TNMM comparability requires the same base and separate benchmarking of functionally different transactions in transfer pricing
Under TNMM, comparability requires the assessee and comparables to be measured on the same base; using different denominators for profit level indicators is inconsistent with Rule 10B(1)(e), so the first appellate comparison was not sustainable. Separately, indenting and buy-sell activities involve materially different functions and cost structures, because a commission agent and a trader operate on distinct economic bases; accordingly, the two transactions had to be benchmarked separately and the matter required de novo examination. The consolidated transfer pricing adjustment could not stand.
Issues: (i) whether, for applying the Transactional Net Margin Method, the same profit level indicator and the same base must be used for the assessee and the comparables; (ii) whether the assessee's indenting and buy-sell transactions could be benchmarked on a consolidated basis or had to be examined separately.
Issue (i): whether, for applying the Transactional Net Margin Method, the same profit level indicator and the same base must be used for the assessee and the comparables.
Analysis: Rule 10B(1)(e) requires the net profit margin of the assessee and that of comparables to be computed with the same base. The margin of the tested party cannot be compared with comparables if the denominator differs. In the present case, the first appellate authority proceeded on an incorrect assumption that the assessee's value-added expenses could be equated with operating costs of comparables in the manner adopted. That approach was inconsistent with the statutory scheme governing TNMM.
Conclusion: The comparison made by the first appellate authority was not sustainable.
Issue (ii): whether the assessee's indenting and buy-sell transactions could be benchmarked on a consolidated basis or had to be examined separately.
Analysis: The record showed that the assessee carried on two distinct functions: indenting, where it acted as a commission agent, and buy-sell transactions, where it purchased goods as principal and sold them as owner. A commission agent's operating base differs materially from that of a trader, because a trader's operating costs include cost of goods sold, inventories and debtors, while a commission agent's do not. Since the two business models had different cost structures and economic character, they could not be benchmarked together under one umbrella for transfer pricing purposes.
Conclusion: The two sets of transactions had to be benchmarked separately and the matter required de novo examination.
Final Conclusion: The transfer pricing adjustment could not be sustained on the consolidated benchmarking adopted below, and the matter was remitted for separate examination of the two business models under Chapter X.
Ratio Decidendi: Under TNMM, comparability requires the same base for the assessee and comparables, and functionally different transactions must be benchmarked separately where their operating cost structures are materially distinct.