• Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 6/25/2013

India - Internal TNMM has priority over external TNMM 

June 25: The Mumbai Bench of the Income-tax Appellate Tribunal held that the transactional net margin method (TNMM) does not require a similarity of products and that internal TNMM analysis is acceptable for determining the arm’s length price and is given priority over external TNMM proposed by the tax authorities. Diageo India Private Ltd v. DCIT Mumbai [ITA No. 7932/Mum./2011]

The tribunal, however, agreed with the position of the tax authorities with respect to advertising, marketing, and promotion expenses—that such expenses are an “international transaction” involving foreign related parties.


The taxpayer manufactures and markets various international brands of alcoholic beverages for domestic consumption in India. The taxpayer’s products are sold under various international and domestic brand names.

For the year at issue, the taxpayer incurred certain advertising, marketing, and promotion (AMP) expenses. It also purchased raw materials from foreign related parties.

The taxpayer conducted a comparability analysis based on internal TNMM, by comparing the margin of a profit and loss account involving its related-party transactions with the margin of a non-related-party transaction segment. The net margin from the related-party segment (-4.49%) was greater than the net margin for the non-related-party segment (-29.28%). Accordingly, the taxpayer concluded that its transactions with its related parties were at arm’s length.

The Transfer Pricing Officer, however, proposed adjustments:

  • With respect to the purchase of raw materials, the Transfer Pricing Officer rejected the internal TNMM analysis (in light of the apportionment of the large amount of AMP expenses between the related-party segment and non-related-party segment), and instead applied an external TNMM and benchmarked the net margin of the related-party segment (-4.49%) with the mean margin of 15 external comparables (-0.96%)

  • With respect to the value of the brand name owned by related parties, the Transfer Pricing Officer asserted that the taxpayer had acted to increase the value of the brand name, and thus, ought to have been compensated for promoting these brands. Also, the Transfer Pricing Officer rejected the exclusion of the sales promotion expenses from the taxpayer’s AMP expenses because they also promoted brands owned by related parties

The Dispute Resolution Panel largely upheld the Transfer Pricing Officer’s order.

The tribunal agreed with the taxpayer’s contentions that product comparability is not essential for applying TNMM, and that based on the facts and circumstances of the case, the internal comparability analysis was acceptable and was to be given priority over external TNMM.

However, the tribunal agreed with the tax authorities that an excessive advertising, marketing, and promotion expense is an international transaction—one that requires application of the arm’s length price measure.

The tribunal remanded the case to the Transfer Pricing Officer.

Read a June 2013 report [PDF 174 KB] prepared by the KPMG member firm in India: The application of Transactional Net Margin Method does not necessitate similarity of products; Internal TNMM should be given priority over external TNMM for determining the arm’s length price

Contact a tax professional with KPMG's Global Transfer Pricing Services.

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