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17.4. The OECD transfer pricing guideline for multinational enterprises and tax administration in Chapter 2 on transfer pricing methods, at page 93, para C.1 states as follows:

"C.1 In general 2.108 The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9- 3.12) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the "combined profits"). References to "profits" should be taken as applying equally to losses. See paragraphs 2.124-2.131 for a discussion of how to measure the profits to be split. It then splits those Infogain India Pvt. Ltd.

6.3.13.2. The Profit Split Method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction(or in controlled transactions that it is appropriate to aggregate) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. Figure 5 illustrate this.

6.3.13.3 The Profit Split Method starts by identifying the profits to be divided between the associated enterprises from the controlled transactions. Subsequently, these profits are divided between the associated enterprises based on the relative value of each enterprise's contribution, which should reflect the functions performed, risks incurred and assets used by each enterprise in the controlled transactions. External market date (e.g. profit split percentages among independent enterprises performing comparable functions) should be used to value each enterprise's contribution, if possible, so that the division of combined profits between the associated enterprises is in accordance with that between independent enterprises performing functions comparable Infogain India Pvt. Ltd.

17.9. Residual Profit Split Method is stated as follows:

10.04 Residual Profit Split Method As illustrated in Figure 10-2, RPSM proceeds in two steps:

Infogain India Pvt. Ltd.

Step 1: Functional capital is provided a return derived from data for functional comparables, i.e. independent companies performing similar routine manufacturing or distribution functions; and Step 2:The remaining "residual" operating profit or loss is allocated based on residual, "entrepreneurial" capital so as to equalize the rate of return on such capital, adjusted for market differences in the cost of capital.

value chain of provision of software services to the end customers.

24. Therefore, by keeping in view the aforesaid discussion and considering the totality of the facts we are of the view that Profit Split Method was rightly applied by the assessee for determining the arm's length price. Moreover, in the instant case, it is an admitted fact that in the preceding years as well as in the succeeding year i.e. assessment year 2011-12, the same method i.e. Profit Split Method has been accepted by the department. Therefore, we are of the view that the TPO/AO was not justified in applying the TNMM method instead of Profit Split Method adopted by the assessee. For the aforesaid view we are fortified by the following decisions of the Coordinate Bench: