TNMM Segmental Accounts: Reconcile the Margin to the Books

A company earns ₹1 crore service revenue and also has a separate trading segment. The useful result is a working that explains the facts, the calculation or classification, and the evidence behind the conclusion. This guide shows how to prepare that working and where a reviewer should investigate before accepting the result.

Scope and applicable period

Indian transfer-pricing documentation for FY 2025–26 / AY 2026–27, with legacy provision references. For Tax Year 2026–27, use the Income-tax Act, 2025 and Income-tax Rules, 2026; OECD guidance does not override Indian law.

Verification date: 11 October 2026. Figures and rates identified as assumptions are teaching examples; apply the stated conditions and the actual facts to a real assignment.

The key principle

A TNMM margin needs a segment that corresponds to the tested transaction. Reconcile segment revenue and operating costs to the audited books, and document direct attribution and allocation of shared expenses. Define operating and non-operating items consistently with the study and comparable data. Entity-level profit should not be used merely because segment accounting is inconvenient.

Worked example

The 20% margin is a computation, not an arm’s-length conclusion. If shared costs were ₹15 lakh rather than ₹10 lakh, the margin would be ₹15 lakh divided by ₹105 lakh, or approximately 14.29%. That sensitivity makes the allocation evidence significant. Reconcile the remaining business segments and all excluded items so that no expense disappears. Keep the denominator and accounting treatment consistent when comparing the result with a properly selected comparable set.

A practical sequence

Define the tested segment and trace revenue to customer and agreement records. Allocate direct and shared operating costs using documented drivers and reconcile the remaining business.

Check classification of exceptional or non-operating items and the selected denominator. Compute the margin and retain sensitivity to significant allocations.

Compare it with reliably selected comparables only after aligning the accounting basis; a clean percentage cannot repair an inconsistent segment population.

Separate the factual file from the pricing conclusion

Transfer pricing depends on reliable transaction facts and comparability. Contracts, actual conduct, segment accounts and external evidence should tell a consistent story. A margin calculation is only one part of the analysis: the method, tested party, profit indicator, comparable data and adjustments all need reasons. Keep assumptions visible, preserve original data and reconcile the study with reported transactions. OECD materials help analyse issues, but the applicable Indian provisions and rules govern the Indian compliance conclusion. Do not treat a sample percentage, a contractual charge or a favourable comparable as an automatic arm’s-length result.

Evidence checklist

Keep the following records linked to the same entity, period and working version. Identify missing items explicitly; a checked box should mean the document was examined and supports the stated conclusion.

• Segment trial balance
• Revenue attribution schedule
• Direct-cost ledger mapping
• Shared-cost allocation policy
• Bridge to audited accounts

Common mistakes and how to avoid them

• Leaving shared expenses unallocated. Compare the conclusion with the segment trial balance and resolve any conflicting facts.
• Comparing profit/revenue with profit/cost. Trace the affected item to the direct-cost ledger mapping before finalising the working.
• Dropping an expense without an exclusion reason. Use the bridge to audited accounts to make the final position and remaining exceptions clear.

Before you finalise

Recheck the example’s assumptions against the actual assignment, resolve the identified exceptions and make the final figure or conclusion traceable to its source. Preserve the reviewed version and the reason for material changes. For this task, the bridge to audited accounts should agree with the conclusion presented to the client, reviewer or authority.

Frequently asked question

Can a management spreadsheet be used? It can support the working if its inputs, allocations and reconciliation are reliable and documented.

Sources and further reading

• Income Tax Department — transfer pricing guidance
• Income Tax Department — transfer-pricing methods and Rule 10B
• Rule 10D — transfer pricing information and documents

Related guide: Form 3ceb reconciliation books financial statements.