Arm's length freight sharing accepted where both sides had comparable functions, assets and risks, defeating transfer pricing adjustment.

The transfer pricing adjustment on freight receipts and freight payments was rejected because the freight arrangement was found to reflect arm's length conditions. The record showed that the overseas entities on both sides performed similar functions, used comparable assets and assumed comparable risks, and the freight revenue and expense were shared equally after transportation costs in both countries. As the Revenue did not dislodge this comparable profile, the 50:50 profit split was accepted as commercially justified and there was no basis for the proposed addition.

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Issues: Whether the transfer pricing adjustment made by the TPO in respect of freight receipts and freight payments was justified, or whether the 50:50 sharing of freight revenue and expense between the assessee and its associated enterprises was at arm's length.

Analysis: The transactions were examined as deemed international transactions arising from arrangements with overseas entities. The record showed that both the origin and destination entities performed similar functions, employed comparable assets and assumed comparable risks. The freight receipts and freight payments were structured on an equal sharing basis after meeting transportation expenses in both countries, and the Revenue did not dislodge the finding that the economic profile of both sides was comparable. In these circumstances, the equal profit split was accepted as reflecting arm's length conditions, and there was no basis for the proposed adjustment.

Conclusion: The transfer pricing addition was not sustainable and the Revenue's challenge failed.

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