Direct Tax Laws and International Taxation · Business Restructuring

International Transaction and Restructuring in Transfer Pricing

Updated 11 October 2026 · Fact-checked

Under section 163 of the Income-tax Act, 2025, an international transaction is a transaction between two or more associated enterprises, at least one of which is a non-resident. It covers goods, intangibles, financing, services, business restructuring, cost-sharing and any transaction affecting profits. Check the parties first, then the nature of the transaction.

Understand International Transaction and Restructuring Transfer Pricing

Transfer pricing applies only to a transaction that is an international transaction (or a specified domestic transaction). Section 163(1) defines it as a transaction between two or more associated enterprises, one of which is necessarily a non-resident. Two Indian residents dealing with each other do not meet this test, however closely they are related.

The definition is inclusive. It lists the purchase, sale, transfer, lease or use of tangible property; the same for intangible property; capital financing (borrowing, lending, guarantees, marketable securities, advances, deferred payments, receivables and other debts arising in business); and provision of services such as market research, administration, technical service, design, consultation, scientific research, legal or accounting service. The catch-all clause (g) takes in any other transaction having a bearing on profits, income, losses or assets.

Business restructuring is clause (e). A transaction of business restructuring or reorganisation entered into with an associated enterprise is an international transaction irrespective of whether it has any bearing on profit, income, losses or assets at the time of the transaction or at any future date. So you cannot argue that it is outside the rules just because no profit effect is visible. Examples: an Indian company converting from a full-fledged manufacturer to a contract manufacturer for its foreign parent, or transferring a product line, assets or customer relationships to a group company abroad.

Clause (f) covers cost-sharing or cost-contribution arrangements between associated enterprises. Section 161(3) then says the cost allocated or contributed must be determined having regard to the arm's length price of the benefit, service or facility. Section 163(2) adds a deeming rule: a deal with an unrelated party is treated as one between associated enterprises if there is a prior agreement between that party and an associated enterprise, or its terms are determined in substance between them, and the enterprise or its associated enterprise (or both) is a non-resident.

Section 173 supplies the supporting definitions. Arm's length price is the price applied or proposed in a transaction between persons other than associated enterprises, in uncontrolled conditions. Transaction includes an arrangement, understanding or action in concert, whether or not formal, written or legally enforceable. Enterprise includes a permanent establishment.

Key rules to remember

Meaning of international transaction: International transaction = transaction between two or more associated enterprises + at least one is a non-resident (s.163(1)); Both conditions must be met. The list of items in clauses (a) to (g) is inclusive.
Business restructuring rule: Restructuring with an associated enterprise = international transaction, even if no effect on profit, income, losses or assets now or later (s.163(1)(e)); The test is the nature of the transaction, not its profit effect.
Deemed international transaction: Deal with other person + (prior agreement OR terms determined in substance with the associated enterprise) + enterprise or associated enterprise or both non-resident = deemed international transaction (s.163(2)); The other person may be resident or non-resident.
Cost-sharing income rule: Cost allocated or contributed = determined having regard to arm's length price of the benefit, service or facility (s.161(3)); Applies to allocation or contribution arrangements between associated enterprises.
Arm's length price: ALP = price applied or proposed in a transaction between persons other than associated enterprises, in uncontrolled conditions (s.173(a)); Section 161(1) and (2) apply it to income and to allowances for expense or interest.
Section 161(4) limit: s.161 does not apply if the ALP determination reduces income chargeable to tax or increases loss computed on book entries; Adjustment works only to raise income or reduce loss.

How to solve International Transaction and Restructuring Transfer Pricing questions

Use this sequence for any question asking whether a transaction is an international transaction or how a restructuring is treated.

1List the parties and their residence. Confirm at least one is a non-resident (a permanent establishment counts as an enterprise).
2Test whether the parties are associated enterprises. If the facts show a third party, check the section 163(2) deeming rule: prior agreement or terms determined in substance.
3Identify the nature of the transaction and match it to clauses (a) to (g) of section 163(1): tangible, intangible, financing, services, restructuring, cost-sharing, or other with profit bearing.
4For a restructuring, state clearly that it qualifies even if there is no present or future effect on profit, income, losses or assets.
5Note that a transaction includes any arrangement or understanding, formal or not, written or not, enforceable or not (section 173(e)).
6Apply section 161: income and expense allowances are determined having regard to the arm's length price. Compute or discuss the ALP if figures are given.
7Check section 161(4): no adjustment if it would reduce income or increase loss.
8Conclude in one line with the reason.

Quickest way: Two-gate check

When to use it: For MCQs and short case questions where you must decide quickly whether section 163 applies.

Gate 1: Is a non-resident involved, directly or through the section 163(2) deeming rule?
Gate 2: Are the parties associated enterprises (or deemed to be)?
If both gates pass, scan clauses (a) to (g). The catch-all (g) and restructuring (e) leave very few gaps.
If an option says restructuring is covered only when profits change, reject it.
If an adjustment is proposed, check whether it raises income. If it lowers income, section 161(4) blocks it.

Common mistakes in International Transaction and Restructuring Transfer Pricing

Treating a transaction between two Indian resident associated enterprises as an international transaction.
Students focus on the word 'associated' and forget the non-resident requirement.
Fix: Always confirm at least one party is a non-resident. Without that, it is not an international transaction under section 163.
Saying business restructuring is covered only if it changes profits or assets.
Students assume transfer pricing is always about profit shifting.
Fix: Clause (e) applies irrespective of any bearing on profit, income, losses or assets, now or in future.
Ignoring unrelated third-party deals that are really controlled by the group.
The deeming rule in section 163(2) is easy to overlook.
Fix: Look for a prior agreement or terms determined in substance between the other person and the associated enterprise, with a non-resident on either side.
Limiting 'transaction' to written contracts.
Students think of legal agreements only.
Fix: Section 173(e) includes arrangements, understandings and concerted action, formal or informal, enforceable or not.
Applying the ALP adjustment even when it reduces taxable income.
Students treat transfer pricing as a two-way correction.
Fix: Section 161(4) stops the section from applying where the determination reduces income or increases loss on the book entries.
Treating the list in section 163(1) as exhaustive.
Students memorise clauses (a) to (f) and miss the word 'includes' and clause (g).
Fix: The definition is inclusive. Any other transaction with a bearing on profits, income, losses or assets also qualifies.

Worked examples

Example 1

Bharat Auto Ltd, an Indian company, has so far manufactured and sold vehicle parts on its own risk. From this year it agrees with its Singapore parent, which holds all its shares, to act only as a contract manufacturer for the parent and to transfer its customer relationships to the parent. Bharat Auto's profit is unchanged this year. The finance head says it is not an international transaction because there is no profit impact. Examine.

Show the solution

Parties: Bharat Auto (resident) and its Singapore parent (non-resident). A parent holding all the shares makes them associated enterprises. The non-resident condition is met.
Nature: a change from full-fledged to contract manufacturing and a transfer of customer relationships is a business restructuring or reorganisation under section 163(1)(e). The transfer of customer relationships is also a transfer of intangible property (customer related intangible assets) under section 163(1)(b) and (3)(f).
Profit impact: clause (e) applies irrespective of any bearing on profit, income, losses or assets at the time of the transaction or at any future date. So the no-profit-impact argument fails.
Consequence: under section 161(1) and (2), income and allowances arising from it must be determined having regard to the arm's length price, that is, the price in uncontrolled conditions between unrelated persons (section 173(a)).
Limit: section 161(4) would stop an adjustment only if it reduced income or increased loss.

Answer: The restructuring is an international transaction under section 163(1)(e) even though profit is unchanged. Its income and related expenses must be determined at arm's length price.

Example 2

Kaveri Textiles Ltd (India) and Lotus Fabrics Ltd (India) are both subsidiaries of a Dubai company. Kaveri sells goods worth ₹80,00,000 to Lotus. Separately, Kaveri sells goods worth ₹50,00,000 to Meera Traders (India), an unrelated resident, under an arrangement fixed in advance between Meera Traders and the Dubai company. Which transactions are international transactions?

Show the solution

Kaveri and Lotus are both residents. Neither is a non-resident. Section 163(1) needs one of the associated enterprises to be a non-resident, so the ₹80,00,000 sale is not an international transaction under section 163 on these facts.
Meera Traders is not an associated enterprise of Kaveri. Test section 163(2): there is a prior agreement between Meera Traders and an associated enterprise of Kaveri (the Dubai company), so clause (a) is satisfied.
The associated enterprise (the Dubai company) is a non-resident. This satisfies the closing condition of section 163(2), and it does not matter that Meera Traders is a resident.
So the ₹50,00,000 sale is deemed to be an international transaction between associated enterprises.

Answer: The ₹80,00,000 sale to Lotus is not an international transaction (both parties are residents). The ₹50,00,000 sale to Meera Traders is a deemed international transaction under section 163(2).

Exam tips

In MCQs, the usual traps are the missing non-resident, the profit-impact condition for restructuring, and the exhaustive-list idea. Check each option against these.
In case questions, tabulate parties, residence and relationship before discussing the clause. It earns method marks even if your conclusion is debated.
Quote the clause number, for example section 163(1)(e) for restructuring and section 163(2) for the deeming rule. Name section 161 for the ALP consequence and section 173 for definitions.
For restructuring cases, always write the words 'irrespective of any bearing on profit, income, losses or assets'.
Link the answer to transfer pricing methods only if figures are given. Otherwise stay on the meaning and scope.

Practice questions from Business Restructuring

International Transaction and Restructuring Transfer Pricing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalInternational Transfer Pricing, Tax and Regulation

International Transaction and Restructuring Transfer Pricing: frequently asked questions

What is an international transaction under section 163 of the Income-tax Act, 2025?

It is a transaction between two or more associated enterprises, one of which is necessarily a non-resident. It includes dealings in tangible and intangible property, financing, services, business restructuring, cost-sharing arrangements and any other transaction affecting profits, income, losses or assets.

Is business restructuring always an international transaction?

It is one when entered into by an enterprise with an associated enterprise, and the other conditions of section 163(1) are met, including the non-resident requirement. It counts whether or not it affects profit, income, losses or assets now or later.

Can a deal with an unrelated party be an international transaction?

Yes. Under section 163(2), it is deemed one if there is a prior agreement with an associated enterprise, or the terms are determined in substance between them. The enterprise or its associated enterprise, or both, must be non-resident.

What does 'arm's length price' mean?

Under section 173(a), it is the price applied or proposed in a transaction between persons other than associated enterprises, in uncontrolled conditions. Section 161 requires income and expense allowances from international transactions to be determined having regard to it.