Comparable uncontrolled transaction principle bars using one related-party commission rate as an internal CUP benchmark.

For transfer pricing purposes, arm's length price must be benchmarked against a comparable uncontrolled transaction, not against another controlled transaction between associated enterprises. The Tribunal held that commission rates accepted in one associated-enterprise transaction could not be used as an internal CUP for a separate related-party transaction, because the statutory CUP method requires an external uncontrolled comparison. Applying the Third Member view relied on, the Tribunal sustained the restriction of the addition and rejected the Revenue's challenge to the reduction made by the Commissioner (Appeals).

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Issues: Whether the rate of commission earned from one associated enterprise could be used as an internal comparable uncontrolled price to benchmark commission receivable from another associated enterprise for determining the arm's length price.

Analysis: The assessee had rendered similar services to two associated enterprises, but the transfer pricing adjustment was made by applying the commission methodology accepted in one controlled transaction as a benchmark for the other. The Tribunal held that an uncontrolled transaction, for transfer pricing purposes, must be a transaction between enterprises other than associated enterprises. A comparable controlled transaction cannot be used as CUP for benchmarking, because the statutory scheme requires comparison with an uncontrolled transaction and not with another controlled transaction. Following the Third Member decision relied upon, the Tribunal held that the commission rate accepted in the transaction with one associated enterprise could not be adopted as the internal CUP for the transaction with the other associated enterprise.

Conclusion: The transfer pricing adjustment as reduced by the Commissioner (Appeals) was upheld, and the Revenue's challenge to the restriction of the addition failed.

Ratio Decidendi: For determining arm's length price, comparison must be made with a comparable uncontrolled transaction, and a controlled transaction between associated enterprises cannot be used as an internal CUP benchmark.

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