s.92C — Determination of the arm's length price
The provision that prescribes the methods by which an arm's length price must be determined, and denies a holiday on the income the adjustment adds.
Income-tax Act, 1961
s.92C
Income-tax Act, 2025
s.165
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 92C(1) of the Income-tax Act, 1961 requires the arm's length price in relation to an international transaction or specified domestic transaction to be determined by the comparable uncontrolled price method, the resale price method, the cost plus method, the profit split method, the transactional net margin method, or such other method as may be prescribed by the Board, being the most appropriate method having regard to the nature of the transaction or class of transaction, the class of associated persons, the functions performed and such other relevant factors as the Board may prescribe. Sub-section (2) requires the most appropriate method to be applied in the prescribed manner, and Rules 10B and 10C supply the detail. Sub-section (3) allows the Assessing Officer to determine the price himself in the circumstances it lists, and sub-section (4) then provides that where he has done so he may compute the total income on the basis of the price so determined. The proviso to sub-section (4) denies any deduction under section 10A, 10AA, 10B or Chapter VI-A in respect of the amount by which the total income is enhanced after that computation. An arm's length price arrived at without selecting and applying one of the prescribed methods is unsustainable, as ITAT Ahmedabad held in Sun Pharma Advance Research. The Bombay High Court in Kodak India recorded the same view of section 92C without deciding the point, and expressly left the question of law open. The counterpart in the Income-tax Act, 2025 is section 165, within which section 92C(4) becomes sub-section (6) and its proviso becomes sub-section (7). Clause (f) was an empty box until Rule 10AB, in force from 1 April 2012, prescribed the other method.
What the provision does
Confines the determination of an arm's length price to a closed list of methods and denies a profit linked or unit based deduction on the enhancement. It does NOT rank the methods, so there is no hierarchy in the Indian rules and the choice is fact specific; and clause (f) was not a residuary power at all until Rule 10AB prescribed the other method with effect from 1 April 2012.
Threshold questions
- Whether one of the methods in clauses (a) to (e) was selected and applied
- Whether the method relied on under clause (f) is Rule 10AB, which prescribed the other method only from 1 April 2012
- Whether the most appropriate method was chosen by reference to the Rule 10C(2) factors
- Whether the price was determined by the Assessing Officer under sub-section (3), which is what sub-section (4) and so its proviso require
- Whether the enhancement attracts the denial of a deduction under Chapter VI-A
In practice
The recurring disputes.
Deletion or remand where no method was used
Where the Transfer Pricing Officer reaches a figure by reasoning rather than by a prescribed method, assessees say the addition must be deleted, relying on a line of Tribunal decisions including Wartsila India and CLSA India which did exactly that. The Revenue answers that the Bombay High Court in Kodak India decided no such thing and left the question open, and that section 92 requires the income to be computed, so that deletion leaves a statutory obligation unperformed. The Bombay High Court in Capgemini India declined to disturb a deletion and refused the Revenue a second innings, holding that no substantial question of law arose, though on the footing that the remand plea had not been raised below and with the general question expressly left open; ITAT Mumbai has since followed it in UCB India. ITAT Ahmedabad in Sun Pharma Advance Research remanded rather than deleted, and the distinguishing feature was that the assessee had itself filed no report in Form No. 3CEB.
Whether the proviso to sub-section (4) applies to a price not fixed by the Assessing Officer
Sub-section (4) opens with the words "Where an arm's length price is determined by the Assessing Officer under sub-section (3)", and the proviso qualifies that sub-section. Assessees argue that where the price comes from an advance pricing agreement, from safe harbour, or through the mutual agreement procedure, or is accepted as returned, the proviso has no application and the holiday survives. The Bangalore Bench in Dell International Services and the Pune Bench in Approva Systems read the sub-section that way, Dell framing it by reference to section 92CA(4); the extension to agreed and safe harbour prices follows on the logic rather than being decided by them, and the Revenue's appeal against Approva has not been disposed of. The Revenue argues that the purpose is to deny a holiday on an enhancement however it arises. The point is open.
Cost plus or transactional net margin for contract research
For contract research and product development services the assessee usually benchmarks on a cost plus mark-up, reflecting a service provider bearing limited risk, while the Transfer Pricing Officer often prefers the transactional net margin method with manufacturing comparables. Neither the statute nor the Rules create a hierarchy, and no High Court has chosen between them, so the contest in practice moves on to comparability and filters rather than the name of the method.
The scope of appellate scrutiny after SAP Labs
The Supreme Court in SAP Labs held that there is no absolute proposition barring a High Court from examining whether a determination accords with the Act and the Rules, including comparability and filters, and that a determination made de hors the provisions is perverse. The Revenue reads it as opening comparability to appeal generally; assessees read it as requiring a case by case examination and as creating no automatic substantial question of law. The judgment supports the narrower reading.