Draft Income Tax Rule 81 – Determination of arm’s length price in certain cases

Rule 81 of the Draft Income-tax Rules, 2026 lays down the mechanism for determining the arm’s length price (ALP) where application of the most appropriate transfer pricing method results in more than one comparable price. In such cases, all identified prices are arranged in ascending order to create a dataset. Where the Resale Price Method, Cost Plus Method, or Transactional Net Margin Method is applied and comparable uncontrolled transactions span multiple financial years, weighted average prices are computed based on specified factors such as sales, costs, assets, or other relevant bases. If current-year data establishes that a transaction is not comparable, it must be excluded from the dataset. Where the dataset contains six or more entries, an arm’s length range is determined between the 35th and 65th percentiles. If the transaction price falls within this range, it is deemed to be at arm’s length and no adjustment is required. If it falls outside the range, the median (50th percentile) of the dataset is applied to determine the ALP. Where fewer than six entries exist, the arithmetic mean applies, subject to a permissible variation not exceeding 3% as notified. The rule clearly defines the computation of median and percentile values. Through illustrations, it demonstrates weighted average profit level indicator calculations, dataset ordering, percentile identification, and determination of the acceptable range, ensuring consistency and statistical objectivity in transfer pricing assessments.