Transactional net margin method demands like-for-like profit comparison; substituting the tax base makes the adjustment unsustainable.

Under the transactional net margin method, arm's length price must be determined by comparing the assessee's actual realised profit margin on the chosen base with the adjusted margins of comparable uncontrolled transactions on the same base. Substituting the assessee's cost base with FOB value of exports, or comparing gross receipts with a hypothetical profit figure, is not a like-for-like exercise and does not satisfy Rule 10B(1)(e). Because the assessee's margin remained within the comparables' range, the transfer pricing adjustment was held unsustainable and the addition was deleted.

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Issues: Whether the transfer pricing adjustment made by substituting the assessee's cost base with FOB value of exports and comparing the assessee's gross receipts with a hypothetical profit figure under the transactional net margin method was legally sustainable.

Analysis: Under Chapter X and section 92C, the arm's length price must be determined in the manner prescribed. Rule 10B(1)(e) requires the assessee's actual net profit margin realised from the international transaction to be computed on the chosen base and compared with the adjusted net profit margins of comparable uncontrolled transactions on the same base. The computation adopted by the transfer pricing officer changed the base from costs to FOB value of exports, treated the assessee's gross receipts as if they were the operating profit figure, and then compared that amount with a revised compensation figure. This approach did not involve comparison of like with like and did not determine the profit margin of comparables as required by the rule. The assessee's own margin, as recorded, remained within the range of the comparables and the substitution of the base had already been disapproved in the assessee's case.

Conclusion: The transfer pricing adjustment was unsustainable and the addition was deleted in favour of the assessee.

Ratio Decidendi: Under the transactional net margin method, arm's length price must be determined by comparing the assessee's actual realised profit margin with the adjusted profit margins of comparables on the same base, and not by substituting the assessee's base or by comparing gross receipts with a hypothetical profit figure.

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