B S R & Co.
27 October 2012

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10A
10B &
10 AB
10C
Meaning of expressions used in computation of ALP
Determination of ALP under Section
92C
10D
Most Appropriate Method
Information / Documentation to be maintained
Accountant’s Report 10E
10 F –
10 T
Advance Pricing Agreements
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a) “uncontrolled transaction” means a transaction between enterprises other than associated enterprises, whether resident or non-resident
Controlled transaction
Uncontrolled transaction
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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
Avaya India (P) Ltd
Delhi ITAT
Philips Software
Bangalore ITAT
Sony India
Delhi ITAT
• Mumbai ITAT had held that comparables with related party transactions can be considered, in case of inability to find uncontrolled comparable transactions
• The Tribunal upheld the TPO’s approach of rejecting companies having related party transactions of more than 15%.
• Companies with even a single rupee of transactions with associated enterprises cannot be considered as comparables.
• 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.
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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
Star India
Mumbai ITAT
Ranbaxy
Laboratories
Delhi ITAT
Principal held
• Aggregation of different business activities for testing arm’s length price is contrary to the transfer pricing principles.
• 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 India’s approach of entity level TNMM is not appropriate.
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(1) For the purposes of subsection (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)
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• Most Direct Method for benchmarking
• Requires strict comparability in products, contractual terms, economic terms, etc.
• 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
 credit terms
 Risks assumed
 Geographic market
• OECD - Priority to Internal CUP due to higher degree of comparability
Parent Co .
Sub Co.
Unrelated Co. X
Unrelated Co. Y
Unrelated Co. Z
Outside India
Outside India
India
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• 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
Sub Co.
Outside India
Resale Price
INR 100
India
Unrelated Co. Y
Price 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`
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• 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
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• Compares mark up (profits) earned on direct and indirect costs incurred with that of comparable independent companies
• Preferred method in case
 Semi finished goods sold between related parties
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Contract/toll manufacturing agreement
 Long term buy/supply arrangements
• 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
Parent Co.
Transfer Price
INR 125
Sub Co.
Co. Y / AE Co. Z
Outside India
India
Price 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
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• 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
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• 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.
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• 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:
 Contribution PSM Analysis
 Residual PSM Analysis
US Co A –
Technology intangibles
Mfg. Co B
Outside India
India
Mkt Co C
Marketing intangibles
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• Two alternate approaches to arrive at ALP
• Relative Contribution approach:
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Determine combined net profit of AEs
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Split the combined net profit amongst the AEs in proportion to their ‘relative contributions’
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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
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Profit so split is taken into account to arrive at ALP
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• Residual Profit approach:
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Allocate basic return to each enterprise based on markets returns achieved for comparable uncontrolled transactions
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Allocate residual profit based on relative contribution as discussed above
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Profit so split is taken into account to arrive at ALP
Used in case of transfer of unique intangibles or multiple interrelated transactions
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• 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.
Subsidiary B
Net margin 5%
Outside India
India
Unrelated Cos.
Net margin 3%
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• 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
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(a)
(b)
(c)
(d)
(e)
Method
CUP
RPM
CPLM
PSM
TNMM
Product
Comparability
Functional
Comparability
Very High
High
High
Medium
Medium
Approach Remarks
Subsumed in product
High
High
High*
More tolerant
Prices are benchmarked
GPM
(on sales) benchmarked
GPM
(on costs) benchmarked
Profit
Margins
Net Profit
Margins
Very difficult to apply as very high degree of comparability required
Difficult to apply as high degree of comparability required
Difficult to apply as high degree of comparability required
Complex Method, sparingly used
Most commonly used
Method
* Relevant for certain parts of the PSM analysis
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• 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
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Whether quotations can be considered as comparable ?
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Use of standard rate cards, price lists, etc;
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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
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(a) Characteristics
Depends on type: tangible, intangible or service
(c) Contractual terms
Where not written, deduce from conduct
Comparability factors
(d) Economic Circumstances
Geography, size of market, date and time
(b) Functional Analysis
Conduct is best evidence of risk bearing, should be consistent with control
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Practical Experience
Sources of information and reliability
Timing issues in comparability
Documenting a search of comparables
Identifying comparables having uncontrolled transactions
Comparability adjustments
Selecting or rejecting internal / external comparables
Single year visà-vis multiple year data
Other issues (Loss making companies, companies with extreme results, etc.)
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• 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
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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
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Assessee
Diamond Dye
Chem. Ltd.
Fiat India Pvt.
Ltd.
E-Gain
Communication
Pvt. Limited
Principal held
• The ITAT held that adjustment for difference in volume should be allowed to the assessee.
• The ITAT upheld the assessee’s contention and allowed claim for adjustment on account of under utilization of capacity.
• The 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.
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• 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
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• 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
Aztec Software
Bangalore ITAT
(Five Member Special Bench)
Skoda Auto India Pvt Ltd
Pune ITAT
Principal held
• Multiple-year data may be used if one can demonstrate that such data has an influence on determination of ALP
• ITAT directed the TPO to consider the impact of product cycle on use of multiple-year data
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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.
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(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:
— 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.
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Assessee
Starlite
Mumbai ITAT
Principal held
• 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 visà-vis the method adopted by the taxpayer
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Entity related Price related Transaction related
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Profile of industry
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Profile of group
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Profile of Indian entity
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Profile of associated enterprises
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Transaction terms

Functional analysis
(functions, assets and risks)
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Economic analysis
(method selection, comparable benchmarking)
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Forecasts, budgets, estimates
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
Agreements
Invoices

Pricing related correspondence
(letters, emails etc)
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
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Assessee
Philips Software
Bangalore ITAT
Principal held
• The 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 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 arm’s length price; if it does not make a material difference then the effect is not fatal.
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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.
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Accountant’s Report contains following disclosures:-
Nature of international transactions
Book value and Arm’s length value of international transactions
Method adopted for the purpose of benchmarking
Documentation to justify arm’s length nature of international transactions
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Section Default
271(1)(c) In case of a post-inquiry adjustment, there is deemed to be a concealment of income
Penalty
100-300% of tax on the adjusted amount
271AA Failure to maintain documents 2% of the value of each international transaction;
271G
271BA
Failure to furnish documents
Failure to furnish accountant’s report
2% of the value of each international transaction for Nonreporting of transaction
2% of the value of the international transaction
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’.
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• Seven rounds of TP audits completed – AY 2002-03 to AY 2008-09
Particulars No. of cases selected for scrutiny
No of cases adjusted
% of cases adjusted
AY 2002-03
AY 2003-04
AY 2004-05
AY 2005-06
AY 2006-07
AY 2007-08
AY 2008-09
1081
1501
1768
1479
1600
2301
2589
236
345
477
370
800
1138
1338
22
23
27
25
50
49
52
Adjustments
(In INR Cr)
1403
2631
3947
5060
10,000
23,237
44,500
INR 44,500 crores of TP adjustment in recent concluded audit cycle for AY 2008-09
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File tax return and Accountant’s Report (30th November)
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)
Notice to be issued by the TPO – TPO calls for supporting documents and evidence
TP Audit
Based on results of above mentioned procedure assessing officer passes the order
Rectification application can be made against the order of TPO for apparent mistakes
Appeal can be made against the order of AO as order of
TPO included within the order of the AO
DRP Mechanism-Finance
Act 2009
Appeal Procedure
Appeal to CIT(A)
Passes an order
Income Tax Appellate Tribunal
High Court – only on matters related to law
Supreme Court
Constitutional Bench
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Triggers for Detailed Scrutiny
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Consistent losses / low margins of the taxpayer attributable to intercompany transactions
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Significant changes in profitability of the taxpayer
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High value intra-group services such as royalty / technical payouts, cost allocations, etc.
‒ Payment of ‘management charges’ and ‘royalty’ not passing the ‘benefit test’
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Net losses incurred by routine distributors
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Low mark-ups for services
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Significant marketing expenses by manufacturing / distribution companies
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Others
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Demanding information on transactions by AE with other AE
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Insistence on use of ‘single-year’ data
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Exclusion of loss making / low margin companies from the set of comparables
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1
2
3
4
5
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.
Contract 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.
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
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•
APA legislation effective 1 July 2012 & APA Rules notified 30 August 2012
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Types - Unilateral, Bilateral, Multilateral
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Validity – Up to 5 years (renewal possible)
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Coverage – Existing/ongoing transactions & New transactions
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Mandatory Pre-Filing Application & Consultation – option to remain anonymous
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APA Directorate to include panel of experts - Economists, Statisticians, etc
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Annual APA Compliance Report & Compliance Audit
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Fees (only at APA Application stage):
Transaction Value Fees
Up to Rs 1 billion / approx US$ 20 million
Up to Rs 2 billion / approx US$ 40 million
Over Rs 2 billion / approx US$ 40 million
Rs 1 million / approx US$
20,000
Rs 1.5 million / approx US$
30,000
Rs 2 million / approx US$
40,000
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Manish Bafna
Senior Manager
B S R &Co., Mumbai, India
Phone : +91 (22) 3090 2230
E-mail : manishb@kpmg.com
Kolkata
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
Mumbai
Lodha Excelus, 1st Floor,
Apollo Mills Compound,
N.M. Joshi Marg, Mahalakshmi,
Mumbai 400 011
Tel +9122 39896000
Fax +91 22 39836000
Pune
703, Godrej Castlemaine
Bund Garden
Pune 411 001
Tel: +91 20 3058 5764/ 65
Fax: +91 20 30585775
Bangalore
Solitaire, 139/26, 3rd Floor,
Inner Ring Road,
Koramangala,
Bangalore 560071
Tel +91 80 3980 6000
Fax +91 80 3980 6999
Kochi
4/F, Palal Towers,
M. G. Road,
Ravipuram, Kochi 682016
Tel +91 (484) 302 7000
Fax +91 (484) 302 7001
Hyderabad
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
Chennai
No. 10, Mahatma Gandhi Road,
Nungambakam,
Chennai 600 034
Tel +91 40 3914 5000
Fax +91 40 3914 5999
Chandigarh
SCO 22-23
1st floor. Sector 8 C
Madhya Marg
Chandigarh 160019
Tel : 0172 3935778
Fax 0172 3935780
Delhi
Building No.10,
Tower B, 8th Floor,
DLF Cyber City, Phase
– II
Gurgaon 122002 Haryana
Tel +91 124 3074000
Fax +91 124 2549101
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(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 arm’s length price in respect of the property transferred or services provided in the international transaction;
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( 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 arm’s length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise;
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(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 arm’s length price in relation to the supply of the property or provision of services by the enterprise;
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(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 arm’s 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 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;
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( 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 arm’s length price in relation to the international transaction.
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