the arm's length price under sub-sections (1)-(3) where, based on material in his possession, he is of the opinion that: (a) the price charged or paid has not been determined as per sub-sections (1)-(3); or (b) any information and document relating to the transaction has not been kept and maintained by the assessee as per section 168(1); or (c) the information or data used by the assessee is not reliable or correct; or (d) the assessee has failed to furnish, within specified time, any information or document required by a notice u/s 171(2).
• Sub-section (5): Requires the AO, before determining ALP under sub-section (4), to give a notice calling upon the assessee to show cause why ALP should not be determined on the basis of material in the AO's possession.
• Sub-section (6): Provides that on determination of ALP under sub-section (4), the AO may compute the total income of the assessee having regard to that ALP.
• Sub-section (7): States that no deduction shall be allowed u/s 144 or under Chapter VIII in respect of income by which the total income of the assessee is enhanced after computation under sub-section (6).
• Sub-section (8): Provides that where the total income of an associated enterprise is computed under sub-section (6) on account of ALP paid to another associated enterprise from which tax has been deducted or was deductible under Chapter XIX-B, the income of the other associated enterprise shall not be recomputed by reason of such determination in the case of the first enterprise.

Interpretation

The text indicates a legislative intent to: (i) adopt standard OECD-aligned transfer-pricing methods (CUP, RPM, cost-plus, profit split, TNMM), while preserving a power to prescribe additional methods; (ii) emphasise selection of the "most appropriate method" on a facts-and-circumstances basis, subject to Board prescriptions; (iii) provide a statutory tolerance (up to 3% as notified) permitting actual transaction price to be accepted in certain circumstances; and (iv) empower AOs to re-determine ALP during assessment where documentation or reliability is deficient, subject to procedural safeguards (a show-cause notice). The clause contemplates administrative rules to operationalise method selection and multi-price situations by reference to "as prescribed" language.

Exceptions/Provisos

The provision contains specific conditional statements rather than formal provisos. Notable carve-outs/conditions: the option to accept the actual transaction price despite a difference from the method-determined price is limited by a percentage ceiling not exceeding 3% as notified by the Central Government. The AO's power to act under sub-section (4) is conditional on being "of the opinion" based on material that one or more specified deficiencies exist (non-compliance with method, lack of records per section 168(1), unreliability of information, or failure to furnish information u/s 171(2)). Further details on application where multiple prices arise are left to rules ("as prescribed").

Illustrations

• Example 1: A taxpayer applies TNMM and arrives at a single arm's length price for a specified domestic transaction; that price is the arm's length price under sub-section (3)(a)(i). (Consistent with text.)
• Example 2: A taxpayer's method-determined ALP is 100 and the actual transaction price is 103; if the notified tolerance is 3% of the actual price, the AO may accept the actual price as ALP under sub-section (3)(a)(ii). (Consistent with text.)
• Example 3: The AO, during assessment, considers the taxpayer's transfer-pricing documentation incomplete per section 168(1); the AO may proceed to determine ALP under sub-section (4) after issuing a notice under sub-section (5). (Consistent with text.)

Interplay

The clause expressly refers to section 168(1) (record-keeping obligation) and section 171(2) (notice to furnish information). It also references section 144 and Chapter VIII in relation to deductions and Chapter XIX-B regarding tax deduction at source. Further interplay with Rules/Notifications/Circulars is signalled by multiple references to matters being "as prescribed" and to a percentage "notified by the Central Government." Specific rules, forms, timelines, and Board prescriptions are not contained in the clause. Details of such interplay: Not stated in the document.

Differences between the Clause 165 of the Income Tax Bill, 2025 (Old Version) and Section 165 of the Income-tax Act, 2025

Practical Implications

• Compliance and risk areas: Taxpayers undertaking international/specified domestic related-party transactions must choose and apply the "most appropriate method" and maintain records as required by section 168(1). Failure to do so exposes taxpayers to AO re-determination of ALP under sub-section (4), with consequent reassessment risk and potential income enhancement that cannot be offset by deductions u/s 144 or Chapter VIII as per sub-section (7).
• Record-keeping/evidence points: The clause makes material compliance with record-keeping obligations a trigger for AO action; therefore, contemporaneous transfer-pricing documentation and reliable data supporting the chosen method are essential. The AO must give a show-cause notice (sub-section (5)) before proceeding; preserving audit trails and records of responses to AO notices, and demonstrating reliability of comparables and data, are central to avoiding adverse re-determination.

Key Takeaways

• The clause codifies standard transfer-pricing methods and mandates selection of the "most appropriate method" based on prescribed factors.
• A statutory tolerance mechanism permits acceptance of the actual transaction price where deviation from method-determined ALP is within a notified percentage (not exceeding 3%).
• The AO is empowered to determine ALP during assessment if documentation is not maintained as per section 168(1), data is unreliable, or required information is not furnished under a notice.
• Procedural protection for taxpayers: the AO must give a show-cause notice before determining ALP on his own material.
• Income enhancements made by the AO on account of ALP determination are not eligible for deduction u/s 144 or Chapter VIII (sub-section (7)).
• The provision prevents automatic recomputation of the counterparty's income where ALP adjustments are made in respect of payments to that counterparty who has had tax deducted under Chapter XIX-B (sub-section (8)).
• Operational details-application rules, procedures for multi-price outcomes, Board prescriptions and Central Government notifications-are left to subordinate legislation and notifications.

Full Text:

Section 165 Determination of arm’s length price.