The three most important aspects of application of TNMM are
1) selection of the tested party – usually the simpler of the two related parties involved with the intercompany transactions;
2) selection of the profit level indicator (PLI); and
3) selection of the comparables.
PLIs are ratios between the operating profits and operating costs / operating revenue /capital employed. It provides a sound basis to match operating profits of the company with that of the unrelated companies.
The issue emerging out of this pertains to categorizing of expenses/incomes as operating/non-operating while calculating the PLIs. Since these terms are not being defined in the Indian TP Regulations, both taxpayers and tax authorities take different approaches to compute PLI
It is suggested that Profit level indicators be clearly defined so as to avoid adoption of different approaches by the taxpayer and the Department leading to increased litigation.