Section 165 of the Income-tax Act, 2025 (old section 92C), read with Rules 79 and 80 of the Income-tax Rules, 2026 (old Rules 10B and 10C), prescribes six methods: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin and the "other method". There is no hierarchy — the most appropriate method is the one that best fits the transaction, the available data and the reliability of adjustments. For Indian service subsidiaries billing a foreign parent, the transactional net margin method (TNMM) with operating profit on operating cost as the indicator is the method accepted in practice; the cost plus method in its strict statutory form is rarely usable because gross-margin data for comparables is not available in India.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Methods for determining ALP | s. 92C(1); Rule 10B | s. 165; Rule 79 | CUP, RPM, CPM, PSM, TNMM, other method | — | — |
| 'Other method' | Rule 10AB | Rule 78 | Any method using price charged in comparable uncontrolled transactions incl. quotations | — | — |
| Most appropriate method factors | Rule 10C | Rule 80 | Nature of transaction, availability of data, comparability, reliability of adjustments | — | — |
| Arm's length range / arithmetic mean | s. 92C(2); Rule 10CA | s. 165; Rule 81 | 35th–65th percentile where 6+ comparables; otherwise arithmetic mean | — | — |
| Tolerance band | Notified yearly under s. 92C(2) | Notified yearly under s. 165 / Rule 81 | 1% wholesale trading, 3% others (as notified for the year) | Notified each year | — |
| Multiple-year data | Rule 10CA(2) | Rule 81 | Current year plus two preceding years, where available | — | — |
| Multi-year ALP determination | — | Rule 82 (new) | ALP for a block of years in one proceeding, on the taxpayer's option | As prescribed | — |
The six methods in one paragraph each
Comparable uncontrolled price (CUP)
Compares the price charged in the controlled transaction to the price in a comparable transaction between independent parties. The most direct method, and the one the department prefers where it exists — interest on loans (benchmarked to market rates), royalties with published comparables, and commodities. It fails where the product or service is bespoke, which is most intercompany services.
Resale price method (RPM)
Starts with the price at which goods bought from the AE are resold to independent customers, and strips out an arm's length gross margin. Suited to distributors that add little value. Indian subsidiaries acting as resellers of the parent's software or hardware are candidates, provided they do not perform significant marketing or technical functions.
Cost plus method (CPM)
Adds an arm's length gross markup to the direct and indirect costs of producing goods or services. The textbook method for contract manufacturers and service providers. In India it is seldom applied in its strict form because comparables' financial statements do not disclose gross margins on a consistent basis — which is why "cost plus" in Indian practice almost always means TNMM with a net cost-plus indicator.
Profit split method (PSM)
Splits the combined profit from a transaction between the AEs according to their relative contributions. Used where both sides own unique intangibles or the operations are so integrated that one-sided testing is unreliable. Rare for captives; relevant where the Indian entity owns developed IP or co-develops products.
Transactional net margin method (TNMM)
Tests the net operating margin the Indian entity earns from the controlled transaction against the net margins of comparable independent companies. The profit level indicator is chosen to fit the function: operating profit / operating cost for service providers and contract manufacturers; operating profit / sales for distributors; return on assets for asset-intensive businesses. Because it works from publicly available net-margin data and tolerates small product differences, it is the method applied in the large majority of Indian transfer pricing assessments.
Other method (Rule 78, old 10AB)
Any method that takes into account the price that has been or would have been charged in comparable uncontrolled transactions — including third-party quotations, valuation reports and tender data. Useful for one-off transactions such as the sale of a business, shares or intangibles where there is no transactional comparables set.
How the most appropriate method is chosen
Rule 80 (old 10C) lists the factors: the nature and class of the transaction; the functions performed, assets used and risks assumed by each party; the availability and reliability of data; the degree of comparability; and the extent to which reliable adjustments can be made. There is no fixed hierarchy in Indian law, unlike the former OECD preference for traditional methods. In practice the sequence is: use CUP if a genuine comparable price exists; otherwise choose the one-sided method that fits the tested party's function; reserve PSM for integrated or two-sided intangible cases.
Range, mean and tolerance
Where six or more comparables are found, Rule 81 (old 10CA) applies the arm's length range — the 35th to 65th percentile of the data set. If the taxpayer's margin falls inside the range, no adjustment is made; if outside, the median is substituted. With fewer than six comparables, the arithmetic mean applies, together with a tolerance band (3% of the transaction value for most businesses, 1% for wholesale traders, as notified for each year). Comparables' data for the current year and the two preceding years is weighted where available, which smooths out one-year anomalies.
New in the 2026 Rules is a facility (Rule 82) to have the arm's length price determined for a block of years in a single proceeding, on the taxpayer's option — a response to the repetitive year-on-year litigation on identical facts that characterised the old regime.
Worked example
An Indian subsidiary provides back-office finance and HR support to its German parent. Operating cost for the year is ₹6.0 crore; the parent is billed cost plus 8%, i.e. ₹6.48 crore.
| Step | Detail |
|---|---|
| Characterisation | Routine, low-risk service provider; no intangibles; parent bears market and utilisation risk. |
| Method | TNMM. CUP rejected (no third-party price for this bundle of services); CPM rejected (no gross-margin data). Tested party: the Indian company, as the less complex entity. |
| Profit level indicator | Operating profit / operating cost (OP/OC). |
| Comparables | Nine Indian independent BPO/shared-services companies; three-year weighted OP/OC margins from 9.1% to 21.4%. |
| Arm's length range | 35th percentile 12.0%; median 14.8%; 65th percentile 17.3%. |
| Result | 8% is below the 35th percentile. Adjustment to the median: ₹6.0 crore × (14.8% − 8%) = ₹40.8 lakh added to income. |
Had the markup been 12.5%, it would have fallen inside the range and no adjustment would arise even though it is below the median.
Common mistakes we see
- Labelling the pricing 'cost plus method' in Form 48 when the analysis is in fact TNMM with a net cost-plus indicator. The mismatch invites questions in assessment.
- Choosing the foreign parent as the tested party because its margins look reasonable. The tested party should be the less complex entity for which reliable comparables exist — usually the Indian company.
- Using comparables from the parent's global study. Indian assessments expect Indian comparables drawn from Indian databases, with the search process documented.
- Applying the tolerance band on top of the arm's length range. The band applies only where the arithmetic mean is used (fewer than six comparables).
- Excluding pass-through costs from the cost base without a contractual and functional basis. If the Indian company bears the risk on a cost, it belongs in the base.
Frequently asked questions
Is there a preferred method under Indian law?
No. Section 165 and Rule 80 require the most appropriate method for the facts. In practice CUP is used where a reliable comparable price exists and TNMM in most other cases.
What is the difference between the cost plus method and 'cost plus' pricing?
The statutory cost plus method compares gross markups on direct and indirect costs. 'Cost plus' pricing in an intercompany agreement is simply a billing formula; it is normally tested under TNMM using the operating profit to operating cost ratio.
How many comparables are needed?
Six or more to use the arm's length range (35th to 65th percentile). With fewer, the arithmetic mean applies together with the notified tolerance band.
Can I use foreign comparables?
Only where Indian comparables are genuinely unavailable and the foreign data is reliable and adjusted for market differences. Assessing officers rarely accept foreign sets for routine services.
Which years' data should the benchmarking use?
The current tax year and the two preceding years, weighted, where the data exists. The study must be updated each year; a three-year-old study is not contemporaneous documentation.
What is Rule 82's multi-year ALP determination?
A new facility in the Income-tax Rules, 2026 that lets a taxpayer ask for the arm's length price determined in one proceeding to apply to a block of years, reducing repetitive annual disputes on the same transaction.
Sources
Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.
- Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
- FAQs and guidance notes on forms under the Income-tax Rules, 2026 — Income Tax Department
- e-Gazette of India — Finance Act, 2026; Income-tax Rules, 2026; FEMA notifications
Last reviewed on 1 November 2026 by Suchit Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.
