I-T Bill: Select Panel Proposes Wider Transfer-Pricing Net

Companies wielding substantive influence with other firms may face more scrutiny

- MONIKA YADAV

In a move that could have far-reaching repercussions on the corporate landscape, the proposed new Income Tax (I-T) law could bring inter-corporate transactions under transfer pricing scrutiny if the tax department considers one of the firms to have a substantive influence on another, even if thresholds pertaining to shareholding or board control are not triggered.

This is a key recommendation made by the Lok Sabha's select committee in its report on the draft Income Tax Bill, 2025, tabled in Parliament on Monday.

Transfer pricing refers to tax rules that regulate the pricing of transactions between related or associated enterprises, especially cross-border transactions—to ensure they reflect fair market value and prevent profit shifting.

The select panel's recommendation could significantly widen the scope of transfer pricing provisions, as it has suggested treating companies exercising substantial influence over another as associated enterprises (AEs) to be brought under transfer pricing scrutiny, even if the said firms have not met currently laid down criteria like shareholding or board control levels.

The Income Tax Act of 1961, which the new Bill is likely to replace, defines associated enterprises and related parties through two limbs. The first limb is a general principle stating that an enterprise is an associated enterprise if it participates, directly or indirectly, in the management, control, or capital of another enterprise. The second limb has multiple criteria for what qualifies as associated enterprise, such as 26 per cent voting power, appointment of the majority of the board of directors, business dependency on the other enterprise, and so on.