Transfer pricing adjustment must be confined to associated enterprise purchases, not extended to entire turnover.

In transfer pricing of purchases from associated enterprises, the arm's length price must be computed only with reference to the international transactions with those enterprises, not on the assessee's entire turnover. The absence of separate accounts for controlled and uncontrolled transactions does not, by itself, justify applying a net profit margin to local or other non-AE transactions. The adjustment must remain confined to purchases from associated enterprises, with any fresh computation to be made on that restricted basis.

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Issues: Whether, in determining the arm's length price of purchases from associated enterprises, the transfer pricing adjustment could be made on the basis of the assessee's entire turnover or had to be restricted only to the purchases from associated enterprises.

Analysis: The assessee's challenge to the transfer pricing adjustment on the ground of the scope of computation was substantively examined. The Tribunal followed the settled position that the computation of arm's length price under Chapter X of the Income-tax Act, 1961 must relate only to the international transactions with associated enterprises. Where the assessee did not maintain separate accounts for controlled and uncontrolled transactions, that by itself did not justify applying the net profit margin to the entire turnover. The adjustment, if any, had to be confined to the purchases from associated enterprises and not extended to local transactions or total turnover.

Conclusion: The issue was decided in favour of the assessee. The transfer pricing adjustment was held to be restrictable only to purchases made from associated enterprises, and the matter was restored to the Assessing Officer for fresh computation on that basis.

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