Arm’s Length Price (ALP) Tolerance Range for AY 2025–26
S.O. 5053(E) — The Income-tax Notification on Arm’s Length Price (ALP) Tolerance Range for AY 2025–26 👇
1. Purpose of the Notification
This notification is issued by the Central Government under Section 92C(2) of the Income-tax Act, 1961, read with Rule 10CA(7) of the Income-tax Rules, 1962.
It specifies the tolerance range allowed while determining the Arm’s Length Price (ALP) for Transfer Pricing purposes.
2. Background – What is Arm’s Length Price (ALP)?
Under transfer pricing rules, when an Indian company enters into international transactions or specified domestic transactions with related parties (associated enterprises), the price must be at arm’s length — i.e., similar to what would have been charged between unrelated parties in open market conditions.
If there’s a small difference between the actual transaction price and the determined ALP, the law allows a tolerance range within which the transaction is still considered to be at arm’s length.
3. Key Provision for AY 2025–26
For the Assessment Year 2025–26, the following tolerance ranges apply:
| Type of Transaction | Tolerance Range Allowed | Meaning |
|---|---|---|
| Wholesale Trading | ±1% of the actual transaction price | If the ALP differs by not more than 1% from the actual price, the actual price is accepted as ALP |
| All Other Cases | ±3% of the actual transaction price | For non-wholesale cases, a difference up to 3% is acceptable |
✅ In simple terms:
If the price difference between the company’s actual transaction and the ALP determined is within 1% (for wholesale) or 3% (for others) — then the actual price will be deemed to be the ALP.
4. Definition of “Wholesale Trading”
To qualify as wholesale trading, both the following conditions must be met:
a. Purchase cost of finished goods must be 80% or more of the total cost of trading activity.
b. Average monthly closing inventory must be 10% or less of the sales related to such trading activity.
✅ This means it applies to businesses that are purely engaged in bulk trading with minimal inventory holding — not retail or value-added businesses.
5. Applicability
- Applicable Assessment Year: 2025–2026
- Effective for: Both international and specified domestic transactions
- Authority: Central Board of Direct Taxes (CBDT)
6. Objective and Impact
- Provides certainty for taxpayers in transfer pricing assessments.
- Avoids disputes where the pricing difference is insignificant.
- Ensures that genuine variations within a small percentage are not penalized.
- The retrospective effect is clarified as not harmful to taxpayers.
7. Quick Summary
| Particulars | Wholesale Trading | All Other Cases |
|---|---|---|
| Applicable Tolerance Range | ±1% of the actual transaction price | ±3% of the actual transaction price |
| Eligibility Criteria for Wholesale Trading | (a) Purchase cost of finished goods ≥ 80% of total trading cost(b) Average monthly closing inventory ≤ 10% of sales | Not Applicable |
| Coverage | Applies to both International and Specified Domestic Transactions | Applies to both International and Specified Domestic Transactions |
| Assessment Year | AY 2025–26 | AY 2025–26 |
| Practical Effect | If the difference between actual price and ALP is within 1%, the actual price will be accepted as ALP | If the difference between actual price and ALP is within 3%, the actual price will be accepted as ALP |
In Short:
For AY 2025–26, if your transfer price is within 1% (for wholesale) or 3% (for others) of the ALP, the actual price will be accepted as compliant under Indian transfer pricing rules.
Also Read:
- Recommendations of the 55th Meeting of the GST Council
- Changes in GST and Income Tax during the Financial Year 2024-25
- TDS and TCS provisions applicable from April 1, 2025
- Rationalizing TDS: A Deep Dive into Budget 2025’s Proposals
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