Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.
Both methods test gross margin, and the difference is which side of the transaction is examined. The Resale Price Method tests a distributor on the margin earned when goods are resold onward. The Cost Plus Method tests a manufacturer or service provider on the mark-up added over its own direct and indirect costs.
Finance teams usually summarise the choice as one method for distributors and the other for manufacturers. That summary is not enough. The entity under examination frequently performs both functions, and the gross-level data each method needs is often missing.
Both methods are defined in the same place. Rule 79 of the Income-tax Rules 2026, which carries the heading “Determination of arm’s length price under section 92C”, sets out each method clause by clause, and the two here sit at clause (1)(b) and clause (1)(c). Reading them in the order they are written is the fastest way to see what separates the methods.
What is the Resale Price Method?
The Resale Price Method tests a distributor. Rule 79(1)(b) states it as a sequence rather than as a formula, and the sequence is worth following in the order the clause sets it out.
Identify the price at which property purchased from the associated enterprise is resold to an unrelated enterprise. Reduce that price by the normal gross profit margin accruing in a comparable uncontrolled transaction, then reduce it again by the expenses incurred in connection with the purchase. Adjust for functional and other differences, including differences in accounting practices, that could materially affect the gross profit margin in the open market. The adjusted price is the arm’s length price of the original purchase.
The margin deducted at the second step carries the analysis. It must cover the reseller’s selling and operating expenses and leave a return proportionate to the functions performed, assets employed and risks assumed, so an analysis lifting a margin from a database without asking what it must fund has tested nothing.
What is the Cost Plus Method?
The Cost Plus Method tests the supplier, and Rule 79(1)(c) starts from the direct and indirect costs of production, or of rendering the service, and adds the normal gross profit mark-up ordinarily earned by independent suppliers on comparable costs.
“Direct and indirect costs of production” is the rule’s own phrase, which is why cost classification, not the choice of mark-up, usually decides the analysis. Where the Indian entity manufactures to order for a group principal, or performs a support function under a group contract, this is the structure the transaction genuinely has, so the method reads onto it rather than being imposed on it.
How do the Resale Price and Cost Plus methods compare?
They differ in the governing sub-clause, the tested party, the margin compared and the accounting conditions each one demands.
| Resale Price Method | Cost Plus Method | |
|---|---|---|
| Governing sub-clause | Rule 79(1)(b), Income-tax Rules 2026 | Rule 79(1)(c), Income-tax Rules 2026 |
| Starting figure named in the rule | Price at which the property is resold to an unrelated enterprise | Direct and indirect costs of production, or of rendering the service |
| Tested party | The distributor or reseller | The manufacturer or service provider |
| What is compared | Gross margin on the onward resale price | Gross mark-up on direct and indirect costs |
| Where it suits | Distribution and resale with limited value addition, no unique intangibles and no transformation of the goods | Contract or toll manufacturing, routine support services and back-office work for a group principal |
| Where it fails | The reseller adds value or holds marketing intangibles, or comparables classify selling costs differently | The cost base is incomplete, or comparables push production costs into operating expenses |
Which party is tested under each method?
The tested party is the entity whose margin is examined, and it should always be the less complex side: an entity that performs routine functions, employs no unique intangibles and bears limited risk can be benchmarked, because enough independent companies do similar work to be searched and screened. An entity holding valuable intangibles has almost no genuine comparables. Testing the wrong side produces a range nobody can rely on.
What data does each method require?
Both require data at the gross level, which is more demanding than it sounds. A resale price analysis works only if every accepted comparable reports cost of goods sold on the same basis as the tested party. A cost plus analysis carries the same burden on the cost base.
When does the Resale Price Method suit your transaction?
It suits an Indian entity that buys finished goods from a related party and resells them without meaningful transformation. Limited value addition is the condition on which the method depends.
The clearest case is an importer that warehouses and sells onward under the group brand. Where that entity is compensated for a routine distribution function and does not own the marketing intangible, the gross resale margin is a reasonable proxy for an independent distributor’s margin.
What breaks a resale price analysis?
Value addition breaks it, because where goods are held for long periods or put through further processes, the link between the resale price and the original purchase price weakens.
Marketing intangibles break it as well. Where the Indian entity has built brand presence through sustained spending of its own, an officer may hold that it has created an intangible which a routine distribution margin does not compensate, and that question remains contested in Indian practice, so a file that has not addressed it is answering it by silence.
When does the Cost Plus Method suit your transaction?
It fits an Indian entity that manufactures goods for, or renders services to, a related party on terms that party sets: contract and toll manufacturing, and routine support arrangements of a similar kind.
The method reads well where the Indian entity carries no market risk, no inventory risk and no responsibility for commercial success, because it is then remunerated for its cost base.
Which costs enter the cost base?
Direct and indirect costs of production, or of rendering the service, enter the base, and the wording is the rule’s own, while costs relating to the tested entity as a whole rather than to the controlled transaction generally do not, which is the boundary that starts most disputes.
Pass-through costs need attention. Marking up an expense incurred on behalf of a related party overstates the compensation the functions justify, while excluding it without documenting the basis invites the officer to add the amount back at assessment, so settle the treatment in the inter-company agreements before the year begins.
Why are both methods used less often in India than expected?
The obstacle is gross margin comparability across financial statements prepared on different accounting policies, because both methods need comparable companies to split costs the way the tested party does, and Indian statements often do not.
A comparable set that works at the net margin level may fail at the gross margin level, because the differences sit in exactly the line items the method rests on. Indian studies therefore drift towards the transactional net margin method at Rule 79(1)(e), even though a properly supported gross margin analysis is the stronger evidence.
Which selection factors decide against them?
Rule 80 decides that question, and it supplies the vocabulary the file should use. It requires the most appropriate method to be the one best suited to the facts and circumstances that provides the most reliable measure of an arm’s length price. Six factors follow: the nature and class of the transaction; the class of associated enterprises and the functions performed, taking account of assets employed and risks assumed; the availability, coverage and reliability of data; the degree of comparability between the transactions and between the enterprises; the extent to which reliable and accurate adjustments can be made; and the nature, extent and reliability of the assumptions made.
Factors (c) and (d) are where the gross-margin methods lose. Availability, coverage and reliability of data is factor (c), and gross-level data of the consistency these methods require frequently does not exist in the Indian databases. Degree of comparability is factor (d), and the accounting-practice difference that Rule 79(1)(b) already anticipates is precisely what degrades it. Reject a gross-margin method by naming the factor, never by asserting that net-margin testing is what everybody does. That distinction is what an officer reads first.
How does the law govern the choice between the two methods?
Selection is directed by Section 165 of the Income-tax Act 2025, headed “Determination of arm’s length price”. It corresponds to Section 92C of the Income-tax Act 1961, which still governs earlier tax years, so confirm the year before citing either.
The section lists the permitted methods and requires the most appropriate one, without ranking them. A transaction enters the regime under Section 163, corresponding to Section 92B, or, where the aggregate of such transactions in a tax year exceeds ₹20 crore, under Section 164, corresponding to Section 92BA.
Which rules govern the tax year being documented?
The Income-tax Rules 2026 took effect on 1 April 2026, so Rule 79 and Rule 80 govern the tax year 2026-2027 onward. Their substance carries over from Rules 10B and 10C of the Income-tax Rules 1962, which continue to govern earlier years, so state the year alongside the rule rather than assuming one number covers both.
What has to be recorded about the selection?
The record must disclose the reasoning, not only the conclusion. Rule 84 of the Income-tax Rules 2026, which lists the information and documents to be maintained under Section 92D, requires the record to specify the method adopted and the reason for selecting it, which makes method selection part of the documentation requirement rather than a step that precedes it. Section 171 of the Income-tax Act 2025 sets out the documentation obligation and Section 172 the duty to obtain an accountant’s report, answering to Sections 92D and 92E of the 1961 Act.
This is where gross-margin files usually lose, because a file naming the method without recording why the Rule 80 factors pointed to it, and why the alternatives were rejected, has not met the requirement however sound the resulting margin proves to be.
A defensible file works through the Rule 80 factors. It records the functional analysis, identifies the least complex party as the tested party, and holds the factual material for every method considered. Our note on Indian transfer pricing compliances covers the annual filing obligations that accompany the study, and groups with overseas entities in the chain should also review the transfer pricing compliances for non-residents that run alongside them.
Where do both methods fail under examination?
Both break at the same point: the gross margin comparison itself. An officer who accepts the method but rejects the comparable set will still propose an adjustment.
No safe harbour covers the exposure. Rule 89 lists the eligible international transactions whose declared price is accepted at a stated margin, and plain distribution and general contract manufacturing do not appear there outside the specific eligible categories. The matter may then be referred to a Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, the successor to Section 92CA, and where an adjustment follows, the transfer pricing assessment procedure sets out the stages.
Which firm should you hire for transfer pricing documentation?
Hire a firm that tests the gross-level data before committing to a gross-margin method. In practice the comparable set, not the method label, is what gets challenged.
Documentation and method selection are the same question in different words, because Rule 84 requires the file to justify the method chosen. Ask an adviser how the selection itself is recorded, not only how the margins are computed.
The practical checks are whether the firm documents its search strategy so acceptances and rejections can be reviewed, whether it examines the cost classification of each accepted comparable, and whether it has carried positions through assessment. Global networks such as Deloitte, EY, PwC, BDO and Grant Thornton bring depth on multi-country structures, while independent Indian boutiques bring partner-level attention on a single jurisdiction. Neither category is better in the abstract.
Steadfast Business Consulting (SBC) handles functional analysis, method selection, comparable searches and economic adjustments through its transfer pricing benchmarking and documentation services, and SBC was named a Notable Transfer Pricing Firm 2024 by ITR World Tax and was founded by former Big 4 professionals with combined experience exceeding 150 years. Offices are in Hyderabad, Mumbai, Pune and Dubai.
If a method chosen in an earlier year needs restating, or the Indian entity has taken on functions it did not perform before, speak to the SBC transfer pricing practice before the earlier position is repeated in the current file.
Frequently Asked Questions
Which rule defines the Resale Price and Cost Plus methods?
Rule 79 of the Income-tax Rules 2026, headed “Determination of arm’s length price under section 92C”, defines the Resale Price Method at clause 1(b) and the Cost Plus Method at clause 1(c). The Income-tax Rules 2026 renumber the transfer pricing rules, so confirm the relevant rule for the current tax year.
Is the Resale Price Method better than the Cost Plus Method?
Neither method is superior. Rule 79(1)(b) and Rule 79(1)(c) test the same transaction from opposite sides, so the functional profile of the Indian entity decides. The Resale Price Method suits distributors, and the Cost Plus Method suits manufacturers and service providers.
Can both methods apply within the same group?
Selection is made transaction by transaction, not entity by entity, so a group may apply the Resale Price Method to its distribution transactions and the Cost Plus Method to its manufacturing transactions. Each transaction must still carry its own justification.
Why do Indian analyses avoid gross-margin methods?
Because gross margin comparability is hard to establish. Comparable firms may split expenses differently between cost of goods sold and operating expenses, which defeats factors (c) and (d) of Rule 80 on data availability and comparability. Net margin testing absorbs those differences.
Which section governs the selection of the method?
Selection is governed by Section 165 of the Income-tax Act 2025, headed “Determination of arm’s length price”, which requires the most appropriate method to be applied. Section 92C of the Income-tax Act 1961 remains relevant for preceding tax years, so establish the tax year before citing either. — Sources: Section 165, Income-tax Act 2025 · Section 166, Income-tax Act 2025 · Rule 10B, Income-tax Rules 1962, predecessor of Rule 79 of the Income-tax Rules 2026