Transactional Net Margin Method requires the assessee's own cost base; third-party costs cannot be added for transfer pricing adjustment.

For applying the Transactional Net Margin Method under Rule 10B(1)(e), the assessee's net profit margin must be computed by reference to the assessee's own costs, assets or sales, and not by importing costs incurred by unrelated third-party vendors or the associated enterprise. The cost base cannot be artificially expanded by adding third-party manufacture or export expenses, and a transfer pricing adjustment cannot be sustained on a notional percentage of FOB value attributable to such transactions. The issue was therefore answered against the Revenue and in favour of the assessee, with no question of law arising for consideration.

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Issues: Whether, for application of the Transactional Net Margin Method under Rule 10B(1)(e) of the Income-tax Rules, 1962, the assessee's net profit margin could be computed by including the cost of goods sourced and incurred by third parties, so as to sustain an adjustment in transfer pricing.

Analysis: The appeal was stated to be covered by an earlier coordinate Bench decision concerning the same assessee. That decision held that, under Rule 10B(1)(e), the net profit margin from an international transaction must be computed with reference to the costs, assets, or sales of the assessee itself, and not by importing the costs incurred by unrelated third parties or the associated enterprise. The rule does not permit enhancement of the assessee's cost base by adding the cost of manufacture or export incurred by third-party vendors, and the transfer pricing adjustment cannot rest on a notional percentage of FOB value attributable to such third-party transactions.

Conclusion: The issue was answered against the Revenue and in favour of the assessee; no question of law arose for consideration and the appeal was dismissed.

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