AS | Ankit Sarawagi|Founder, CFOmatrix·August 2026·10 min read | Transfer Pricing |
Your Indian entity bills the US parent cost plus a markup, and someone, the auditor signing Form 3CEB or the officer reviewing it, will ask one question: how do you know that markup is arm’s length?
The answer is a transfer pricing benchmarking study. It is the piece of analysis that takes your intercompany margin and tests it against what independent companies doing similar work actually earn. This guide walks through the full mechanics: characterising the tested party through a FAR analysis, picking the method and profit level indicator, searching comparables in a database like Prowess or Capitaline, applying filters, building the 35th to 65th percentile range, and what happens to your tax bill when your margin falls outside it.
- What it proves
- That your intercompany price or margin is at arm’s length under Sec 165 (old 92C).
- Core steps
- FAR analysis, choose method and PLI, search comparables, apply filters, build the range.
- The range
- 35th to 65th percentile of the comparables (when 6 or more comparables exist), under Rule 10CA.
- If outside
- Arm’s length price is the median; profit is adjusted up to that median.
- Where it lives
- In your TP study / Local File (Sec 171, Rule 10D) and behind your Form 3CEB.
1 What a transfer pricing benchmarking study is
A transfer pricing benchmarking study is the documented analysis that supports the price or margin on your international transactions with an associated enterprise. The law (Sec 165, old 92C) says related-party transactions must be priced at arm’s length, meaning the price two unrelated parties would have agreed. Benchmarking is how you demonstrate that with real, market data instead of an assertion.
For most Indian startups the transaction is a captive set-up: an Indian development or support centre billing a foreign parent on cost plus a markup. The benchmarking study asks a simple question with a rigorous answer, which is what margin independent Indian companies doing comparable work actually earn, and does your margin sit inside that band.
2 Step one: characterise the tested party (FAR)
Before you compare anything, you have to know what you are comparing. That starts with a FAR analysis: the Functions performed, the Assets employed, and the Risks assumed by each party to the transaction. FAR is what tells you which side is the simpler one to benchmark and what kind of independent companies are a fair match.
You then pick the tested party, normally the entity with the less complex functions and no valuable, unique intangibles, because that is the side you can reliably find comparables for. In a captive set-up the Indian entity is almost always the tested party: it writes code or runs a process to the parent’s specification, it does not own the IP, and it does not carry market or entrepreneurial risk.
Brewly runs a 40-person engineering team in Bengaluru that builds features for its US parent’s SaaS product. FAR analysis shows the India team performs routine development functions, uses no unique intangibles (the IP and customer contracts sit with the US parent), and carries no market risk (it gets paid whether or not the product sells). Conclusion: Brewly India is a low-risk captive service provider, and it is the tested party.
3 Step two: choose the method and the PLI
Indian rules recognise five methods: CUP, Resale Price Method, Cost Plus Method, TNMM and Profit Split. You must select the most appropriate method for the transaction. For captive service centres, where you rarely have an internal or external price for the exact same service, the Transactional Net Margin Method (TNMM) is the workhorse, because it compares net operating margins rather than prices.
Under TNMM you pick a Profit Level Indicator (PLI): the ratio you will compare across companies. For a cost-plus captive the PLI is the net cost plus markup, that is Operating Profit divided by Operating Cost (OP/OC). A 15% PLI simply means the entity earns operating profit equal to 15% of its operating costs.
| Set-up | Usual method | PLI |
|---|---|---|
| Captive software / ITeS on cost-plus | TNMM | OP / OC (net cost plus markup) |
| Distributor buying finished goods to resell | RPM or TNMM | Gross margin, or OP / Sales |
| Identical product with an outside price | CUP | Price itself |
4 Step three: search comparables and apply filters
Now you find the independent companies. Indian studies run the search on a commercial database of audited financials, most commonly Prowess (CMIE) or Capitaline. You start with a broad pool by industry keyword or code, then narrow it with a documented set of filters until only genuinely comparable companies remain.
5 Step four: the 35th to 65th percentile range
This is the heart of the study. Under Rule 10CA, once your dataset has six or more comparables, you do not use a simple average. You build an arm’s length range that runs from the 35th percentile to the 65th percentile of the comparables’ margins. If your tested party’s margin falls anywhere inside that band, the price is accepted and no adjustment is made.
If your margin falls outside the band, whether below the 35th or above the 65th, the range benefit is lost. The arm’s length price is then deemed to be the median (the 50th percentile) of the comparable set, and your taxable margin is adjusted to that median.
Brewly India is benchmarked as a captive software developer. The final comparable set gives an arm’s length range of 12% to 18% OP/OC, with a median of 14.5%. Brewly’s own margin for the year is 15%. Because 15% sits between the 35th percentile (12%) and the 65th percentile (18%), the margin is within the range and accepted. No transfer pricing adjustment, no extra tax.
Now take the same comparable set (range 12% to 18%, median 14.5%), but suppose Brewly billed thin and earned only a 9% margin. 9% is below the 35th percentile of 12%, so it is outside the range. The arm’s length price is deemed to be the median, 14.5%, and Brewly’s operating profit is adjusted up from 9% to 14.5%. On an operating cost base of, say, ₹20 crore, that is extra operating profit of (14.5% − 9%) × ₹20 crore = ₹1.1 crore added to Indian taxable income, plus interest, and a potential penalty exposure.
The tolerance band, and when the range does not apply
The 35th to 65th range only kicks in with six or more comparables. If you end up with fewer than six, you fall back to the older mechanism: the arithmetic mean of the comparables, with a tolerance band. If your price is within the tolerance band of that mean, no adjustment is made. The band is 1% for wholesale trading and 3% for all other cases. If you are outside it, the arithmetic mean itself becomes the arm’s length price.
| Number of comparables | Arm’s length benchmark | If tested margin is outside |
|---|---|---|
| 6 or more | Range: 35th to 65th percentile | Adjust to the median (50th percentile) |
| Fewer than 6 | Arithmetic mean, with a 1% / 3% tolerance band | Adjust to the arithmetic mean |
6 How the pieces fit together
Put end to end, a benchmarking study is a short, logical chain. Each link has to hold, because a weak FAR or a poorly filtered comparable set undermines everything that follows.
7 Your benchmarking checklist
- Write the FAR analysis first, and confirm the tested party is your low-risk entity (usually the Indian captive).
- Select the most appropriate method (TNMM for most captives) and state why the others were rejected.
- Fix the PLI: OP/OC for a cost-plus captive, and define operating cost and operating profit consistently.
- Run the comparable search in Prowess or Capitaline and document every quantitative and qualitative filter.
- Compute each comparable’s margin using multiple-year data where the range applies.
- Build the 35th to 65th percentile range if you have 6 or more comparables; otherwise use the arithmetic mean with the 1% / 3% tolerance band.
- Compare your tested margin to the range; if outside, model the adjustment to the median and its tax cost.
- File the study inside your Rule 10D documentation and reconcile it to the numbers in Form 3CEB.
Not sure if transfer pricing even applies to you?
Use our free Transfer Pricing Applicability Checker: tell us about your foreign parent or subsidiary and what flows between you, and see which filings you owe, from Form 3CEB to the TP study, Master File and CbCR.
Check my transfer pricing8 FAQs
What is a transfer pricing benchmarking study?
What is the 35th to 65th percentile range in Indian transfer pricing?
What happens if my margin is below the arm’s length range?
Which database is used for transfer pricing comparables in India?
Is multiple-year data used in a benchmarking study?
Related transfer pricing guides
The five transfer pricing methods in India, explained →
Captive dev-centre transfer pricing: getting the markup right →
Transfer pricing for startups: the complete India guide →
Transfer Pricing Applicability Checker (free tool) →
AS | Founder, CFOmatrix | Finance Strategy & Compliance CFOmatrix helps Indian startups build finance, tax and compliance functions that stand up to investor due diligence, from process and controls to the filings and the numbers behind them. |
Disclaimer: This article is general information as of August 2026 and is not tax or legal advice. Transfer pricing rules, section numbers under the Income-tax Act, 2025, and the mechanics of Rule 10CA can change and turn on the specific facts of your case. Confirm your benchmarking approach with a qualified transfer pricing professional before filing.