Transaction net margin method TNMM is best method when data is imperfect

CPM is not a residuary method in the sense that if every other method of ascertaining the arm's length price fails, CPM can be applied on the basis of imperfect data. If at all there is a residuary method, or what is termed as the method of last resort, it is transactional net margin method. TNMM has almost become the 'default' method for taxpayers in recent years

• The key advantage of the TNMM is that there is often available data in the public domain about the net profits that comparable independent businesses earn from their trading activities in comparable markets with other third parties.

• As such, the TNMM often proves easier to apply than, say, the Cost Plus or RPM methods, and TNMM is less sensitive to minor differences in the products being sold.

• Where there is a difference between the product that the assessee is manufacturing vis-à-vis the products being manufactured by the comparables adopted, it is only broad similarity in the product and economic similarity in the conditions which is need.

IT/ILT : The very definition of 'uncontrolled transaction' under rule 10A excludes the transactions with associated enterprises "whether resident or non-resident". Once it is not in dispute that "uncontrolled transaction" is a statutorily defined term, there is no room for discarding or questioning this definition on the basis of superior logic in an alternative definition. Such heroics are not called for in the process of judicial interpretation. Learned DRP ought to have followed the law as it exists rather than pondering over what the law ought to be, as is inherent in their justification for inclusion of uncontrolled transactions with associated enterprises resident in India

• Rule 10A(a) defines 'uncontrolled transaction' "a transaction between enterprises other than associated enterprises, whether resident or non-resident". herefore, the first essential input for application of CUP method is the price charged or paid for similar product in a transaction between two enterprises, whether resident or non-resident, which are not associated enterprises.

• In the present case, the comparable price adopted for determining the arm's length price is the price at which the assessee has sold the same product to other group entities, which are thus 'associated enterprises', residents in India.

• It has been defended by the DRP on the ground that there cannot be any tax avoidance motive in selling the products at an artificial price. This aspect of the matter is irrelevant inasmuch as the very definition of 'uncontrolled transaction' under rule 10A excludes the transactions with associated enterprises "whether resident or non-resident".

• Once it is not in dispute that "uncontrolled transaction" is a statutorily defined term, there is no room for discarding or questioning this definition on the basis of superior logic in an alternative definition.

• Such heroics are not called for in the process of judicial interpretation. Learned DRP ought to have followed the law as it exists rather than pondering over what the law ought to be, as is inherent in their justification for inclusion of uncontrolled transactions with associated enterprises resident in India.

• Whether the transactions are with associated enterprises resident in India or with associated enterprises resident outside India, the prices at which such transactions are entered into with such enterprises cannot be taken as "comparable uncontrolled price" for the purpose of determining the arm's length price.
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