Section 92 of ITA, 1961 : Section 92: Computation Of Income From International Transaction Having Regard To Arms Length Price

Explanation using Example

Consider a hypothetical scenario where an Indian software development company, Tech Solutions Pvt. Ltd., has a subsidiary in Germany, CodeGen GmbH. Tech Solutions provides software development services to CodeGen at a significantly lower price than the market rate. This transaction between the two associated enterprises is an international transaction.

Under Section 92(1) of the Income-tax Act, 1961, the income arising from this transaction must be computed based on the arm's length price, which is the price that would be charged in a similar transaction between unrelated parties under similar circumstances. If the market rate for such services is higher than what Tech Solutions is charging CodeGen, the Indian tax authorities may adjust the income of Tech Solutions to reflect the arm's length price, thereby increasing the company's taxable income in India.

This ensures that both companies report a fair income for tax purposes, preventing Tech Solutions from shifting profits to a jurisdiction with a lower tax rate (Germany, in this case) by undercharging for the services provided to its subsidiary.