India’s Central Board of Direct Taxes (CBDT) announced that the tolerance level applicable to transfer pricing will remain at 1% for the 2025-26 fiscal year, in line with the policy in force for the previous period. This decision seeks to reinforce the predictability of the international tax regime and reduce litigation arising from minor adjustments between related companies.
The context of the measure
In terms of transfer pricing, India has established a detailed regulatory framework in accordance with the Income Tax Act (Section 92C) and the Income Tax Rules, 1962, which empower the CBDT to set the tolerance range—also known as the “tolerance band”—around the price or profit margin determined in accordance with the arm’s length principle.
According to the most recent notification, the CBDT confirmed that the tolerance band remains at ±1% for wholesale trading transactions and ±3% for other transactions subject to transfer pricing during the 2025-26 fiscal year. The agency also specified that this benefit applies only to activities that meet certain specific conditions: that the cost of acquiring finished goods represents at least 80% of the total cost of such commercial activities and that the average monthly closing inventory does not exceed 10% of the corresponding sales.
This range represents the acceptable margin of variation between the price declared by the taxpayer and the price that would result from applying the most appropriate transfer pricing method. In practice, if the difference is within 1% for transactions involving manufactured goods or 3% in other cases, no additional tax adjustment is required.
The confirmation of the ±1% margin for the 2025-26 fiscal year provides continuity and certainty to taxpayers, particularly multinational groups with operations in India, by maintaining consistency with the previous fiscal period.
Importance of the tolerance level in tax risk management
The tolerance level is a technical tool that allows tax administrations and taxpayers to manage the inherent imprecision of transfer pricing methods. Given the variable nature of markets, financial margins, and the availability of comparables, establishing a tolerance band prevents minor differences—not attributable to price manipulation—from leading to tax disputes.
According to the OECD Transfer Pricing Guidelines (2022, paragraphs 3.55–3.59), the ranges resulting from comparability analyses should be interpreted with caution, as there is no single arm’s length point but rather a range of acceptable values. In this regard, the existence of a regulatory tolerance band, such as the one applied by India, represents a practice that harmonizes the application of the arm’s length principle with criteria of proportionality and administrative efficiency.
Implications for multinational companies
For companies with operations in India, the continuation of the 1% tolerance level has several key implications:
- Tax predictability: By remaining unchanged, taxpayers can project margins and prices with greater certainty in their financial planning and transfer pricing reports.
- Less exposure to litigation: A stable tolerance reduces the risk of marginal adjustments that can lead to costly disputes with tax authorities or courts.
- Easier compliance: The measure allows documentation and defense efforts to focus on transactions of greater complexity or impact, rather than disputes over minor differences.
Furthermore, maintaining the range reflects the prudent position of the Indian tax administration, which recognizes the need for balance between tax control and international competitiveness.
A policy aligned with international standards
Although the tolerance range is not expressly provided for in the OECD Guidelines, its practical application is aligned with the principle that transfer pricing analyses should not be interpreted with mathematical rigidity. The OECD recognizes that arm’s length valuation requires consideration of interquartile range, data dispersion, and reasonable adjustments based on the characteristics of each market.
India, as an active member of the OECD/G20 BEPS Inclusive Framework, has shown an ongoing commitment to improving its transfer pricing practices, balancing tax control with business environment stability.
Conclusion
The CBDT’s decision to maintain the tolerance level at 1% for the 2025-26 fiscal year reaffirms the stability of the transfer pricing system in India and provides confidence to multinational groups operating in its territory.
This margin, although technical, is a key element in the effective management of tax risks and the reduction of international disputes.
In an environment of increasing global taxation, having clear safety margins, robust documentation, and specialized advice remains essential to ensure compliance and consistency with international best practices.
Comprehensive transfer pricing advice
At TPC Group, we provide technical and strategic solutions designed to ensure international regulatory compliance, optimize transfer pricing documentation, and strengthen your company’s tax position.
Our multidisciplinary team, with a presence in Latin America, the United States, and Spain, assists companies in implementing consistent policies, performing comparability analyses, and defending against tax audits, ensuring transparency, consistency, and tax sustainability in every cross-border transaction.
Source: Economic Times