B S R & Co.

Transfer Pricing Rules and

TP Assessment
27 October 2012

Manish Bafna
Senior Manager, Global Transfer Pricing Services
B S R & Co., Mumbai, India

Agenda

Transfer Pricing Rules

-Overview
-Practical Experience
-Case Laws
Penalties
Transfer Pricing Assessments
Advance Pricing Agreements
- Overview

Transfer Pricing - Rules

Rule 10 of the Income-tax Rules, 1962

10A
10B &
10 AB

Meaning of expressions used in

computation of ALP

Determination of ALP under Section 92C

10C

Most Appropriate Method

10D

Information / Documentation to be
maintained

10E

Accountants Report

10 F
10 T

Advance Pricing Agreements

4

Rule 10A - Meaning of

expressions used in computation
of ALP

Rule 10A Meaning of expression used in computation of

ALP
a) uncontrolled transaction means a transaction between enterprises other than
associated enterprises, whether resident or non-resident

Associated Enterprises
Controlled
transaction

Assessee

Uncontrolled
transaction

Third Party

Rule 10A Meaning of expression used in computation

of ALP
Assessee

Principal held

Tecnimont ICB P. Ltd

Mumbai ITAT

All methods of ALP computation and Rule 10A entail

comparison with uncontrolled transactions; Comparable
may be internal or external, but its transactions must
necessarily be with third parties

Bayer Material
Science P. Ltd
Mumbai ITAT

Mumbai ITAT had held that comparables with related party

transactions can be considered, in case of inability to find
uncontrolled comparable transactions

Avaya India (P) Ltd

Delhi ITAT

The Tribunal upheld the TPOs approach of rejecting companies

having related party transactions of more than 15%.

Philips Software
Bangalore ITAT

Companies with even a single rupee of transactions with

associated enterprises cannot be considered as comparables.

Sony India
Delhi ITAT

The Tribunal held that an entity can be taken as uncontrolled if its

related party transaction do not exceed 10 to 15 percent of total
revenue.
7

Rule 10A Meaning of expression used in computation

of ALP
b) property includes goods, articles or things, and intangible property
c) services include financial services
d) transaction includes a number of closely linked transactions
Assessee

Principal held

Star India
Mumbai ITAT

Aggregation of different business activities for testing arms

length price is contrary to the transfer pricing principles.

Ranbaxy
Laboratories
Delhi ITAT

Transactions should not be aggregated unless they are

inextricably linked.

UCB India Pvt Ltd.

Mumbai ITAT

International transaction comprised only 50 percent of total

sales, and, hence it was held that UCB Indias approach of
entity level TNMM is not appropriate.

Rule 10B Determination of

arms length price under
section 92C

Rule 10B & 10 AB Determination of arms length price

under section 92C
(1) For the purposes of sub-section (2) of section 92C, the arms length price
in relation to an international transaction or specified domestic transaction
shall be determined by any of the following methods, being the most
appropriate method, in the following manner, namely :
(a) comparable uncontrolled price method (Rule 10 B(1)a)
(b) resale price method (Rule 10 B(1)b)
(c) cost plus method (Rule 10 B(1)c)
(d) profit split method (Rule 10 B(1)d)
(e) transactional net margin method (Rule 10 B(1)e)
(f)

any other method (Rule 10 AB)

10

Rule 10B(1)(a) - CUP Method

Most Direct Method for benchmarking

Two types of CUPs- Internal CUP & External

CUP
Adjustments required for differences which
could materially affect the price in the open
market e.g.: Difference in
Volume / quality of product
Risks assumed
Geographic market
OECD - Priority to Internal CUP due to higher
degree of comparability

In t

Sub Co.

er
na
l

CU

Outside India

Unrelated Co. X

Unrelated Co. Y

External CUP

credit terms

Transfer Price

Requires strict comparability in products,

contractual terms, economic terms, etc.

Parent Co.

Outside India
India

Unrelated Co. Z
11

Rule 10B(1)(b) - RPM

To be applied when a goods
purchased or service obtained from
an AE is resold to an unrelated
enterprise.
Compares resale gross margin
earned by AE with resale gross
margin earned by similar independent
distributors
Preferred method for distributor
buying purely finished goods from a
group company (if no CUP available)
dependant more on similarity of
functions performed & risks assumed
rather than product comparability

Parent Co.
Transfer Price
INR 75
Outside India

Sub Co.

Resale Price
INR 100

India
Unrelated Co. Y

Price paid by Sub Co. to AE is at arms

length if the 25% resale margin earned by
Sub Co. is more than margins earned by
similar Indian distributors`

12

Rule 10B(1)(b) - RPM

Involves use of gross margins

Identify the price at which goods / services purchased from AE are resold to
non-AE
Reduce the resale price by normal gross profit margin arising from comparable
uncontrolled transactions
Reduce the expenses incurred in connection with purchase (e.g. custom duty)
Adjust the resultant price for functional and other differences which could
materially affect such gross profit margin in open market
Adjusted price is considered as ALP

Usually used in case where the enterprise is engaged in pure resale, with no
value addition

13

Rule 10B(1)(c) - CPLM

Compares mark up (profits) earned on direct
and indirect costs incurred with that of
comparable independent companies
Preferred method in case

Parent
Co.
Transfer Price
INR 125
Outside India

Semi finished goods sold between related

parties
Contract/toll manufacturing agreement
Applied in cases of manufacture, assembly /
production of tangible products or services that
are sold / provided to AEs
Comparability not dependent on close physical
similarity between the products.
Larger emphasis on functional comparability

Sub Co.
COGS INR
70

Long term buy/supply arrangements

India
D
In ire
Pr di ct
od re co
u c ct
s
tio c o t &
n st
IN o f
R
30

Co. Z
Co. Y /
AE
Price charged by Sub co to AE is
at arms length if the 25% mark
up on cost is more than that of
similar Indian assemblers
14

Rule 10B(1)(c) - CPLM

Involves use of gross margins
Identify direct and indirect costs of production of goods / services
Identify the normal gross profit mark-up arising from comparable
uncontrolled transaction
Mark-up to be computed as per same accounting norms

Adjust the comparable mark-up for functional and other differences which
could materially affect such mark-up in open market
Add the adjusted mark-up to the identified costs to arrive at the ALP

Used in case where enterprise transfers goods / services to AE after adding

substantial value

15

Rule 10B(1)(c) CPLM

Direct costs would generally include:

Purchased Material costs (including freight, custom duty, etc.);
Labour costs and manufacturing overheads

Indirect costs would generally include:

Fixed cost of production such as rent & property taxes on manufacturing facilities;
Variable indirect production costs such as consumables, utilities etc.

Following costs generally not included

Selling expenses, including advertising; general and administrative expenses; research
& development, etc.

16

Rule 10B(1)(d) - PSM

Evaluates allocation of combined profit/loss
in controlled integrated transactions
The contribution made by each party is
based upon a functional analysis and
valued, if possible, using external
comparable data
To be applied in cases involving transfer of
unique
intangibles
or
in
multiple
international transactions that cannot be
evaluated separately
The two methods discussed by OECD
Guidelines:

US Co A
Technology
intangibles
Outside India
India
Mfg. Co B

Mkt Co C
Marketing
intangibles

Contribution PSM Analysis

Residual PSM Analysis

17

Rule 10B(1)(d) - PSM

Two alternate approaches to arrive at ALP
Relative Contribution approach:

Determine combined net profit of AEs

Split the combined net profit amongst the AEs in proportion to their relative
contributions
Relative contribution made by each of AE to the earning of such combined net profit
is based on:

Functions performed, assets employed and risks assumed by each enterprise

taken as basis for such evaluation

Reliable external market data which indicate how relative contribution would be
evaluated by unrelated enterprises

Profit so split is taken into account to arrive at ALP

18

Rule 10B(1)(d) PSM

Residual Profit approach:

Allocate basic return to each enterprise based on markets returns achieved for
comparable uncontrolled transactions

Allocate residual profit based on relative contribution as discussed above

Profit so split is taken into account to arrive at ALP

Used in case of transfer of unique intangibles or multiple interrelated

transactions

19

Rule 10B(1)(e) - TNMM

Examines net operating profit from

transactions as a percentage of a certain
base (can use different bases i.e. costs,
turnover, etc) in respect of similar parties
Preferred method in India, due to broad
level of product comparability and high
level of functional comparability
Internal TNMM preferable when entity
has uncontrolled transactions also

Parent A

Unrelated
Cos.
Outside India
India

Subsidiary B

Unrelated Cos.

Net margin
5%

Net margin
3%

20

Rule 10B(1)(e) - TNMM

Determine the net profit margin earned by the assessee from the international
transaction, as a percentage of an appropriate base (e.g. percentage of costs
incurred, sales effected, assets employed, etc.)
Using the same base, compute net profit margin from a comparable
uncontrolled transaction
Adjust the comparable margin for differences which could materially affect such
margin in open market
Adjusted net profit margin is taken into account to arrive at ALP

Usually regarded as an indirect method, but is most widely used

21

Rule 10B(1) - Summary of Methods

Method

(a)

(b)

CUP

RPM

Product
Comparability

Functional
Comparability

Approach

Remarks

Very High

Subsumed in
product

Prices are
benchmarked

Very difficult to apply as

very high degree of
comparability required

High

GPM
(on sales)
benchmarked

Difficult to apply as high

degree of comparability
required
Difficult to apply as high
degree of comparability
required

High

(c)

CPLM

High

High

GPM
(on costs)
benchmarked

(d)

PSM

Medium

High*

Profit
Margins

Complex Method, sparingly

used

(e)

TNMM

Medium

More tolerant

Net Profit
Margins

Most commonly used

Method

* Relevant for certain parts of the PSM analysis

22

Rule 10 AB Other Method

Introduced by CBDT vide notification dated 23-5-2012
Allows use of any method taking into consideration the price actually charged or
would have been charged in an uncontrolled transaction

Whether quotations can be considered as comparable ?

Use of standard rate cards, price lists, etc;
Valuation Report

Whether the other method can be considered to justify specified domestic

transaction ?
Whether other method can have priority over the five method as specified in
Rule 10 B

23

Rule 10B(2) - Comparability Factors

(a) Characteristics
Depends on type: tangible,
intangible or service

(c) Contractual terms

Where not written,
deduce from conduct

Comparability
factors

(b) Functional Analysis

Conduct is best evidence
of risk bearing, should be
consistent with control

(d) Economic Circumstances

Geography, size of market, date
and time
24

Rule 10B(2) - Comparability Factors

Practical Experience

Sources of information and reliability

Comparability adjustments

Single year vis--vis multiple year data

Timing issues in comparability

Documenting a search of comparables
Identifying comparables having uncontrolled
transactions
Selecting or rejecting internal / external
comparables
Other issues (Loss making companies,
companies with extreme results, etc.)

25

Rule 10B(3) - Adjustments for Comparability

An Uncontrolled transaction shall be comparable to international transactions if:
(i) none of the differences between the transactions being compared or between the enterprises
entering into such transactions are likely to materially affect the price, or cost charged, or profit
arising from, such transactions in the open market; or
(ii) reasonable accurate adjustments can be made to eliminate the material effects of such
differences.
Thus, the Indian regulations expressly require that adjustments to prices/margins should be made
(where appropriate) to enhance comparability
Practical Experience Kind of adjustments asked for:

Working capital adjustment

Volume adjustment

Idle capacity adjustment

Adjustment for difference in risk profile

Adjustment for differences in accounting policies

Adjustment for difference in depreciation rates

26

Rule 10B(3) - Adjustments for Comparability

Practical Experience:
Indian law permits adjustments only to comparables and not tested party
The TPOs generally reject adjustments inter-alia stating that the assumptions,
approximations and estimations used in computation are not tenable
Challenge lies in obtaining reliable and adequate data of comparables for
computation of adjustments
Lack of guidance on computation methodology
Courts favor adjustments for proper comparability
Quantification of adjustment is a huge challenge
Adjustments being accepted - Working capital adjustment, Risk adjustments

27

Rule 10B(3) - Adjustments for Comparability

Assessee

Principal held

Diamond Dye
Chem. Ltd.

The ITAT held that adjustment for difference in volume should be allowed
to the assessee.

Fiat India Pvt.

Ltd.

The ITAT upheld the assessees contention and allowed claim for
adjustment on account of under utilization of capacity.

E-Gain
Communication
Pvt. Limited

The ITAT upheld the assessees contention and allowed claim for
adjustment on difference in the depreciation policy.

Mentor Graphics
(Noida) Pvt. Ltd.

The ITAT allowed adjustments for working capital, risk profile and R&D
expenses.

28

Rule 10B(4) - Usage of Multiple Year Data

The data to be used in analysing the comparability of an uncontrolled transaction with an
international transaction shall be the data relating to the financial year in which the
international transaction has been entered into :
Provided that data relating to a period not being more than two years prior to such financial
year may also be considered if such data reveals facts which could have an influence on
the determination of transfer prices in relation to the transactions being compared.
Use of multiple year data considered useful to even out fluctuations caused by:
Adverse business scenarios,
Economic situation; and
Product life cycle
Multiple year data widely used due to non-availability of relevant year financial statements of
comparable companies at the time of finalizing TP documentation

29

Rule 10B(4) - Usage of Multiple Year Data

Practical Experience:

TPOs follow first leg of rule 10B(4), reject multiple year data

Adopt only data relating to the relevant financial year and undertake adjustments

Courts allow usage of multiple year data if proper reasoning in terms of proviso to rule 10B(4)
available

Case Laws

Assessee

Principal held

Aztec Software
Bangalore ITAT
(Five Member Special Bench)

Multiple-year data may be used if one can demonstrate that such

data has an influence on determination of ALP

Skoda Auto India Pvt Ltd

Pune ITAT

ITAT directed the TPO to consider the impact of product cycle on

use of multiple-year data

30

Rule 10B(4) - Usage of Multiple Year Data

Assessee

Principal held

Customer Services
India (P) Ltd.
Delhi ITAT

Mandatory and absolute requirement of law for use of the current financial year
data cannot be dispensed with even if the relevant data was not available with the
appellant in the electronic data base at the time of preparation of the TP report.
The TPO is empowered to determine the ALP by using the current financial year
data available at the time of transfer pricing proceedings and to conduct the
comparability analysis by using such data.
Multiple year data should be used only when it adds value to the transfer pricing
analysis.

Honeywell
Automation India
Limited
Pune ITAT

Under Indian transfer pricing regulations, for comparability purposes, consideration

of subsequent year data or average profits not permitted
In relation to comparability analysis, the OECD guidelines allowed use of profits for
the period under consideration, previous or next year or average of such profits.
However, under Rule 10B(4) there is no provision for consideration of data for a
subsequent assessment year.

31

Rule 10C - Most Appropriate

Method

32

Rule 10C - Most Appropriate Method

(1) For the purposes of sub-section (1) of section 92C,
the most appropriate method shall be the method
which is best suited to the facts and circumstances
of each particular international transaction, and which
provides the most reliable measure of an arms length
price in relation to the international transaction.
(2) In selecting the most appropriate method as
specified in sub-rule (1), the following factors shall be
taken into account, namely:
a) Nature and class of international transaction;
b) Class and functions performed by associated enterprises;
c) Availability, coverage and reliability of data;
d) Degree of comparability;
e) Possible adjustments;
f)

Nature, extent and reliability of assumptions.

33

Rule 10C - Most Appropriate Method

Assessee

Principal held

Starlite
Mumbai ITAT

Taxpayer none of the methods can applied to determined ALP

TPO selected TNMM as the MAM
ITAT remanded back the matter to determine fresh assessment in line with the
submissions made by the Assessee

Nimbus
Communication
Ltd
Mumbai ITAT

TPO made adjustment without specifying any method;

The ITAT deleted the adjustment stating that arms length price needs to be
determined using one of the prescribed methods mandated in section 92C(1) of
the Act.

MSS India Pvt Ltd

The most appropriate method adopted by the taxpayer cannot be disturbed

unless the revenue authorities are able to demonstrate that a particular method is
more appropriate vis--vis the method adopted by the taxpayer

34

Rule 10D - Information /

Documentation to be maintained

35

Rule 10D - Information / Documentation to be maintained

Entity related

Price related

Transaction terms
Profile of industry
Functional analysis
Profile of group
(functions, assets and risks)
Profile of Indian entity
Profile of associated Economic analysis
enterprises

(method selection, comparable

benchmarking)

Transaction related

Agreements
Invoices
Pricing related
correspondence
(letters, emails etc)

Forecasts, budgets, estimates

Contemporaneous documentation requirement Rule 10D
Documentation to be retained for 9 years
No specific documentation requirement if the value of international transactions is
less than one crore rupees
36

Rule 10D - Information / Documentation to be maintained

Assessee

Principal held

Philips Software
Bangalore ITAT

The ITAT held that the documentation maintained by the assessee to justify
arms length price based on contemporaneous data cannot be rejected by the
TPO without pointing out any deficiency or insufficiency therein.

UCB India Pvt Ltd.

Mumbai ITAT

Substantive compliance should be the criteria and the test should be as to

whether non-maintenance/deficiency in maintenance of some records
fundamentally effects or distorts the computation of arms length price; if it
does not make a material difference then the effect is not fatal.

37

Rule 10E - Accountants Report

38

Rule 10E - Accountants Report

Report from an accountant to be furnished under section 92E.
10E. The report from an accountant required to be furnished under section 92E by every person who has
entered into an international transaction during a previous year shall be in Form No. 3CEB and be verified
in the manner indicated therein.
FORM NO. 3CEB
[See rule 10E]
Report from an Accountant to be furnished under section 92E relating to
international transaction(s)
1.

We have examined the accounts and records of <<Entity Name, Postal Address and PAN
Number>> relating to the international transactions entered into by the assessee during the previous
year ended on 31 March 2012.

2.

In our opinion proper information and documents as are prescribed have been kept by the assessee in
respect of the international transaction(s) entered into so far as appears from our examination of the
records of the assessee.

3.

The particulars required to be furnished under section 92E are given in the Annexure to this Form. In
our opinion and to the best of our information and according to the explanations given to us, the
particulars given in the Annexure are true and correct.
39

Accountants Report Legal Requirement

Accountants Report contains following

disclosures:-

Nature of international transactions

Book value and Arms length value

of international transactions

Method adopted for the purpose of

benchmarking

Documentation
length

nature

to
of

justify

arms

international

transactions

40

Transfer Pricing - Penalties

41

Penalties
Section
271(1)(c)

271AA

Default

Penalty

In case of a post-inquiry adjustment, there

is deemed to be a concealment of income

100-300% of tax on the adjusted

amount

Failure to maintain documents

2% of the value of each

international transaction;
2% of the value of each
international transaction for Nonreporting of transaction

271G

Failure to furnish documents

2% of the value of the

international transaction

271BA

Failure to furnish accountants report

Rs 100,000

However, penalty for concealment of income shall not

be levied if the taxpayer demonstrates that price charged or paid has
been determined in good faith and with due diligence.
42

Transfer Pricing Assessment

43

Transfer Pricing Litigation Scenario in India

Seven rounds of TP audits completed AY 2002-03 to AY 2008-09
Particular
s

No. of cases
selected for
scrutiny

No of
cases
adjusted

% of cases
adjusted

Adjustments

AY 2002-03

1081

236

22

1403

AY 2003-04

1501

345

23

2631

AY 2004-05

1768

477

27

3947

AY 2005-06

1479

370

25

5060

AY 2006-07

1600

800

50

10,000

AY 2007-08

2301

1138

49

23,237

AY 200809

2589

1338

52

44,500

(In INR Cr)

NR 44,500 crores of TP adjustment in recent concluded audit cycle for AY 2008-09

44

Audit Process
File tax return and Accountants Report (30th November)

DRP MechanismFinance Act 2009

Reference to be made to TP Officer (TPO) by the Assessing

Officer (AO); Compulsory Reference to be made by AO
if international transactions exceed INR 150 million
(Internal guidelines)

Appeal Procedure
Notice to be issued by the TPO TPO calls for supporting
documents and evidence

TP Audit

Appeal to CIT(A)
Passes an order
Income Tax Appellate Tribunal

Based on results of above mentioned procedure

assessing officer passes the order

Appeal can be made against

Rectification application can be
the order of AO as order of
made against the order of TPO
TPO included within the
for apparent mistakes
order of the AO

High Court only on matters related to law

Supreme Court
Constitutional Bench

45

Transfer Pricing Audit Experience

Triggers for Detailed Scrutiny

Consistent losses / low margins of the taxpayer attributable to intercompany transactions

Significant changes in profitability of the taxpayer

High value intra-group services such as royalty / technical payouts, cost
allocations, etc.

Payment of management charges and royalty not passing the benefit

test

Net losses incurred by routine distributors

Low mark-ups for services
Significant marketing expenses by manufacturing / distribution companies

Others
Demanding information on transactions by AE with other AE
Insistence on use of single-year data
Exclusion of loss making / low margin companies from the set of
comparables

46

Transfer Pricing challenges

1

Comparability between branded products and generic products:

Tax authorities generally compare the import price of raw materials used for
branded products with prices prevailing in local market for unbranded generics
Serdia Pharmaceuticals
Use of secret data - data sourced from Customs; Also data sourced by using
statutory
Contract
R powers.
& D Services:
Tax authorities require Indian entity to get a share of the global profit earned by the parent entity
on the ground that Indian entity is part owner of the Intellectual Property as majority of R & D
work is undertaken by it in India.
Definition of total cost for the purpose of computing mark-up in case of R & D
activities.
Marketing Intangibles:
Tax authorities require Indian Companies to be compensated for extra ordinary
advertising and marketing expenses Bright Line Test Maruti Suzuki.
Business Restructuring
Rationale for change in business model to be adequately documented
Exit charge and valuation of intangibles
Management recharges / cost allocation:
Payment of management recharges disallowed unless the same is supported by
robust documentation
Basis of cost allocation scrutinized in detail
Disallowances made on an arbitrary basis
47

Advance Pricing Agreement Rule 10F to Rule 10T

48

APA Rules Overview

APA legislation effective 1 July 2012 & APA Rules notified 30 August 2012

APA Directorate to include panel of experts - Economists, Statisticians,

etc

Annual APA Compliance Report & Compliance Audit

Types - Unilateral, Bilateral, Multilateral

Validity Up to 5 years (renewal possible)
Coverage Existing/ongoing transactions & New transactions
Mandatory Pre-Filing Application & Consultation option to remain
anonymous

Fees (only at APA Application stage):

Transaction Value

Fees

Up to Rs 1 billion / approx US$ 20

million

Rs 1 million / approx US$

20,000

Up to Rs 2 billion / approx US$ 40

million

Rs 1.5 million / approx US$

30,000

Over Rs 2 billion / approx US$ 40

million

Rs 2 million / approx US$

40,000
49

Questions

50

Thank You !!
Presenters contact details
Manish Bafna
Senior Manager
B S R &Co., Mumbai, India

Phone : +91 (22) 3090 2230

E-mail : manishb@kpmg.com

Kolkata

Mumbai

Pune

Infinity Benchmark, Plot No.G-1,

10th floor, Block - EP & GP,
Sector - V, Salt Lake City
Kolkata 700091
Tel: +91 33 44034066
Fax: +91 33 4403 4199

Lodha Excelus, 1st Floor,

Apollo Mills Compound,
N.M. Joshi Marg, Mahalakshmi,
Mumbai 400 011
Tel +9122 39896000
Fax +91 22 39836000

703, Godrej Castlemaine

Bund Garden
Pune 411 001
Tel: +91 20 3058 5764/ 65
Fax: +91 20 30585775

Bangalore

Kochi

Hyderabad

Chennai

Chandigarh

Delhi

Solitaire, 139/26, 3rd Floor,

Inner Ring Road,
Koramangala,
Bangalore 560071
Tel +91 80 3980 6000
Fax +91 80 3980 6999

4/F, Palal Towers,

M. G. Road,
Ravipuram, Kochi 682016
Tel +91 (484) 302 7000
Fax +91 (484) 302 7001

8-2-618/2
Reliance Humsafar,
4th Floor
Road No. 11, Banjara Hills
Hyderabad 500 034
Tel +91 40 6630 5000
Fax +91 40 6630 5299

No. 10, Mahatma Gandhi Road,

Nungambakam,
Chennai 600 034
Tel +91 40 3914 5000
Fax +91 40 3914 5999

SCO 22-23
1st floor. Sector 8 C
Madhya Marg
Chandigarh 160019
Tel : 0172 3935778
Fax 0172 3935780

Building No.10,
Tower B, 8th Floor,
DLF Cyber City, Phase II
Gurgaon 122002 Haryana
Tel +91 124 3074000
Fax +91 124 2549101

51

Rule 10 B - Reproduced

52

Rule 10B(1)(a) - CUP Method

(a) comparable uncontrolled price method, by which,
(i)

the price charged or paid for property transferred or services provided in a

comparable uncontrolled transaction, or a number of such transactions, is identified;

(ii) such price is adjusted to account for differences, if any, between the international
transaction and the comparable uncontrolled transactions or between the
enterprises entering into such transactions, which could materially affect the price in
the open market;
(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arms length price
in respect of the property transferred or services provided in the international
transaction;

53

Rule 10B(1)(b) RPM

(b) resale price method, by which,
(i)

the price at which property purchased or services obtained by the enterprise from an
associated enterprise is resold or are provided to an unrelated enterprise, is identified;

(ii)

such resale price is reduced by the amount of a normal gross profit margin accruing to
the enterprise or to an unrelated enterprise from the purchase and resale of the same or
similar property or from obtaining and providing the same or similar services, in a
comparable uncontrolled transaction, or a number of such transactions;

(iii)

the price so arrived at is further reduced by the expenses incurred by the enterprise in
connection with the purchase of property or obtaining of services;

(iv)

the price so arrived at is adjusted to take into account the functional and other
differences, including differences in accounting practices, if any, between the international
transaction and the comparable uncontrolled transactions, or between the enterprises
entering into such transactions, which could materially affect the amount of gross profit
margin in the open market;

(v)

the adjusted price arrived at under sub-clause (iv) is taken to be an arms length price in
respect of the purchase of the property or obtaining of the services by the enterprise from
the associated enterprise;
54

Rule 10B(1)(c) CPLM

(c) cost plus method, by which,
(i)

the direct and indirect costs of production incurred by the enterprise in respect of
property transferred or services provided to an associated enterprise, are determined;

(ii) the amount of a normal gross profit mark-up to such costs (computed according to the
same accounting norms) arising from the transfer or provision of the same or similar
property or services by the enterprise, or by an unrelated enterprise, in a comparable
uncontrolled transaction, or a number of such transactions, is determined;
(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into
account the functional and other differences, if any, between the international
transaction and the comparable uncontrolled transactions, or between the enterprises
entering into such transactions, which could materially affect such profit mark-up in the
open market;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up
arrived at under sub-clause (iii);
(v) the sum so arrived at is taken to be an arms length price in relation to the supply of
the property or provision of services by the enterprise;
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Rule 10B(1)(d) PSM

(d) profit split method, which may be applicable mainly in international transactions involving transfer
of unique intangibles or in multiple international transactions which are so interrelated that they
cannot be evaluated separately for the purpose of determining the arms length price of any one
transaction, by which
(i) the combined net profit of the associated enterprises arising from the international transaction
in which they are engaged, is determined;
(ii) the relative contribution made by each of the associated enterprises to the earning of such
combined net profit, is then evaluated on the basis of the functions performed, assets
employed or to be employed and risks assumed by each enterprise and on the basis of
reliable external market data which indicates how such contribution would be evaluated by
unrelated enterprises performing comparable functions in similar circumstances;
(iii) the combined net profit is then split amongst the enterprises in proportion to their relative
contributions, as evaluated under sub-clause (ii);
(iv) the profit thus apportioned to the assessee is taken into account to arrive at an arms length
price in relation to the international transaction :
Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each
enterprise so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with
reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual
net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the
manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in
the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall
be taken to be the net profit arising to that enterprise from the international transaction;
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Rule 10B(1)(e) TNMM

(e) transactional net margin method, by which,
(i) the net profit margin realised by the enterprise from an international transaction entered
into with an associated enterprise is computed in relation to costs incurred or sales
effected or assets employed or to be employed by the enterprise or having regard to any
other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a
comparable uncontrolled transaction or a number of such transactions is computed
having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled
transactions is adjusted to take into account the differences, if any, between the
international transaction and the comparable uncontrolled transactions, or between the
enterprises entering into such transactions, which could materially affect the amount of
net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is
established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arms
length price in relation to the international transaction.

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Rule 10AB Any other transaction

For the purposes of clause (f) of sub-section (1) of section 92C, the
other method for determination of the arms' length price in relation
to an international transaction shall be any method which takes into
account the price which has been charged or paid, or would have
been charged or paid, for the same or similar uncontrolled
transaction, with or between non associated enterprises, under
similar circumstances, considering all the relevant facts.

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