Section 173 · Avoidance of tax
Section 173 of the Income-tax Act, 2025 — Definitions for Arm's Length Price and Transfer Pricing
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter X
📜 What the law says — Section 173, Income-tax Act 2025
173. For the purposes of this section and sections 161, 162, 163, 165, 171 and 172,
unless the context otherwise requires,—
(a) “arm’s length price” means a price which is applied or proposed to be
applied in a transaction between persons other than associated enter-
prises, in uncontrolled conditions;
(b) “enterprise” means a person (including a permanent establishment of
such person) who is, or has been, or is proposed to be, engaged in any
activity relating to—
(i) the production, storage, supply, distribution, acquisition or control
of articles or goods; or
(ii) know-how, patents, copyrights, trade-marks, licences, franchises
or any other business or commercial rights of similar nature; or
(iii) any data, documentation, drawing or specification relating to any
patent, invention, model, design, secret formula or process of which
the other enterprise is the owner or in respect of which the other
enterprise has exclusive rights; or
(iv) provision of services of any kind; or
(v) carrying out any work in pursuance of a contract; or
(vi) investment or providing loan; or
(vii) business of acquiring, holding, underwriting or dealing with shares,
debentures or other securities of any other body corporate,
whether such activity or business is carried on, directly or through one
or more of its units or divisions or subsidiaries, or whether such unit or
division or subsidiary is located at the same place where the enterprise
is located or at a different place or places;
(c) “permanent establishment”, referred to in clause (b), includes a fixed
place of business through which the business of the enterprise is wholly
or partly carried on;
(d) “specified date” means the date one month before the due date for fur-
nishing the return of income under section 263(1) for the relevant tax
year;
(e) “transaction” includes an arrangement, understanding or action in
concert,—
(i) whether or not such arrangement, understanding or action is formal
or in writing; or
(ii) whether or not such arrangement, understanding or action is in-
tended to be enforceable by legal proceeding.
Avoidance of incom
In plain language
What Section 173 actually does
Section 173 is the definitions clause of the transfer-pricing chapter (Chapter X) of the Income-tax Act, 2025. It does not by itself tax anything or create any liability. Instead, it fixes the precise meaning of the key words that the operative transfer-pricing sections use — most importantly "arm's length price", "enterprise", "permanent establishment", "specified date" and "transaction". It is the direct successor to Section 92F of the old Income-tax Act, 1961, and the two are worded almost identically. Because the whole transfer-pricing machinery turns on these terms, Section 173 quietly controls how Sections 161, 162, 163, 165, 171 and 172 are read.
The key defined terms
- Arm's length price (ALP): a price which is applied, or proposed to be applied, in a transaction between persons other than associated enterprises, in uncontrolled conditions. This is the benchmark — the price unrelated parties would have agreed on in the open market.
- Enterprise: any person (including a permanent establishment of such person) engaged in activities such as production, storage, supply, distribution, acquisition or control of goods; dealing in know-how, patents, copyrights, trade-marks, licences or franchises; provision of services; carrying out any work under contract; investment; lending money; or dealing in shares and securities — carried on directly or through one or more units, divisions or subsidiaries, and whether at one place or many.
- Permanent establishment (PE): a fixed place of business through which the business of the enterprise is wholly or partly carried on.
- Specified date: the date one month before the due date for furnishing the return of income under Section 263(1) for the relevant tax year. This drives transfer-pricing report and documentation deadlines.
- Transaction: includes an arrangement, understanding or action in concert, whether or not it is formal, in writing, or intended to be enforceable by legal proceeding. This deliberately wide net stops taxpayers escaping simply because nothing was written down.
Who it applies to
Section 173 is relevant to every taxpayer that enters into an international transaction or a specified domestic transaction with an associated enterprise — typically Indian companies that are part of a multinational group, Indian subsidiaries of foreign parents, and foreign companies operating in India through a PE or subsidiary. If you have no related-party cross-border dealings, this section (and Chapter X) generally does not touch you.
How it interacts with the rest of Chapter X
- Section 161 — computes income from international/specified domestic transactions having regard to the ALP; it also preserves the anti-avoidance rule that an ALP adjustment cannot be used to reduce Indian taxable income or increase a loss.
- Section 162 — defines "associated enterprise" (the 26% voting-power / control tests). Section 173's ALP definition is meaningless without knowing who is "associated".
- Section 163 — defines "international transaction" (tangible property, intangibles, services, financing, cost-sharing, business restructuring, and a residual clause).
- Section 165 — prescribes the six methods (CUP, RPM, CPM, PSM, TNMM and Other Method) for determining the ALP using the "most appropriate method".
- Sections 171 & 172 — documentation, the accountant's report and record-keeping, whose timelines hang on the "specified date".
Practical implications
- Because "transaction" is defined so broadly, informal group understandings, cost allocations and even implicit financing can be pulled into transfer-pricing scrutiny.
- The ALP benchmark forces you to price related-party dealings as if they were with a stranger — and to keep evidence (a contemporaneous TP study) proving it.
- The "specified date" (one month before the return due date) is the practical deadline for the accountant's report; missing it exposes you to penalty.
- Since the wording tracks old Section 92F, the large body of existing case law and CBDT guidance on these terms continues to remain persuasive.
💡 Example
Worked example 1 — spotting the ALP. Ind-Tech Pvt Ltd (India) sells 1,000 software licences to its US parent for ₹8,000 each (₹80 lakh). Unrelated Indian customers buy the same licence for ₹12,000. Under Section 173, the "arm's length price" is the price in uncontrolled conditions — ₹12,000. So the arm's length value is ₹1.2 crore, an upward adjustment of ₹40 lakh to Ind-Tech's income. That ₹40 lakh is added to taxable income under Section 161 (and, because of the anti-avoidance rule, cannot be used to reduce tax elsewhere).
Worked example 2 — no written contract, still a "transaction". Global Foods India routinely lets its Singapore associate use its customer database at no charge, purely on a verbal understanding. There is no agreement on paper. Because Section 173 defines "transaction" to include an arrangement or understanding "whether or not in writing or legally enforceable", this free use of an intangible is still an international transaction requiring an ALP. If an independent party would have paid, say, ₹15 lakh a year for such access, the department can benchmark and add ₹15 lakh.
A relatable story. Meera runs the India arm of a mid-size electronics group. She assumed transfer pricing "only applied to written contracts" and ignored a casual arrangement where her team gave engineering support to the German parent for free. During assessment, the officer pointed to Section 173's wide "transaction" definition, treated the free support as a service that should have been charged at arm's length, and made an adjustment plus interest. Meera's lesson: in transfer pricing, the definition — not the paperwork — decides what counts.
| Term (Section 173) | Meaning in plain English | Why it matters |
|---|
| Arm's length price | Price used between unrelated parties in uncontrolled conditions | The benchmark for adjusting related-party prices under Sec 161/165 |
| Enterprise | Any person (incl. its PE) carrying on business, IP, services, finance or trading activity | Identifies the entities whose dealings are tested |
| Permanent establishment | Fixed place of business through which business is wholly/partly carried on | Brings foreign entities' Indian presence into the net |
| Specified date | One month before the return due date under Sec 263(1) | Deadline for the accountant's report / TP documentation |
| Transaction | Any arrangement, understanding or action in concert — written or not | Prevents escape via informal or verbal deals |
Related sections
Section 161 — Computation of income from international & specified domestic transactions Section 162 — Meaning of associated enterprise Section 163 — Meaning of international transaction Section 165 — Determination of arm's length price (methods) Section 171 — Transfer-pricing documentation and information Section 172 — Accountant's report on international/specified domestic transactions
Frequently asked questions
What is Section 173 of the Income-tax Act, 2025 about?
It is the definitions clause of the transfer-pricing chapter, defining terms like arm's length price, enterprise, permanent establishment, specified date and transaction. It is the successor to Section 92F of the 1961 Act.
What is the old-law equivalent of Section 173?
Section 92F of the Income-tax Act, 1961. The definitions are almost word-for-word the same, with updated section cross-references to Chapter X of the 2025 Act.
Does Section 173 apply to me if I only deal with unrelated parties?
Generally no. Transfer pricing applies to transactions between associated enterprises (mainly cross-border). If you have no related-party international or specified domestic transactions, Chapter X usually does not affect you.
What does 'arm's length price' mean under Section 173?
It is the price that would apply in a transaction between persons who are not associated enterprises, under uncontrolled (open-market) conditions. Related-party dealings must be tested against this benchmark.
Why is 'transaction' defined so broadly?
To close loopholes. It includes any arrangement, understanding or action in concert, whether or not written or legally enforceable, so informal or verbal group dealings still fall within transfer pricing.
What is the 'specified date' under Section 173?
It is the date one month before the due date for filing the return of income under Section 263(1) for that tax year, and it governs transfer-pricing report and documentation deadlines.
Does Section 173 create any tax liability by itself?
No. It only defines terms. The actual computation and adjustment happen under Sections 161 and 165; Section 173 simply supplies the meaning those sections rely on.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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