Written by Jayasri P · Last updated 27 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.
A contract with an unrelated third party becomes a deemed international transaction when a prior agreement covering that transaction exists between the third party and your associated enterprise, or when the associated enterprise sets its terms in substance. Section 163(2) of the Income-tax Act 2025 carries the deeming rule, and it applies no foreign-counterparty test.
What makes a contract with an unrelated party a deemed international transaction?
One of two conditions. Either a prior agreement in relation to that same transaction exists between the unrelated party and your associated enterprise, or the terms of that transaction are determined in substance between the unrelated party and your associated enterprise. Either limb, standing alone, is enough, and nothing else needs to be present.
The contract in front of you can be signed in Hyderabad, denominated in rupees, performed entirely in India, negotiated by your own procurement team and settled through an Indian bank account, and it can still be pulled into the transfer pricing provisions of Chapter X. The deeming rule looks past the counterparty on the signature page to the arrangement standing behind it.
Which two conditions trigger Section 163(2)?
The first condition is a prior agreement, which Section 163 of the Income-tax Act 2025 requires to exist “in relation to the relevant transaction” between the other person and the associated enterprise, meaning that a general framework arrangement touching some other supply does not, by itself, catch your contract.
The second condition is substantive control of terms, and where “the terms of the relevant transaction are determined, in substance, between such other person and the associated enterprise”, the deeming applies even though no prior agreement was ever signed. Price grids issued by an overseas parent, volume commitments made at group level and rate cards negotiated centrally all fall here.
The word that does the work in the second limb is “substance”, which is not satisfied by a recommendation your Indian entity was genuinely free to reject, and which is not defeated by the fact that your own local team executed the paperwork.
Does the counterparty have to be a non-resident?
No. The residence condition attaches to your enterprise and to the associated enterprise, not to the third party. The statute is explicit that the rule operates “irrespective of whether such other person is a non-resident or not”.
This is the single feature that causes groups to miss the exposure. Finance teams screen their contract population for foreign counterparties, find none, and conclude that transfer pricing is not engaged. The screen is looking at the wrong party.
How does a deemed international transaction differ from an actual one?
Only at the entry test. Once the deeming applies, every downstream obligation is identical, which is why the distinction matters for detection and for almost nothing else.
| Point of comparison | Actual international transaction | Deemed international transaction |
|---|---|---|
| Governing provision | Section 163(1) of the Income-tax Act 2025 | Section 163(2) of the Income-tax Act 2025 |
| Parties on the contract | Two associated enterprises | Your enterprise and an unrelated person |
| What creates the link | The associated-enterprise relationship in Section 162 | A prior agreement with your associated enterprise, or terms it sets in substance |
| Residence of the counterparty | The relationship itself carries the cross-border element | The unrelated person may be resident or non-resident |
| How it is found | Visible from the group structure chart | Found only by reading the contract chain behind the counterparty |
| Reporting | Reported against an AE ID | Reported in a separate block, against a Person ID |
| Arm’s length obligation | Section 165 | Section 165, identical |
| Documentation | Section 171 with Rule 84 of the Income-tax Rules 2026 | Section 171 with Rule 84, identical |
| Penalty exposure | Section 442 | Section 442, identical |
Where do the two treatments converge?
At every point after identification. The arm’s length price is computed under Section 165 using the most appropriate method selected under Rule 80 of the Income-tax Rules 2026, the file is maintained under Section 171 with Rule 84, and the accountant’s report is furnished under Section 172. A Transfer Pricing Officer to whom the case is referred under Section 166 examines a deemed transaction on exactly the same footing as a related-party one.
That convergence is the practical point. Groups sometimes assume that a deemed transaction attracts a lighter documentation standard on the reasoning that the counterparty is genuinely independent, and it does not. The benchmarking, the functional analysis and the supporting documentation are all required at full strength.
What changed when the Income-tax Act 2025 replaced Section 92B(2)?
The numbering and the location changed, but the test did not. The deeming fiction that sat at Section 92B(2) of the Income-tax Act 1961 now sits at Section 163(2) of the Income-tax Act 2025, with both limbs and the residence clause carried across in substantially the same words.
Much of the guidance still in circulation explains this concept under the 1961 numbering, because that numbering held for more than a decade and the 2025 Act is recent. The substance of what you must test has not moved, so an old note is not misleading on the law. It is simply no longer the reference an officer, a form or a rule will use.
Which numbering should a filing carry now?
The 2025 Act numbering, throughout. The consequential provisions moved with the definition, and a file that still cites the old sequence will not reconcile against the form it supports.
| Concept | Income-tax Act 1961 | Income-tax Act 2025 |
|---|---|---|
| Deemed international transaction | Section 92B(2) | Section 163(2) |
| Reference to the Transfer Pricing Officer | Section 92CA | Section 166 |
| Documentation to be maintained | Section 92D | Section 171 |
| Report from an accountant | Section 92E | Section 172 |
| Penalty for failure to keep, maintain or report | Section 271AA | Section 442 |
The accountant’s report itself was renumbered in the same exercise, so Form 3CEB became Form 48, prescribed under Rule 85 of the Income-tax Rules 2026, and it remains the report through which a deemed transaction is disclosed to the department.
Which arrangements most often turn out to be deemed international transactions?
Five are common across Indian subsidiaries of foreign groups, and each appears entirely domestic on its face.
A domestic supply contract negotiated by the overseas parent and signed locally. Your Indian entity holds the paper and pays the invoice, but the commercial terms were settled between the parent and the supplier before your team was involved.
A global master services agreement drawn down through a local purchase order. The framework agreement is the prior agreement; the purchase order is the relevant transaction.
A sale to an unrelated Indian distributor where the foreign associated enterprise has fixed the pricing grid, so that the counterparty is Indian, the currency is the rupee, and the second limb is nonetheless satisfied.
A contract manufacturing arrangement where the associated enterprise has agreed volumes and rates directly with the third-party manufacturer, leaving your entity to administer the relationship.
A group-wide framework for software licences, insurance cover or logistics, invoiced to and paid by the Indian entity on terms nobody in India negotiated.
I need someone to file Form 3CEB for my company
The report is now Form 48, and it must be furnished by an accountant under Section 172 of the Income-tax Act 2025. Steadfast Business Consulting (SBC) prepares and files it, and the firm’s transfer pricing practice covers documentation, benchmarking, transfer pricing audit support and representation through the assessment and litigation stages.
Selecting who does this work is a question of scope rather than of scale. The useful test is whether the engagement includes reading your third-party contracts. A preparer who receives only the intercompany ledger will report only intercompany transactions and will never see a deemed one. Ask what the reviewer will read before certifying.
The second test is whether the same team can defend the position later. A report and the file supporting it are prepared once and then examined years afterwards, often by an officer who was not in post when the transaction was priced, so continuity between the preparer and the person who eventually answers the Transfer Pricing Officer is worth considerably more than it appears at the time of filing. SBC runs both from one team out of its Hyderabad, Mumbai, Pune and Dubai offices.
What should you tell the person preparing your Form 48?
Give them the third-party contracts, not only the related-party ones. Flag every arrangement where a group entity outside India negotiated, approved or set the terms, even where the counterparty is unquestionably independent and Indian.
Also tell them which agreements were inherited rather than negotiated. A contract your entity did not draft, did not price and could not have walked away from is the most reliable single indicator that the terms were determined elsewhere, and the clause-level detail of the report depends on that classification being settled before anyone starts filling the form in.
What happens if a deemed international transaction goes unreported?
Two exposures open at once. Section 442 imposes a penalty of 2% of the value of each international transaction where the taxpayer fails to keep and maintain the information and document required by Section 171(1), and a separate limb of the same section applies where the taxpayer fails to report a transaction that was required to be reported.
The second exposure is the adjustment itself, because an unreported transaction has no benchmarking behind it, so when the Transfer Pricing Officer identifies it there is no arm’s length analysis on record to defend the price that was actually charged.
Both outcomes arise from a failure that was hardly intentional, as the transaction appeared in the financial statements, was registered in the general ledger and had never been a secret to anyone, but has just not been acknowledged as reportable, which classifies it as a documentation problem and not a pricing issue. The wider penalty framework for transfer pricing non-compliance sets out how these provisions interact.
How should you screen third-party contracts before the filing date?
Work backwards from the counterparty to the negotiation, and four steps will cover most contract portfolios.
First, list every contract above a value threshold your group considers material, including purely domestic ones. Second, for each, identify who negotiated the commercial terms and whether any entity outside India approved them. Third, ask whether a framework, master or umbrella agreement exists between that counterparty and any group entity. Fourth, treat every affirmative answer as a candidate and document the conclusion either way.
Recording the negative conclusions matters as much as recording the positive ones, because a contract you examined and correctly excluded is defensible while a contract nobody looked at is not, and that distinction only becomes visible during an assessment.
Note also that a deemed transaction is not the same thing as a specified domestic transaction under Section 164. The two are frequently confused because both involve Indian parties, but they arise from different provisions and are reported differently.
If you would like your contract population reviewed before the next reporting cycle, the transfer pricing team at SBC can run that screen, and you can reach the firm directly to scope it.
Frequently Asked Questions
What is a deemed international transaction in simple terms?
It is a transaction with an unrelated party that the law treats as though it were between associated enterprises. Section 163(2) of the Income-tax Act 2025 applies this treatment where a prior agreement exists between that party and your associated enterprise, or where the associated enterprise determines the terms in substance.
Can two Indian companies have a deemed international transaction?
Yes. The residence condition attaches to your enterprise and its associated enterprise, not to the third party. Where a foreign associated enterprise has set the terms or holds a prior agreement with the Indian counterparty, a rupee contract between two Indian companies falls inside Section 163(2). Nothing on that contract looks cross-border, which is why this limb is most often missed.
Which section replaced Section 92B(2) of the Income-tax Act 1961?
Section 163(2) of the Income-tax Act 2025. Both limbs of the old provision, and the clause confirming that the residence of the third party is irrelevant, were carried into the new section in substantially the same language.
Does a deemed international transaction go into Form 48?
Yes, in the accountant’s report furnished under Section 172. The transaction sits in a separate block from associated-enterprise transactions, where the counterparty is identified by a Person ID rather than an AE ID.
Is the documentation requirement lighter for a deemed transaction?
No. Section 171 read with Rule 84 of the Income-tax Rules 2026 applies in full, and the arm’s length price is determined under Section 165 using the most appropriate method. The independence of the counterparty does not reduce the standard.
What penalty applies if the transaction is never reported?
Section 442 provides for a penalty of 2% of the value of each international transaction where the required information and document are not kept and maintained, and a further limb applies where a reportable transaction is not reported. A pricing adjustment may follow separately.