Section 161 of the Income-tax Act, 2025 requires income and any allowance for expense or interest arising from an international transaction or specified domestic transaction to be determined having regard to the arm's length price.
What section 161 does
Section 161 is the transfer pricing charging section — the successor to section 92 of the Income-tax Act, 1961. Note the renumbering carefully: section 92 of the new Act is income from other sources, a different subject entirely.
The rule is stated in three limbs. Income arising from an international or specified domestic transaction is determined having regard to the arm's length price. So is any allowance for expense or interest from such a transaction. And where associated enterprises agree to allocate, apportion or contribute to costs for a benefit, service or facility, the amount allocated or contributed is determined at arm's length.
Sub-section (4) is the one-way valve that defines the whole regime: the section does not apply if the determination has the effect of reducing the income chargeable to tax or increasing the loss computed on the basis of the entries in the books. Transfer pricing can only increase Indian taxable income, never decrease it.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 92(1) | Income from an international transaction at arm's length | 161(1) |
| 92(2) | Cost allocation and contribution arrangements | 161(3) |
| 92(2A) | Specified domestic transactions | 161(1) and (2) |
| 92(3) | No downward adjustment | 161(4) |
| 92A | Associated enterprise | 162 |
| 92B | International transaction | 163 |
| 92BA | Specified domestic transaction | 164 |
| 92C | Determination of arm's length price | 165 |
| 92D and 92E | Documentation and accountant's report | 171 and 172 |
Section 161 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-sections (1) and (2) — income and expenses both
Any income arising from an international transaction or a specified domestic transaction shall be determined having regard to the arm's length price. And any allowance for any expense or interest arising from such a transaction shall also be determined having regard to the arm's length price. Both sides of the profit and loss account are therefore within the regime — understated income and overstated expenditure are treated alike.
Sub-section (3) — cost contribution arrangements
Where two or more associated enterprises enter into a mutual agreement or arrangement for (a) allocation or apportionment of any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided to one or more of them; or (b) any contribution to such cost or expense, then the amount allocated, apportioned or contributed shall be determined having regard to the arm's length price of that benefit, service or facility.
Sub-section (4) — adjustments only work one way
The section shall not apply if the determination under sub-section (1), (2) or (3) has the effect of reducing the income chargeable to tax or increasing the loss, computed on the basis of entries made in the books of account for the tax year in which the transaction was entered into. A taxpayer cannot use transfer pricing to argue its Indian profit down.
The supporting sections
Section 162 defines associated enterprise — and the new Act places that definition here because it is used across the Act. Section 163 defines international transaction, section 164 specified domestic transaction, and section 165 sets out how the arm's length price is determined. Section 166 is the reference to the Transfer Pricing Officer.
Safe harbours, APAs and secondary adjustment
Section 167 carries the Board's power to make safe harbour rules, sections 168 and 169 the advance pricing agreement and its effect, and section 170 the secondary adjustment. Documentation is section 171 and the accountant's report section 172, with the penalty for failing to furnish that report in section 447.
Worked example
An Indian subsidiary transacts with its overseas parent in tax year 2026-27.
| Transaction | Book position | Arm's length position | Effect under section 161 |
|---|---|---|---|
| Export of services to the parent | ₹40,00,00,000 | ₹46,00,00,000 | Income increased by ₹6,00,00,000 — sub-section (1) |
| Management fee paid to the parent | ₹9,00,00,000 | ₹6,00,00,000 | Allowance restricted to ₹6,00,00,000 — sub-section (2) |
| Share of group IT platform cost contributed | ₹4,00,00,000 | ₹3,20,00,000 | Restricted to ₹3,20,00,000 — sub-section (3) |
| Import of components | ₹18,00,00,000 | ₹20,00,00,000 (arm's length is higher) | No adjustment — it would reduce Indian income, barred by sub-section (4) |
The fourth row shows the asymmetry plainly. Where the arm's length price would increase the deductible cost and reduce Indian taxable income, section 161 simply does not apply. The relief in such a case has to come from a mutual agreement procedure under a section 159 treaty or an advance pricing agreement under section 168, not from this section.
Documentation under section 171 and the accountant's report under section 172 are the compliance obligations that follow, with penalties in sections 442 and 447.
Compliance checklist and due dates
- Identify every international transaction (section 163) and specified domestic transaction (section 164) with associated enterprises under section 162.
- Benchmark both income and expenses; sub-section (2) covers the expense side expressly.
- For group cost sharing, benchmark the allocation or contribution under sub-section (3), not only the total cost.
- Do not expect a downward adjustment; sub-section (4) bars any determination that reduces income or increases loss.
- Maintain documentation under section 171 and furnish the accountant's report under section 172 on time — the penalty is section 447.
- Consider a safe harbour under section 167 or an advance pricing agreement under section 168 for recurring transactions.
- Watch the secondary adjustment in section 170 once a primary adjustment is made.
Common mistakes
- Citing section 92 for transfer pricing under the new Act; section 92 is now income from other sources and transfer pricing is section 161.
- Benchmarking only revenue transactions and ignoring intra-group expenses and interest.
- Expecting an adjustment that reduces Indian income; sub-section (4) prevents it.
- Treating a cost contribution arrangement as outside the regime because no invoice was raised.
- Missing the section 172 report deadline, which attracts penalty under section 447.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.