Section 165 — Arms Length Price Methods | ITA 2025

Section 165 — - COMPUTATION OF ARM'S LENGTH PRICE

Section 165 is the substantive equivalent of 1961 s. 92C -- the engine of TP determination. The provision specifies FIVE METHODS for ALP determination -- each suitable for different transaction types -- and requires the MOST APPROPRIATE METHOD to be used. (1) CUP -- Comparable Uncontrolled Price; (2) RPM -- Resale Price Method; (3) CPM -- Cost Plus Method; (4) PSM -- Profit Split Method; (5) TNMM -- Transactional Net Margin Method; (6) Other Method (Rule 10AB -- prescribed). The Most Appropriate Method (MAM) doctrine governs selection. ALP-RANGE (FA 2014 / Rule 10CA) -- where multiple comparables, the 35th to 65th percentile range; if assessee's price within range, no adjustment. Tolerance band (sub-s. 2) -- 1% (wholesale trading) / 3% (other transactions) safe harbour for marginal differences.

Statutory text — Income-tax Act, 2025

Marginal note -- Computation of arm's length price

(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—

(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,—

(a) selected having regard to the nature of transaction or class of transaction or class of associated enterprise or functions performed by such enter- prises or such other relevant factors as the Board may prescribe;

(b) applied for determination of arm’s length price in such manner as may be prescribed.

(3) The arm’s length price shall be—

(a) in case, only one price is determined by the most appropriate method,—

(i) the price determined by that method; or

(ii) the price at which the international transaction or specified domestic transaction has actually been undertaken, if the variation

20. Words “or section 144” omitted by the Finance Act, 2026, w.e.f. 1-4-2026. 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 3% of the latter, notified by the Central Government in this behalf; or

(b) in case, more than one price is determined by the most appropriate method, the price determined in such manner as may be prescribed.

(4) The Assessing Officer, during the course of any proceeding for the assessment of income, may proceed to determine the arm’s length price in relation to an inter- national transaction or specified domestic transaction as per sub-sections (1), (2) and (3) if, on the basis of material or information or document in his possession, he is of the opinion that—

(a) the price charged or paid in an international transaction or specified domestic transaction has not been determined as per sub-sections (1),

(2) and (3); or

(b) any information and document relating to an international transaction or specified domestic transaction has not been kept and maintained by the assessee as per section 171(1); or

(c) the information or data used in determination of the arm’s length price by the assessee is not reliable or correct; or

(d) the assessee has failed to furnish, within the specified time, any infor- mation or document which he was required to furnish by a notice issued under section 171(2) and (3).

(5) The Assessing Officer, before determining the arm’s length price under sub-sec- tion (4), shall issue a notice calling upon the assessee to show cause, on the date and time to be specified in the notice, why the arm’s length price should not be determined on the basis of material or information or document in the possession of the Assessing Officer.

(6) The Assessing Officer, on determination of arm’s length price under sub-section (4), may compute the total income of the assessee having regard to the arm’s length price so determined.

(7) No deduction shall be allowed 21[***] under Chapter VIII in respect of income by which the total income of the assessee is enhanced after computation of income under sub-section (6).

(8) When the total income of an associated enterprise is computed under sub-section

(6) 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 XIX-B, 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.

21. Words “under section 144 or” omitted by the Finance Act, 2026, w.e.f. 1-4-2026. Reference to Transfer Pricing Officer.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 165	INCOME-TAX ACT, 1961 -- s. 92C
s. 165(1) -- five methods + 'other prescribed method' (Rule 10AB)	1961 s. 92C(1)
Most appropriate method test	1961 s. 92C(1) read with Rule 10C
Tolerance band 1% / 3%	1961 s. 92C(2) Proviso [FA 2012 / FA 2015]
ALP range methodology	1961 s. 92C(2A) [FA 2014] read with Rule 10CA

FIVE METHODS

(i) CUP -- COMPARABLE UNCONTROLLED PRICE: directly compares price of controlled transaction to uncontrolled-price of similar transaction. Used for commodities / standard products with available comparables (e.g., crude oil price benchmark). (ii) RPM -- RESALE PRICE METHOD: starts with resale price to unrelated party, deducts gross-margin (from comparable resellers) to derive purchase ALP. Used for distributor / reseller arrangements. (iii) CPM -- COST PLUS METHOD: starts with cost incurred, adds appropriate gross-mark-up (from comparables). Used for routine manufacturing / contract-manufacturing / services. (iv) PSM -- PROFIT SPLIT METHOD: combines profits from controlled transactions and splits between AEs based on relative contributions. Used for highly integrated transactions / unique intangibles / financial services. (v) TNMM -- TRANSACTIONAL NET MARGIN METHOD: examines net margin (operating margin / NCP / similar) earned in controlled transaction vs comparables. Most-used method in India; broadly applicable; less data-intensive than PSM. (vi) OTHER METHOD: Rule 10AB / 10B -- prescribed. Per FA 2014 expanded scope to include any method which provides reasonable expectation of ALP based on facts.

ALP RANGE (Rule 10CA)

FA 2014 introduced range-based ALP methodology (post Mentor Graphics ITAT approval). Where 6+ comparables are available: (a) Compute MARGIN of each comparable; (b) Sort ascending; (c) ALP RANGE = 35th percentile to 65th percentile; (d) If assessee's transaction margin within RANGE -- no adjustment; (e) If outside range, ALP = MEDIAN of comparable set. Pre-FA 2014: arithmetic mean was the norm; range methodology now standard for 6+ comparables. For 1-5 comparables, simple mean still applies.

TOLERANCE BAND (sub-s. 2)

Pre-adjustment safe harbour: (a) WHOLESALE TRADING (FA 2019 / 1961 s. 92C(2) Proviso) -- 1%; (b) OTHER TRANSACTIONS -- 3%. If assessee's transaction price is within tolerance band of ALP, no adjustment. CG can re-set bands annually.

MOST APPROPRIATE METHOD (Rule 10C)

MAM selection criteria: (a) Nature and class of international transaction; (b) Class of associated enterprises; (c) Functions performed / assets used / risks assumed (FAR analysis); (d) Availability / coverage / reliability of data; (e) Degree of comparability between controlled and uncontrolled transactions; (f) Extent to which adjustments can be made for material differences; (g) Nature / extent / reliability of assumptions required.

CASE LAW

(i) Sony India v. CIT (Del HC, 2008) -- TNMM application; foundational. (ii) Mentor Graphics India v. CIT (ITAT Mumbai) -- range methodology pre-FA 2014; codified into Rule 10CA. (iii) Maruti Suzuki India v. CIT (SC) -- AMP-as-international-transaction; bright-line test rejected. (iv) Sony Ericsson v. CIT (Del HC) -- AMP / RPM application. (v) LG Electronics v. CIT (ITAT Spec Bench, 2013) -- bright-line for AMP. (vi) Cadbury India v. CIT (Bom HC) -- ALP for marketing-intangibles. (vii) Recent ITAT decisions on tolerance band / range / MAM selection.

CROSS-REFERENCES

Section 161 -- TP charging.
Section 162 -- Associated enterprise.
Section 163 -- International transaction.
Section 164 -- Specified domestic transaction.
Section 166 -- Penalty.
Section 168 -- APA.
Income-tax Rules, 2026 r. 10A / 10AB / 10B / 10C / 10CA -- methods / range / MAM / documentation.
OECD TP Guidelines / UN TP Manual.

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