s.92 — Income from an international transaction computed at arm's length
The provision that requires any income arising from an international transaction to be computed having regard to the arm's length price.
Income-tax Act, 1961
s.92
Income-tax Act, 2025
s.161
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 92(1) of the Income-tax Act, 1961 requires that any income arising from an international transaction be computed having regard to the arm's length price, and its Explanation extends the same requirement to the allowance for any expense or interest arising from such a transaction. Section 92(2) covers a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of any cost or expense incurred in connection with a benefit, service or facility, and section 92(2A) does the same for a specified domestic transaction. Section 92(3) is the saving: the section does not apply where its application would have the effect of reducing the income chargeable to tax or increasing the loss computed on the basis of entries made in the books. The courts have treated section 92 and Chapter X as machinery rather than as a charging provision, so that a transfer pricing adjustment computes the quantum of income that sections 4 and 5 already charge and does not alter the head or the nature of that income, which is how ITAT Ahmedabad put it in Sun Pharma Advance Research. The counterpart in the Income-tax Act, 2025 is section 161.
What the provision does
Requires the quantum of income from an international transaction to be measured at arm's length, and bars the adjustment from being used to reduce income or increase a loss. It does NOT create a charge of its own, so where no income arises at all the section has nothing to compute, which is the basis on which the Bombay High Court decided the share premium question in Vodafone India Services.
Threshold questions
- Whether an international transaction or specified domestic transaction exists at all
- Whether the counterparties are associated enterprises within section 92A
- Whether income arises from the transaction, as distinct from a capital receipt from which none arises
- Whether the adjustment would reduce income or increase a loss, in which case sub-section (3) bars it
In practice
The recurring disputes.
Machinery or charge
Assessees argue that Chapter X is purely machinery, so that if the charge under sections 4 and 5 fails there is nothing for the machinery to operate on, and that an adjustment cannot bring notional income to tax. The Revenue answers that the machinery characterisation is correct but does not help: where income does arise, Chapter X measures it and sections 4 and 5 charge it, and the head and nature of the income are unaffected. The argument has real force only where the receipt is on capital account or no income arises at all.
The reach of the Vodafone principle
The Bombay High Court held that Chapter X cannot apply to a share premium on a capital account issue because no income arose. Assessees press that as a general proposition that an adjustment needs an independent charge. The Revenue, and the Ahmedabad Special Bench in Doshi Accounting, confine it to its facts, as a case about whether income arises rather than about how much income is. Where the transaction produces income whose quantum alone is in issue, the principle does not assist.
Whether sub-section (3) protects a loss-making assessee
Sub-section (3) prevents the section being applied so as to reduce income or increase a loss computed on the basis of the books. Assessees argue from it that an adjustment which only shrinks a carried forward loss achieves nothing and should not be made. The Revenue reads the sub-section as directed at the direction of the adjustment rather than at its utility, so that an upward adjustment remains available even where the assessee is in loss. The point arises most often alongside a holiday or exemption claim.