Transfer pricing methods are the accepted techniques for setting and testing the price of transactions between related companies, so the price reflects what unrelated parties would have agreed.
There are five: three traditional methods (CUP, Resale Price, Cost Plus) and two profit-based methods (TNMM, Profit Split), plus a sixth "Other Method" recognised in India.
Every method exists to satisfy one principle: the arm's length principle, which says a transaction between a parent and its subsidiary should be priced as if the two were independent.
This guide explains each method with a worked example, sets out India's rules, and gives you a practical way to choose the right one, including the case most Indian finance teams face: a captive services centre billing a foreign parent.
For where the money movement fits, our transfer pricing hub covers the payments side.
This is general information, not tax advice. Transfer pricing outcomes depend on facts, functions and comparables, so confirm your position with a qualified chartered accountant.
What is transfer pricing?
Transfer pricing is the price at which one part of a multinational group sells goods, services, funding or intellectual property to another part of the same group.
Because both sides share ownership, the price is not set by a free market, so tax authorities require it to match an arm's length outcome.
Get it wrong and profit can shift from a higher-tax country to a lower-tax one, which is exactly what the rules are designed to prevent. The wider context sits in our overview of transfer pricing in taxation.
The 5 transfer pricing methods: a quick reference
Here are the five methods side by side, so you can compare their purpose and best fit before we work through each one in detail.
| Method | Type | What it tests | Best suited to |
|---|---|---|---|
| <strong>CUP</strong> (Comparable Uncontrolled Price) | Traditional transaction | Price of the same or similar item between unrelated parties | Commodities, loans, royalties with close comparables |
| <strong>Resale Price Method</strong> | Traditional transaction | Gross margin a reseller earns | Distributors that buy and resell without adding much value |
| <strong>Cost Plus Method</strong> | Traditional transaction | Mark-up on costs | Manufacturers and service providers, including captives |
| <strong>TNMM</strong> | Transactional profit | Net profit margin against a base (cost, sales, assets) | Services, ITeS, most Indian captive centres |
| <strong>Profit Split Method</strong> | Transactional profit | How combined profit is divided | Highly integrated operations or shared, unique intangibles |
India adds a sixth "Other Method", which allows any price that unrelated parties would have charged, using evidence such as quotations or valuation reports, where the five standard methods do not work.
The five methods explained, with worked examples
1. Comparable Uncontrolled Price (CUP) method
The CUP method compares the price charged in a controlled transaction with the price charged in a comparable transaction between unrelated parties. It is the most direct method, so tax authorities prefer it when a genuine comparable exists.
Example: An Indian company licenses software to its US parent. An unrelated Indian firm licenses very similar software to a third party for ₹1,000 per licence. Under CUP, the intercompany price should sit close to ₹1,000.
If the group charged ₹600, the ₹400 gap looks like profit shifted out of India.
2. Resale Price Method (RPM)
RPM starts from the price at which a product bought from a related party is resold to an independent customer, then subtracts a normal gross margin. It suits distributors that add little value.
Example: An Indian distributor buys hardware from its parent and resells it for ₹1,000. Independent distributors of similar goods earn a 20% gross margin.
The arm's length purchase price from the parent is therefore about ₹800 (₹1,000 minus the ₹200 margin).
3. Cost Plus Method (CPM)
The cost plus method takes the costs a supplier incurs and adds an arm's length mark-up. It fits manufacturers and, importantly for India, captive service providers billing a parent.
Example: An Indian engineering centre spends ₹1,00,00,000 delivering services to its parent. Comparable independent providers earn a 15% mark-up on cost. The arm's length charge to the parent is ₹1,15,00,000.
4. Transactional Net Margin Method (TNMM)
TNMM compares the net profit margin a company earns on a suitable base (such as operating cost, sales or assets) against the margins independent companies earn in similar activities.
It is the workhorse method for Indian IT and ITeS captives because reliable net-margin comparables are easier to find than exact price comparables.
Example: A captive ITeS centre earns an operating margin of 15% on its total costs. A set of comparable independent service firms earns operating margins between 12% and 18%. Because 15% falls inside that range, the intercompany pricing is defensible.
5. Profit Split Method (PSM)
PSM is used when two related parties both make significant, unique contributions, so their profits cannot be tested separately. The combined profit is split according to each party's relative contribution.
Example: An Indian R&D team and a US commercial team jointly build a product and together earn ₹1,00,00,000 in profit.
A functional analysis attributes 60% of the value to the US side and 40% to the Indian side, so the profit is split ₹60,00,000 to ₹40,00,000.
What are India's transfer pricing rules?
India's transfer pricing regime applies to international transactions between associated enterprises, and to certain specified domestic transactions. The core mechanics:
- Arm's length price: determined using the most appropriate of the six methods, historically under Section 92C read with Rule 10B of the Income-tax Act. India's transfer pricing framework has been carried into the Income-tax Act, 2025, so confirm the current section references for your filing year.
- Most appropriate method: selected under the rules based on the nature of the transaction and available data, with no set order of preference.
- Tolerance range: where the dataset gives a range, a notified tolerance band applies, commonly 1% for wholesale trading and 3% otherwise. The exact percentage is notified each year, so verify it for the relevant assessment year.
- Specified domestic transactions: transfer pricing can also apply to domestic related-party dealings above an aggregate threshold of ₹20 crore.
- Accountant's report: taxpayers with covered transactions must file Form 3CEB, certified by a chartered accountant.
For the documentation you need to keep, see our guide to transfer pricing documentation, and for how these get tested, transfer pricing audit.
How to choose the right transfer pricing method
There is no universal answer, but the transaction type usually points to a natural fit. Use this as a starting decision aid, then validate with comparables.
- A commodity, loan or royalty with a close market comparable: start with CUP.
- A distributor that buys and resells with little added value: Resale Price Method.
- A manufacturer or captive service provider billing the group: Cost Plus or TNMM.
- A services or ITeS captive where net-margin comparables are the reliable data: TNMM.
- Two entities sharing unique intangibles or a deeply integrated operation: Profit Split.
- None of the above fits and you have quotations or a valuation: India's Other Method.
Running this alongside a proper functional analysis is the heart of a defensible position. Our note on transfer pricing risk assessment covers how to pressure-test the choice before filing.
Which method fits GCCs, captives and intercompany services?
This is the situation most Indian finance leaders face: a Global Capability Centre (GCC) or captive subsidiary providing software, engineering or back-office services to a foreign parent.
In practice, TNMM and Cost Plus dominate here, because the Indian entity is a low-risk service provider whose reward is best measured as a mark-up on cost.
India also offers a Safe Harbour route, under which the tax authority accepts the transfer price if the Indian provider earns at least a notified operating margin.
For software development and ITeS services, those margins have sat in the region of 17% to 18% depending on turnover, subject to conditions and turnover ceilings.
The Safe Harbour Rules are revised periodically, so confirm the current margins and thresholds before relying on them. Choosing Safe Harbour trades a slightly higher taxable margin for certainty and lighter litigation risk, which suits many GCCs.
For the operational side of paying an Indian team inside such a structure, see pay remote workers in india.
Where cross-border payments fit into transfer pricing
Setting the arm's length price is one half of the job. The other half is actually moving the money, and this is where a defensible transfer price can quietly erode.
When a foreign parent pays an Indian captive its intercompany service fee, a traditional bank wire adds an FX markup over the live mid-market rate and intermediary fees, so the rupee amount that lands can differ from the invoiced arm's length figure.
That gap is avoidable friction, and it complicates reconciliation against your Form 3CEB workings.
If the parent sits in a hub like Singapore, corridor guides such as send money from singapore to india set out the local details that leg needs.
A cross-border payments platform helps keep the received amount aligned with the invoice.
With receiving accounts, the parent pays into local account details abroad, conversion happens at pricing built on the mid-market rate, and settlement reaches the Indian bank account, typically on the next business day, with an electronic Foreign Inward Remittance Advice (eFIRA) issued automatically for your records.
Xflow supports intercompany flows for exactly this profile and holds a final Payment Aggregator - Cross Border (PA-CB) authorisation from the RBI for both exports and imports, as of February 2026.
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Common transfer pricing mistakes to avoid
Even with the right method chosen, execution is where positions weaken. These are the errors auditors see most often, and each is avoidable:
- Choosing a method to fit a target profit, rather than fitting the transaction. Auditors look for this.
- Weak comparables: the strongest method fails if the comparable set is not genuinely similar in functions and risks.
- Ignoring the documentation deadline and the Form 3CEB filing, which invites penalties.
- Treating Safe Harbour as automatic: it applies only if you opt in and meet the notified margins.
- Overlooking the payment leg, so the settled rupee figure drifts from the arm's length invoice.
For a fuller checklist, see transfer pricing best practices.
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Frequently asked questions
Five under the OECD framework: CUP, Resale Price, Cost Plus, TNMM and Profit Split. India recognises these five plus a sixth "Other Method" for cases where none of the five is suitable.
There is no single best method. India requires the "most appropriate method" for the specific transaction, chosen on the facts, functions and quality of comparables, with no fixed hierarchy.
TNMM and Cost Plus are the most common, because a captive is a low-risk service provider whose arm's length reward is best measured as a mark-up on cost or a net operating margin.
CUP compares the actual price of a comparable transaction. TNMM compares net profit margins. CUP is more direct but needs close price comparables, while TNMM is used when reliable margin data is easier to find.
It is the accountant's report on international and specified domestic transactions, certified by a chartered accountant, that transfer pricing taxpayers in India must file for the relevant year.
It is the standard that a transaction between related parties should be priced as if the parties were independent, so that profit is not artificially shifted between tax jurisdictions.
Yes. The arm's length figure is the invoice, but bank FX markups and fees can change the rupee amount received. Using a mid-market-based receiving account keeps the settled amount aligned with the invoice.
