Income tax / Transfer pricing
Section 92C: Computation of Arm's Length Price
A practical guide to transfer-pricing methods, comparability, pricing ranges, assessment adjustments and compliance under Indian income-tax law.
Overview
Section 92C provides the framework for determining the arm's length price (ALP) of an international transaction or a specified domestic transaction. The most appropriate method is selected having regard to the transaction, the functions performed, assets employed, risks assumed and applicable rules. The Income-tax Act, 2025 applies from 1 April 2026; for earlier tax years the provisions of the Income-tax Act, 1961 remain relevant, subject to transition and saving provisions.
Section 92C(1): six methods
The statutory methods are: (a) comparable uncontrolled price (CUP); (b) resale price; (c) cost plus; (d) profit split; (e) transactional net margin (TNMM); and (f) another method prescribed by the Board. The sixth method is detailed in Rule 10AB. Rules 10B and 10C govern the application of methods and selection of the most appropriate method.
Section 92C(2): determination and tolerance
The selected method must be applied in the prescribed manner. For transactions from 1 April 2014, where more than one price is determined, the prescribed computation and range or arithmetic-mean rules apply as appropriate under Rule 10CA. The tolerance band is not an automatic standard deduction: it applies only under the relevant statutory proviso and the notified percentage for the relevant assessment year. The historical five-percent and three-percent references in earlier versions must not be applied indiscriminately.
Section 92C(2A) and (2B): historical provisions
These provisions address a transitional issue concerning the earlier five-percent variation option and restrict reopening or rectification of assessments completed before 1 October 2009 on that basis. They remain relevant when interpreting older assessment years.
Section 92C(3): determination by Assessing Officer
The Assessing Officer may determine the ALP from available material where the price is not computed in accordance with the law, prescribed documentation is not maintained, information is unreliable or incorrect, or required information is not furnished. The assessee must receive a show-cause opportunity. A reference to the Transfer Pricing Officer is governed separately by Section 92CA.
Section 92C(4): tax consequences
Where the ALP is determined under subsection (3), taxable income may be recomputed accordingly. The additional income arising from a transfer-pricing adjustment does not qualify for specified tax holidays or Chapter VI-A deductions under the proviso. The corresponding income of another associated enterprise is not automatically recomputed merely because an adjustment is made in the first enterprise.
Practical illustration
Suppose an Indian company supplies services to its foreign associated enterprise for Rs. 90 lakh, while reliable comparable data under the most appropriate method supports an arm's length consideration of Rs. 100 lakh. Subject to comparability adjustments, applicable range rules and other statutory conditions, a primary transfer-pricing adjustment of Rs. 10 lakh may arise. This is illustrative, not a substitute for a benchmarking study.
Documentation and compliance
Maintain a functional and risk analysis, intercompany agreements, invoices, comparables, selection and rejection of methods, and supporting calculations. Section 92D and Rule 10D address records; Section 92E and Form 3CEB address the accountant's report where applicable. Safe harbour and advance pricing agreement provisions may also be relevant.
Income-tax Act, 2025
The Income-tax Act, 2025 reorganises the transfer-pricing provisions for tax years beginning on or after 1 April 2026. For a filing or assessment, check the corresponding provision in the official 2025 Act and the applicable rules and notifications rather than assuming the old section number continues unchanged.
Original statutory structure of Section 92C
The original article covers subsections (1), (2), (2A), (2B), (3) and (4). The six methods and the historical amendments are discussed above. For the authoritative consolidated wording, refer to the official legislation and applicable Finance Act amendments.
Notable historical amendments include the Finance Act, 2002 (substitution of the provision); the Finance (No. 2) Act, 2009 (provisos); the Finance Act, 2012 (specified domestic transactions); and the Finance (No. 2) Act, 2014 (revised multiple-price computation framework). Their application depends on the relevant year.
Official legislation and guidance
Frequently asked questions
What is arm's length price?
It is the price applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions, as defined for transfer-pricing purposes.
Which transfer-pricing method must be used?
The most appropriate method must be selected based on the transaction and the prescribed comparability factors; no single method applies to every case.
Is the three-percent variation always allowed?
No. Any tolerance depends on the relevant statutory conditions, notification and assessment year, and it is not an automatic deduction.