Page 461 - MANUAL OF SOP WITH COVER- 04.12.2018

Manual of OP for Trade Remedy Investigations

enterprise in respect of products transferred or service related entity, are determined
and the amount of a normal gross profit mark-up to such costs arising from the
transfer or provision of the same or similar products 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 is adjusted to
take into account the functional and other differences, if any, between the related
transaction or the specified domestic 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 sum so arrived
at is taken to be an Arm’s Length Price in relation to the supply of the product or
provision of services by the enterprise.
19.10.4 The Profit Split Method is mainly used in transactions which deal with unique
intangibles or in transactions that are multiple in nature and therefore, cannot be
evaluated separately to determine arm’s length price as they are interrelated. Under
this method, the combined net profit of the related entities arising from the related
transaction in which they are engaged, are determined. The relative contribution
made by each of the related entities 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 entity and on the basis of reliable
external market data which indicates how such contribution would be evaluated by
unrelated entities performing comparable functions in similar circumstances. The
combined net profit is then split among the related entities in proportion to their
relative contributions. The profit thus apportioned to the related entity is taken into
account to arrive at arm’s length price in relation to the related transaction.

19.10.5 The Transactional Net Margin Method (TNMM) requires establishing
comparability level at a broad functional level. It requires comparison between net
margin derived from operation of the uncontrolled parties and net margin derived
by a related entity on similar operation. Under this method, the net profit margin
realised by arelated entity from a related transaction is computed in relation to a
particular factor such as costs incurred, sales, assets utilized, etc. The net profit
margin earned by a related entity is compared with net profit margin of uncontrolled
transactions to arrive at arm’s length price.

19.10.6 The Arm’s Length Price is determined under Section 92C (1) of the Income
Tax Act by using the most appropriate method. The Most Appropriate Method is

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