SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAXCentral

Section 173 of Income Tax Act 2025

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 enterprises, in uncontrolled conditions;
1. (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—
2. (i)the production, storage, supply, distribution, acquisition or control of articles or goods; or
3. (ii)know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature; or
4. (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
5. (iv)provision of services of any kind; or
6. (v)carrying out any work in pursuance of a contract; or
7. (vi)investment or providing loan; or
8. (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;
1. (d)"specified date" means the date one month before the due date for furnishing the return of income under section 263(1) for the relevant tax year;
2. (e)"transaction" includes an arrangement, understanding or action in concert,—
3. (i)whether or not such arrangement, understanding or action is formal or in writing; or
4. (ii)whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.

Summary

Provides definitions for terms used in transfer pricing and anti-avoidance provisions, including Sections 161, 162, 163, 165, 171, and 172.
Defines "arm's length price" as a price applied or proposed to be applied in a transaction between independent parties in uncontrolled conditions.
Defines "enterprise" as a person or their permanent establishment engaged in activities such as production, storage, goods supply, services, commercial rights, loans, investments, or securities dealing.
Defines "permanent establishment" as a fixed place of business through which the business of the enterprise is wholly or partly carried on.
Defines "specified date" as the date exactly one month before the due date for furnishing the return of income under section 263(1) for the relevant tax year.
Defines "transaction" as including any arrangement, understanding, or action in concert, whether or not it is formal, in writing, or intended to be legally enforceable.
Defines "unit" as a unit of a business trust, certain specified funds, or an investor's beneficial interest in an Alternative Investment Fund.

Practical examples

1Karan runs a technology consulting firm with a permanent office in Tokyo where developers work. That Tokyo office is considered a "permanent establishment" under the definitions because it is a fixed place of business.

2Two related companies agree via an informal email thread to split office rent. Even though there is no formal signed paper contract and it is not intended to be legally enforceable in court, this arrangement is considered a "transaction" because it is an "understanding or action in concert."

FAQ

1. What does "arm's length price" mean under Section 173?

It means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

2. Does an arrangement have to be in writing to be considered a "transaction"?

No, a "transaction" includes any arrangement, understanding, or action in concert, whether or not such arrangement is formal or in writing.

3. How is the "specified date" defined in Section 173?

It is defined as the date one month before the due date for furnishing the return of income under section 263(1) for the relevant tax year.

4. What does "permanent establishment" include?

It includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

Test yourself

Q1.Under Section 173, what is the definition of the "specified date"?

Q2.Which of the following is true regarding the definition of a "transaction" under Section 173?

Q3.Under Section 173, a permanent establishment includes which of the following?

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