Income Tax Law / Transfer Pricing

Section 92: Computation of Income at Arm's Length Price

Section 92 of the Income-tax Act, 1961 governs the computation of income and deductible expenses arising from international transactions and specified domestic transactions using the arm's length principle. The corresponding provision under the Income-tax Act, 2025 is Section 161.

Legal transition: The Income-tax Act, 2025 applies from 1 April 2026, subject to its transitional and savings provisions. Section 92 of the 1961 Act remains relevant for earlier tax years and proceedings governed by that Act. For current tax years, consult Section 161 of the 2025 Act.

What is the arm's length principle?

An arm's length price (ALP) is a price that would apply, or is proposed to apply, between independent parties dealing under uncontrolled conditions. Transfer pricing rules help ensure that taxable profits from transactions between associated enterprises are determined on a comparable independent-party basis.

Section 92 of the Income-tax Act, 1961 explained

Sub-section (1): Income and deductions from international transactions

Income arising from an international transaction must be computed having regard to its arm's length price. The Explanation clarifies that deductible expenditure or interest arising from such a transaction must also be determined on that basis.

Sub-section (2): Shared costs between associated enterprises

Where two or more associated enterprises agree to allocate, apportion or contribute to costs connected with a benefit, service or facility in an international transaction or specified domestic transaction, each enterprise's share must be determined having regard to the arm's length price of that benefit, service or facility.

Sub-section (2A): Specified domestic transactions

Income, deductible expenditure, interest and allocations of cost or expense relating to specified domestic transactions must also be computed using arm's length pricing. The meaning and applicable thresholds of specified domestic transactions are governed by the relevant statutory definition, including Section 92BA of the 1961 Act.

Sub-section (3): No downward adjustment under Section 92

Section 92 does not permit the application of these computations to reduce taxable income or increase a loss compared with the amount computed from the books of account for the relevant previous year. This limitation must be read with the precise statutory wording and other applicable provisions.

Section 161 of the Income-tax Act, 2025

Section 161 carries forward the core transfer pricing requirement and presents the rules for international transactions and specified domestic transactions together. It covers determination of income, allowance for expenses and interest, allocation or contribution to shared costs, and the restriction on reducing taxable income or increasing losses through these provisions.

The related provisions are Section 162 (associated enterprises), Section 163 (international transactions), Section 164 (specified domestic transactions), Section 165 (determination of ALP), Section 166 (Transfer Pricing Officer), Section 171 (records) and Section 172 (accountant's report).

Methods for determining arm's length price

Section 92C of the 1961 Act and Section 165 of the 2025 Act provide for selection of the most appropriate prescribed method, taking account of the nature of the transaction and relevant comparability factors.

Method	General approach
Comparable Uncontrolled Price (CUP)	Compares prices in comparable independent transactions.
Resale Price Method (RPM)	Examines the resale margin earned on goods acquired from a related party.
Cost Plus Method (CPM)	Applies an appropriate comparable gross markup to relevant costs.
Profit Split Method (PSM)	Allocates combined profits using an economically supportable basis.
Transactional Net Margin Method (TNMM)	Compares net profit indicators with comparable independent transactions.
Other prescribed method	Uses a prescribed valuation approach suitable for the transaction.

Illustrative transfer pricing example

An Indian company sells services to its overseas associated enterprise for Rs. 80 lakh. If a properly supported comparability analysis establishes an arm's length consideration of Rs. 100 lakh, the Rs. 20 lakh difference may require a transfer pricing adjustment, subject to applicable law, facts, method and available relief. The illustration is simplified and is not a substitute for a full functional and comparability analysis.

Documentation and compliance

Taxpayers should identify covered transactions, document the functions performed, assets employed and risks assumed, select and substantiate the most appropriate method, retain supporting records and determine whether an accountant's report is required. Under the 1961 Act, Sections 92D and 92E govern documentation and reporting; the corresponding provisions of the 2025 Act are Sections 171 and 172.

Safe harbour provisions, advance pricing agreements, secondary adjustments and multi-year ALP determination may be relevant in eligible cases. These are subject to specific conditions and should not be assumed to apply automatically.

Official legislation and guidance

Updated 26 October 2026. This article is general legal information; applicability depends on the relevant tax year, transaction facts, statutory rules and notifications.