Rule 81 — Determination of arm’s length price in certain cases. Made under s.165 of the Income-tax Act, 2025.
Rule 81 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.
Sub-rule (1) sets the occasion for the rule: where applying the most appropriate method under section 165(3)(b) to an international transaction or a specified domestic transaction produces more than one price, the arm's length price is computed under this rule. Sub-rule (2) requires a dataset to be constructed by placing those prices in ascending order, and the arm's length price to be determined on that dataset.
Sub-rule (3) governs multi-year data where the most appropriate method is the resale price method, cost plus method or transactional net margin method and the comparable uncontrolled transaction was undertaken by an enterprise other than the one undertaking the transaction under test. Clause (a) covers comparables identified using current year data where that enterprise also undertook the same or similar comparable uncontrolled transaction in either or both of the two financial years immediately preceding the current year: the price for those years is worked out by applying the most appropriate method in the same manner as in the current year, and the weighted average of those prices, computed under sub-rule (5), goes into the dataset instead of the single price. Clause (b) covers comparables identified using data of the financial year immediately preceding the current year, where current year data was not available at the time of furnishing the return, and the enterprise also undertook such a transaction in the year preceding those two financial years: again the price is worked out on the same method and the weighted average enters the dataset.
Sub-rule (4) removes a comparable altogether. Where current year data used in terms of rule 79(5) establishes that the enterprise did not undertake the same or similar uncontrolled transaction during the current year, or that the transaction it did undertake is not a comparable uncontrolled transaction, then, irrespective of anything else, neither the price nor the weighted average of prices of those transactions is to be included in the dataset.
Sub-rule (5) fixes how the weighted average is computed where an enterprise has comparable uncontrolled transactions in more than one financial year, by a Table: for the resale price method the weight goes to the quantum of sales considered for arriving at the respective prices; for the cost plus method, to the quantum of costs; and for the transactional net margin method, to the quantum of costs incurred, sales effected, assets employed or to be employed, or any other base considered for arriving at the respective prices.
Sub-rule (6) is the range test. Where the most appropriate method is the comparable uncontrolled price method, resale price method, cost plus method or transactional net margin method, and the dataset has six or more entries, an arm's length range is constructed beginning from the 35th percentile and ending on the 65th percentile. If the price at which the transaction has actually been undertaken is within that range, that price is deemed to be the arm's length price; if it is outside, the median of the dataset is used to compute the arm's length price.
Sub-rule (7) covers every case where sub-rule (6) does not apply. The arm's length price is then the arithmetical mean of all the values in the dataset, or the price at which the transaction was actually undertaken if the variation between the mean-based arm's length price and that actual price does not exceed such percentage, not exceeding 3% of the latter, as may be notified by the Central Government.
Sub-rule (8) defines the statistical terms. The median is the lowest value in the ascending dataset where at least 50% of the values are less than or equal to it, or the arithmetic mean of that lowest value and the value immediately succeeding it where the count of values equal to or less than it is a whole number; the 35th percentile and the 65th percentile are defined the same way at their respective proportions. Three worked Illustrations follow, showing the weighted average calculation for seven comparables, the treatment when current year data is available for only some of them and a new comparable emerges during assessment, and a 20-price dataset where the percentile places fall on whole numbers.
Section 165 requires an arm's length price but a benchmarking exercise almost never yields one number; the most appropriate method usually throws up a spread. This rule turns that spread into a single determinable figure and settles the mechanics the section leaves open: how many years of comparable data go in, how prices across years are averaged, when a range applies instead of a mean, and what happens when the tested price falls outside the range. The 35th to 65th percentile band and the median fallback exist so that neither side is arguing about which comparable in a spread is the right one.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Size of dataset needed before the range approach applies | Six or more entries | And the most appropriate method is the comparable uncontrolled price, resale price, cost plus or transactional net margin method | Rule 81(6) |
| Lower limit of the arm's length range | 35th percentile of the dataset | Dataset arranged in ascending order; percentile as defined in sub-rule (8)(b)(i) | Rule 81(6) |
| Upper limit of the arm's length range | 65th percentile of the dataset | Dataset arranged in ascending order; percentile as defined in sub-rule (8)(b)(ii) | Rule 81(6) |
| Price used where the actual price falls outside the range | The median of the dataset | Sub-rule (6) applies and the actual transaction price is outside the 35th to 65th percentile range | Rule 81(6)(b) |
| Proportion of values at or below the median | At least 50% | Median is the lowest value in the ascending dataset satisfying this, or the mean of it and the next value where the count is a whole number | Rule 81(8)(a) |
| Ceiling on the tolerance percentage between the computed arm's length price and the actual price | Not exceeding 3% of the actual price | This is the outer limit within which the Central Government may notify a percentage; the operative tolerance is the percentage actually notified, and it applies only where sub-rule (6) does not | Rule 81(7)(b) |
| Years of comparable data brought in for a current year comparable | Either or both of the two financial years immediately preceding the current year | Resale price, cost plus or transactional net margin method, and the comparable enterprise undertook the same or similar transaction in those years | Rule 81(3)(a) |
| Years of comparable data brought in where current year data was unavailable at return filing | The financial year immediately preceding the current year, and the financial year immediately preceding those two financial years | Data relating to the current tax year not available at the time of furnishing the return of income for that year | Rule 81(3)(b) |
The 3% in sub-rule (7)(b) is a ceiling on what the Central Government may notify, not a tolerance you can apply on your own. The rule says such percentage, not exceeding 3% of the latter, as may be notified, so the working figure is whatever has been notified, and the tolerance is available only in the sub-rule (7) situation, that is, where the range in sub-rule (6) does not apply. When the range does apply and the actual price falls outside it, the adjustment is not to the nearest edge of the range: sub-rule (6)(b) sends you to the median of the whole dataset. Sub-rule (4) overrides the multi-year mechanics entirely, so a comparable that fails on current year data is dropped, weighted average and all, rather than being carried in on its earlier years. And the arithmetical mean survives only as the residual rule in sub-rule (7); with six or more entries on any of the four listed methods, the percentile range governs.
A company benchmarks a service transaction on the transactional net margin method and the dataset, after weighted averaging under sub-rule (5), has seven values in ascending order. Since there are six or more entries, sub-rule (6) applies. The 35th percentile place is 7 x 0.35 = 2.45, which is not a whole number, so the value at the 3rd place is the 35th percentile, and the 65th percentile place is 7 x 0.65 = 4.55, so the value at the 5th place is the 65th percentile. If the company's own margin sits between those two values its price is deemed to be at arm's length; if it sits below the 35th percentile, the median, being the value at the 4th place, is used to compute the arm's length price.
You meet it inside the transfer pricing study and the accountant's report supporting an international or specified domestic transaction, and again in a Transfer Pricing Officer's order that reconstructs the dataset and applies the median.
an arm’s length range beginning from the 35th percentile of the dataset and ending on the 65th percentile of the dataset shall be constructed
outside such arm's length range, the median of the dataset shall be used to compute the arm's length price
does not exceed such percentage, not exceeding 3% of the latter, as may be notified in this behalf by the Central Government