CBDT Retains Transfer Pricing Tolerance Levels for AY 2025-26

CBDT Retains Transfer Pricing Tolerance Levels for AY 2025-26

Issue: To provide continuity and stability in the application of Transfer Pricing (TP) regulations, the Central Board of Direct Taxes (CBDT) formalized the tolerance range for assessing the difference between the actual price of a related-party transaction and the Arm’s Length Price (ALP) for the Assessment Year 2025-26.

Facts:

• Transfer Pricing (TP) rules require transactions between associated enterprises (like MNC subsidiaries) to be conducted at an Arm’s Length Price (ALP)—the price a transaction would fetch between unrelated parties.
• The tolerance range defines an acceptable variation between the actual price and the determined ALP; transactions falling within this range are not subjected to a TP adjustment.
• The CBDT issued Notification No. 157/2025 on November 6, 2025, specifying the acceptable tolerance percentages for the Assessment Year (AY) 2025-26 (Financial Year 2024-25).

Decision:

The CBDT retained the existing tolerance range for the difference between the transaction price and the Arm’s Length Price (ALP) for AY 2025-26:

• 1% for Wholesale Trading
• 3% for All Other Transactions.

Key TakeDowns:

• Taxpayer Certainty: Retaining the tolerance levels provides much-needed certainty and stability to multinational companies (MNCs) and large taxpayers, mitigating the risk of disputes and litigation over minor pricing variations.
• Wholesale Trading Definition: The notification also specifically defined “wholesale trading” for TP purposes. A transaction qualifies as wholesale trading if:
  1. The purchase cost of finished goods is 80% or more of the total cost pertaining to the trading activities.
  2. The average monthly closing inventory of such goods is 10% or less of sales pertaining to those trading activities.
• Compliance Aligned: Maintaining these fixed tolerance levels simplifies TP compliance, aligning with the guidelines of the Organisation for Economic Co-operation and Development (OECD), and encourages companies to conduct transactions reflecting fair market value.