Section 176 — Special measures in respect of transactions with persons located in notified jurisdictional area. Successor to s.94A of the 1961 Act.
Section 176 is in Chapter X — Special Provisions Relating to Avoidance of Tax, which runs from section 161 to section 177.
Sub-section (1) empowers the Central Government to notify any country or territory outside India as a notified jurisdictional area, having regard to the lack of effective exchange of information with it. Sub-section (2) then deems, for any transaction with a person located in such an area, all the parties to be associated enterprises under section 162 and the transaction to be an international transaction under section 163, and applies sections 161, 162, 163, 165, 166, 167, 171, 172 and 173 accordingly — expressly withholding the benefit of the variation in section 165(3)(a)(ii). Sub-section (3) denies deductions: for a payment to a financial institution in the area unless the assessee furnishes a prescribed authorisation letting the Board or an income-tax authority seek information from that institution on his behalf, and for any other expenditure or allowance including depreciation arising from a transaction with a person there unless prescribed documents are maintained and prescribed information furnished. Sub-section (4) deems any sum received or credited from a person located in the area to be the assessee's income for the tax year where he offers no explanation of the source in that person's hands, or in the beneficial owner's hands, or where the Assessing Officer finds the explanation unsatisfactory. Sub-section (5) requires tax deductible under Chapter XIX-B on sums payable to such a person to be deducted at the highest of the rate in force, the rate in the relevant provision, and 30%; sub-section (6) defines who is "located" in the area, taking "permanent establishment" and "transaction" from section 173.
It is a counter-measure against jurisdictions that do not exchange information: the taxpayer, not the department, is made to carry the burden of proof and disclosure, and dealing with such a jurisdiction is priced in through denied deductions, deemed income and a floor withholding rate. The withdrawal of the section 165(3)(a)(ii) variation benefit removes the tolerance band that other transfer pricing cases enjoy.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Floor rate of tax deduction on sums payable to a person located in a notified jurisdictional area | 30% | Tax is deducted at the highest of the rate or rates in force, the rate in the relevant provisions of the Act, and 30%; applies where tax is deductible under Chapter XIX-B | 176(5) |
If any counterparty sits in a notified jurisdictional area, the whole transfer pricing machinery switches on automatically — associated enterprise status and international transaction status are deemed, so documentation under section 172 and a possible reference under section 166 follow even between unrelated parties. Deductions are conditional: get the prescribed authorisation on file before claiming any payment to a financial institution there, and maintain the prescribed documents for every other expenditure or allowance, depreciation included. Money coming in from such a person is the exposed item — you must explain its source in the payer's hands, or in the beneficial owner's hands where the payer is not the beneficial owner, or it is taxed as your income. On outbound payments, apply at least 30% withholding even where the ordinary rate or a rate in force is lower.
A company pays Rs. 6 crore in fees to a person located in a country notified by the Central Government as a notified jurisdictional area, and receives Rs. 2 crore back from the same person. Sub-section (2) deems the two associated enterprises and the payment an international transaction, but expressly without the variation allowed by section 165(3)(a)(ii), so the tolerance other transfer pricing cases enjoy is not available. The Rs. 6 crore is disallowed under sub-section (3)(b) unless the prescribed documents are maintained and prescribed information furnished, and if the company cannot explain the source of the Rs. 2 crore in the payer’s hands — or in the beneficial owner’s, where the payer is not the beneficial owner — sub-section (4) deems that Rs. 2 crore to be its income. On the fees themselves the ordinary or treaty rate does not govern the withholding: sub-section (5) takes the highest of the rate in force, the rate in the relevant provision, and 30%.
In the assessment of a taxpayer dealing with a notified jurisdiction — the disallowance of the payment, the addition of the unexplained receipt and the transfer pricing determination all appear in the assessment order. Before that you meet it at the payment stage, in the withholding under Chapter XIX-B, and in the authorisation in the prescribed form that must be furnished for a payment to a financial institution there if the deduction is to survive at all.
all the parties to the transaction shall be deemed to be associated enterprises within the meaning of section 162
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
See the circulars index.
See the notifications index.
