Why it matters for IFSC units
A group that books income in a GIFT IFSC unit, while the unit is claiming the section 147 deduction, gains if more profit sits in the unit. The tax authorities know that. The questions they ask are the usual transfer pricing questions:
- Does the IFSC unit perform the functions, control the risks and use the assets that would earn the profit it reports?
- Are the prices charged between the unit and its Indian or foreign affiliates what independent parties would agree?
A unit with thin substance and a high margin on group business is the obvious target. See substance.
The rules under the 2025 Act
- Arm's length principle. Income from an international transaction or a specified domestic transaction, and any expense or interest arising from one, is determined having regard to the arm's length price (section 161(1) and (2)). Cost-sharing and cost-allocation arrangements between associated enterprises are tested the same way (section 161(3)). The rules do not apply where the adjustment would reduce the income chargeable or increase a loss (section 161(4)).
- Methods. The arm's length price is determined by the most appropriate of the prescribed methods (section 165). "Arm's length price" means a price applied between persons other than associated enterprises in uncontrolled conditions (section 173(a)).
- Specified domestic transactions (section 164) include defined categories of domestic transactions where their total in a tax year exceeds twenty crore rupees.
- Certainty tools. Safe harbour rules (section 167) and advance pricing agreements with the Board (section 168) are available.
- Compliance. A person entering into an international or specified domestic transaction keeps prescribed information and documents (section 171) and files an accountant's report (section 172).
Related rules for IFSC finance and treasury units
- Interest limitation. The limit on deduction of interest paid to associated enterprises in section 177 does not apply to an Indian company or a permanent establishment of a foreign company engaged in banking or insurance, or to a Finance Company located in an IFSC (section 177(3)(b)).
- Deemed dividend. An advance or loan between two group entities, where one is a Finance Company or Finance Unit, is excluded from "dividend" in section 2(40). After the Finance Act, 2026, the other group entity must be located in, and the group's parent listed in, a country or territory specified by the Central Government by notification.
Both matter for group treasury centres. See treasury centres.
Practice
- Benchmark the IFSC unit's functions, assets and risks before pricing anything. Choose the method that fits the business, not the one that gives the best answer.
- Document the decisions made in the IFSC: who made them, when and on what information. Board and committee minutes, credit approvals and investment committee papers prepared in GIFT City are the evidence of where the functions are performed.
- Align intra-group agreements with the unit's IFSCA permission. Income from activities outside the permission is not eligible for section 147 in any case. See group services agreements.
- Consider an advance pricing agreement where the group flows are large and recurring.