Section 92C — Section 92C — Computation of Arm's Length…

STATUTORY ARCHITECTURE — 18-ROW MAP

Statutory text — Income-tax Act, 1961

Computation of arm's length price.

92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction

shall be determined by any of the following methods, being the most appropriate method, having regard to

the nature of transaction or class of transaction or class of associated persons or functions performed by

such persons or such other relevant factors as the Board may prescribe, namely :—

(a) comparable uncontrolled price method;

(b) resale price method;

(c) cost plus method;

(d) profit split method;

(e) transactional net margin method;

(f) such other method as may be prescribed by the Board.

(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's

length price, in the manner as may be prescribed :

Provided that where more than one price is determined by the most appropriate method, the arm's length

price shall be taken to be the arithmetical mean of such prices:

Provided further that if the variation between the arm's length price so determined and price at which the

international transaction or specified domestic transaction has actually been undertaken does not exceed

such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in

the Official Gazette in this behalf, the price at which the international transaction or specified domestic

transaction has actually been undertaken shall be deemed to be the arm's length price :

Provided also that where more than one price is determined by the most appropriate method, the arm's

length price in relation to an international transaction or specified domestic transaction undertaken on or

after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the

first and second proviso shall not apply.

Explanation.—For the removal of doubts, it is hereby clarified that the provisions of the second proviso

shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as

on the 1st day of October, 2009.

(2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act,

2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the

variation between the arithmetical mean referred to in the said proviso and the price at which such

transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee

shall not be entitled to exercise the option as referred to in the said proviso.

(2B) Nothing contained in sub-section (2A) shall empower the Assessing Officer either to assess or reassess

under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise

increasing the liability of the assessee under section 154 for any assessment year the proceedings of which

have been completed before the 1st day of October, 2009.

(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the

basis of material or information or document in his possession, of the opinion that—

(a) the price charged or paid in an international transaction or specified domestic transaction has not

been determined in accordance with sub-sections (1) and (2); or

(b) any information and document relating to an international transaction or specified domestic

transaction have not been kept and maintained by the assessee in accordance with the provisions

contained in sub-section (1) of section 92D and the rules made in this behalf; or

(c) the information or data used in computation of the arm's length price is not reliable or correct; or

(d) the assessee has failed to furnish, within the specified time, any information or document which he

was required to furnish by a notice issued under sub-section (3) of section 92D,

the Assessing Officer may proceed to determine the arm's length price in relation to the said international

transaction or specified domestic transaction in accordance with sub-sections (1) and (2), on the basis of

such material or information or document available with him:

Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the

assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should

not be so determined on the basis of material or information or document in the possession of the Assessing

Officer.

(4) Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing

Officer may compute the total income of the assessee having regard to the arm's length price so determined :

Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall

be allowed in respect of the amount of income by which the total income of the assessee is enhanced after

computation of income under this sub-section :

Provided further that where the total income of an associated enterprise is computed under this sub-section

on determination of the arm's length price paid to another associated enterprise from which tax has been

deducted or was deductible under the provisions of Chapter XVIIB, the income of the other associated

enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the

first mentioned enterprise.

Function in the statutory architecture

Section 92C sets how the arm's length price of an international transaction or specified domestic transaction is found. It must be determined by the most appropriate of the following methods, having regard to the nature or class of transaction, the class of associated persons, the functions performed and other factors the Board prescribes: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin, or another method prescribed by the Board. The method is applied in the prescribed manner.

Where more than one price results, the arithmetical mean is taken; but if the actual price varies from the arm's length price by no more than a percentage notified by the Central Government, "not exceeding three per cent" of the actual price, the actual price is deemed to be the arm's length price. For transactions undertaken on or after 1 April 2014, where more than one price results, the arm's length price is computed in the prescribed manner and the first and second provisos do not apply.

Operative consequences

The Assessing Officer may determine the arm's length price himself where the price was not determined under sub-sections (1) and (2), the documents under s. 92D(1) were not kept, the data used is unreliable, or information called for under s. 92D(3) was not furnished, after a show-cause notice to the assessee (sub-section (3)).
Total income may then be computed at that price (sub-section (4)), but no deduction under ss. 10A, 10AA, 10B or Chapter VI-A is allowed on the amount of the enhancement.
Where the income of one associated enterprise is so computed on a payment to another enterprise from which tax was deducted or deductible under Chapter XVII-B, the other enterprise's income is not recomputed.

Status

Operative for assessment year 2026-27. The Finance Act, 2026 does not amend this section.

The 1961 Act governs assessment year 2026-27 and earlier years; the Income-tax Act, 2025 governs tax year 2026-27 onwards, and for this subject the 2025 Act provision is s. 165. The Finance Act, 2026 omitted the reference to s. 144 from s. 165(7).

Case Laws & Commentary

SECTION 92C — COMPUTATION OF ARM'S LENGTH PRICE

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

A. SECTION COMMENTARY

A.1 Structural position & legislative purpose

Section 92C is the computational engine of the TP code. It prescribes that the ALP of an international transaction or SDT be determined by the most appropriate method (MAM) out of the methods listed in sub-section (1) — Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), Transactional Net Margin Method (TNMM), and 'such other method as may be prescribed' (the sixth method, Rule 10AB). The MAM is selected having regard to the nature of the transaction, the FAR (functions, assets, risks) profile and the availability of reliable data (Rule 10C).

Sub-section (2) and its provisos contain the tolerance/range mechanism — historically the 5 per cent arithmetic-mean variation, later a notified percentage not exceeding three per cent of the transaction price (second proviso), replaced for transactions from AY 2015-16 by the 'arm's length range' concept (where six or more comparables are available) under Rule 10CA. Sub-section (3) empowers the AO to determine the ALP himself where the assessee has not used the MAM, has not maintained documentation, or the data used is unreliable; sub-section (4) provides for computation of total income on the basis of the ALP so determined, with its first proviso barring deductions under s.10A, s.10AA, s.10B or Chapter VI-A on the enhancement.

A.2 Sub-section / clause taxonomy

Sub-section (1): ALP is to be determined by the most appropriate method (CUP / RPM / CPM / PSM / TNMM / prescribed other method), being the method best suited to the facts and circumstances, in the manner prescribed by Rules 10B-10C.

Sub-section (2): Where more than one price is determined by the MAM, the ALP is taken to be the arithmetic mean of such prices; the second proviso contains the tolerance band (a notified percentage not exceeding three per cent of the transaction price) and, from AY 2015-16, the arm's length range (35th-65th percentile) under Rule 10CA where the dataset is large enough.

Sub-section (3): Where the AO, on the basis of material/information/documents, is of opinion that the price charged is not the ALP, or the assessee has not maintained/produced the prescribed documentation, or the data/information used is unreliable/incorrect, the AO may determine the ALP himself (after hearing the assessee).

Sub-section (4): On determination of the ALP, the AO computes the total income having regard to the ALP; the first proviso bars any deduction under s.10A, s.10AA, s.10B or Chapter VI-A on the amount by which total income is enhanced; the second proviso bars recomputation of the income of the other associated enterprise where tax was deducted or deductible under Chapter XVIIB.

A.3 Core doctrinal themes

Theme (1) — Choice of MAM and FAR analysis: the selection of method and comparables is the crux of most TP disputes; the comparability analysis must follow Rule 10B(2)-(3) (comparability factors, adjustments for material differences).

Theme (2) — Comparable selection and filters: turnover filters, functional comparability, related-party-transaction filters, and the inclusion/exclusion of super-profit or loss-making comparables are recurrent battlegrounds; high-profit comparables cannot be excluded merely for high profit if functionally comparable (Chryscapital).

Theme (3) — Cost base in CPM/TNMM: only the assessee's own costs (value-adding costs) form the base; pass-through third-party costs (e.g. FOB value of goods sourced for the AE) are not to be marked up (Li & Fung).

Theme (4) — Tolerance band/range: the tolerance band (now the range) is not a standard deduction available in every case; its application depends on the dataset and the year (proviso conditions).

Theme (5) — Reviewability: comparability/method questions are now examinable by the High Court under s.260A (SAP Labs).

A.4 Legislative evolution / Finance Act amendment trail

FA 2001 (w.e.f. 1-4-2002): Section 92C introduced with the five methods and the proviso tolerance.

FA 2002 / 2009 / 2011 / 2012: Refinements to the tolerance proviso (shift from 5% to a notified percentage; clarifications on the band not being a standard deduction).

FA 2012: 'Such other method' (sixth method) given effect via Rule 10AB; clarificatory amendments to the proviso.

FA 2014 (w.e.f. AY 2015-16): Introduction of the arm's length 'range' concept and use of multiple-year data (operationalised by Rule 10CA from October 2015).

FA 2026: No amendment to s.92C; the method hierarchy, range mechanism and computation rules are preserved.

A.5 CA practitioner pointers

(1) Document the MAM selection with a reasoned FAR analysis; an unreasoned method choice is the first casualty in appeal. Keep the comparable search process (databases, filters, accept/reject matrix) fully on record — post-SAP Labs the High Court will look at it.

(2) In CPM/TNMM, exclude pass-through costs from the cost base (Li & Fung). Resist the TPO's nil-ALP / re-characterisation moves (EKL Appliances; Cushman & Wakefield).

(3) Apply the correct year's tolerance/range rule; do not claim the tolerance band as an automatic deduction where the proviso conditions are not met.

(4) Seek comparability adjustments (working capital, capacity utilisation, risk) under Rule 10B(3) where material differences exist.

B. FA 2026 IMPACT NOTE

Section 92C is NOT amended by the Finance Act, 2026. The method hierarchy, the arithmetic-mean/range mechanism and the AO's determination powers continue unchanged up to AY 2026-27.

All comparability and method authorities below remain good law; FA 2026 introduces no new method and no change to the tolerance band or range percentiles.

C. CASE LAW — CLUSTERED BY ISSUE

Cluster C-1 : Cost base and pass-through costs

1. Li & Fung India (P) Ltd. v. CIT (2014) 361 ITR 85 (Delhi)

Facts: The assessee provided sourcing-support services to its overseas AE and was remunerated on a cost-plus basis on its own operating costs. The TPO sought to compute the mark-up on the FOB value of the goods sourced by the AE from third-party Indian vendors (i.e. on costs the assessee never bore).

Issue: Whether the cost base for a cost-plus/ TNMM remuneration can include the value of goods/costs that were not incurred by the tested party.

Held: The Delhi High Court held that the TPO erred in enhancing the cost base by the FOB value of third-party goods; a service provider can only be remunerated on the costs it actually incurs and the functions it actually performs. Marking up costs the assessee did not bear has no basis in Rule 10B.

Ratio: The cost/operating base for CPM/TNMM is confined to the tested party's own value-adding costs; pass-through costs are excluded.

Relevance: Leading authority on cost-base determination for captive service providers and sourcing entities.

Cluster C-2 : Comparable selection — high-profit comparables, filters

2. Chryscapital Investment Advisors (India) (P) Ltd. v. DCIT (2015) 376 ITR 183 (Delhi)

Facts: In benchmarking an investment-advisory captive, the question arose whether a potential comparable should be excluded solely because it earned abnormally high profits.

Issue: Whether high profit margin per se is a valid ground to exclude an otherwise functionally comparable company.

Held: The Delhi High Court held that high profit (or loss) is not, by itself, a ground for exclusion; the company must first be tested for functional comparability. Only if the high margin is shown to result from factors making it functionally non-comparable (or an abnormal event) can it be excluded. A mechanical 'super-profit' exclusion is impermissible.

Ratio: Comparability is functional, not margin-based; abnormal profit is a trigger for enquiry, not an automatic disqualifier.

Relevance: Frequently cited in comparable-selection disputes by both sides.

Cluster C-3 : Limits of the TPO's power — ALP vs. re-characterisation

3. CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi)

Facts: The TPO determined the ALP of royalty/brand payments at nil on the ground that the loss-making assessee derived no benefit, effectively disallowing the payment.

Issue: Whether the TPO can determine ALP at nil by re-characterising or second-guessing the commercial need for a transaction.

Held: The Delhi High Court held that the TPO must determine the ALP of the transaction as structured by the parties; he cannot disregard or re-characterise it (save in the narrow exceptions in the OECD Guidelines) nor disallow on a 'no benefit'/commercial-expediency basis.

Ratio: ALP determination is price-benchmarking, not a licence to re-characterise transactions or test commercial wisdom.

Relevance: Key defence against nil-ALP adjustments; read with Cushman & Wakefield (s.92 Cluster C-3).

4. SAP Labs India (P) Ltd. v. ITO (2023) 454 ITR 121 (SC)

Facts: See s.92 Cluster C-2. The Supreme Court addressed whether comparability/ method determinations under s.92C are immune from High Court review.

Issue: Whether the application of s.92C method/comparability by the Tribunal can be examined under s.260A.

Held: The Supreme Court held that the High Court can examine whether the ALP was determined in accordance with Chapter X and the Rules — comparable selection, filters and method application are open to scrutiny; such issues are substantial questions of law.

Ratio: Section 92C determinations are reviewable for compliance with the statutory method and for perversity.

Relevance: Governs the appellate fate of all s.92C comparability disputes from AY 2026-27 onward.

D. PRACTITIONER'S NOTE

Benchmarking file essentials: MAM rationale (Rule 10C), search strategy and accept/reject matrix, FAR analysis, comparability adjustments (Rule 10B(3)), and the correct-year tolerance/range computation (Rule 10CA). Exclude pass-through costs from the base (Li & Fung).

Appeal drafting: frame grounds to show non-compliance with the Rules or perversity in comparable selection (SAP Labs), and resist nil-ALP/ re-characterisation by citing EKL Appliances and Cushman & Wakefield. Keep working-capital and risk-adjustment workings ready.

Caveat: This material is treatise-style commentary for practitioners and academic use. It is not legal opinion. Verify the current text, the latest CBDT circulars/notifications and the most recent appellate position before relying on any proposition in assessment, audit (Form 3CEB) or litigation.

Case law on Section 92C

ITAT, High Court and Supreme Court judgments applying this section, on BharatTax.net, our income tax case law search.

← All sections (940)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025
s. 92C(1) — most appropriate method	s. 165(1), (2)
s. 92C(2) and provisos — manner of application, arithmetical mean, tolerance	s. 165(3)
s. 92C(2A), (2B) — transitional rules on the pre-2009 proviso	No corresponding provision in the Income-tax Act, 2025
s. 92C(3) — determination by the Assessing Officer	s. 165(4), (5)
s. 92C(4) and provisos — computation of income; deduction bar; no recomputation of the other enterprise	s. 165(6) to (8)

Section 92C — Computation of Arm's Length Price

Case Laws & Commentary

Case law on Section 92C