4Rule 10 of the Income-tax Rules, 1962 Meaning of expressions used in computation of ALP10B &10 ABDetermination of ALP under Section 92C10CMost Appropriate Method10DInformation / Documentation to be maintained10EAccountant’s Report10 F – 10 TAdvance Pricing Agreements
5Rule 10A - Meaning of expressions used in computation of ALP
6Rule 10A – Meaning of expression used in computation of ALP “uncontrolled transaction” means a transaction between enterprises other than associated enterprises, whether resident or non-residentAssociated EnterprisesControlled transactionUncontrolled transactionAssesseeThird Party
7Rule 10A – Meaning of expression used in computation of ALP AssesseePrincipal heldTecnimont ICB P. Ltd Mumbai ITATAll 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 partiesBayer Material Science P. Ltd Mumbai ITATMumbai ITAT had held that comparables with related party transactions can be considered, in case of inability to find uncontrolled comparable transactionsAvaya India (P) LtdDelhi ITATThe Tribunal upheld the TPO’s approach of rejecting companies having related party transactions of more than 15%.Philips SoftwareBangalore ITATCompanies with even a single rupee of transactions with associated enterprises cannot be considered as comparables.Sony IndiaThe 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.
8Rule 10A – Meaning of expression used in computation of ALP “property” includes goods, articles or things, and intangible property“services” include financial services“transaction” includes a number of closely linked transactionsAssesseePrincipal heldStar IndiaMumbai ITATAggregation of different business activities for testing arm’s length price is contrary to the transfer pricing principles.RanbaxyLaboratoriesDelhi ITATTransactions should not be aggregated unless they are inextricably linked.UCB India Pvt Ltd.International transaction comprised only 50 percent of total sales, and, hence it was held that UCB India’s approach of entity level TNMM is not appropriate.
9Rule 10B – Determination of arm’s length price under section 92C
10Rule 10B & 10 AB – Determination of arm’s length price under section 92C (1) For the purposes of sub-section (2) of section 92C, the arm’s 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)
11Rule 10B(1)(a) - CUP Method Most Direct Method for benchmarkingRequires strict comparability in products, contractual terms, economic terms, etc.Two types of CUPs- Internal CUP & External CUPAdjustments required for differences which could materially affect the price in the open market e.g.: Difference inVolume / quality of productcredit termsRisks assumedGeographic marketOECD - Priority to Internal CUP due to higher degree of comparabilityParent Co.Internal CUPTransfer PriceOutside IndiaSub Co.Unrelated Co. XUnrelated Co. YUnrelated Co. ZExternal CUPOutside IndiaIndia
12Rule 10B(1)(b) - RPMTo 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 distributorsPreferred 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 comparabilityParent Co.Transfer Price INR 75Outside IndiaIndiaResale Price INR 100Sub Co.Unrelated Co. YPrice paid by Sub Co. to AE is at arm’s length if the 25% resale margin earned by Sub Co. is more than margins earned by similar Indian distributors`
13Rule 10B(1)(b) - RPM Involves use of gross margins Identify the price at which goods / services purchased from AE are resold to non-AEReduce the resale price by normal gross profit margin arising from comparable uncontrolled transactionsReduce 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 marketAdjusted price is considered as ALPUsually used in case where the enterprise is engaged in pure resale, with no value addition
14Direct cost & Indirect cost of Production INR 30 Rule 10B(1)(c) - CPLMCompares mark up (profits) earned on direct and indirect costs incurred with that of comparable independent companiesPreferred method in caseSemi finished goods sold between related partiesContract/toll manufacturing agreementLong term buy/supply arrangementsApplied in cases of manufacture, assembly / production of tangible products or services that are sold / provided to AEsComparability not dependent on close physical similarity between the products.Larger emphasis on functional comparabilitySub Co.Parent Co.Co. Y / AEOutside IndiaIndiaCo. ZTransfer Price INR 125Direct cost & Indirect cost of Production INR 30COGS INR 70Price charged by Sub co to AE is at arm’s length if the 25% mark up on cost is more than that of similar Indian assemblers
15Rule 10B(1)(c) - CPLM Involves use of gross margins Identify direct and indirect costs of production of goods / servicesIdentify the normal gross profit mark-up arising from comparable uncontrolled transactionMark-up to be computed as per same accounting normsAdjust the comparable mark-up for functional and other differences which could materially affect such mark-up in open marketAdd the adjusted mark-up to the identified costs to arrive at the ALPUsed in case where enterprise transfers goods / services to AE after adding substantial value
16Rule 10B(1)(c) – CPLM… Direct costs would generally include: Purchased Material costs (including freight, custom duty, etc.);Labour costs and manufacturing overheadsIndirect 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 includedSelling expenses, including advertising; general and administrative expenses; research & development, etc.
17Rule 10B(1)(d) - PSMEvaluates allocation of combined profit/loss in controlled integrated transactionsThe contribution made by each party is based upon a functional analysis and valued, if possible, using external comparable dataTo be applied in cases involving transfer of unique intangibles or in multiple international transactions that cannot be evaluated separatelyThe two methods discussed by OECD Guidelines:Contribution PSM AnalysisResidual PSM AnalysisUS Co A –TechnologyintangiblesMfg. Co BMkt Co CMarketingOutside IndiaIndia
18Rule 10B(1)(d) - PSM Two alternate approaches to arrive at ALP Relative Contribution approach:Determine combined net profit of AEsSplit 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 evaluationReliable external market data which indicate how relative contribution would be evaluated by unrelated enterprisesProfit so split is taken into account to arrive at ALP
19Rule 10B(1)(d) – PSM… Residual Profit approach: Allocate basic return to each enterprise based on markets returns achieved for comparable uncontrolled transactionsAllocate residual profit based on relative contribution as discussed aboveProfit so split is taken into account to arrive at ALPUsed in case of transfer of unique intangibles or multiple interrelated transactions
20Rule 10B(1)(e) - TNMMExamines 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 partiesPreferred method in India, due to broad level of product comparability and high level of functional comparabilityInternal TNMM preferable –when entity has uncontrolled transactions alsoParent AUnrelated Cos.Outside IndiaIndiaSubsidiary BNet margin 5%Unrelated Cos.Net margin 3%
21Usually regarded as an indirect method, but is most widely used Rule 10B(1)(e) - TNMMDetermine 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 transactionAdjust the comparable margin for differences which could materially affect such margin in open marketAdjusted net profit margin is taken into account to arrive at ALPUsually regarded as an indirect method, but is most widely used
22Product Comparability Functional Comparability Rule 10B(1) - Summary of MethodsMethodProduct ComparabilityFunctional ComparabilityApproachRemarks(a)CUPVery HighSubsumed in productPrices are benchmarkedVery difficult to apply as very high degree of comparability required(b)RPMHighGPM(on sales) benchmarkedDifficult to apply as high degree of comparability required(c)CPLMHighGPM(on costs) benchmarkedDifficult to apply as high degree of comparability required(d)PSMMediumHigh*Profit MarginsComplex Method, sparingly used(e)TNMMMediumMore tolerantNet Profit MarginsMost commonly used Method* Relevant for certain parts of the PSM analysis
23Rule 10 AB – Other MethodIntroduced by CBDT vide notification datedAllows use of any method taking into consideration the price actually charged or would have been charged in an uncontrolled transactionWhether quotations can be considered as comparable ?Use of standard rate cards, price lists, etc;Valuation ReportWhether 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
24Rule 10B(2) - Comparability Factors (a) CharacteristicsDepends on type: tangible,intangible or service(c) Contractual termsWhere not written, deduce from conductComparability factors(b) Functional AnalysisConduct is best evidence of risk bearing, should be consistent with control(d) Economic CircumstancesGeography, size of market, date and time
25Rule 10B(2) - Comparability Factors Practical ExperienceSources of information and reliabilityTiming issues in comparabilityDocumenting a search of comparablesIdentifying comparables having uncontrolled transactionsComparability adjustmentsSelecting or rejecting internal / external comparablesSingle year vis-à-vis multiple year dataOther issues (Loss making companies, companies with extreme results, etc.)
26Rule 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 comparabilityPractical Experience – Kind of adjustments asked for:Working capital adjustmentVolume adjustmentIdle capacity adjustmentAdjustment for difference in risk profileAdjustment for differences in accounting policiesAdjustment for difference in depreciation rates
27Rule 10B(3) - Adjustments for Comparability Practical Experience:Indian law permits adjustments only to comparables and not tested partyThe TPOs generally reject adjustments inter-alia stating that the assumptions, approximations and estimations used in computation are not tenableChallenge lies in obtaining reliable and adequate data of comparables for computation of adjustmentsLack of guidance on computation methodologyCourts favor adjustments for proper comparabilityQuantification of adjustment is a huge challengeAdjustments being accepted - Working capital adjustment, Risk adjustments
28Rule 10B(3) - Adjustments for Comparability AssesseePrincipal heldDiamond 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 assessee’s contention and allowed claim for adjustment on account of under utilization of capacity.E-GainCommunicationPvt. LimitedThe ITAT upheld the assessee’s 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.
29Rule 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; andProduct life cycleMultiple year data widely used due to non-availability of relevant year financial statements of comparable companies at the time of finalizing TP documentation
30Rule 10B(4) - Usage of Multiple Year Data Practical Experience:TPOs follow first leg of rule 10B(4), reject multiple year dataAdopt only data relating to the relevant financial year and undertake adjustmentsCourts allow usage of multiple year data if proper reasoning in terms of proviso to rule 10B(4) availableCase LawsAssesseePrincipal heldAztec SoftwareBangalore ITAT(Five Member Special Bench)Multiple-year data may be used if one can demonstrate that such data has an influence on determination of ALPSkoda Auto India Pvt LtdPune ITATITAT directed the TPO to consider the impact of product cycle on use of multiple-year data
31Rule 10B(4) - Usage of Multiple Year Data AssesseePrincipal heldCustomer Services India (P) Ltd.Delhi ITATMandatory 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 LimitedPune ITATUnder Indian transfer pricing regulations, for comparability purposes, consideration of subsequent year data or average profits not permittedIn 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.
33Rule 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 arm’s 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:—Nature and class of international transaction;Class and functions performed by associated enterprises;Availability, coverage and reliability of data;Degree of comparability;Possible adjustments;Nature, extent and reliability of assumptions.
34Rule 10C - Most Appropriate Method AssesseePrincipal heldStarliteMumbai ITATTaxpayer – none of the methods can applied to determined ALPTPO – selected TNMM as the MAMITAT – remanded back the matter to determine fresh assessment in line with the submissions made by the AssesseeNimbus Communication LtdTPO 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 LtdThe 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-à-vis the method adopted by the taxpayer
35Rule 10D - Information / Documentation to be maintained
36Rule 10D - Information / Documentation to be maintained Entity relatedPrice relatedTransaction relatedProfile of industryProfile of groupProfile of Indian entityProfile of associated enterprisesTransaction termsFunctional analysis (functions, assets and risks)Economic analysis (method selection, comparable benchmarking)Forecasts, budgets, estimatesAgreementsInvoicesPricing related correspondence (letters, s etc)FAR enables characterization to determine compensation.Functional Analysis + Economic Analysis – Backbone of documentationContemporaneous documentation requirement – Rule 10DDocumentation to be retained for 9 yearsNo specific documentation requirement if the value of international transactions is less than one crore rupees
37Rule 10D - Information / Documentation to be maintained AssesseePrincipal heldPhilips SoftwareBangalore ITATThe ITAT held that the documentation maintained by the assessee to justify arm’s 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 ITATSubstantive 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 arm’s length price; if it does not make a material difference then the effect is not fatal.
39international transaction(s) Rule 10E - Accountant’s ReportReport 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 tointernational transaction(s)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.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.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.
40Accountant’s Report – Legal Requirement Accountant’s Report contains following disclosures:-Nature of international transactionsBook value and Arm’s length value of international transactionsMethod adopted for the purpose of benchmarkingDocumentation to justify arm’s length nature of international transactions
42Penalties Section Default Penalty 271(1)(c) In case of a post-inquiry adjustment, there is deemed to be a concealment of income% of tax on the adjusted amount271AAFailure to maintain documents2% of the value of eachinternational transaction;2% of the value of each international transaction for Non-reporting of transaction271GFailure to furnish documents2% of the value of the international transaction271BAFailure to furnish accountant’s reportRs 100,000However, penalty for concealment of income shall notbe levied if the taxpayer demonstrates that price charged or paid hasbeen determined in ‘good faith’ and with ‘due diligence’.
44No. of cases selected for scrutiny Transfer Pricing Litigation Scenario in IndiaSeven rounds of TP audits completed – AY to AYParticularsNo. of cases selected for scrutinyNo of cases adjusted% of cases adjustedAdjustments(In INR Cr)AY1081236221403AY1501345232631AY1768477273947AY1479370255060AY16008005010,000AY230111384923,237AY258913385244,500INR 44,500 crores of TP adjustment in recent concluded audit cycle for AY
45Audit Process Appeal Procedure File tax return and Accountant’s Report (30th November)DRP Mechanism-Finance Act 2009Reference to be made to TP Officer (‘TPO’) by the AssessingOfficer (‘AO’); Compulsory Reference to be made by AOif international transactions exceed INR 150 million(Internal guidelines)Appeal ProcedureNotice to be issued by the TPO – TPO calls for supportingdocuments and evidenceAppeal to CIT(A)Passes an orderIncome Tax Appellate TribunalHigh Court – only on matters related to lawSupreme CourtConstitutional BenchTP AuditBased on results of above mentioned procedureassessing officer passes the orderRectification application can bemade against the order of TPOfor apparent mistakesAppeal can be made againstthe order of AO as order ofTPO included within theorder of the AO
46Transfer Pricing Audit Experience Triggers for Detailed ScrutinyConsistent losses / low margins of the taxpayer attributable to inter- company transactionsSignificant changes in profitability of the taxpayerHigh 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 distributorsLow mark-ups for servicesSignificant marketing expenses by manufacturing / distribution companiesOthersDemanding information on transactions by AE with other AEInsistence on use of ‘single-year’ dataExclusion of loss making / low margin companies from the set of comparables
47Transfer Pricing challenges 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 powers.1Contract R & 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.2Marketing Intangibles:Tax authorities require Indian Companies to be compensated for extra ordinary advertising and marketing expenses – Bright Line Test – “Maruti Suzuki”.3Business RestructuringRationale for change in business model to be adequately documentedExit charge and valuation of intangibles4Management recharges / cost allocation:Payment of management recharges disallowed unless the same is supported by robust documentationBasis of cost allocation scrutinized in detailDisallowances made on an arbitrary basis5
48Advance Pricing Agreement - Rule 10F to Rule 10T
49APA Rules – OverviewAPA legislation effective 1 July 2012 & APA Rules notified 30 August 2012Types - Unilateral, Bilateral, MultilateralValidity – Up to 5 years (renewal possible)Coverage – Existing/ongoing transactions & New transactionsMandatory Pre-Filing Application & Consultation – option to remain anonymousAPA Directorate to include panel of experts - Economists, Statisticians, etcAnnual APA Compliance Report & Compliance AuditFees (only at APA Application stage):Transaction ValueFeesUp to Rs 1 billion / approx US$ 20 millionRs 1 million / approx US$ 20,000Up to Rs 2 billion / approx US$ 40 millionRs 1.5 million / approx US$ 30,000Over Rs 2 billion / approx US$ 40 millionRs 2 million / approx US$ 40,000
53Rule 10B(1)(a) - CUP Method… comparable uncontrolled price method, by which,—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 arm’s length price in respect of the property transferred or services provided in the international transaction;
54Rule 10B(1)(b) – RPM… (b) resale price method, by which,— 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;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 arm’s length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise;
55Rule 10B(1)(c) – CPLM… cost plus method, by which,— 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;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;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;the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);the sum so arrived at is taken to be an arm’s length price in relation to the supply of the property or provision of services by the enterprise;
56Rule 10B(1)(d) – PSM…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 arm’s length price of any one transaction, by which—the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined;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;the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii);the profit thus apportioned to the assessee is taken into account to arrive at an arm’s 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;
57Rule 10B(1)(e) – TNMM… (e) transactional net margin method, by which,— 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;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;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;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);the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.
58Rule 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.”