In recent years, India has established itself as one of the most active countries in transfer pricing enforcement, promoting an increasingly strict and sophisticated regulatory framework. Within this context, disputes related to the choice of the appropriate method have become a central point of contention between taxpayers and tax authorities. The ruling of the Delhi Income Tax Appellate Tribunal (ITAT Delhi) in the Vodafone Idea Ltd. case (ITA No. 8361/Del/2019, October 2025) is a clear example of this dynamic and sets an important precedent for both India and the international community.
The ruling addresses a technical issue with significant implications: the choice between the Comparable Uncontrolled Price (CUP) method and the Transactional Net Margin (TNMM) method, two of the pillars of transfer pricing analysis under the OECD Guidelines. Beyond its local scope, the decision reaffirms the need to apply an approach based on actual comparability, economic substance, and documentary consistency, which are essential principles for ensuring tax fairness and legal predictability in transactions between related parties.
Context of the case
Vodafone Idea Ltd., one of the largest telecommunications operators in the country, was subject to an adjustment by the Transfer Pricing Officer (TPO), who considered that the method used by the company to analyze its international transactions was not the most appropriate.
The company had applied the TNMM method to determine the profitability of its transactions with related entities, arguing that this better reflected the economic reality of the business, characterized by integrated operations, shared functions, and global margins that were difficult to compare individually.
The TPO, on the other hand, concluded that the CUP method should be used, considering that there were observable market prices and that this method offered a more accurate measure of the arm’s length principle. According to the authority, the TNMM did not correctly reflect market conditions, and therefore proposed adjustments to the result declared by the company.
Vodafone Idea appealed the decision, and the case reached the ITAT Delhi, which had to assess whether the substitution of the method was technically justified and in accordance with the OECD Guidelines.
Arguments of the parties
The company’s defense argued that the CUP was not applicable, as the intra-group transactions in question—mainly support services and technology charges—did not have exact comparables in the independent market. Furthermore, differences in functions, risks, and contractual conditions made it impossible to make reliable comparability adjustments.
On the contrary, the TNMM allowed for a consolidated assessment of profitability, considering the complex nature of the telecommunications sector and the interdependence between the group entities.
The tax administration argued that comparable data was available and that the CUP should be applied because, in its opinion, it was the “most direct and accurate” method for determining arm’s length prices.
Court decision: primacy of the TNMM
After reviewing the background information, the ITAT Delhi concluded that the TNMM method was the most appropriate given the circumstances of the case. The court noted that the transactions analyzed were not identical or sufficiently comparable to reliably apply the CUP method.
The ruling emphasized that the choice of transfer pricing method should not be based on administrative preferences, but on a technical analysis that considers the availability and quality of comparables, the functional profile of the entities, and the economic substance of the transactions.
The court also noted that the TPO had not demonstrated with sufficient evidence that the transactions identified under CUP were truly comparable, and therefore the proposed adjustments lacked technical basis.
Consequently, the ITAT upheld the application of TNMM and overturned the adjustments made by the tax authority.
Technical and jurisprudential relevance
The Vodafone Idea Ltd. case reinforces several key principles in international transfer pricing practice:
- There is no rigid hierarchy among methods: The Court recalled that the choice of method should not be based on administrative preference, but on a technical analysis of the circumstances of each case. No method has automatic priority; the one that best reflects the economic substance of the transactions and the availability of reliable data should be chosen.
- The CUP method requires highly similar comparables: The ITAT specified that the CUP can only be applied when there are transactions that are virtually identical in terms of functions, risks, and conditions. In the absence of accurate comparables, its use can lead to distortions, as occurred in this case, where structural differences invalidated its application.
- The TNMM is more appropriate for complex operations: The Court recognized that the TNMM offers a more realistic view for companies with integrated or interdependent operations, by measuring overall profitability rather than individual prices. Therefore, its application is preferable in sectors such as telecommunications or services, where direct comparability is limited.
- Technical documentation is key to supporting the method: The ruling highlighted that the soundness of the functional analysis and contemporary documentation are decisive in justifying the selected method. In this case, Vodafone Idea’s technical defense was consistent and demonstrated the reasonableness of the TNMM in the face of the TPO’s arguments.
Implications for multinational companies
The ruling has significant implications for companies with a presence in India and other jurisdictions that follow OECD guidelines. In particular, it highlights the need to:
- Conduct a comprehensive functional analysis, documenting the functions, risks, and assets of each entity in the group.
- Justify the choice of method technically, explaining why the TNMM is more representative in certain contexts.
- Maintain consistency between the local report, the master file, and the comparability studies.
- Anticipate possible tax challenges through contemporary documentation and solid economic evidence.
For tax authorities, the case also offers an important lesson: the substitution of methods must be properly justified. It is not enough to claim that a method is more “accurate”; it must be demonstrated that the comparables are reliable and adequately reflect arm’s length conditions.
Conclusion
The ITAT Delhi decision in the Vodafone Idea Ltd. case reinforces the importance of technical rigor in the selection of transfer pricing methods. By confirming the validity of the TNMM, the court favors an approach based on economic substance and actual comparability over formal interpretations or administrative generalizations.
This precedent provides greater clarity and predictability for both taxpayers and authorities, while reaffirming the need to apply the OECD Guidelines with technical and prudent judgment.
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Source: TPCases