Transfer Pricing Methods Explained: CUP, Resale Price, Cost Plus, TNMM and Profit Split With Examples

There are five transfer pricing methods: the Comparable Uncontrolled Price (CUP) method, the Resale Price Method, the Cost Plus Method, the Transactional Net Margin Method (TNMM) and the Profit Split Method. The first three compare prices or gross margins on individual transactions; the last two compare profits. India recognises all five plus a sixth 'other method'.

Each method answers the same question in a different way: would two unrelated companies have agreed this price? This guide explains the transfer pricing methods with examples in rupees, shows when tax authorities prefer one over another, and covers India's rules under the Income-tax Act 2025, including the case most Indian finance teams face, a captive or GCC billing its foreign parent.

This is general information, not tax advice; confirm your position with a chartered accountant.

Transfer pricing is the price one company in a group charges another company in the same group for goods, services, loans or intellectual property. Because both sides share an owner, tax law requires that price to match what independent companies would charge each other, which is called the arm's length principle.

For example, if an Indian software subsidiary builds code for its US parent, the fee it charges is a transfer price. Set it too low and profit that should be taxed in India moves to the US; India's tax department can then adjust the price upwards and tax the difference. Transfer pricing methods are the tools used to prove the price is at arm's length.

Traditional transaction methods test the price or the gross margin of a specific transaction against comparable deals between independent companies. The OECD Transfer Pricing Guidelines say that where a traditional method and a profit method are equally reliable, the traditional method is preferable, and where CUP and another method are equally reliable, CUP is to be preferred, because these methods test the transaction itself.

1. Comparable Uncontrolled Price (CUP) method

What it does: compares the price charged between related companies with the price charged for the same or a very similar item between unrelated companies, in similar conditions.

Best suited for: commodities, interest on intercompany loans, royalties and standard products where an exact or near-exact market price 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 charges ₹600, the ₹400 gap looks like profit shifted out of India.

When tax authorities prefer it: whenever a reliable comparable price exists, because it is the most direct test. Limitation: small differences in volume, contract terms or quality can make a price comparable unusable.

2. Resale Price Method (RPM)

What it does: starts from the price at which a product bought from a related company is resold to an independent customer, then subtracts a normal gross margin for the reseller to arrive at the arm's length purchase price.

Best suited for: distributors that buy and resell goods without changing them much, such as an Indian subsidiary selling its parent's hardware.

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, so the arm's length purchase price from the parent is about ₹800 (₹1,000 minus a ₹200 margin).

Limitation: it does not work well if the reseller adds significant value, such as assembly or its own brand, because the margin then reflects more than distribution.

3. Cost Plus Method (CPM)

What it does: takes the direct and indirect costs a supplier incurs in providing goods or services to a related company and adds an arm's length gross mark-up.

Best suited for: contract manufacturers, contract R&D and captive service providers billing a parent, a common set-up for Indian IT and ITeS subsidiaries.

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, so the arm's length charge to the parent is ₹1,15,00,000.

Limitation: companies classify costs differently, so the mark-ups of comparables are only meaningful if their cost base is defined the same way.

Transactional profit methods test the profit a company earns from a related-party transaction rather than its price. They are used when reliable price or gross-margin comparables are not available, which is often the case for services and integrated operations.

4. Transactional Net Margin Method (TNMM)

What it does: compares the net operating profit that the tested company earns on a base, such as costs, sales or assets, with the net margins independent companies earn in similar activities.

Best suited for: routine, one-sided operations such as IT and ITeS captives, shared service centres and limited-risk distributors. It is the most widely used method in India because net-margin data for comparable companies is easier to find than exact prices.

Example: a captive ITeS centre earns an operating margin of 15% on its total costs. Comparable independent service companies earn operating margins between 12% and 18%. Because 15% falls inside that range, the intercompany pricing is defensible.

Limitation: net margins are affected by factors other than pricing, such as efficiency or one-off costs, so comparables need careful adjustment.

5. Profit Split Method (PSM)

What it does: takes the combined profit that related companies earn from a transaction and splits it between them according to each one's contribution, measured by functions, assets and risks.

Best suited for: highly integrated operations or deals where both sides contribute unique and valuable assets, such as jointly developed intellectual property.

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.

Limitation: it needs reliable data on the combined profit and a defensible way to value each side's contribution, which makes it the hardest method to apply.

6. India's sixth method: the 'other method'

India adds a sixth option, the 'other method', for cases where none of the five standard methods works. It allows any method that reflects the price unrelated parties have charged or would have charged in similar circumstances, using evidence such as third-party quotations, valuation reports or bids.

It is typically used for one-off transactions, such as transfers of shares, intangibles or business assets, where there is no stream of comparable transactions or margins.

A profit level indicator (PLI) is the ratio used to compare the tested company's profit with comparables. The right one depends on what drives the company's profit.

Most Indian IT and ITeS captives use net cost plus, which is also the measure India's safe harbour margins are set on: a 15.5% safe harbour margin means operating profit of at least ₹15.50 for every ₹100 of operating cost.

The right method is the most appropriate one for the facts of the transaction, chosen after a functional analysis of what each company does, which assets it uses and which risks it bears (often called a FAR analysis). India has no fixed order of preference; the choice depends on the transaction and the quality of comparable data.

• 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 on cost: Cost Plus or TNMM.
• A services or ITeS captive where net-margin comparables are the reliable data: TNMM.
• Two companies sharing unique intangibles or a deeply integrated operation: Profit Split.
• A one-off transfer with only quotations or a valuation: India's Other Method.

Example of choosing a method: an Indian subsidiary writes software only for its US parent, uses the parent's tools and clients, and is paid all its costs plus a mark-up whatever happens to the product. Its functions are routine and its risks are low, so it is the tested party; exact prices for comparable software contracts are not available, but the net margins of independent software service companies are. That points to TNMM with net cost plus as the profit level indicator, or to safe harbour.

The FAR analysis also decides the tested party: usually the company with the simpler, more routine functions, because comparables for it are easier to find.

India's transfer pricing rules apply to international transactions between associated enterprises and to certain specified domestic transactions. From 1 April 2026 they sit in the Income-tax Act 2025 and the Income-tax Rules 2026, which carry the earlier rules across with new section numbers and some real changes.

• Range and tolerance: with at least six comparables, the arm's length price is a range from the 35th to the 65th percentile and your price is accepted if it falls inside it. With fewer comparables the arithmetic mean applies, with a tolerance band notified each year; for AY 2025-26, CBDT Notification 157/2025 kept it at 1% for wholesale traders and 3% for all others.
• Safe harbour for IT services: for the 1961 Act years, Notification 21/2025 set 17% of operating cost for software development and ITeS up to ₹100 crore and 18% up to ₹300 crore, 18% to 24% for KPO and 24% for contract R&D. From tax year 2026-27, the new rules group software development, ITeS, KPO and software R&D into one information technology services category at a single 15.5% margin, for companies up to ₹2,000 crore, with the option lasting five years.
• Advance pricing agreements: a company can agree a method or margin with CBDT in advance for up to five years, with rollback to four earlier years. CBDT signed a record 174 APAs in FY 2024-25, taking the total since 2012 to 815, and Budget 2026 added a fast-track route for IT services.
• Penalties under the 1961 Act: ₹1 lakh for not filing the accountant's report (section 271BA) and 2% of the transaction value for not giving documents to the transfer pricing officer (section 271G).

New-Act section numbers and the 2026 safe harbour terms are as reported in professional commentary and the Budget 2026 announcement; confirm them against the notified rules for your filing year.

TNMM, using net cost plus, is the usual method for an Indian GCC, captive or IT/ITeS subsidiary providing software, engineering or back-office services to its foreign parent, with Cost Plus as the alternative. The Indian company performs routine services, bears little market risk and is paid its costs plus a mark-up, so its arm's length reward is best measured as a margin on cost.

Example: a GCC with ₹50 crore of operating costs that opts for safe harbour at 15.5% bills its parent ₹57.75 crore, keeping a ₹7.75 crore margin in India; if its benchmarking study supports 13%, it would bill ₹56.5 crore but carry the risk of a dispute.

Once the price is set, the intercompany invoice still has to be paid. When a foreign parent pays its Indian captive by bank wire, an exchange-rate markup can make the rupees received differ from the arm's length figure in your workings. Some groups route these payments through a provider such as Xflow, which converts at the live mid-market rate and issues an eFIRA for each payment, so receipts reconcile cleanly with the invoices.

Most transfer pricing disputes in India come from how a method is applied, not from the method itself. These five mistakes cause the most adjustments.