Arm's length price methods under Section 92C

Section 92C prescribes methods to determine the arm's length price: Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM) and Transactional Net Margin Method (TNMM), plus an 'other method'. The taxpayer applies the most appropriate method to the facts of each transaction.

The five methods plus one

Choosing the most appropriate method

There is no hierarchy; the taxpayer selects the most appropriate method based on the nature of the transaction, availability of reliable comparables, the functions performed, assets used and risks assumed (the FAR analysis), and the degree of comparability. TNMM is the most widely used because it tolerates product and functional differences better than transactional methods.

The arm's length range and tolerance

Where more than one comparable price is available, the arm's length price is determined using a range (the 35th to 65th percentile, in prescribed cases) or the arithmetic mean. A tolerance band (notified each year, e.g. 1% for wholesale trading and 3% for others) means no adjustment is made if the transaction price is within the band of the ALP. The tolerance band (1% for wholesale trading, 3% for others) is notified annually by the CBDT — verify the notification for the relevant year.

Documentation and benchmarking

• Support the method choice with a documented FAR analysis.
• Use reliable comparables from approved databases for the benchmarking study.
• Apply suitable adjustments for differences (working capital, risk).
• Report the chosen method per transaction in Form 3CEB.