Section 92: The Controlled Transactions (s.92(1) to s.92(11))

Section 92 of the Income-tax Act, 1961 is the provision that puts India’s arm’s length rule into force: the income from a controlled transaction (an international or specified domestic transaction between associated persons) is computed with reference to the arm’s length price, and the machinery that determines that price where the price is not at arm’s length sits in the same section, read with the TPO’s procedure under s.92A–92C. The section runs from s.92(1) to s.92(11); this reference covers the operative core — the rule, the definitions, the thin-cap cap, the determination machinery, and the adjustment it runs on.

What the provision says

In plain English, the section does five things:

1. The rule (s.92(1)). The income from an international transaction or a specified domestic transaction between associated persons is computed with reference to the arm’s length price — the price independent enterprises would have charged each other in comparable circumstances, having regard to the functions performed, the assets employed and the risks assumed.
2. The definitions (s.92(2)). The covered concepts: the international transaction (between associated persons, one a non-resident), the specified domestic transaction (both parties resident, the same test), the associated person (the 26% voting-power test, directly or indirectly, plus the management and control limbs), and the arm’s length price itself.
3. The thin cap (s.92(3)). The interest-deduction cap on borrowings from an associated enterprise: where the interest paid exceeds the interest that would have been payable had the borrowing been from an unrelated party, the excess interest is not deductible — a quantum test, not a rate test (the thin capitalisation glossary carries the mechanics).
4. The determination. Where the transaction is carried out at a price not at arm’s length — or where the Income-tax Officer considers it necessary — the Transfer Pricing Officer determines the arm’s length price in accordance with the prescribed methods and procedure (the Rule 10B method set, on the best-method standard). Where the income computed is less than the arm’s length income, the difference is added to the income computed and the assessee is assessed accordingly — the lever the TPO’s adjustment runs on. The over-priced purchase reaches the income through the same computation: the excess cost is deductible, the income computed falls below the arm’s length income, and the addition corrects it.
5. The machinery sub-sections. The determination runs with a defined discipline: the TPO has regard to the arm’s length price of the preceding and subsequent periods, to the extent relevant; the TPO may require the person concerned to furnish such information and documents as are necessary; where the method adopted is not the most appropriate method in the facts and circumstances, the TPO may adopt such other method as he considers appropriate; and where the adjustment would, in the case of income arising from sources outside India, result in double taxation, the matter is referred to the Central Government for determination under the applicable double-taxation-avoidance agreement.

The operative requirements

Element	Requirement
The scope (s.92(1)–(2))	The transaction is between associated persons (26% voting power, directly or indirectly, or the management / control limbs) and is an international transaction or a specified domestic transaction; the year’s value exceeds ₹30 million, or does not exceed it but exceeds 10% of all such transactions between the persons
The price standard	The arm’s length price — the price independent enterprises would have charged in comparable circumstances, having regard to the functions performed, the assets employed and the risks assumed (the FAR)
The thin cap (s.92(3))	No deduction for the interest on associated-enterprise borrowings that exceeds the interest on the arm’s length debt quantum — the excess interest is disallowed
The determination	Where the price is not at arm’s length (or the Income-tax Officer so considers), the TPO determines the arm’s length price on the prescribed methods and procedure
The income addition	Where the income computed is less than the arm’s length income, the difference is added to the income computed and the assessee is assessed accordingly
The method discipline	Where the method adopted is not the most appropriate method in the facts and circumstances, the TPO may adopt such other method as he considers appropriate — the method-substitution power
The period standard	The TPO has regard to the arm’s length price of the preceding and subsequent periods, to the extent relevant
The information powers	The TPO may require the person concerned to furnish such information and documents as are necessary for the section’s purposes
The mutual-agreement reference	Where the adjustment would result in double taxation of income arising from sources outside India, the matter is referred to the Central Government for determination under the applicable agreement

Key excerpts (the provision’s core, framed)

• The rule (s.92(1)): the income from the controlled transaction is computed with reference to the arm’s length price — the provision’s core requirement in one phrase; everything else in the section is machinery for enforcing it.
• The addition lever: “such income shall be added to the income computed by the assessee, and the assessee shall be assessed accordingly” — the sentence that carries the TPO’s determination into the assessment.
• The method substitution: where the method adopted is not the most appropriate method in the facts and circumstances, the TPO may adopt such other method as he considers appropriate — the power behind the method-substitution adjustments, and the reason the method-choice record is the first document the examination reads.
• The thin cap (s.92(3)): “no deduction shall be allowed in respect of such excess interest” — the cap on the associated-enterprise interest, measured on the debt quantum an unrelated lender would have extended.

What it means in practice

• The counterparty is the TPO, not the Assessing Officer. The arm’s length determination is the TPO’s function under s.92A–92C; the AO incorporates the determination into the assessment. The examination sequence and the adjustment theories (method substitution, pool substitution, the tested-party challenge, the add-on) are catalogued in the TPO glossary and the TP audit defense guide.
• The addition is the working lever. The classic TPO adjustment is the under-charge (the sale priced below the range); the over-charge (the purchase, the interest, the service fee priced above) enters through the same income computation. The file that prices both directions within the ranges is the file the section is designed to let pass.
• The method substitution is the risk to manage. The documented method-selection record — each alternative considered and set aside on stated facts — is the defence; the framework is in how to choose a method.
• The double-taxation exit is statutory. Where the adjustment would double-tax income arising from sources outside India, the reference to the Central Government is the MAP route — see MAP and the DTA.
• The thin cap is a separate question on the same debt. The rate’s position (the MAA support, the safe harbour) and the quantum’s position (the s.92(3) test) are two defences on one borrowing.
• The appeals chain. The TPO’s determination is not final: the appeal runs to CIT(A) within the statutory window, then to the ITAT and beyond — the same file read at every stage.

Related docs

• Section 92 — the glossary entry
• India transfer pricing — the s.92 overview
• TPO — powers, process and adjustments
• Thin capitalisation — the s.92(3) cap

This reference summarizes the law for orientation; confirm the current text before relying on it.