In recent years, India has established itself as one of the most active countries in Transfer Pricing auditing, promoting an increasingly strict and sophisticated regulatory framework. Within this context, method selection controversies have become a core issue 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, thus setting an important precedent for both India and the international community.
The ruling addresses a critical technical issue: Choosing between the Comparable Uncontrolled Price (CUP) method and the Transactional Net Margin Method (TNMM), two of the pillars of the 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 related-party transactions.
Background
Vodafone Idea Ltd., one of the largest telecommunications operators nationwide, faced an adjustment from the Transfer Pricing Officer (TPO), who determined that the method used for analyzing the company’s international operations was not the most appropriate.
The company had applied the TNMM method to determine the profitability of its related party transactions, arguing that a better reflection of the business’s economic reality, characterized by integrated operations, shared functions, and global margins, is complicated to compare individually.
Instead, the TPO found the CUP method to be appropriate due to observable market prices, providing a more accurate measure of the Arm’s Length Principle. According to the authority, the TNMM did not accurately reflect market conditions, and, therefore, proposed adjustments to the company’s declared result.
Vodafone Idea appealed the decision, which reached the ITAT Delhi, to assess whether the substitution of the method was technically justified and compliant with the OECD Guidelines.
Arguments of the Parties
The company’s defense argued that the CUP was not applicable, as these intragroup transactions-mainly support services and technology charges-did not have exact comparables in the independent market. Furthermore, differences in functions, risks, and contractual conditions hindered reliable comparability adjustments.
Conversely, the TNMM allowed for consolidated assessments of profitability, considering the complex nature of the telecommunications sector and the interdependence among group entities.
The tax administration confirmed the existence of comparable data, arguing that the CUP should be applied as it was, in its opinion, the “most direct and accurate” method for determining Arm’s Length prices.
Court Decision: TNMM Prevails
After reviewing the facts, the ITAT Delhi concluded that the TNMM was the most appropriate given the circumstances of the case. The Court noted that the analyzed transactions were not identical or sufficiently comparable to apply the CUP method reliably.
The ruling emphasized that choosing a Transfer Pricing method should not be based on administrative preferences, but rather 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 sufficiently demonstrated that the CUP transactions were truly comparable; therefore, the proposed adjustments lacked a technical basis.
Consequently, the ITAT upheld the TNMM and overturned the tax authority’s adjustments.
Technical and Jurisprudential Relevance
The Vodafone Idea Ltd. case reinforces several key principles in international Transfer Pricing practice:
- There is no inflexible hierarchy among the methods: The Court recalled that the method chosen should not be based on administrative preference, but rather on a technical analysis of the circumstances of each case. There is no preferred method, but 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 CUP can only apply when there are transactions that are virtually identical in functions, risks, and conditions. Without accurate comparables, its use can lead to distortions, as shown in this case, where structural differences undermined its effectiveness.
- The TNMM is more appropriate for complex transactions: The Court recognized that the TNMM offers a more realistic view for companies with integrated or interdependent operations, as it measures overall profitability rather than individual prices. Therefore, it applies more 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 is decisive in supporting the selected method. In this case, Vodafone Idea’s technical defense was consistent and proved the TNMM’s grounds against the TPO’s arguments.
Implications for Multinational Companies
The ruling has significant implications for companies operating in India and other jurisdictions following the OECD guidelines. Specially, it underscores the need to:
- Conduct a thorough functional analysis, documenting the functions, risks, and assets of each entity in the group.
- Technically support the method selected, explaining why the TNMM is more representative in specific contexts.
- Maintain consistency among the local report, master file, and comparability studies.
- Anticipate potential tax challenges by contemporaneous documentation and solid economic evidence.
For tax authorities, the case also offers an important lesson: The substitution of methods must be duly supported. It is not enough to claim that one is more “accurate,” but it must demonstrate 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 selecting Transfer Pricing methods. By confirming the TNMM’s validity, 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