CBDT Tolerance Range for Arm’s Length Price, AY 2025–26

Tax rules often change, and a small change can travel a long way. On November 6, 2025, the Central Board of Direct Taxes (CBDT) issued Notification No. 157/2025. It is a short update.

It sets the tolerance range for Arm’s Length Price (ALP) for Assessment Year (AY) 2025–26.

The update looks technical at first glance. In fact, it touches multinational enterprises (MNEs), tax authorities and the wider business world. The order keeps the tolerance range at 1% for wholesale trading and 3% for all other cases. It repeats the government’s steady line on transfer pricing (TP) compliance.

But what does this mean for a firm that trades across borders? Why does a small percentage matter so much in India’s tax system? And what does it show about how the government now views TP certainty?

Let’s dive deeper.

Setting the Context: Why Tolerance Limits Matter in Transfer Pricing

To see why this matters, start with the main idea: the Arm’s Length Price (ALP) in transfer pricing.

Section 92C of the Income-tax Act, 1961 defines the ALP. It is the price that two unrelated parties would have agreed on in a similar deal, and the fairness test for a deal between related firms. It stops a group from moving profit into a low-tax country.

In practice, the exact ALP is hard to fix. It takes long benchmarking studies, and the data is never complete. Judgement plays a part too. No two comparables are the same, so small gaps are bound to arise.

The law accepts that limit, and it allows a tolerance range. This is a band where the actual price may differ from the computed ALP. Inside that band, no adjustment follows. The band saves taxpayers work. It also cuts needless litigation, a long-running problem in Indian transfer pricing.

Put simply, if your price falls inside the notified band, say ±3%, the law treats it as arm’s length. You then face no TP adjustment.

The Notification in Focus: What CBDT Has Announced

The CBDT issued Notification S.O. 5053(E) on November 6, 2025. It rests on the third proviso to Section 92C(2) of the Income-tax Act. It also rests on the proviso to Rule 10CA(7) of the Income-tax Rules, 1962.

“Where the variation between the arm’s length price determined under section 92C and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed, (i) one per cent of the latter in respect of wholesale trading; and (ii) three per cent of the latter in all other cases — the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price for the assessment year 2025–2026.”

So the same levels that applied in past years continue to apply for AY 2025–26, which gives taxpayers a steady base.

The order also sets out what “wholesale trading” means:

• The purchase cost of finished goods must be 80% or more of the total trading cost.

• The average monthly closing stock must not go above 10% of sales from those trades.

The split matters. Wholesale trading runs on thin margins and fast stock turnover, so it gets a narrower band (1%) than other sectors do.

Why Maintaining the Same Tolerance Range Matters

At first glance, a 1% or 3% range may not look like much. Why does keeping it matter?

The answer comes down to three things: consistency, simpler compliance and certainty.

India’s transfer pricing regime has grown up over twenty years. It has moved from rigid enforcement to a more balanced approach that aims to prevent disputes. The limit is small. Yet it links what the policy wants with how business works.

By keeping the 1% and 3% limits, CBDT sends a few clear messages:

1. Stability for Taxpayers: A firm can carry on with its TP documentation as before. It need not rework its models for AY 2025–26.

2. Administrative Continuity: It avoids needless confusion and teething trouble, for the tax office and the taxpayer alike.

3. Alignment with Global Practice: Most countries allow a range of fair gaps in fixing the ALP. Markets are not perfect, and data has limits.

4. Litigation Control: A steady band cuts avoidable fights over small gaps. Such fights are a long-standing worry in India’s TP regime.

The move backs a wider shift in India’s tax policy, towards certainty and trust-based compliance. It also sits well with Advance Pricing Agreements (APAs) and Safe Harbour Rules.

Tracing the Evolution: A Brief Historical Perspective

Tolerance limits in transfer pricing are not new. Section 92C(2) of the Income-tax Act and its provisos carry the idea, and CBDT has notified the limits every year.

For several years, the band has held at 1% for wholesale trading and 3% for other sectors. That fits India’s aim of a stable transfer pricing regime. It also fits the OECD’s Base Erosion and Profit Shifting (BEPS) work.

Over the past decade, India has overhauled its transfer pricing rules. It brought in country-by-country reporting (CbCR), Master File rules and APAs. All of them aim at transparency and fewer tax fights.

The tolerance range works with these steps. It acts as a practical buffer, an admission that pricing can never be exact in every case.

The Real-World Implications for Businesses

Now let us turn the policy into plain numbers.

Take a group firm that imports goods from its parent. Benchmarking sets the ALP for one deal at ₹100. The firm actually books the deal at ₹102.

With a 3% band, the ₹2 gap sits inside the range. The law then treats ₹102 as arm’s length, and no TP adjustment follows.

That looks simple. In practice, the gains reach much further than one deal.

1. Reduced Litigation and Compliance Burden

Transfer pricing is still one of the most fought-over areas in Indian tax law. A fair margin lets CBDT cut disputes over small price gaps.

2. Certainty in Financial Planning

Business runs on certainty. When the levels are known in advance, a CFO and a tax team can set group pricing with confidence. They can also size the risk.

3. Encouraging Efficient Supply Chains

For a wholesale trader, 1% reflects the thin margin it works on. The narrower band stays fair. It does not punish real efficiency.

4. Alignment with Global Tax Reforms

BEPS Action Plan 13 and the OECD guidelines push for transparency. India’s steady approach builds trust with global investors. It also shows a mature regulator.

5. Retroactive Clarification without Adverse Impact

The order says plainly that it works with retrospective effect. It also certifies that no taxpayer is hurt by it, so no one is worse off from the date it applies.

Linking It with Broader Transfer Pricing Reforms

The order does not stand alone. It is part of a wider plan to make India’s tax climate more predictable, more global and less combative.

The APA programme and Safe Harbour Rules already give taxpayers certainty. The tolerance limit adds to them. It offers a built-in margin of flexibility to firms outside those two routes.

Business models are going digital. Intangibles and group services are harder to price. Transfer pricing analysis has to be finer as a result. Keeping familiar levels offers comfort while the ground shifts.

It also backs a wider point. India is shifting from tough enforcement to cooperative compliance. That fits the government’s “Ease of Doing Business” agenda.

Comparative Perspective: How India Stands Globally

Tax authorities around the world treat tolerance and range ideas in different ways. For example:

• OECD Guidelines set no fixed percentage. They allow an “arm’s length range” built from interquartile analysis.

• The United States leans on the “best method rule” and sets no fixed percentage.

• India gives clear numbers instead. That brings certainty and is simple to apply, which helps in a developing economy with many kinds of industry.

The numbers make India’s framework easy to read, even if they are rigid. Richer economies lean on complex statistical models. India’s approach instead keeps the rule easy to apply, and leaves less room for opinion.

Challenges and the Way Forward

The stability is welcome. The order still draws debate.

1. Uniform Tolerance vs. Industry-Specific Flexibility: Some experts say margins swing by very different amounts from one industry to the next. A flat 3% may not suit all of them. Sectors such as ITES, pharma and financial services often see benchmarking gaps above that line.

2. Dynamic Global Pricing: In choppy world markets, with shifting exchange rates or rising prices, even a 3% band can look narrow at times.

3. Dependence on Quality of Comparables: The band is only as good as the benchmarking study under it. Weak comparables can still cause a dispute, margin or no margin.

Even so, the narrow band shows what the government believes. Good data and the APA route can handle the outliers. The tolerance range is the safety net for small gaps that are real.

Case in Point: The Practical Impact of Consistent Tolerance Policy

Take a manufacturing MNE whose ALP is computed at ₹500 crore from comparables. The actual deal stands at ₹514 crore. The ₹14 crore gap works out to 2.8%, inside the 3% band.

With no such limit, the firm could have faced a TP adjustment of ₹14 crore. That would mean more tax, interest and possibly a penalty. With the tolerance, the deal is treated as compliant, and a costly fight is avoided.

That case shows why these small numbers matter. They prop up both a working tax office and business confidence.

The Broader Message: Stability Breeds Trust

A healthy investment climate rests on tax certainty. For years, India has tried to balance the revenue it needs against the trust of investors.

By keeping the limits, CBDT makes three points:

• It sees the practical problems a firm faces in fixing the ALP.

• It does not want to punish small gaps that come from real trading conditions.

• The Board stays committed to a stable, predictable tax climate that draws global investment.

The step is modest in form. In substance, it carries real weight. It backs India’s shift to a tax office built on trust rather than tension.

Conclusion: Small Margins, Big Impact

On its face, the CBDT order keeping the 1% and 3% range for AY 2025–26 is a routine yearly update. In substance, it restates something bigger: India’s transfer pricing framework is maturing.

It stands for consistency, clarity and confidence in how the country is taxed. For a multinational, it means a steady base for planning and pricing. Small gaps need not become large disputes.

Global supply chains are being redrawn. Tax transparency faces closer scrutiny. In that setting, a steady rule sends a clear message. India values certainty and fair dealing in its tax system.

What comes next may be cleverer. Benchmarking could lean on AI, and tolerance could move with the market. For now, the order makes one point clear. Keeping things steady is progress in itself.