Transaction Net Margin Method(TNMM)

What is TNMM ?

Under the TNMM, the standard of comparability is relaxed relative to the other methods with only broad similarity of functions required. It compares the normal net profit margin, computed in relation to costs incurred or sales affected or assets employed or having regard to any other relevant base, realized by associated enterprises to the net profit margin realized by unrelated enterprises from comparable uncontrolled transactions. The reason why TNMM can be used with data for companies that are more broadly comparable to the controlled company is that functional differences are likely to be reflected in the level of operating expenses incurred by each company. These expenses are deducted in the calculation of operating profit, and are accordingly taken account of, in the subsequent comparability analysis of the data.

In India, usually the Transfer Pricing Officer agree for a rate of 20-25% unofficially which is considered as a safe harbor. However, Companies can opt for a lower rate subject to litigations and appeals up to tribunal level. This has been commonly seen in IT/ITES companies.