In determining transfer prices between a taxpayer and related parties one of the permitted methods is the transactional net margin method (TNMM). This compares profit margins to an appropriate base such as sales, assets or costs realized from a controlled transaction. The comparable profit margins are often taken from an external database of company transactions but where comparable transactions with third parties have been conducted by the same taxpayer these may be used as comparable transactions in the application of the transfer pricing method.
In a recent decision held by the Tax Court of India, it was ruled that the internal TNMM to be preferred over the external TNMM in some situations. This includes a situation where comparable functions are performed and similar services are provided to the associated enterprise and to independent parties, provided that reliable internal data are available. This finding follows the principles of a previous decision by an Indian court in the Tecnimont case.
