“TNMM”

Knowledge Process Outsourcing (KPO) service providers are functionally dissimilar to Business Process Outsourcing (BPO) or Information Technology Enabled Services (ITeS) providers and cannot be compared for transfer pricing purposes, even under the Transactional Net Margin Method (TNMM). Further, companies with significantly different business models, such as those with extensive subcontracting, should be excluded as comparables.

The existence of an international transaction must be established before its arm's length price can be determined. An alleged 'excessive' AMP expenditure cannot unilaterally expand the scope of an international transaction if its existence is contested.

Foreign exchange fluctuation gains or losses are operational in nature and must be included in the computation of the operating margin for both the assessee and comparable companies when determining the Arm's Length Price.

The profits of a Permanent Establishment (PE) must be determined on the basis of what an independent enterprise would derive, using the Transactional Net Margin Method (TNMM) for profit attribution. When applying TNMM, the operating profit from an international transaction should be compared with the operating profit margin of comparables.

When benchmarking export transactions, the Associated Enterprise (AE) can be considered the tested party if it possesses the least complex functional analysis. The Assessing Officer's acceptance of a methodology in prior years can also support its use.

For Transfer Pricing, this case clarifies that foreign exchange gains can be considered operating revenue for ITES providers, acknowledges the impact of offshore versus onsite development pricing on margins even when using TNMM, and affirms the use of a turnover filter for selecting comparable companies.

A change in depreciation policy impacts an entity's profitability, which is a key factor in assessing its suitability as a comparable company for transfer pricing analysis.

Comparability of a company for transfer pricing purposes must be decided afresh by the TPO after considering the facts recorded in prior tribunal decisions. The tribunal may direct exclusion of comparable companies based on such prior decisions.