Section 165
Section 165: how the arm's length price is determined
Section 165 sets out the mechanics for arm's length pricing under Chapter X - which method to use, how the price is fixed when the chosen method throws up one price or several, when the Assessing Officer can step in and redetermine the price, and what happens to the assessee's income once that redetermination is made.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
The prescribed methods
The arm's length price for an international transaction or specified domestic transaction is determined by whichever of the following is the most appropriate method:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Profit split method
- Transactional net margin method
- Such other method as may be prescribed by the Board
Choosing and applying the most appropriate method
The most appropriate method is selected having regard to the nature of the transaction (or class of transaction), the class of associated enterprise, the functions performed by the enterprises, or such other relevant factors as the Board may prescribe, and is applied for determining the arm's length price in the manner prescribed.
Fixing the price - single vs. multiple results
Where the most appropriate method throws up only one price, the arm's length price is that price - or, if the variation between that price and the price at which the transaction was actually undertaken does not exceed a percentage (up to 3%) notified by the Central Government, the arm's length price can instead be taken as the actual transaction price.
Where the method throws up more than one price, the arm's length price is determined in the manner prescribed.
When the Assessing Officer can redetermine the price
During assessment proceedings, the Assessing Officer may proceed to determine the arm's length price under sub-sections (1) to (3) if, based on material, information or a document in their possession, they are of the opinion that:
- The price charged or paid in the transaction has not been determined per sub-sections (1) to (3); or
- The assessee has not kept and maintained information/documents as required under section 171(1); or
- The information or data used by the assessee to determine the arm's length price is not reliable or correct; or
- The assessee failed to furnish, within the specified time, information or a document required by a notice under section 171(2) and (3).
Procedure and consequences of redetermination
Before determining the arm's length price under sub-section (4), the Assessing Officer must issue a show-cause notice to the assessee specifying a date and time, asking why the price should not be determined based on the material in the Officer's possession.
Once the arm's length price is determined under sub-section (4), the Assessing Officer may compute the assessee's total income having regard to that price.
No deduction is allowed under Chapter VIII in respect of income by which the total income is enhanced after this recomputation.
Where an associated enterprise's total income is recomputed under sub-section (6) on determination of the arm's length price paid to another associated enterprise (from which tax has been deducted or was deductible under Chapter XIX-B), the other associated enterprise's income is not recomputed by reason of that determination.
Frequently asked questions
What methods can be used to determine the arm's length price?
The comparable uncontrolled price method, resale price method, cost plus method, profit split method, transactional net margin method, or any other method prescribed by the Board - whichever is the most appropriate for the transaction.
Is there a tolerance band between the computed price and the actual transaction price?
Yes - where only one price results from the most appropriate method, and the variation between that price and the actual transaction price does not exceed a percentage (up to 3%) notified by the Central Government, the actual transaction price can be treated as the arm's length price.
Can the Assessing Officer override the assessee's own arm's length price determination?
Yes, in specified circumstances - such as where the price was not determined per the prescribed method, required documentation was not maintained, the data used is unreliable, or the assessee failed to respond to a notice - but only after issuing a show-cause notice to the assessee.
What happens to Chapter VIII deductions when income is enhanced by a transfer pricing adjustment?
No deduction is allowed under Chapter VIII on the portion of income by which total income is enhanced as a result of the arm's length price recomputation.
Related sections
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Talk to our team about arm's length price determinationLast updated 9 September 2026