Transfer Pricing – Arm’s length price under TNMM can be determined even with one comparable company

The Delhi bench of the Income-tax Appellate Tribunal [“The Tribunal”] recently pronounced its ruling in the case of Haworth (India) Private Limited Vs. DCIT [ITA NO. 5341/DEL/2010], wherein it upheld Revenue’s contention that arm’s length price can be determined under transactional net margin method [“TNMM”] even with one comparable company. Besides, the decision also deals with several other important aspects of the manner of application of TNMM, viz. method of making adjustments to the results, use of current year data, benefit of +/- 5% range and functional comparability. Facts

The Taxpayer is a wholly-owned subsidiary of Haworth Inc. and is engaged in the business of manufacture and sale of Haworth branded furniture using raw material imported from its associated enterprises [“the AEs”]. It also renders marketing and installation support services to its AEs.

During the relevant assessment year, the Taxpayer created two segments for the purpose of bench marking the aforesaid transactions, namely manufacturing segment and marketing support services [“MSS”] segment.

For manufacturing segment, TNMM was adopted as the most appropriate method with operating profit on sales (“OP/Sales”) as profit level indicator [“PLI”]. Since the Taxpayer’s PLI of 13.50% (after making adjustment on account of capacity utilization and pre-operative expenses) was higher than com parables’ PLI of 8.45%, it was concluded that the arm’s length principle was satisfied.