Income Tax Bill: Select panel proposes wider transfer-pricing net

Companies wielding substantive influence with other firms may face more scrutiny

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 that 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 majority of the board of directors, business dependency on the other enterprise, and so on. 

 

High courts have generally ruled in favour of taxpayers by noting that the second limb must be read together with the first limb. However, the Select Committee, in its report, has combined the first and second limb, thereby making all the provisions independent and widening the ambit of associated enterprises.

 

This could lead to increased compliance obligations, especially for companies engaged in intra-group or cross-border transactions, especially where formal thresholds are not met but practical influence exists.

 

“The language in the new Bill leads to a situation where ‘any’ participation in management, capital and control could lead to creation of an associated enterprise. This interpretation could lead to unintended outcomes and would lead to more litigation,” said Kunj Vaidya, Partner, PwC India. He suggested the Bill should have added language to specify what level of participation would lead to an enterprise becoming an associated enterprise.

 

“This is a controversial area at present, and recent court judgments seem to be leaning towards interpretations in favour of the taxpayer,” said Chetan Daga, founder of AdvantEdge Consulting.

 

“Certain courts have held that general and specific tests need to be applied separately, and if general tests are satisfied but not the specific tests, the AE relationship will exist. This interpretation is in favour of the tax authorities,” he explained. However, some courts have taken an opposite view in favour of taxpayers, holding that if specific tests are not satisfied, general tests need not be looked into and AE relationship does not exist.

 

Daga said the Select Committee report seemingly addressed this issue by combining the general tests and specific tests into a single provision. “It seems that this debate of general versus specific tests will no longer apply under the new Bill. This is a significant change that could widen the applicability of transfer pricing provisions," he reckoned. 

 

Further, the committee has proposed expanding the condition for carrying forward business losses to include continuity of “beneficial ownership” — not just legal shareholding. Under the existing law, losses can be carried forward if at least 51 per cent of shareholders remain the same. The panel has now recommended that this test be applied to individuals who “directly or indirectly derive benefits” from the shares.

 

Tax experts say this may complicate compliance for companies backed by private equity or venture capital funds, where shares are legally held by investment vehicles, but the actual investors behind them may change or remain undisclosed.

 

“It may be administratively difficult to trace ultimate beneficiaries, especially when shareholders are foreign funds or pooled entities,” said Rohinton Sidhwa, Partner, Deloitte India. While the amendment is aimed at curbing tax avoidance, it could result in uncertainty and litigation for genuine businesses, particularly startups and foreign-invested entities.

 

The Committee has also proposed key changes on how house property income is to be taxed in a bid to bring clarity and relief for homeowners and landlords. Under the current law, there has been confusion over whether the standard 30 per cent deduction on house property income should be calculated before or after deducting municipal taxes.

 

The Committee has recommended that this deduction be applied after municipal taxes are subtracted, effectively reducing the taxable income.

 

In another major relief, the Committee has suggested allowing pre-construction interest deductions not just for self-occupied homes but also for let-out properties.

 

At present, this benefit is restricted to self-occupied houses, meaning landlords were not eligible to claim such deductions. These changes reflect the Committee’s intent to streamline the tax system and offer fairer treatment to property owners,” said Amit Maheshwari, tax partner at AKM Global. 

Some relief for taxpayers

• House property income taxation: Standard 30% deduction to be applied after subtracting municipal taxes
• Pre-construction interest deduction allowed for let-out properties
• Flexibility for small taxpayers by removing the requirement of compulsory filing of returns just to claim refunds