Rule 80 of the Draft Income-tax Rules, 2026 clarifies the concept of the “most appropriate method” for determining the arm’s length price (ALP) under section 165(2)(a). It provides that the selected method must be best suited to the specific facts and circumstances of an international or specified domestic transaction and must offer the most reliable measure of ALP. In selecting the appropriate method, several key factors must be considered, including the nature and class of the transaction, the characteristics of associated enterprises involved, and the functions performed, assets employed, and risks assumed by them. The rule also emphasizes the availability, coverage, and reliability of data necessary for applying a method, as well as the degree of comparability between controlled and uncontrolled transactions. Further, it requires evaluation of the extent to which accurate adjustments can be made for material differences and the reliability of assumptions used in applying the method. The provision ensures a principled and fact-based selection of transfer pricing methodology.

Extract of Rule No. 80 of Draft Income-tax Rules, 2026

Rule 80

Most appropriate method.

(1) For the purposes of section 165(2)(a), the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction or specified domestic transaction and which provides the most reliable measure of an arm’s length price in relation to the international transaction or the specified domestic transaction, as the case may be.

(2) The following factors shall be taken into account for selecting the most appropriate method, namely: —

(a) the nature and class of the international transaction or the specified domestic transaction;

(b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;

(c) the availability, coverage and reliability of data necessary for application of the method;

(d) the degree of comparability existing between the international transaction or the specified domestic transaction and the uncontrolled transaction and between the enterprises entering into such transactions;

(e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions;

(f) the nature, extent and reliability of assumptions required to be made in application of a method.