Method of Computation – Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method (TNMM) and Profit Split Method (PSM) “INTENSIVE

Method of Computation – Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method (TNMM) and Profit Split Method (PSM)“INTENSIVE WORKSHOP ON TRANSFER PRICING “Organized by J.B. Nagar CPE Study Circle jointly with WIRC

Prakash Kotadia26 October 2012

Method of Computation – RPM, CPM, TNMM and PSM

CONTENTS

Page 2

Overview

Resale Price Method

Cost Plus Method

Profit Split Method

Transactional Net Margin Method

Most Appropriate Method


BACKGROUND

• Any income arising from an international transaction between the AEs should be computed having regard to the ALP

• ALP is the price applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled transactions

• Due to special relationship between AEs, transfer price may be different than the price that would have been agreed between unrelated parties and hence, TP Regulations

Page 3


COMPARABILITY

• All the prescribed methods require comparables

• Transfer Price is set or defended using data from comparable companies

• Comparables should be independent and operate in uncontrolled environment

• Factors used in judging comparability- Nature of transactions- Functions performed- Assets employed- Risks Assumed- Contractual terms- Economic and market conditions

Page 4

Method of Computation – RPM, CPM, TNMM and PSMPage 5

PRESCRIBED METHODS

Methods for computing

ALP

Traditional Profit Based

CUP RPM CPM PSM TNMM New Method – CBDT Notification 18/2012


OECD GUIDELINES 2010

• Where traditional method and profit based method can be applied in an equally reliable manner, the traditional method is preferable to the profit based method

• Traditional methods cannot be applied to every possible situation

• Mere difficulty in obtaining data for application of traditional methods should not be the sole criteria for adopting profit based methods in determining ALP

• Profit based methods are more appropriate in situations- where each of the parties make valuable and unique contribution in

relation to the controlled transaction or when the transactions are highly inter-related;

- where reliable data for application of traditional methods is not available

Page 6


RESALE PRICE METHODTRANSACTIONAL NET MARGIN METHODRESALE PRICE METHOD


RPM

• Compares the resale gross margin earned by AE with the resale gross margin earned by comparable independent entity

• An arm’s length gross margin should be sufficient for a reseller to cover its operating expenses and make an appropriate operating profit considering its functions and risks

• RPM can be applied only in cases where the tested party has purchased goods/services from AE and resold to non-AE. If goods/services are purchased from non-AE and sold to AE by the tested party, then RPM cannot be applied

- Gharda Chemical Ltd Vs. DCIT (Mumbai ITAT) - 2009-TIOL-790-ITAT-MUM

Page 8

RPM generally applied to marketing operations (distributor not adding significant value to the product)


RPMSteps• Identify the third party selling price/fee for products/services purchased

/procured from AEs

• Reduce the comparable uncontrolled Gross Profit Margin in similar products /services

• Reduce the expenses incurred for procuring products/services

• Adjust for functional and other differences, if any

• The adjusted price is the ALP


RPM• Foreign manufacturer has WOS in

India as its distributor for Product A in India

• Foreign manufacturer has also appointed third party distributor for Product B in India

• GP Margin of third party distributor from sale of Product B – 30%

• Market price of Product A in India – 600

• Transfer Price for sale of Product A by the foreign manufacturer to its AE in India = Resale Price x (1 – 30%)600 x 70% = 420

Foreign Manufacture

r

Indian WOS – AE - Distributor

Third Party Distributor

Sales = 500COGS =

350

End Customer in

India

End Customer in

IndiaGP Margin =

30%

Product - BProduct - A

Resale Price =

600


RPMApplicability of RPM when foreign AE is a distributor and selected as tested party• Foreign benchmarking is required to be done treating AE as tested party

• Even though the tax department has recently started accepting foreign benchmarking but insist on providing robust documentation to prove functional similarity and reliability of data

• Assessee should be able to prove the close functional comparability between the AE and comparables and should be able to prove the reliability of the data

Page 11


RPMStrengths• Product differences are less significant, i.e. are less likely to have material

effect on profit margins than on price

• Fewer comparability adjustments needed to account for product differences, because focus is on functions performed

• OECD Guidelines

“the facts may indicate that a distribution company performs the same functions (taking into account assets used and risks assumed) selling toasters as it would selling blenders and hence in a market economy there should be a similar level of compensation for the two activities…”

Page 12


RPMWeaknesses• Gross profit margins may be affected by management efficiency etc., which

may have an impact on profitability but not on the price of the goods or services

• Accounting consistency important for comparability purposes

• Resale price method difficult to use when - goods are further processed before resale, or - reseller contributes substantially to creation or maintenance of

intangible associated with the product (e.g. trademarks)

Page 13


RPM Case Study • L India is 100% subsidiary of L Ltd.,

France• L India engaged in manufacturing and

distribution of cosmetics • L India’s business was accordingly

segregated between manufacturing and distribution

• L Ltd. benchmarked manufacturing and distribution segments separately

• For distribution segment i.e. international transaction of purchase of finished goods, L India applied RPM benchmarking the gross margin at 40.80% against comparables’ margin of 14.85%

• The TPO rejected RPM and applied TNMM. An adjustment was made on the basis of operating margin of comparables at 0.36% against L India’s loss of (-) 19.84%

Page 14

L Ltd. France

L India

Manufacturing of

cosmetics

Distribution of cosmetics

Purchase of finished goods

and raw materials


RPM Case Study • L India’s contentions

– As per OECD guidelines and guidance note issued by ICAI, RPM is the MAM in case of distribution and marketing activities especially when goods are purchased from AE and resold to unrelated parties

– Net losses in the distribution segment incurred only for 3 years and thereafter L India started earning profits

– Certificates from AE confirming profit margin only at 2%

• Ruling– RPM is appropriate for distribution– Losses on account of business

strategy– No motive to shift profits in view of

low margin earned by AE

L Ltd. France

L India

Manufacturing of

cosmetics

Distribution of cosmetics

Purchase of finished goods

and raw materials


RPMPractical Issues • Minor functional difference affect gross profit margins

- In RPM, the comparability is at the Gross margin level and hence, RPM requires a high degree of functional comparability rather than product comparability. Hence, a detailed analysis showing the close functional comparability and risk profile of the tested party and comparables should be clearly brought out in the TP Study to justify comparability at gross profit level under RPM

- Axalto Cards & Terminals India Ltd (2010-TII-37-ITAT-DEL-TP)

• Difficulties in determination of costs- Finding correct data of gross margin in the public domain- Categorization of expenses as COGS or operating expenses- Adjustments on account of economies of scale, operational efficiencies, accounting

policies etc. - Benchmarking limited risk distributor

Page 16

COST PLUS METHOD


TRANSACTIONAL NET MARGIN METHODCOST PLUS METHOD


CPM

• Compares the gross profit on costs earned by the tested party with the gross profit on costs earned by comparable independent entity

• “Cost Plus method” is different from “Cost Plus Pricing mechanism”- For instance: A captive service provider in India may charge Cost plus

15% mark up from its AE but may use TNMM to justify its international transactions

Page 18

CPM generally applied to Contract Manufacturer, in particular of semi-finished goods, Contract R&D Service Provider, Captive Service Provider


CPMSteps• Identify the direct and indirect costs of production incurred in transactions

undertaken by the tested party

• Identify the normal gross profit in comparable uncontrolled transactions

• Adjust the normal gross profit (as computed above) to account for functional and other differences

• Add the adjusted gross profit (as computed above) to the costs identified in first step

• The sum so arrived above is taken as ALP

Page 19


CPMStrengths• Product differences are less significant, i.e. are less likely to have material

effect on profit margins than on price

• Less product comparability required compared with CUP method

• Fewer comparability adjustments needed compared with the CUP method to account for product differences, because focus is on functions performed

Page 20


CPMWeaknesses• In practice, often difficult to determine appropriate cost basis

• Costs incurred may not always be determinant of profit level

• Not always discernible link between level of costs incurred and a market price

• Accounting consistency important for comparability purposes

Page 21


CPM VS TNMM

In the case of manufacturer, whether CPM should be selected as the Most Appropriate Method instead of TNMM?

• Facts of various judicial precedents suggest that the assessees engaged in manufacturing activity have been following CPM. However, they could not justify the same before TPO due to functional differences, difference in terms and conditions, inadequate documentation, etc and hence, the TPO rejected CPM and followed TNMM

• Diamond Dye Chem Ltd. vs. DCIT (2010-TII-20-ITAT-MUM-TP)Where reliable cost data for the product manufactured is available, CPM must be followed

• It may be advisable that in case of manufacturer, CPM should be preferred over TNMM subject to availability of the reliable data necessary for the application of CPM and a close degree of comparability of the functions performed, assets employed and risks assumed by the tested party and the comparables.Page 22


CPMCase Study

• Foreign manufacturer has WOS in India• Indian WOS manufactures and supplies semi

finished goods to its foreign AE• Comparable companies in India selling similar

products earn an average mark-up on cost of 20%Foreign AE

Indian WOS –

Manufacturer

Supply of semi

finished goods

ALP of international transaction of Indian WOS

Particulars Amount

Cost of raw materials 200

Other direct and indirect production costs 100

Total cost base 300

Mark-up on costs (20% - tested in CPM – determined from uncontrolled comparables

60

Transfer Price 360

Overheads and other operating expenses

40

Operating Profit 20

PROFIT SPLIT METHOD


TRANSACTIONAL NET MARGIN METHODPROFIT SPLIT METHOD


PSM

• PSM calculates the combined operating profits resulting from all intercompany transactions based on the relative value of each AE’s contribution to the operating profits

• The contribution made by each party is ascertained on the basis of FAR of each AE

• PSM may be applicable mainly in international transactions involving- transfer of unique intangibles; or - in multiple inter-related international transactions which cannot be

evaluated separately

• It works on an assumption that independent parties would split the combined profits in proportion to the value of their relative contributions

Page 25


PSMSteps• Determine the combined net profit of AEs arising out of international

transactions

• Evaluate relative contributions by each AE on the basis of FAR of each AE

• Split the combined net profit amongst AEs in proportion to their relative contributions

• Profit thus apportioned to the tested party is used to arrive at ALP

Page 26


PSMStrengths • Offers solution for highly integrated operations for which one-sided method

would not be appropriate

• Offers solutions where both the parties to the transaction contribute unique intangibles

• Offers flexibility since it takes into account specific, possibly unique, facts and circumstances of the AEs which are absent in the case of independent third parties by adopting arm’s length approach

• The two-sided approach in PSM ensures that neither party to the controlled transaction is left with an extreme and improbable profit result

Page 27


PSMWeaknesses • Difficult to apply in practice

• AEs and Tax authorities face difficulties in accessing information from foreign affiliates

• It may be difficult to measure combined costs and revenue for all AEs, as it may require stating of books and records on common basis as regards- Accounting practices- Different currencies, etc.

• It may be difficult to identify the operating expenses associated with the international transactions and AE’s other activities

Page 28

PSM is not widely used in practice


PSMDetermination of ALP Allocation of the combined profit can be done by any one of the following ways

• Contribution Approach / Analysis- Capital Investment Approach / Analysis- Compensation Approach- Bargaining Theory Approach- Survey Approach

• Residual Approach / Analysis

Page 29


PSMDetermination of ALP

Contribution Approach / Analysis

• The combined profit i.e. the total profit from the controlled transactions would be divided between the AEs based on

- the reasonable approximation of the division of the profits under the arm’s length condition prevailing in similar transactions and

- the relative value of the functions performed after taking into account assets employed and risks assumed by each AE, i.e. FAR analysis of each AE

Page 30

Determination of contribution of each AE should be economically justified and not on Global Apportionment Formula



Residual Approach / Analysis

• Under the residual approach, the combined profits of the controlled transactions are allocated in two stages

- Towards the basic return appropriate for the type of transactions (which would be without considering the contribution of intangibles or unique product)

- The residual profit must be split between enterprises in their relative contribution (which is generally based on contribution of intangibles possessed by AEs)

Page 31


PSMDetermination of ALP Factors to be kept in mind• The combined profit to be split (including losses) should be only that profit

arising from controlled transactions under review

• Allocation of combined profit between AEs should be consistent with the FAR Analysis of each AE and should be based on the factors agreeable between the third parties

• Criteria or allocation keys used to split the profit should be reasonably independent of the transfer pricing policy formulation and should be reasonably supported by reliable comparable data

• In practice, common allocation keys used are assets (operating assets, fixed assets, intangible assets, etc.) or capital employed or costs (relative spending and/or investment in key areas such as research and development, engineering, marketing, etc.)Page 32



Factors to be kept in mind

• Asset based or capital based allocation keys can be used where there is a strong correlation between tangible or intangible assets or capital employed and creation of value in the context of the controlled transaction

• Cost based allocation keys can be used where there is a strong correlation between relative expenses incurred and relative value added

• Other allocation keys can be based on incremental sales, headcounts, time spent by certain group of employees, number of servers, data storage, floor space, etc.

Page 33


PSMCase Study • Government of Germany is the sole

telecom operator in Germany• XYZ Germany, pursuant to its

Agreement with the German Government in 1997, was to provide BTS Equipment to the Government for the period of 25 years

• XYZ Germany enjoys the monopoly (due to its early entry in German Market and expertise in delivering BTS Equipment) in the German Market - the sole customer being the German Government

• XYZ Germany owns the brand name under which the BTS Equipments are sold to the German Government

• In view of the above, determination of the ALP treating XYZ Germany as the tested party is ruled outPage 34

XYZ Germany

Government of

Germany

XYZ India

Sells the BTS Equipment manufactured by XYZ India under the brand name XYZ

Germany

Sells Manufactured BTS Equipment for Mobile

GSM Network


PSMCase Study

• XYZ India, WOS of XYZ Germany, manufactures the BTS Equipments by application of highly complicated technical know-how developed by it in-house

• ABC India is the only company in India which manufactures such BTS equipments, but entire transaction of ABC India is with its related party (Uncontrolled comparable is not available)

• CUP method, CPM and TNMM cannot be selected as the MAM due to lack of availability of comparable data; and RPM is not applicable based on the facts of the case

• On account of presence of valuable intangibles with XYZ India (viz. technical knowhow) and XYZ Germany (viz. Product Brand name), PSM was considered as the MAM

XYZ Germany

Government of

Germany

XYZ India

Sells the BTS Equipment manufactured by XYZ India under the brand name XYZ

Germany

Sells Manufactured BTS Equipment for Mobile

GSM Network


PSMCase Study

Financial Results of XYZ India and XYZ Germany

Page 36

XYZ India

Particulars

Amount

Particulars

Amount

COGS 250 Sales 460

Other Op. Expenses

150

Net Profit 60

Total 460 Total 460

XYZ Germany

Particulars

Amount Particulars

Amount

Purchases 460 Sales 700

Other Op. Expenses

140

Net Profit 100

Total 700 Total 700


PSMCase Study

Allocation of Profits to Routine Contributions• The total profits of 160 is required to be allocated between XYZ India and XYZ

Germany on the basis of their manufacturing and distribution functions respectively

• Based on the benchmarking study conducted from the data available in public domain in India in relation to manufacturing of Communication Equipments, a profit margin of 8% on total cost was considered to be at arm’s length

• Based on the benchmarking study conducted from the data available in public domain in Germany in relation to distribution of communication equipments, a profit margin of 4% on sales was considered to be at arm’s length

• Accordingly, 32 (8% of 400) and 28 (4% of 700) was attributed to manufacturing and distribution functions performed by XYZ India and XYZ Germany respectively

Page 37


PSMCase Study Allocation of Residual Profits• The residual consolidated profit of 100 (160-32-28) will have to be allocated

between XYZ India and XYZ Germany on the basis of their relative value of intangibles

• Valuation of intangible was conducted for the technical know-how owned by XYZ India based on income approach and was valued at 250 with expected life of the know-how to last for 10 years

• Valuation of intangible was conducted for the brand name owned by XYZ Germany based on income approach and was valued at 1,000 with expected life of the brand name to last for residual 10 years (i.e. till the expiry of the contract with the German Government)

• Hence, the consolidated residual value of profits was allocated between XYZ India and XYZ Germany in the ratio of 1:4

• Accordingly, the balance profit of 100 was allocated between XYZ India and XYZ Germany in the proportion of 20 and 80 respectively

Page 38


PSMCase Study Summary of Distribution of Consolidated Profits

Page 39

Profit Attribution XYZ India

XYZ German

y

Total

Consolidated Net Profit (a) 160

Less: Attributed towards respective Routine Contributions

(b) 32 28 60

Residual Profits (c = a – b) 100

Attribution towards relative intangibles

(d) (1:4) 20 80 100

Total Profit Attribution (e = b + d)

52 108 160Since actual profit earned by XYZ India is more than the Attributed

Profit (60 > 52), the transactions entered into by XYZ India with XYZ Germany are at

arm’s length


TRANSACTIONAL NET MARGIN METHODTRANSACTIONAL NET MARGIN METHOD


TNMM• Under TNMM, ALP is determined by comparing

- the net profit margin of the tested party - from controlled transaction - with net profit margin earned from comparable uncontrolled transactions (Internal

TNMM) or - with net profit margin of an unrelated party engaged in a comparable uncontrolled

transaction (External TNMM)

• TNMM compares net margins by using certain ratios (PLIs) to express net profit as a % of a given base which commonly include operating cost, operating income, total assets, value added expenses, etc.

• TNMM is similar to RPM and CPM to the extent that it involves a comparison of margins earned in a controlled situation with margins earned from comparable uncontrolled situations

• However, TNMM differs from RPM and CPM to the extent that it involves comparison of margins at net profit level as against at gross profit level

Page 41


TNMMSteps

Perform FAR Analysis of all entities engaged in controlled transactions

Choose a Tested Party(generally, the simpler

Entity)

Characterize the TestedParty (based on FAR

Analysis)

Indentify uncontrolledTransactions or

comparables

Select PLI and determine operating Margin

of comparables

Determine arm’s Length Operating Margin after

Making Adjustments, if any

Compare adjusted marginof comparables with tested party’s margin

Determine whether controlledtransactions are at ALP


TNMMStrengths• Requires comparability at a Broad functional level - Product differences are

acceptable provided such difference does not materially affect the margin

• Operating profit margins are less affected by transactional differences as is the case with price in case of application of CUP Method

• Need to examine a financial indicator of only one of the AE (i.e. the tested party)

• No need to restate the books and records for all participants on a common basis or to allocate costs as is the case with PSM

• The differences in functions performed between enterprises are often reflected in variation in operating expenses. Consequently enterprises may have wide range of gross profit margins but it may still earn broadly similar level of net profitsPage 43


TNMMWeaknesses • Requires information on uncontrolled transaction which may not be available

at the time of entering into controlled transaction

• Difficulty in ascertaining revenue and operating expenses (i.e. segmental results) related to the controlled transactions to establish the net profit indicator

• Difficulty in making reasonable accurate adjustments in cases where factors like difference in working capital, risk assumed, etc. have influence on the net margins of the taxpayers vis-à-vis third parties

• Difficulty in determining the corresponding adjustment, particularly where the controlled transactions are both on the purchase as well as sales side

Page 44


TNMMTested Party • The following parameters are used for selection of the tested party

- Should be least complex (functionally) entity

- Availability of reliable comparable data that requires fewest and most reliable adjustments

- Should ideally not own any intangibles

Page 45

The reasons for selection of tested party should be adequately documented in the TP Study


TNMMPLI• PLIs are the ratios that measure the relationship between the profits and

other attributes like costs or sales or resources like capital employed or assets employed to establish ALP

• Most commonly used PLIs in TNMM are:- Operating Margin (Operating Profit to Operating Cost or Operating Income)- Return on Assets or Capital Employed (Operating Profit to Operating Assets

or Capital Employed)

• Operating Margin is calculated by eliminating extra-ordinary income or expenses and non operating income and expenses like interest, loss on sale of fixed assets, etc. from the net profit

Page 46


TNMMPLI

Page 47

PLI Formula Typical Applicability

Operating Margin on Operating Income

OP/OI When amount payable to AE for purchase from AE or services received from AE

Operating Margin on Operating Cost

OP/OC When amount receivable from AE for exports to AE or services rendered to AE

Return on Assets OP/Operating Assets Capital Intensive Manufacturers

Berry Ratio GP/VAE Intermediary activities


TNMMPLI

Indian TP regulations

• Net profit margin realized by an enterprise from an international transaction entered into with its AEs has to be compared with the net profit margin realized by an enterprise from a comparable uncontrolled transaction or by an unrelated enterprise from a comparable uncontrolled transaction

• In the absence of any clarification on what constitutes the net margin, it is normally understood as “NPBT / Sales” or “NPBT / Cost” as the case may be

Page 48


TNMMPLI

OECD Guidelines

• TNMM examines the net profit relative to an appropriate base (for example costs, sales, assets) that a taxpayer realizes from a controlled transaction

• Net profit from a controlled transaction (i.e. international transaction) should constitute only those items, which are- Directly or indirectly related to international transaction; and- Operating in nature

• Accordingly, net profit margin is understood as Operating Profit

Page 49


TNMMPLI

Judicial Precedents• One View:

TNMM requires comparison of Net Profit Margin and not operating margins - Addl. CIT vs. M/s Tej Diam (2010-TII-27-ITAT-MUM-TP);- UCB India Pvt. Ltd. vs. ACIT (121 ITD 131)(Mum); - ACIT vs. M/s Twinkle Diamond (2010-TII-09-ITAT-MUM-TP)- Symantec Software Solutions Pvt. Ltd. vs. ACIT (2011-TII-60-ITAT-MUM-TP)

• Contrary View:Net Margin i.e. only operating income and operating expenses for relevant business activity to be considered - TNT India Private Ltd. vs. ACIT [ITA No. 1442(BNG) / 08]- M/s Marubeni India Pvt. Ltd. vs. Addl. CIT (2011-TII-36-ITAT-DEL-TP)- M/s DHL Express (India) Pvt. Ltd. vs. ACIT (2011-TII-59-ITAT-MUM-TP)

Page 50


TNMM Case Study

• G India was engaged in facilitating sourcing of apparel from India for its AEs

• The primary activity of G Ltd comprised of assistance in identifying vendors, assistance to vendors in procurement of apparel, inspection and quality control and coordination with vendors to ensure delivery of goods to AEs

• The technical and intellectual inputs for discharge of above services were provided by AEs

• G India adopted TNMM to benchmark the service fee determined at cost plus 15% mark up from AE

• TPO disregarded FAR of G India, observed that G India was not limited risk support provider and held that G India ought to have earned a commission of 5% on FOB of goods procured for AEs

G Ltd. USA and its group

companies

G India

Cost plus 15%

Third party vendors

Sourcing Services

Sale of goods


TNMM Case Study

Ruling• G India is a limited risk procurement

service provider, no intangibles were developed by G India

• G India’s roles and responsibilities were well defined by its agreement with AEs

• G India had no role to play in the end customer pricing and therefore there was no question of location savings. The intent of sourcing from India was to provide lower cost to end customers

• The application of PLI on the basis of commission of FOB value would give absurd results. The PLI should be in consonance to FAR of G India. Accordingly application of cost plus was the most appropriate PLI

G Ltd. USA and its group

companies

G IndiaThird party

vendors

Sale of goods

Cost plus 15%

Sourcing Services


TRANSACTIONAL NET MARGIN METHODMOST APPROPRIATE METHOD


MOST APPROPRIATE METHOD

• Indian TPR does not provide any hierarchy or priority for selection of MAM

• MAM is that method which, under the facts and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result

• Each method needs to be tested on its merits depending on the nature of international transaction, availability of reliable comparable data, extent to which reasonable adjustments can be made, etc.

Page 54


MOST APPROPRIATE METHOD

Page 55

Method PLI Degree of

comparability

required is

With respect to

CUP Price Very High Similar products & surrounding conditions

RPM GP/Sales High Similar FAR and engaged in distribution of products

CPM GP/Direct and Indirect Cost of Production

High Similar FAR and engaged in manufacture, assembly or production of tangible products or provision of services

PSM OP/Assets or Capital Employed or Cost

Moderate Similar FAR and involving transfer of unique intangible or multiple inter related international transactions

TNMM OP/OC or OI or operating assets or capital employed

Moderate Similar FAR and applied when other methods fail to be applied


ISSUES IN SELECTING THE MOST APPROPRIATE METHOD• Can ALP be determined without following any method as MAM

- It is mandatory for the assessee to follow one of the prescribed method and demonstrate the arm’s length nature of the international transaction - DCIT vs. M/s Starlite (2010-TII-28-ITAT-MUM-TP)

- TPO can not follow the method which is not authorized under the IT Act or Rules - CA Computer Associates Pvt. Ltd. vs DCIT (2010-TIOL-68-ITAT-

MUM)- Nimbus Communications Ltd. vs. ACIT (2010-TII-21-ITAT-MUM-

TP)

- However, in view of New Method prescribed by CBDT Notification 18/2012 , it would be possible to apply a method other than the prescribed onesPage 56


GLOSSARY

Page 57

Abbreviation Term Abbreviation Term

AE(s) Associated Enterprise(s) PSM Profit Split Method

ALP Arm’s Length Price RPM Resale Price Method

BTS Base Transceiver Station TNMM Transactional Net Margin Method

COGS Cost of Goods Sold TPO Transfer Pricing Officer

CPM Cost Plus Method TPR Transfer Pricing Regulations

CUP Method Comparable Uncontrolled Price Method VAE Value Added Expenses

FAR Analysis Functions, Assets and Risk Analysis

ICAI The Institute of Chartered Accountants of India

IT Act The Income Tax Act, 1961

MAM Most Appropriate Method

NPBT Net Profit Before Tax

OECD Organisation for Economic Co-operation and Development

OECD Guidelines

Transfer Pricing Guidelines issued by OECD in July 2010

PLI Profit Level Indicator


mailto:[email protected]


PRAKASH KOTADIAPartner, Tax & Regulatory ServicesBDO Consulting Pvt. Ltd.Direct +91 22 6672 9790Mobile+ 91 98213 [email protected]

Page 59

mailto:[email protected]


DISCLAIMER

This document has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Consulting Pvt. Ltd. to discuss these matters in the context of your particular circumstances. BDO Consulting Pvt. Ltd., its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this document or for any decision based on it.

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Documents

Method of Computation – Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method (TNMM) and Profit Split Method (PSM) “INTENSIVE