Arm's length pricing may be tested through a valid pricing formula when industry practice supports CUP comparability.

Transfer pricing analysis may benchmark international transactions using a pricing formula or mechanism, not only a fixed monetary price, where that mechanism reflects an industry norm and supports an arm's length result. The Tribunal noted that a 50:50 residual profit-sharing model had been accepted in comparable uncontrolled transactions for CUP analysis, and that insisting on exact amount-wise comparability would undermine the anti-abuse purpose of the transfer pricing rules. It also observed that the additional method introduced by rule 10BA is beneficial procedural legislation and can operate retrospectively. On that basis, the assessee's model was treated as arm's length and the adjustment was deleted.

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Issues: Whether the arm's length price of international transactions could be benchmarked on the basis of the 50:50 residual profit-sharing model followed in comparable uncontrolled transactions, and whether the consequential arm's length price adjustment was sustainable.

Analysis: The Tribunal held that the expression "price" in the transfer pricing rules is not confined to a quantified monetary amount and may also include a pricing mechanism or formula by which consideration is determined. It noted that in the relevant line of business, sharing residual profits equally between the origin and destination entities was an industry norm and had been accepted in earlier coordinate bench decisions as a valid comparable for CUP analysis. The Tribunal further observed that a pedantic insistence on exact amount-wise comparability would defeat the object of transfer pricing provisions, which are anti-abuse measures intended to test whether controlled transactions are at arm's length. It also accepted that the additional method introduced by rule 10BA was a beneficial procedural provision and could operate retrospectively.

Conclusion: The assessee's 50:50 model was accepted as satisfying the arm's length standard, and the transfer pricing adjustment was deleted.

Ratio Decidendi: For transfer pricing purposes, a comparable uncontrolled transaction may be established not only by matching a monetary price, but also by a valid pricing formula or mechanism where that mechanism is shown to be the industry norm and yields an arm's length result.

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