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• Method for computation of arm length price [Rule 10B]
• - Comparable Uncontrolled Price Method
• - Resale Price Method
• - Cost Plus Method
• - Profit Split Method
• - Transactional Net Margin Method
• - Comparability of an International Transaction with an Uncontrolled Transaction
  
• Most Appropriate Method [Rule 10C]

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1.  The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:

( a ) Comparable uncontrolled price method, by which:

• The price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;
• Such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;
• The adjusted price arrived above is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction.

( b ) Resale price method, by which:

• The price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified;
• Such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions;
• The price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services;
• The price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market;
• The adjusted price arrived is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise;

( c ) Cost plus method, by which:

• The direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;
• The amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;
• The normal gross profit mark-up is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;
• The costs are increased by the adjusted profit mark-up arrived;
• The sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; 

( d ) Profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which:

• The combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined;
• The relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances;
• The combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated above;
• The profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction.
• However, alternatively, the combined net profit may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified above, and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction.

( e ) Transactional net margin method, by which:

• The net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
• The net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
• The net profit margin arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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 adjusted net profit margin is then taken into account to arrive at an arm's length price in relation to the international transaction.

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2. For the purposes of aforesaid rule, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:

3. An uncontrolled transaction shall be comparable to an international 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.

4. The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into.

However, data relating to a period not being more than 2 years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.

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Most appropriate method [Rule 10C]

As per Rule 10C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction. In selecting the most appropriate method, the following factors shall be taken into account:

• the nature and class of the international transaction;
• the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;
• the availability, coverage and reliability of data necessary for application of the method;
• the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;
• the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions;
• the nature, extent and reliability of assumptions required to be made in application of a method.

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