Transfer Pricing Methods: Match the Method to the Transaction
A practical guide to transfer pricing methods, with a worked example, evidence checklist, common mistakes and steps to prepare a defensible working.
AI Summary
Compare product sales, a routine service centre and a financing transaction. The useful result is a working that explains the facts, the calculation or classification, and the evidence behind the conclusion. This guide shows how to prepare that working and where a reviewer should investigate before accepting the result.
Scope and applicable period
Indian transfer-pricing documentation for FY 2025–26 / AY 2026–27, with legacy provision references. For Tax Year 2026–27, use the Income-tax Act, 2025 and Income-tax Rules, 2026; OECD guidance does not override Indian law.
Verification date: 11 October 2026. Figures and rates identified as assumptions are teaching examples; apply the stated conditions and the actual facts to a real assignment.
The key principle
The most appropriate transfer-pricing method follows the transaction and the available reliable evidence. CUP, resale price, cost plus, profit split and TNMM are not interchangeable shortcuts. Analyse the functions, assets and risks of the parties, comparability and the data needed for each method. Keep the tested transaction distinct from unrelated income and document why a method is reliable and why alternatives are less suitable.
Worked example
| Item | Value or fact | What it means |
|---|---|---|
| Transaction | Routine service provision | Describe actual activities |
| Third-party price evidence | Not sufficiently comparable | Document differences |
| Cost and segment records | Available | Potential profit-method input |
| Chosen method | Requires analysis | Not decided by turnover alone |
A routine service description may support considering TNMM, but the label does not select the method by itself. Verify contractual and actual risk allocation, the tested party and reliable segment data. If a comparable uncontrolled transaction exists, examine whether adjustments are feasible before dismissing it. The study should explain the profit-level indicator and treatment of operating items. This illustration teaches the selection process; it does not establish an arm’s-length margin or guarantee acceptance.
A practical sequence
Describe the controlled transaction and identify the tested parties’ actual functions, assets and risks. Compare the data and comparability requirements of candidate methods.
Explain the chosen method, profit indicator or price measure, and the limitations of alternatives. Reconcile the resulting analysis to the transaction records.
Document material changes from earlier years instead of relying on continuity as the sole reason for the selection.
Separate the factual file from the pricing conclusion
Transfer pricing depends on reliable transaction facts and comparability. Contracts, actual conduct, segment accounts and external evidence should tell a consistent story. A margin calculation is only one part of the analysis: the method, tested party, profit indicator, comparable data and adjustments all need reasons. Keep assumptions visible, preserve original data and reconcile the study with reported transactions. OECD materials help analyse issues, but the applicable Indian provisions and rules govern the Indian compliance conclusion. Do not treat a sample percentage, a contractual charge or a favourable comparable as an automatic arm’s-length result.
Evidence checklist
Keep the following records linked to the same entity, period and working version. Identify missing items explicitly; a checked box should mean the document was examined and supports the stated conclusion.
- Inter-company agreements
- Transaction and FAR description
- Segment financial records
- Available uncontrolled evidence
- Method-selection memorandum
Common mistakes and how to avoid them
- Selecting TNMM because it was used last year. Compare the conclusion with the inter-company agreements and resolve any conflicting facts.
- Comparing transactions with different risk profiles. Trace the affected item to the segment financial records before finalising the working.
- Treating a method choice as proof of price. Use the method-selection memorandum to make the final position and remaining exceptions clear.
Before you finalise
Recheck the example’s assumptions against the actual assignment, resolve the identified exceptions and make the final figure or conclusion traceable to its source. Preserve the reviewed version and the reason for material changes. For this task, the method-selection memorandum should agree with the conclusion presented to the client, reviewer or authority.
Frequently asked question
Is the easiest method always the most appropriate? No. Reliability and the prescribed comparability factors matter, not convenience alone.
Sources and further reading
- Income Tax Department — transfer pricing guidance
- Income Tax Department — transfer-pricing methods and Rule 10B
- OECD Transfer Pricing Guidelines, 2022
Related guide: Form 3ceb international transactions common omissions.