Transfer Pricing Methods in India (with Examples)

Your Indian company charges its foreign parent for the work it does, or buys from it, or lends to it. The transfer pricing methods are the five accepted ways of proving that the price you used is the price two unrelated companies would have agreed.

There are exactly five transfer pricing methods in Indian law, and each one attacks the same question, is this an arm’s length price, from a different angle. In this guide I walk through all five with a worked rupee example for each, then tell you which one almost every startup actually ends up using and why. The methods and the “most appropriate method” rule sit in Section 165 (old 92C) of the Income-tax Act, 2025, read with Rule 10B.

1 The “most appropriate method” rule first

Before the five methods, understand the rule that governs them. India does not rank the transfer pricing methods into a strict order. For each international transaction you must select the most appropriate method, the one that, given your functions, assets and risks (the FAR analysis) and the quality of comparable data available, gives the most reliable arm’s length result.

In practice CUP wins when a clean comparable price exists, and profit-based methods win when the value being tested is a routine function like development or distribution. The choice is a judgment you document, not a box the law ticks for you.

2 Method 1: Comparable Uncontrolled Price (CUP)

CUP is the purest method. You take the price charged in your controlled transaction and compare it directly to the price charged in a comparable uncontrolled transaction, either an internal comparable (the same company dealing with a third party) or an external one (two independent parties dealing in the same product). If the goods, terms and market match closely, CUP gives the most direct answer.

3 Method 2: Resale Price Method (RPM)

RPM is built for a distributor that buys finished goods from its Associated Enterprise and resells them to independent customers without adding much value. You start from the resale price to the outside customer and work backwards: subtract an arm’s length gross margin that comparable independent distributors earn. What is left is the arm’s length price the distributor should have paid its AE.

The formula is: Arm’s length purchase price = Resale price − (Resale price × arm’s length gross margin).

4 Method 3: Cost Plus Method (CPM)

CPM is the mirror image of RPM and suits a manufacturer or service provider that supplies to its AE. You start from the cost of production and add an arm’s length gross markup that comparable independent suppliers earn on the same kind of work. The result is the arm’s length price to charge the AE.

The formula is: Arm’s length price = Cost × (1 + arm’s length gross markup).

5 Method 4: Transactional Net Margin Method (TNMM)

TNMM tests a net operating margin rather than a price or a gross margin, which makes it far more forgiving of accounting differences. You pick the tested party (usually the simpler entity), choose a profit level indicator (PLI), and compare the tested party’s PLI against the range earned by comparable independent companies. For a captive service or development centre the PLI is almost always Operating Profit / Operating Cost, a cost-plus markup.

6 Method 5: Profit Split Method (PSM)

PSM is for the hard cases: transactions so integrated, or so driven by unique and valuable intangibles on both sides, that you cannot benchmark either party on its own. You add up the combined profit of the AEs from the transaction and split it between them in proportion to the relative value each contributed, measured through the FAR analysis.

7 Which method do startups actually use?

For the vast majority of Indian startups with a foreign parent, the answer is TNMM on a cost-plus basis. The reason is structural: most of these setups are a captive development or back-office centre. The India entity does not sell to outside customers, does not own the core IP, and does not carry market risk. It performs a routine function for a single related customer and is rewarded with a markup on its costs.

That fact pattern rules out the other four almost automatically. There is no third-party price to run CUP against. There is no external resale to run RPM. CPM technically fits a service provider but its gross-margin comparison is fragile. So TNMM, testing the net cost-plus markup against a benchmarked range, wins as the most appropriate method. The Safe Harbour rules reinforce this: from TY 2026-27 eligible software development, ITeS and KPO services have a unified 15.5% cost-plus markup on operating expenses that you can simply elect, and the underlying logic is pure TNMM.

The five methods compared

8 How to apply a method, step by step

Whichever method you land on, the sequence for putting it into practice is the same.

9 Your method-selection checklist

1. Write down what your India entity actually does, owns and risks (the FAR), before you think about methods.
2. If a clean third-party price exists, test whether CUP fits; it beats every other method when comparability is genuine.
3. If you only distribute the parent’s product, consider RPM on a benchmarked gross margin.
4. If you are a routine captive service or development centre, default to TNMM cost-plus, PLI = Operating Profit / Operating Cost.
5. If your India team owns real, valuable IP, get advice on PSM before defaulting to a thin markup.
6. Set the markup from a benchmarking study, not a gut number, and keep it inside the arm’s length range.
7. Sign an intercompany agreement that states the method and margin you actually use.
8. Document the method choice in the TP study and report the transaction in Form 3CEB by 31 October.

10 FAQs

Disclaimer: This article is general information as of August 2026 and is not legal or tax advice. Transfer pricing law, the Income-tax Act, 2025 section numbers, Safe Harbour rates and comparability standards can change. The rupee examples are simplified for illustration. Confirm your specific position with a qualified transfer pricing professional before acting.