Rule 78 of the Income-tax Rules, 2026

Where this rule sits

Rule 78 gives effect to Section 165 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.

← Rule 77  ·  Rule 79 →

What this rule does

The rule prescribes, for section 165(1)(f), what the "other method" of determining the arm's length price is. In relation to an international transaction or a specified domestic transaction, it is any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.

Why it is there

Section 165(1) lists the prescribed methods for arriving at an arm's length price and leaves clause (f) open as a residuary method to be prescribed. Some transactions have no comparable that any of the named methods can work on — a one-off transfer, a bespoke asset, a business arrangement with no market analogue. The rule keeps the residuary method anchored to the same idea as the others: an actual or hypothetical price for a comparable uncontrolled transaction, not a valuation at large.

Who it applies to

• An assessee entering into an international transaction whose arm's length price is determined under section 165(1)(f)
• An assessee entering into a specified domestic transaction whose arm's length price is so determined
• A Transfer Pricing Officer or Assessing Officer applying the other method

What this means in practice

The method is defined by what it must take into account, not by a prescribed computation, so it accommodates a quotation, a tender, a valuation or a third-party price — provided each is a price for the same or similar uncontrolled transaction under similar circumstances. Two features widen it and one narrows it. It expressly admits a price that "would have been charged or paid", so a genuine offer or quotation is usable even though no transaction occurred; and it admits transactions with as well as between non-associated enterprises. But it still requires comparability of transaction and circumstances and consideration of all the relevant facts, so it is not a licence to substitute a general valuation for a comparable-based price. It is one of the methods under section 165(1); the section decides how the most appropriate method is chosen.

An example

A company transfers a unique piece of plant to its overseas associated enterprise and no comparable uncontrolled sale exists. It relies on a written quotation from an unrelated buyer for the same plant on the same delivery and payment terms. That is a price which would have been paid for a similar uncontrolled transaction under similar circumstances, and so is within the other method under rule 78.

Where you meet this rule

A reader meets this rule in the transfer pricing study and Form documentation supporting the arm's length price, and in transfer pricing proceedings where the choice of the other method over a named method has to be justified.

The words themselves

What people get wrong

• Treating the other method as a free-standing valuation. The rule requires the method to take into account a price charged or paid, or that would have been charged or paid, for the same or similar uncontrolled transaction.
• Rejecting a quotation or offer because no transaction took place. The rule expressly covers a price which "would have been charged or paid".
• Limiting the comparable to transactions between two non-associated enterprises. The rule reads "with or between non-associated enterprises".
• Using the other method without testing comparability of circumstances. The rule requires similar circumstances and consideration of all the relevant facts.
• Assuming the rule makes the other method available in preference to the named methods. It defines the method; section 165 governs its selection.