Chapter X - Special Provisions Relating to Avoidance of Tax
Section 163
Section 163: meaning of "international transaction"
Section 163 is a definitions provision that underpins the whole transfer pricing chapter - it fixes what counts as an "international transaction," the trigger for arm's-length pricing rules under Section 161.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) For the purposes of this Chapter, the expression “international transaction” means a transaction between two or more associated enterprises, one of which is necessarily a non-resident, and includes— (a) the purchase, sale, transfer, lease or use of tangible property, including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, lending or borrowing of money, including,–– (i) any type of long-term or short-term borrowing, lending or guarantee; or (ii) purchase or sale of marketable securities; or (iii) any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has any bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (f) a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises; (g) any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
(2) A transaction entered into by an enterprise with a person other than an associated enterprise (“other person”) shall, for sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if— (a) there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise; or (b) the terms of the relevant transaction are determined, in substance, between such other person and the associated enterprise, and the enterprise or the associated enterprise or both of them are non-residents, irrespective of whether the other person is a non-resident or not.
(3) The expression “intangible property” shall include:— (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.
Introduction
Section 163 defines international transactions for transfer pricing. It covers associated-enterprise dealings with a non-resident, including property, financing, services, restructuring and cost-sharing, plus a third-party deeming rule when an associated enterprise sets the terms.
Key takeaways
International transaction
The provision covers a transaction between associated enterprises when at least one is non-resident, including property, financing, services and business restructuring categories.
Deemed transaction
It can also treat a transaction with an unrelated person as one between associated enterprises when the statutory prior-agreement or terms-determined test is satisfied.
The definition
"International transaction" means a transaction between two or more associated enterprises, one of which is necessarily a non-resident, and includes a transaction in the nature of purchase, sale or lease of tangible or intangible property, provision of services, lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
It also includes a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred in connection with a benefit, service or facility provided to any one or more of those enterprises.
Why this definition matters
Whether a transaction is an "international transaction" under this section determines whether Section 161's arm's-length pricing requirement, and the associated documentation obligations under Sections 171-172, apply to it at all. It is deliberately broad - covering not just goods and services but financing, intangibles, and cost-sharing arrangements - and its scope is closely tied to the definition of "associated enterprise" in Section 162.
Look through third-party form
A transaction with an apparently independent person can still be deemed international if a prior agreement or substantive term-setting links that person to an associated enterprise and the statutory non-residence condition is met.
Step-by-step flow for applying Section 163
- 1
Is the transaction between two or more associated enterprises (Section 162)?
- Yes: Go to step 3.
- No: Go to the next step.
- 2
Is it with an other person but deemed under Section 163(2)?
Deemed where there is a prior agreement between the other person and the associated enterprise, or the terms are in substance determined between them, and the enterprise or the associated enterprise or both are non-residents.
- No: Not an international transaction.
- Yes: Go to the next step.
- 3
Is at least one of the associated enterprises a non-resident?
- No: Not an international transaction under Section 163(1).
- Yes: Go to the next step.
- 4
Identify the type under clauses (a) to (g)
Tangible property; intangible property (see the list in Section 163(3)); financing, guarantees and debts; services; business restructuring; cost-sharing arrangements; or any other transaction bearing on profits, income, losses or assets.
- 5
Apply arm's length pricing under Section 161
Practical checklist
Do
- Map the enterprises' association and tax residence before categorising the transaction.
- Review financing, guarantees, intangibles, restructuring and third-party agreements, not only goods sales.
Avoid
- Do not exclude a restructuring because it has no immediate booked profit effect.
- Do not rely solely on the immediate counterparty's name when associated enterprises determine the transaction terms.
Illustrative example
Illustration: direct and deemed international transactions
Hypothetical facts (illustration only, not a real taxpayer): IndCo, resident in India, is a subsidiary of ForCo, a non-resident, and they are associated enterprises. IndCo pays ForCo for use of the group brand, and ForCo guarantees a bank loan taken by IndCo. IndCo also buys raw material from an unrelated foreign supplier, but the price and terms were settled in substance between that supplier and ForCo.
Brand use
Use of intangible property (a brand) under clause (b); brand names are marketing-related intangibles under Section 163(3)(a).
Guarantee
A guarantee falls under clause (c)(i).
Raw material from an unrelated supplier
Terms determined in substance between the supplier and ForCo, with ForCo non-resident, so Section 163(2)(b) deems it an international transaction between associated enterprises.
Outcome
- All three are international transactions, to be priced having regard to the arm's length price under Section 161.
- The supplier's own residential status does not matter for the deeming rule.
Glossary
- International transaction
- A qualifying cross-border associated-enterprise transaction or deemed third-party transaction under this section.
- Intangible property
- Non-physical business rights and assets, with detailed categories in subsection (3).
Frequently asked questions
Does an international transaction require both parties to be non-resident?
No - only one of the associated enterprises involved needs to be a non-resident; the other can be a resident.
Are cost-sharing arrangements between group companies covered?
Yes - the definition explicitly includes agreements between associated enterprises to allocate or apportion costs or expenses for a shared benefit, service or facility.
How does this connect to arm's-length pricing?
Section 161 requires income from an international transaction (as defined here) to be computed having regard to the arm's-length price - this section supplies the definition that triggers that requirement.
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Get help with transfer pricing and cross-border transaction complianceLast updated 10 October 2026