A deal between two interrelated or enterprise associates parties. That is behaviour as if they were not related, so that there is no query of a disagreement of attention. In simple way we can describe this as “a deal between two unconnected or associate parties”. The concept of an arm's length deal is to make sure that both associates in the transaction are behave in their self attention and are not issue to any force or pressure from the other associate.
In India the most commonly used method to establish ALP are Comparable Uncontrolled Price Method (CUP) and Transaction Net Margin Method (TNMM).
Internal CUP – When two transactions one with related party and one with unrelated party are compared and the pricing is checked.
External CUP – When two similar transactions of entities in same business line are compared.
TNMM – Under TNMM, FAR analysis is done that is the functions, assets and risks of an entity are analysed.