79. Determination of arm‘s length price under section 165.—

(1) For the purposes of section 165(2), the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods provided in this sub-rule, being the most appropriate method, in the manner specified therein.

(a) comparable uncontrolled price method, by which, —

(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;

(ii) such price is adjusted to account for differences, if any, between an international transaction or a specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; and

(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction; or

(b) resale price method, by which, —

(i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified;

(ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions;

(iii) the price so arrived at is further reduced by the expenses incurred by the enterprise directly in connection with the purchase of property or obtaining of services;

(iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; and

(v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the transaction of purchase of property or obtaining of the services by the enterprise from its associated enterprise; or

(c) cost plus method, by which, —

(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;

(ii) the amount of a normal gross profit mark-up on such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;

(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;

(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); and

(v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; or

(d) profit split method, which may be applicable mainly, in, —

(i) an international transaction or a specified domestic transaction involving either the transfer of unique intangibles or unique and valuable contributions by each of the enterprises involved in the transaction; or

(ii) multiple international transactions or specified domestic transactions which are so inter-related that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, under which the following two approaches may be used —

(A) contribution profit split method, by which, —

(I) the combined net profit of the associated enterprises arising from the international

transaction or the specified domestic transaction in which they are engaged, is determined;

(II) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data, which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances;

(III) the combined net profit is then split amongst the enterprises in proportion to their

relative contributions, as evaluated under sub-item (II); and

(IV) the profit thus apportioned to the assessee is taken into account to arrive at an

arm's length price in relation to the international transaction or the specified domestic transaction;

(B) residual profit split method, by which, —

(I) the combined net profit of the associated enterprises arising from the international

transaction or the specified domestic transaction in which they are engaged, is determined;

(II) the combined net profit referred to in sub-item (I) may, in the first instance, be

partially allocated to each enterprise so as to provide it with an arm‘s length return

appropriate for the contributions which can be reliably benchmarked using comparable

uncontrolled transactions,

(III) the residual net profit remaining after such allocation may be split amongst the

enterprises in proportion to their relative contributions in the manner specified under items

(II) and (III) of item (A); and

(IV) the aggregate of the net profit allocated to the enterprise for contributions which

can be reliably benchmarked using comparable uncontrolled transactions in together with

the residual net profit apportioned to that enterprise on the basis of its relative contributions shall be taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; or

(e) transactional net margin method, by which, —

(i) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;

(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;

(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;

(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); and

(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; or

(f) any other method as provided in rule 78.

(2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following factors (herein referred to as the comparability factors): —

(a) the characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; and

(d) the conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location, depth and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development, level of competition and whether the markets are wholesale or retail.

(3) An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction, if—

(a) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions, are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(b) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be the data relating to the financial year (hereinafter in this rule and in rule 81 referred to as the current year) in which the international transaction or the specified domestic transaction.

(5) In a case where the most appropriate method for determination of the arm's length price of an international transaction or a specified domestic transaction is resale price method or cost-plus method or transactional net margin method, then, irrespective of anything contained in sub-rule (4), the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be —

(a) the data relating to the current year; or

(b) the data relating to the first preceding year, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee for the tax year; and where the data relating to the current year is subsequently available at the time of determination of arm's length price of an international transaction or a specified domestic transaction during the course of any assessment proceeding for the tax year, then, such data shall be used for such determination irrespective of the fact that the data was not available at the time of furnishing the return of income of the relevant tax year.