Rule 79 of the Income-tax Rules, 2026

Where this rule sits

Rule 79 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 78  ·  Rule 80 →

What this rule does

Sub-rule (1) lists the methods by which the arm's length price of an international transaction or a specified domestic transaction is to be determined for the purposes of section 165(2), and prescribes the steps of each. Whichever is used must be the most appropriate method, and it must be applied in the manner the clause specifies.

Clause (a), the comparable uncontrolled price method: identify the price charged or paid in a comparable uncontrolled transaction or transactions; adjust it for differences between the tested transaction and the comparable, or between the enterprises, which could materially affect the price in the open market; the adjusted price is the arm's length price.

Clause (b), the resale price method: take the price at which the property purchased or services obtained from the associated enterprise is resold or provided to an unrelated enterprise; reduce it by a normal gross profit margin earned on the same or similar property or services in a comparable uncontrolled transaction; reduce it further by the expenses incurred directly in connection with the purchase or the obtaining of services; adjust for functional and other differences, including differences in accounting practices, that could materially affect the gross profit margin in the open market; the adjusted price is the arm's length price of the purchase or obtaining.

Clause (c), the cost plus method: determine the direct and indirect costs of production incurred in respect of the property transferred or services provided to the associated enterprise; determine the normal gross profit mark-up on such costs, computed according to the same accounting norms, in a comparable uncontrolled transaction; adjust that mark-up for functional and other differences; add the adjusted mark-up to the costs; the sum is the arm's length price.

Clause (d), the profit split method, applies mainly where the transaction involves the transfer of unique intangibles or unique and valuable contributions by each enterprise, or where multiple transactions are so inter-related that they cannot be evaluated separately. Two approaches are permitted. Under the contribution profit split approach the combined net profit of the associated enterprises from the transaction is determined, each enterprise's relative contribution is evaluated on the basis of functions performed, assets employed or to be employed and risks assumed and on reliable external market data, the combined net profit is split in proportion to those contributions, and the share apportioned to the assessee is used to arrive at the arm's length price. Under the residual profit split approach the combined net profit is first partially allocated to each enterprise to give it an arm's length return for contributions that can be reliably benchmarked using comparable uncontrolled transactions, and only the residual net profit is split in proportion to relative contributions; the aggregate of the benchmarked allocation and the residual share is used to arrive at the arm's length price.

Clause (e), the transactional net margin method: compute the net profit margin realised by the enterprise from the transaction with the associated enterprise in relation to costs incurred, sales effected, assets employed or to be employed, or any other relevant base; compute the net profit margin realised in a comparable uncontrolled transaction on the same base; adjust that comparable margin for differences that could materially affect the net profit margin in the open market; establish the enterprise's margin as the same as the adjusted comparable margin; and use the margin so established to arrive at the arm's length price. Clause (f) preserves any other method as provided in rule 78.

Sub-rule (2) sets the comparability factors by which comparability with an uncontrolled transaction is judged: the characteristics of the property transferred or services provided; the functions performed, taking into account assets employed or to be employed and risks assumed; the contractual terms, whether or not formal or in writing, which lay down explicitly or implicitly how responsibilities, risks and benefits are divided; and the conditions prevailing in the markets in which the parties operate, including geographical location, depth and size of the markets, the laws and Government orders in force, costs of labour and capital, overall economic development, level of competition and whether the markets are wholesale or retail.

Sub-rule (3) states when an uncontrolled transaction is comparable: either none of the differences between the transactions or the enterprises is likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market, or reasonably accurate adjustments can be made to eliminate the material effects of such differences.

Sub-rule (4) fixes the data to be used in the comparability analysis as the data relating to the financial year in which the transaction takes place, which the rule labels the current year for this rule and for rule 81. As published, this sub-rule breaks off after the words "in which the international transaction or the specified domestic transaction", so the operative naming of the current year is the part that carries.

Sub-rule (5) is the exception, and it overrides sub-rule (4). Where the most appropriate method is the resale price method, the cost plus method or the transactional net margin method, the data may be the data relating to the current year, or the data relating to the first preceding year if current year data is not available at the time of furnishing the return of income for the tax year. If current year data later becomes available at the time the arm's length price is determined in the course of an assessment proceeding for that tax year, that data shall be used, irrespective of the fact that it was not available when the return was furnished.

Why it is there

Section 165 requires the arm's length price to be determined by the most appropriate method but leaves the methods and their mechanics to be prescribed. The rule supplies both — the closed list of methods, and step-by-step working for each — so that a transfer pricing determination is testable rather than impressionistic. Sub-rules (2) and (3) supply the comparability standard the methods all depend on, and sub-rules (4) and (5) settle the timing question that decides which year's comparables a taxpayer and an officer are each entitled to use.

Who it applies to

• An enterprise entering into an international transaction with an associated enterprise
• A person entering into a specified domestic transaction
• The Transfer Pricing Officer or Assessing Officer determining an arm's length price under section 165
• An accountant or adviser preparing the transfer pricing study on which the return is based

The figures, and what each one turns on

What this means in practice

The most appropriate method is not a free choice among five equally available routes — each clause prescribes its own steps, and a determination that skips one of them, for instance a resale price computation that never reduces for the expenses incurred directly in connection with the purchase, is not that method at all. Two of the methods are gross margin methods and one is a net margin method, and the adjustment each contemplates differs accordingly: clause (b) adjusts for what materially affects gross profit margin, clause (e) for what materially affects net profit margin. The comparability test in sub-rule (3) is disjunctive: a difference does not destroy comparability if a reasonably accurate adjustment can eliminate its material effect. The most practically dangerous provision is sub-rule (5). Using first preceding year data is permitted only where the current year data was not available when the return was furnished, and only for the three named methods; and the concession does not survive into the assessment — if the current year data has become available by the time the price is being determined in the proceeding, it must be used, and the study built on the earlier year gives way.

An example

A company distributes goods bought from its foreign associated enterprise and adopts the resale price method. It resells for Rs 100, a normal gross profit margin from comparable uncontrolled resales is 20%, and it incurs Rs 4 of expenses directly in connection with the purchase. The arm's length price of the purchase is Rs 100 less Rs 20 less Rs 4, that is Rs 76, adjusted further for any functional or accounting differences that materially affect the gross margin. Because the method is resale price, sub-rule (5) lets the company use first preceding year comparable data if current year data was not available when it filed its return; if the current year data has been published by the time the Transfer Pricing Officer determines the price in the assessment proceeding, that data must be used instead.

Where you meet this rule

A taxpayer meets it in the transfer pricing study and the accountant's report supporting the return, and again in a transfer pricing order, where the officer must state which method he has adopted and work through that method's own steps. It also governs any argument about which year's comparable data is admissible.

The words themselves

What people get wrong

• Using first preceding year data as a matter of course. Sub-rule (5) allows it only for the resale price, cost plus and transactional net margin methods, and only where current year data was not available at the time of furnishing the return.
• Assuming the return-time choice of data is final. Sub-rule (5)(b) requires current year data to be used if it is available at the time of determination in the assessment proceeding, irrespective of its unavailability earlier.
• Skipping the direct purchase expenses in the resale price method. Clause (b)(iii) requires the price to be further reduced by the expenses incurred by the enterprise directly in connection with the purchase of property or obtaining of services.
• Treating the two profit split approaches as one. Under the residual approach in clause (d)(ii)(B) the combined net profit is first partially allocated for benchmarkable contributions and only the residual is split by relative contributions.
• Ignoring unwritten contractual terms in the comparability analysis. Sub-rule (2)(c) covers contractual terms whether or not they are formal or in writing, and terms that divide responsibilities, risks and benefits implicitly.
• Reading sub-rule (3) as requiring identity. Comparability is satisfied where reasonably accurate adjustments can eliminate the material effects of the differences.

Read with

• Rule 78
• Rule 81