Finance Ministry retains transfer pricing tolerance band for AY 2025-26
The tolerance range for determining the arm’s length price will remain at 1 per cent for wholesale traders and 3 per cent for all other taxpayers.
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SHIV KUMAR PUSHPAKAR
Finance Ministry has retained the existing tolerance band under the transfer pricing framework for assessment year 2025-26, a move that experts say will ensure policy stability and ease compliance for companies engaged in cross-border and specified domestic transactions.
According to a notification, the tolerance range for determining the arm’s length price (ALP) will remain at 1 per cent for wholesale traders and 3 per cent for all other taxpayers. This means that the ALP condition will be considered satisfied if the variation between the transaction price and the ALP does not exceed these thresholds.
The definition of wholesale trading also remains unchanged, referring to transactions where (a) the purchase cost of finished goods constitutes 80 per cent or more of the total cost of such trading activity, and (b) the average monthly closing inventory of those goods does not exceed 10 per cent of related sales.
Under Section 92C of the Income Tax Act, 1961, the arm’s length price mechanism governs pricing of international and specified domestic transactions between associated enterprises (AEs) to prevent artificial shifting of profits and ensure fair taxation across jurisdictions. Each year, the Central Board of Direct Taxes (CBDT) notifies the applicable tolerance range. Transactions between AEs are considered compliant if the deviation from the ALP is within this range.
“In a globalised economy where supply chains span multiple jurisdictions, transfer pricing compliance ensures that profits are appropriately taxed in each country where a group operates,” said Manish Garg, Lead – Transfer Pricing and Litigation, AKM Global.
The tolerance band, he added, provides clarity and facilitates annual transfer pricing documentation. “Notably, taxpayers can avail of the tolerance range only if they rely on the arithmetic mean of comparable margins,” Garg said.
The tolerance band is a very important update for businesses to comply with their transfer pricing documentation requirements, which needs to be done annually. Further, it provides necessary clarity to businesses that their controlled transactions would be considered to be at arm’s length price, if the variation between the actual price and the arm’s length price is less than the tolerance range notified by the CBDT.
Sandeep Jhunjhunwala, Partner at Nangia Andersen LLP, said the move maintains consistency for wholesale trading businesses. “A stable tolerance range streamlines documentation and compliance reporting as benchmarks and internal pricing policies don’t need frequent updates,” he noted.
However, some experts believe this may be the final notification under the current framework. “The proposed new Act introduces changes in methodology, and once implemented, such annual notifications may no longer be required,” said Riaz Thingna, Partner, Grant Thornton Bharat.
Published on November 9, 2025
