TNMM should be used as residuary method and not CPM if data is imperfect

Gemstone Glass (P) Ltd. v. JT. CIT[2015] (Ahmedabad Tribunal)

The issue that was disputed in this case as under:

“Whether either Cost Plus Method (CPM) or Transactional Net Margin Method (TNMM) should be used as a residuary method for ascertaining the arm’s length price (ALP) in case of imperfect data?”

Considering, the advantages and easier application of TNMM, the Tribunal held that TNMM should be used as a method of last resort if all other method of ascertaining the arm’s length price fails.

The Tribunal referred to the following observations in the UN’s Transfer Pricing Manual:

TNMM is usually applied with respect to broad comparable functions rather than particular controlled transactions. Returns to these functions are typically measured by a PLI in the form of a net margin that arguably

will be affected by factors unrelated to arms length pricing. Consequently, one might expect the TNMM to be a relatively disfavoured method. Nevertheless TNMM is typically applied when two related parties engage in a continuing series of transactions and one of the parties controls intangible assets for which an arms length return is not easily determined. Since TNMM is applied to the party performing routine manufacturing, distribution or other functions that do not involve control over such intangible assets, it allows the appropriate return to the party controlling unique or difficulttovalue intangible assets to be determined indirectly.

TNMM may also be appropriate for use in certain situations in which data limitations on uncontrolled transactions make it more reliable than traditional methods. TNMM may be more attractive if the data on gross margins are less reliable due to accounting differences (i.e. differences in the treatment of certain costs as cost of goods sold or operating expenses) between the tested party and the comparable companies for which no adjustments can be made as it is impossible to identify the specific costs for which adjustments are needed. In such a case, it may be more appropriate to use TNMM to analyse net margins, a more consistent measured profit level indicator than gross margins in case of accounting differences.



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