Arm's length pricing under CUP requires a truly comparable benchmark; mechanically matching rates with a larger concern is not acceptable.

Arm's length pricing for an international transaction should not be fixed by mechanically comparing the assessee's rate with that of a much larger independent concern where the factual position is materially different. The text states that, for a newer and dependent service provider, a reliable comparable must be selected and the price may, if necessary, be derived by reference to the subsequent year's rate with an appropriate inflationary adjustment. Once such a discounted CUP-based rate is worked out, no further ad hoc reduction is warranted. The arm's length price was to be redetermined under the CUP method, and the cited comparable was not accepted.

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Issues: Whether the arm's length price in respect of the international transaction had been correctly determined by comparing the assessee's rate with the rate paid to a large independent comparable and whether the CUP method should be applied.

Analysis: The pricing adopted for the assessee could not be equated with the rate paid to a much larger and independently operating concern, since the factual position of the assessee as a newer and dependent service provider was materially different. In the absence of a reliable comparable on record, the proper course was to determine the price on the basis of a suitable comparable, and if necessary by reference to the subsequent year's rate after making an appropriate inflationary adjustment. Once such a discounted rate is worked out, no further ad hoc reduction was warranted.

Conclusion: The arm's length price was directed to be redetermined by applying the CUP method, and the comparison with the cited comparable was held not to be acceptable.

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