How is the arm's length price determined for transactions with our India subsidiary, and what happens if it's challenged?

The Transactional Net Margin Method (TNMM) is the most commonly used approach in India for benchmarking routine transactions like distribution, contract manufacturing, or intra-group services — it compares the subsidiary's net operating margin against a set of independent, functionally comparable companies rather than requiring exact transaction-level comparables. Other prescribed methods (Comparable Uncontrolled Price, Resale Price, Cost Plus, Profit Split) apply better to specific transaction types, such as royalty payments or trading in identical goods.

India's tax department selects cases for TP audit based on risk parameters — low margins relative to industry peers, large or unusual related-party transactions, persistent losses, or a transaction value crossing internal risk thresholds. If an audit results in a proposed adjustment, the taxpayer can contest it through the Dispute Resolution Panel or normal appeal channels, but a sustained adjustment increases taxable income, attracts interest, and can trigger a penalty of 50-200% of the tax on the underreported income. Maintaining contemporaneous documentation with a defensible comparables set is the primary protection against an adverse outcome.