Section 92C(2)

Section 92C(2) — the law in short

What the courts have decided on section 92C(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• STEAG Energy Services (India) P Ltd v ACIT ITATHelps taxpayerJudgment not reachable
  Only a small adjustment survived my appeal. Does the tolerance band wipe it out completely?
  Yes, if the surviving variation is within the notified percentage of the transaction value. The proviso to s.92C(2) is a deeming provision: once the variation is inside the band, the price actually charged is taken to be the arm's length price and there is nothing left to adjust.
• Statutory position — rule 10CA: the dataset, the arm's length range from the thirty-fifth to the sixty-fifth percentile where there are six or more entries, the median where the price falls outside it, and the arithmetical mean under sub-rule (7) where there are fewer than six CBDT Circulars & InstructionsCuts both ways
  The Transfer Pricing Officer has rejected our margin and adopted the median of his comparables. When is he entitled to go to the median at all, how is the range built, and what happens if he is left with only four or five comparables?
  The range is built only where the dataset has six or more entries and the most appropriate method is not the profit split method or the other method. Rule 10CA(2) requires a dataset constructed by placing the prices in ascending order. Rule 10CA(4) then provides that where the most appropriate method applied is a method other than the method referred to in clause (d) or clause (f) of s.92C(1) and the dataset consists of six or more entries, "an arm's length range beginning from the thirty-fifth percentile of the dataset and ending on the sixty-fifth percentile of the dataset shall be constructed". Rule 10CA(5): if the price actually charged is within that range it "shall be deemed to be the arm's length price" — no adjustment. Rule 10CA(6): if it is outside the range, "the arm's length price shall be taken to be the median of the dataset". The median is therefore reached only on the footing that the range was properly constructed and the price fell outside it; there is no route to the median in a case where sub-rule (4) never applied. Where sub-rule (4) does not apply — fewer than six entries, or the profit split method or the other method — sub-rule (7) revives the older machinery: the arm's length price is the arithmetical mean of all the values in the dataset, subject to the proviso that if the variation does not exceed such percentage not exceeding three per cent as may be notified, the price actually charged is deemed to be the arm's length price. The thirty-fifth percentile, the sixty-fifth percentile and the median are all defined in sub-rule (8) on the same pattern, and the pattern is not the ordinary statistical one: each is the LOWEST value in the ascending dataset such that at least thirty-five, sixty-five or fifty per cent of the values are equal to or less than that value, with a proviso that if the number of values equal to or less than that value is a whole number, the percentile is the arithmetic mean of that value and the value immediately succeeding it.
• Statutory position — rule 10B(1)(e) and rule 10B(3): how the transactional net margin method is applied, and the second limb of rule 10B(3) under which reasonably accurate adjustments to eliminate the material effects of differences are the statutory basis for working capital and risk adjustments CBDT Circulars & InstructionsCuts both ways
  The Transfer Pricing Officer has refused our working capital adjustment on the ground that no rule provides for it. Where in the Rules does the right to a working capital or risk adjustment come from, and does anything prescribe how it is computed?
  The right comes from rule 10B(3)(ii), read with rule 10B(1)(e)(iii); nothing in the Rules prescribes how either adjustment is computed. Rule 10B(3) is in two limbs and the word between them is "or": an uncontrolled transaction is comparable to an international transaction or a specified domestic transaction if "(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." So a comparable is not disqualified by a material difference. It is disqualified only if the difference is material AND no reasonably accurate adjustment can be made for it. That second limb is the statutory basis for the working capital adjustment and the risk adjustment, and an officer who refuses an adjustment must, to be consistent, either say the difference is not material — in which case limb (i) is satisfied and the comparable stands unadjusted — or say the adjustment proposed is not reasonably accurate, which is a question of the assessee's computation and not of the existence of the power. Rule 10B(1)(e) carries the same idea inside the transactional net margin method itself: sub-clause (iii) requires that the net profit margin arising in comparable uncontrolled transactions "is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market". On the words of sub-clause (iii) the adjustment is mandatory, not discretionary. What the Rules do not do is prescribe a method. Rule 10B, rule 10C and rule 10CA have all been read in full and none of them prescribes a formula, a base or a rate for computing a working capital adjustment or a risk adjustment.
• Statutory position — rule 10B(3): the Income-tax Rules expressly contemplate a comparability adjustment and prescribe NO method for computing one — a proved negative across rules 10A, 10AB, 10B, 10C, 10CA, 10D and 10TA and s.92F, with nothing in any CBDT circular, instruction or departmental transfer pricing page either CBDT Circulars & InstructionsCuts both ways
  The Transfer Pricing Officer has thrown out my working capital adjustment saying there is no prescribed method for it. Is he right that there is no prescribed method, and if he is, what does that do to the claim?
  He is right on the first half and wrong on the second. No provision of the Income-tax Rules, 1962 prescribes a formula, a base, a period, a source of interest rates or any other method for computing a working capital adjustment or a risk adjustment. Rules 10A, 10AB, 10B, 10C, 10CA, 10D and 10TA have each been read in full, and s.92F, and none of them does. But the absence of a method is not the absence of a power. Rule 10B(3) reads: "An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." The two limbs are joined by "or", and limb (ii) is an express statutory contemplation of the adjustment. Rule 10B(1)(e)(iii) goes further inside the net margin method itself: the net profit margin arising in comparable uncontrolled transactions "is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market" — the words are "is adjusted", not "may be adjusted". Rule 10C(2)(e) makes "the extent to which reliable and accurate adjustments can be made to account for differences" a statutory factor in selecting the most appropriate method, and rule 10D(1)(j) and (l) require the assessee to keep a record of "adjustments, if any, which were made to account for differences" and "details of the adjustments, if any, made to transfer prices". So the Rules name the adjustment four times over and never once say how to work it out. The expression "reasonably accurate" is not defined anywhere that has been found: not in rule 10A, which is the definitions rule for rules 10A to 10E, and not in s.92F, which is the definitions section for ss.92 to 92E.
• Statutory position — s.92C(2): the second proviso tolerance band, and the third proviso which disapplies the first and second provisos for any international transaction or specified domestic transaction undertaken on or after 1 April 2014 CBDT Circulars & InstructionsCuts both ways
  The Transfer Pricing Officer's adjustment is within three per cent of our price. Can I still claim the tolerance band under the proviso to s.92C(2), or has that gone?
  For a transaction undertaken on or after 1 April 2014 the second proviso does not apply, because the third proviso disapplies it — but the band itself has not gone. It has moved into rule 10CA(7) and it now operates only where the arm's length range machinery does not. The third proviso to s.92C(2) reads: "Provided also that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply." The first proviso was the arithmetical mean rule; the second was the tolerance band — variation not exceeding such percentage not exceeding three per cent of the transaction price as may be notified, in which case the transaction price is deemed to be the arm's length price. The prescribed manner is rule 10CA. Where rule 10CA(4) applies, six or more entries and a method other than profit split or the other method, the answer is the range and there is no band at all: within the range the price is deemed to be the arm's length price under rule 10CA(5), outside it the arm's length price is the median under rule 10CA(6). Where rule 10CA(4) does not apply, rule 10CA(7) gives the arithmetical mean and carries its own proviso in the same words as the old second proviso, and it is under that proviso, read with the third proviso to s.92C(2), that the band is now notified. The current notification is Notification No. 157/2025 dated 6 November 2025, S.O. 5053(E), issued expressly under "the third proviso to sub-section (2) of section 92C of the Income-tax Act, 1961, read with the proviso to sub-rule (7) of rule 10CA of the Income-tax Rules, 1962", and it fixes the variation at one per cent of the transaction price in respect of wholesale trading and three per cent in all other cases, for assessment year 2025-2026.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.