Section 163 — Meaning of international transaction. Successor to s.92B of the 1961 Act.
Section 163 is in Chapter X — Special Provisions Relating to Avoidance of Tax, which runs from section 161 to section 177.
Sub-section (1) defines an international transaction for the whole of Chapter X as a transaction between two or more associated enterprises of which at least one is necessarily a non-resident, and then lists seven inclusive categories: dealings in tangible property; dealings in intangible property; capital financing, lending or borrowing (including guarantees, marketable securities and any advance, deferred payment or receivable arising in business); provision of services; a transaction of business restructuring or reorganisation, expressly whether or not it bears on profits, income, losses or assets at the time or at any future date; cost allocation, apportionment or contribution arrangements between associated enterprises; and a residual limb covering any other transaction having a bearing on profits, income, losses or assets. Sub-section (2) deems a transaction with an unrelated person to be an international transaction between associated enterprises where there is a prior agreement in relation to it between that person and the associated enterprise, or the terms are determined in substance between them, provided the enterprise or the associated enterprise or both are non-residents — and it does not matter whether the other person is a non-resident. Sub-section (3) expands "intangible property" over twelve heads, from marketing, technology, artistic, data processing and engineering intangibles through customer, contract, human capital, location and goodwill related assets, to a residual clause for anything deriving its value from its intellectual content rather than its physical attributes.
The definition fixes the perimeter of the transfer pricing regime, and it is drafted inclusively so that new forms of dealing between associated enterprises are not left outside. Sub-section (2) closes the obvious route around it — routing the transaction through an unconnected intermediary while the associated enterprise still sets the terms — and sub-section (3) forestalls the argument that something like a customer list, a trained workforce or goodwill is not intangible property.
Screening a group's dealings means testing each of them against seven inclusive limbs, not against a closed list — and clause (g) sweeps in anything else that bears on profits, income, losses or assets. Business restructurings need to be documented even where nothing appears to shift at the time, because clause (e) applies irrespective of any bearing on profit, income, losses or assets then or in future. Third-party contracts are not automatically safe: if a prior agreement exists with the associated enterprise, or the associated enterprise in substance sets the terms, sub-section (2) treats the third-party transaction as an international transaction, with residence tested on the enterprise and the associated enterprise rather than on the third party. When mapping intangibles, work from the twelve heads in sub-section (3) rather than from the shorter list in clause (1)(b).
An Indian company sells components to an unconnected distributor abroad, but the price, volumes and credit period were settled in advance between that distributor and the company's non-resident parent. Sub-section (2) deems that sale to be an international transaction between two associated enterprises: what matters is that the enterprise or the associated enterprise is a non-resident, and the distributor's own residence is irrelevant. A sale that looks like a third-party sale is therefore drawn into Chapter X and its price must be tested at arm's length. A group business reorganisation carried out in the same year is caught too, under clause (e), even though it has no bearing on profits, income, losses or assets either at the time or at any future date.
You rarely meet section 163 by name; you meet it through the machinery it feeds — the accountant's report under section 172, the information and documents required under section 171, a reference to the Transfer Pricing Officer under section 166, and any arm's length adjustment under section 165, each of which applies only if the dealing falls inside this definition.
"international transaction" means a transaction between two or more associated enterprises, one of which is necessarily a non-resident
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