Revenue Split vs TNMM in Transfer Pricing

Choosing the Most Appropriate Method under Section 92C – A Strategic Assessment Guide (Delhi ITAT – 2025 TaxPub(DT) 6050)

“Arm’s length begins with pricing logic — not with margins discovered later.”

Choosing the Most Appropriate Method under Section 92C – An Assessment-Grade & Policy-Ready Professional Guide

*“In transfer pricing, adjustments are rarely born from numbers.

They are born from incorrect method selection.”*

In the vast majority of transfer pricing cases, adjustments do not originate because margins are low or comparables are imperfect.

They originate far earlier — at the moment TNMM is mechanically adopted, without first asking the legally mandated question:

Is CUP feasible for this transaction?

This phenomenon is most visible in freight forwarding, logistics coordination, and intermediary service models, where business reality operates on pre-agreed pricing formulas, not on residual profit expectations.

The recurring controversy is therefore fundamental, not technical:

Can a revenue split represent a valid CUP, or must the transaction inevitably collapse into TNMM merely because margin benchmarking is easier?

Reasoned Reality

TNMM is frequently preferred because it:

• Requires minimal understanding of transaction mechanics

• Aggregates outcomes instead of analysing pricing behaviour

• Provides statistical comfort to the authority

However, ease of application is not a criterion recognised by Section 92C.

Professional Caution

Once TNMM is prematurely adopted:

• Transaction-level pricing logic is irretrievably lost

• Intermediary economics are mischaracterised as entrepreneurial

• The taxpayer is forced into a margin defence — a structurally weak position

Why the Delhi ITAT Decision Matters (2025 TaxPub(DT) 6050)

The Delhi ITAT ruling does not create taxpayer preference.
It restores statutory discipline.

It reiterates that:

• Method selection is a legal exercise, not an administrative one

• TNMM is not a default or “safe” method

• CUP cannot be rejected without demonstrating why it fails

This post is therefore not commentary.
It is a professional operating manual for:

• Method selection at TP policy stage

• Assessment-stage defence

• Documentation architecture

• Litigation risk containment

Statutory Framework — Section 92C as Enacted, Not as Conveniently Applied

Section 92C mandates that ALP be determined using the most appropriate method, considering:

• Nature of the international transaction

• Class of associated enterprise

• FAR profile

• Availability and reliability of data

Reasoned Interpretation

The statute does not prioritise methods based on:

• Officer familiarity

• Ease of benchmarking

• Litigation convenience

Professional Caution

There exists no statutory hierarchy making TNMM the default.

Under Rule 10B(1)(a):

• CUP is the first method where price can be directly determined

• TNMM is permissible only after CUP is shown to be unworkable

TNMM is a method of last resort — not administrative convenience.

Foundational Principle Reaffirmed by Courts

Price precedes profit. Always.

Arm’s length analysis tests:

• Whether independent parties would agree to the same price or pricing formula

It does not test:

• Whether the resultant margin appears reasonable or comfortable

Reasoned Logic

Profit is an outcome.
Testing outcomes instead of pricing behaviour reverses the statutory design.

Professional Caution

When margin comfort becomes the test:

• Thin-margin intermediaries become structurally vulnerable

• Commercial behaviour is replaced by statistical averages

Where pricing mirrors market behaviour, ALP is satisfied — even if margins fluctuate.

Revenue Split: CUP or Profit Split? — The Decisive Characterisation Test

Revenue authorities frequently misclassify revenue split models as Profit Split Method (PSM).

This is not a nomenclature issue.
It is methodologically fatal.

Revenue Split qualifies as CUP when:

• The split is embedded contractually

• It governs invoice-level billing

• It operates before profit determination

• It reflects how independent agents are remunerated

Revenue Split becomes PSM only when:

• Applied after profit computation

• Allocates residual entrepreneurial returns

• Depends on subjective contribution analysis

Judicial Clarity

👉 Delhi ITAT (2025 TaxPub(DT) 6050) confirms:
What governs pricing governs method characterisation.

Professional Caution

Mischaracterisation typically arises where:

• Agreements are loosely drafted

• Pricing logic is not contemporaneously documented

• Invoices fail to reflect the pricing mechanism

Non-Negotiable Thumb Rules (Settled Law)

The following principles are now crystallised:

• CUP overrides TNMM where pricing logic is demonstrable

• Revenue split is not PSM if it governs pricing

• Industry practice must be proven, not asserted

• Past acceptance is persuasive, not binding

• Rule 46A invocation mandates adjudication on merits

• TNMM requires demonstrated failure of CUP

Professional Warning

Ignoring even one of these principles:

• Silently shifts the burden to the taxpayer

• Makes adjustment nearly inevitable

Strategic Method Selection — The Practitioner’s Reality Test

Revenue Split (CUP) is appropriate where:

• Origin and destination entities are functionally symmetric

• Both are asset-light intermediaries

• Pricing is pre-agreed and formula-driven

• Pass-through costs are clearly excluded

• Documentation exists at transaction level

TNMM is strategically safer where:

• One entity bears entrepreneurial risk

• Functions are asymmetric

• Split is selectively applied

• Pricing mechanics cannot be evidenced contemporaneously

Professional Insight

Method selection is not ideological.
It is about risk containment and credibility.

Strategic maturity lies in choosing the right battle — and sometimes, the right retreat.

How CUP Must Be Presented in TP Documentation

CUP must never be presented defensively.

Documentation should demonstrate:

• Why CUP naturally fits the industry

• How pricing is determined ex ante

• Why TNMM distorts intermediary economics

• How independent parties would price identically

Professional Reminder

Courts evaluate commercial behaviour, not spreadsheet comfort.

Documentation That Actually Withstands Scrutiny

Core (Mandatory)

• Inter-company agreements specifying revenue split

• Invoices reflecting identical pricing mechanics

• Cost sheets segregating pass-through costs

• FAR analysis establishing symmetry

High-Impact Support

• SOPs / internal emails explaining pricing logic

• Industry publications

• Prior year accepted TP orders

• Third-party confirmations

Instant Weakness Indicators

• Post-facto rationalisation

• Unexplained changes in split ratios

• Split applied only to AEs

• Absence of invoice-level proof

TPO-Ready Argument Note 

Procedural Shield — Rule 46A

Where:

• Additional evidence is called for by CIT(A), or

• Matter is remanded for comments

Rejection without adjudication on merits is per se invalid.

This procedural ground alone has reversed numerous adverse orders.

Consistency — Correct Framing

❌ Accepted earlier, therefore binding
✔ Identical facts examined earlier; deviation requires justification

Courts protect reasoned consistency, not entitlement.

Assessment-Room Reality Check

Revenue Objection	Correct Counter
Revenue split is PSM	It governs pricing → CUP
No comparables	Internal CUP exists
Margins are low	ALP tests price
Industry practice unproven	Agreements + invoices
TNMM is safer	Safety is not law

One-Line Practitioner Rule

A revenue split survives scrutiny not because it is popular, but because it is commercially inevitable, provable, and consistently applied.

TP Policy Insert for Logistics & Freight Groups

Policy Objective

To ensure arm’s length pricing for intra-group freight forwarding and logistics services by adopting pricing mechanisms that reflect commercial reality and statutory intent under Section 92C.

Policy Principle

Group entities engaged as logistics intermediaries shall be remunerated based on pre-agreed pricing formulas, not residual profit outcomes.

Approved Pricing Method

• Primary Method: CUP based on revenue split where:

  • Entities are functionally symmetric

  • Services are asset-light

  • Pricing governs billing stage

• Fallback Method: TNMM only where CUP is demonstrably unworkable

Pricing Architecture

• Revenue base defined net of pass-through costs

• Revenue split ratio pre-agreed and contractually embedded

• Pricing applied consistently across periods

Documentation Standards

• Inter-company agreements to expressly define pricing formula

• Invoices to mirror pricing mechanics

• FAR analysis to be updated annually

• Deviations to be documented contemporaneously with justification

Governance & Review

• Annual method validation under Rule 10B

• Any change in pricing mechanism to be approved by Group Tax Head

• TNMM adoption requires documented CUP failure analysis

Risk Control Statement

TNMM shall not be adopted merely for benchmarking convenience where transaction-level pricing is demonstrable.

Final Professional Note

The Delhi ITAT decision in 2025 TaxPub(DT) 6050 does not tilt the balance.

It restores discipline.

Those who:

• Understand their business

• Document pricing contemporaneously

• Choose methods strategically

Will find this ruling a powerful ally.

Those who rely on margin comfort will not.