RULE 81 INCOME-TAX RULES 2026 Determination of arm’s length price in certain cases.

RULE 81 INCOME-TAX RULES 2026

Determination of arm’s length price in certain cases.

81. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in section 165(3)(b) results in determination of more than one price, the arm’s length price in respect of such transactions shall be computed in accordance with the provisions of this rule.

(2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm’s length price shall be determined on the basis of the dataset so constructed.

(3) For the purposes of sub-rule (2), where the most appropriate method is the resale price method, cost plus method, or transactional net margin method, and where the comparable uncontrolled transaction undertaken by an enterprise, not being the enterprise undertaking such transactions referred to in sub-rule (1), has been identified using data relating to—

(4) Where the use of data relating to the current year, in terms of rule 79(5), establishes that—

then, irrespective of anything else, neither the price nor the weighted average of prices of the comparable uncontrolled transactions shall be included in the dataset.

(5) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, the weighted average of the prices of such transactions for the purposes of sub-rules (2), (3) and (4) shall be computed based on the method used for determination of prices as specified in column B of the following Table and by assigning weights to the factors specified in column C thereof:—

TABLE

(6) Where the most appropriate method is comparable uncontrolled price method or resale price method or cost plus method or transactional net margin method and the dataset constructed in accordance with sub-rule (2) consists of six or more entries, 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 and, if the price at which the international transaction or the specified domestic transaction has actually been undertaken is —

(7) Where the provisions of sub-rule (6) are not applicable, the arm’s length price shall be —

(8) For the purposes of this rule,—

Illustration 1

Enterprise X has undertaken controlled transaction with its associated enterprises during the current year. After taking into account the facts and circumstances, transactional net margin method has been selected as the most appropriate method, enterprise X has been selected as the tested party, and the ratio of operating profit (OP) to operating expense (OE) has been selected as the profit level indicator (PLI). The data of the comparable uncontrolled transactions is available for the current year under consideration at the time of furnishing return of income by the assessee and based on the same, seven non-associated enterprises have been identified to have under-taken the comparable uncontrolled transactions in the current year. All the identified comparable enterprises have also undertaken comparable uncontrolled transactions in a period of two years preceding the current year. The weighted average PLI calculation for each non-associated enterprise shall be as follows:

From the above , the dataset will be constructed by arranging the weighted average values of PLI in an ascending order as follows:

For deriving the arm’s length range, the data place of 35th and 65th percentile shall be computed in the following manner:

Total number of data points in dataset × (35/100)

Total number of data points in dataset × (65/100)

Thus, the data place of the 35th percentile = 7 × 0.35 = 2.45.

Since this is not a whole number, the next higher data place, that is, the value at the 3rd place would have at least 35% of the values below it. The 35th percentile, is therefore, value at the 3rd place, that is, 8.2%.

The data place of the 65th percentile is = 7 × 0.65 = 4.55.

Since this is not a whole number, the next higher data place, that is, the value at the 5th place would have at least 65% of the values below it. The 65th percentile is therefore value at 5th place, that is, 10.57%.

The arm’s length range will be beginning at 8.2% and ending at 10.57%.

Therefore, if the PLI in case of the enterprise X that has undertaken the international transaction or the specified domestic transaction is equal to or more than 8.2% and less than or equal to 10.57%, the price at which such international transaction or the specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price. No adjustment shall be required.

However, if the PLI in case of the enterprise X is lower than the 35th percentile of the arm’s length range, that is, 8.2%, then for the purpose of determining the arm’s length price, the median of the dataset shall be used. The median will be first determined in the following manner:

The data place of median is calculated by first computing the total number of data point in the dataset × (50/100). In this case it is 7 × 0.5 = 3.5.

Since this is not a whole number, the next higher data place, that is, the value at the 4th place in the dataset would have at least 50% of the values below it (median).

The median in this case is 9%. Therefore, the PLI at arm’s length shall be 9% and the controlled transaction shall be adjusted so as to yield this PLI for the controlled enterprise X.

Illustration 2

In case of the Enterprise X referred to in Illustration 1, the data of the current year is available only in respect of non-associated enterprises A, C, E, F and G at the time of furnishing the return of income by the assessee. In respect of non-associated enterprises B and D, the data of the financial year preceding the tax year is available at the time of furnishing the return of income and the same has been used to identify comparable uncontrolled transactions undertaken by enterprises B and D. Further, if these seven non-associated enterprises have also undertaken comparable uncontrolled transactions in either or both of the two financial years immediately preceding the tax year then such data has been included in the dataset. The weighted average PLI calculation for each non-associated enterprise shall be as follows:

From the above, the dataset will be constructed by arranging the weighted average values of PLI in an ascending order as follows:

If during the course of assessment proceedings, the data of the tax year becomes available and the use of such data indicates that non-associated enterprise B cannot be considered as a comparable under rule 79(3)(ii) and (iii), then the data in respect of enterprise B shall not be included in the dataset. The data for tax year in respect of enterprise D shall be included in the dataset. Further, if the data available at this stage identifies a new comparable uncontrolled transaction undertaken by enterprise H, then, it shall be included in the revised dataset. The weighted average PLI calculation for each non-associated enterprise shall be as below:

From the above, the dataset will be constructed by arranging the weighted average values of PLI in an ascending order as follows:

The calculation of the arm’s length range and the arm’s length price shall then be performed in the same manner as that described in Illustration 1.

Illustration 3

In a given case, comparable uncontrolled price method has been selected as the most appropriate method and 20 comparable un-controlled transactions have been identified. The dataset of 20 prices, arranged in ascending order, is as under:

Applying the formula given in the Illustration 1, the data place of the 35th and 65th percentile is determined as follows:

35th percentile place = 20 × (35/100) = 7th.

65th percentile place = 20 × (65/100) = 13th.

Since the 35th percentile place is a whole number, it shall be the average of the prices at the 7th and next higher, that is, 8th place. This is (47000+48000)/2 = Rs. 47,500.

Similarly, the 65th percentile will be average of 13th and 14th place prices. This is (48500+49000)/2 = Rs. 48,750.

The median of the range (the 50th percentile place) = 20 × (50/100) = 10th.

Since the 50th percentile place is a whole number, it shall be the average of the prices at the 10th and next higher, that is, 11th place. This is (48350+48450)/2 = Rs. 48,400.

Thus, the arm’s length range in this case shall be from Rs. 47,500 to Rs. 48,750.

Consequently, any controlled transaction whose price is equal to or more than Rs. 47,500 but less than or equal to Rs. 48,750 shall be considered to be within the arm’s length range. If such price is not within the arm’s length range, then, for the purpose of determining the arm’s length price, the median of the dataset shall be used.