What is Arm's Length Price?

How it works

It is determined using the most appropriate of the prescribed methods (CUP, RPM, CPM, PSM, TNMM or the other method), supported by a benchmarking study.

Choosing among the six methods

There is no hierarchy in Indian law — Rule 10C requires the most appropriate method given the transaction, the availability of reliable data and the degree of comparability. In practice: CUP where an internal or external price for the same product or a comparable royalty exists; Resale Price Method for distributors adding little value; Cost Plus for contract manufacturers and routine service providers; Profit Split where both parties contribute unique intangibles and operations are too integrated to test separately; TNMM as the workhorse for captives, tested on an appropriate profit level indicator; and the Other Method under Rule 10AB where quotations or valuations provide the best available evidence.

Rule 10CA: the range and the tolerance band

Once comparables are selected the arithmetic matters. Where the dataset has six or more comparables, the arm's length range is the 35th to 65th percentile, and a transaction price falling inside it stands with no adjustment. Where it falls outside, the median becomes the arm's length price for the whole transaction — not merely the shortfall to the nearest boundary. With fewer than six comparables the arithmetic mean applies instead, with a notified tolerance band of 1% for wholesale trading and 3% for other transactions.

Worked example

An Indian captive earns a 12% net cost-plus margin on services to its parent. Eight comparables produce a 35th-to-65th percentile range of 14% to 19%, with a median of 16.5%. Because 12% sits below the range, the adjustment is computed to the median of 16.5%, not to the 14% lower boundary. The gap between those two numbers is the real cost of a benchmarking study that was not stress-tested before filing. Where the tested party is the Indian entity the comparable set must be Indian as well — importing foreign comparables is among the fastest routes to a rejected study.

This content is for general guidance only and does not constitute professional advice. Tax law changes frequently — verify the current position and consult a qualified Chartered Accountant before acting. Last reviewed: June 2026.